Outsourcing

From Wikipedia, the free encyclopedia

Jump to: navigation, search
Not to be confused with offshoring.
Outsourcing is the contracting out of a business process, which an organization may have
previously performed internally or has a new need for, to an independent organization from
which the process is purchased back as a service. Though the practice of purchasing a business
functioninstead of providing it internallyis a common feature of any modern economy, the
term outsourcing became popular in America near the turn of the 21st century. An outsourcing
deal may also involve transfer of the employees and assets involved to the outsourcing business
partner.[1]
The definition of outsourcing includes both foreign or domestic contracting,[2] which may include
offshoring, described as a company taking a function out of their business and relocating it to
another country.[3]
The opposite of outsourcing is called insourcing, and is sometimes accomplished via vertical
integration. However, a business can provide a contract service to another business without
necessarily insourcing that business process.

Contents

1 Overview
o 1.1 Reasons for outsourcing

2 Implications
o 2.1 Management processes
o 2.2 Quality of service
o 2.3 Language skills
o 2.4 Security
o 2.5 Qualifications of outsourcers
o 2.6 Diversification

o 2.7 Insourcing
o 2.8 Standpoint of labor
o 2.9 Standpoint of government

3 By country
o 3.1 United States
o 3.2 European Union

4 Co-sourcing
o 4.1 Identity management co-sourcing

5 See also

6 References

7 External links

Overview
Two organizations may enter into a contractual agreement involving an exchange of services and
payments. Outsourcing is said to help firms to perform well in their core competencies and
mitigate shortage of skill or expertise in the areas where they want to outsource.[4]
In the early 21st century, businesses increasingly outsourced to suppliers outside their own
country, sometimes referred to as offshoring or offshore outsourcing. Several related terms have
emerged to refer to various aspects of the complex relationship between economic organizations
or networks, such as nearshoring, crowdsourcing, multisourcing[5][6] and strategic outsourcing.[7]
Outsourcing can offer greater budget flexibility and control. Outsourcing lets organizations pay
for only the services they need, when they need them. It also reduces the need to hire and train
specialized staff, brings in fresh engineering expertise, and reduces capital and operating
expenses.[8]
One of the biggest changes in the early 21st century came from the growth of groups of people
using online technologies to use outsourcing as a way to build a viable service delivery business
that can be run from virtually anywhere in the world. The preferential contract rates that can be
obtained by temporarily employing experts in specific areas to deliver elements of a project

purely online means that there is a growing number of small businesses that operate entirely
online using offshore contractors to deliver the work before repackaging it to deliver to the end
user. One common area where this business model thrives is in provided website creating,
analysis and marketing services. All elements can be done remotely and delivered digitally and
service providers can leverage the scale and economy of outsourcing to deliver high value
services at reduced end-customer prices.

Reasons for outsourcing

Companies outsource to avoid certain types of costs. Among the reasons companies elect to
outsource include avoidance of burdensome regulations, high taxes, high energy costs, and
unreasonable costs that may be associated with defined benefits in labor union contracts and
taxes for government mandated benefits. Perceived or actual gross margin in the short run
incentivizes a company to outsource. With reduced short run costs, executive management sees
the opportunity for short run profits while the income growth of the consumers base is strained.[2]
This motivates companies to outsource for lower labor costs. However, the company may or may
not incur unexpected costs to train these overseas workers.[9] Lower regulatory costs are an
addition to companies saving money when outsourcing. On comparative costs, a U.S. employer
typically incurs higher defined benefit costs associated with taxes to account for social security,
Medicare, safety protection (OSHA regulations) and FICA taxes etc. than in other countries.[10]
On comparative CEO pay, executive pay in the United States in 2007 was more than 400 times
more than average workersa gap 20 times bigger than it was in 1965.[11] In 2011, twenty-six of
the largest US corporations paid more to CEO's than they paid in federal taxes.[12] However, it
appears companies do not outsource to reduce executive or managerial costs.
Companies may seek internal savings to focus money and resources towards core business. A
company may outsource its landscaping functions irrelevant to the core business.[13] Companies
and public entities may outsource certain specialized functions, such as payroll, to ADP or
Ceridian. Companies may find the same level of consumer satisfaction.[14][15]
Import marketers may make short run profits from cheaper overseas labor and currency mainly
in wealth consuming sectors at the long run expense of an economy's wealth producing sectors
straining the home county's tax base, income growth, and increasing the debt burden. When
companies offshore products and services, those jobs may leave the home country for foreign
countries at the expense of the wealth producing sectors.[2] Outsourcing may increase the risk of
leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.
[16][17]

Implications
Management processes
Greater physical distance between higher management and the production floor employees often
requires a change in management methodologies, as inspection and feedback may not be as
direct and frequent as in internal processes. This often requires the assimilation of new
communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems,

new Time management methods such as Time Tracking Software, and new cost and schedule
assessment tools such as Cost Estimation Software.

Quality of service
Quality of service is best measured through customer satisfaction questionnaires which are
designed to capture an unbiased view.[18]

Language skills
In the area of call centers end-user-experience is deemed to be of lower quality when a service is
outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where
the first language and culture are different.[19]
Foreign Call center agents may speak with different linguistic features such as accents, word use
and phraseology, which may impede comprehension. The visual clues that are missing in a
telephone call may lead to misunderstandings and difficulties.[20]

Security
Before outsourcing an organization is responsible for the actions of all their staff and liable for
their actions. When these same people are transferred to an outsourcer they may not change desk
but their legal status has changed. They are no longer directly employed or responsible to the
organization. This causes legal, security and compliance issues that need to be addressed through
the contract between the client and the suppliers. This is one of the most complex areas of
outsourcing and requires a specialist third party adviser.[citation needed]
Fraud is a specific security issue that is criminal activity whether it is by employees or the
supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are
involved, for example credit card theft when there is scope for fraud by credit card cloning. In
April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers
occurred when call center workers acquired the passwords to customer accounts and transferred
the money to their own accounts opened under fictitious names. Citibank did not find out about
the problem until the American customers noticed discrepancies with their accounts and notified
the bank.[21]

Qualifications of outsourcers
In the engineering discipline there has been a debate about the number of engineers being
produced by the major economies of the United States, India and China. The argument centers
around the definition of an engineering graduate and also disputed numbers. The closest
comparable numbers of annual graduates of four-year degrees are United States (137,437) India
(112,000) and China (351,537).[22][23]

Companies looking to outsource their engineering activities should evaluate the capabilities of
the providers. There are many bench marking reports by independent research and consulting
firms which analyze the vendors' capabilities.[citation needed]

Diversification
The early trend in outsourcing was manifest in a financial construct where a function's associated
capital and personnel were sold to a vendor and then rented back over a series of years. Early
benefits were a boost in expertise and efficiency as outsource vendors had more focus and
capability in their specialization. As time progressed, the year 0 benefit was off the books,
customer needs evolved and contracts generally aged poorly. Rigid contracts hampered the
ability of customers to respond to emerging business drivers, and simultaneously tied the hands
of the vendor's team who was focused on increased efficiencies for static problems. The result
tended to be additional "project" contracts for incremental changes in a monopoly environment.
Many deals became contentious, and many customers have become very uncomfortable
surrendering so much power to a single vendor. As the contract aged, it became increasingly
difficult to even negotiate with vendors with confidence, because the customer began to lack any
real knowledge of the cost structure of the function, or the competitive situation of the vendor.
Industry leaders turned to each other, trade journals and management consultants to try to regain
control of the situation, and the next answer that grabbed hold of the industry was labor cost
arbitration; leveraging cheap, offshore resources to replace or pressure increasingly expensive
legacy outsource vendors. Pressure led incumbent vendors to move resources offshore, or to be
replaced wholesale. As this renegotiation was under way, many customers seized the opportunity
to restructure to gain more control, transparency and negotiating power. The end result has been
fragmentation of outsource contracts and a decline in mega-deals. Many companies are now
relying on several vendors who each offer specialization and / or lowest cost.

Insourcing
Outsourcing has gone through many iterations and reinventions. Some outsourcing deals have
been partially or fully reversed citing an inability to execute strategy, lost transparency & control,
onerous contractual models, a lack of competition, recurring costs, hidden costs, etc... Many
companies are now moving to more tailored models where along with outsource vendor
diversification, key parts of what was previously outsourced has been insourced. Insourcing has
been identified as a means to ensure control, compliance and to gain competitive differentiation
through vertical integration or the development of shared services [commonly called a 'center of
excellence']. Insourcing at some level also tends to be leveraged to enable organizations to
undergo significant transformational change.[citation needed]
Further, the label outsourcing has been found to be used for too many different kinds of
exchange in confusing ways. For example, global software development, which often involves
people working in different countries, it cannot simply be called outsourcing. The outsourcingbased market model fails to explain why these development projects are jointly developed, and
not simply bought and sold in the marketplace. Recently, a study has identified an additional
system of governance, termed algocracy, that appears to govern global software projects along

side bureaucratic and market-based mechanisms. The study[24] distinguishes code-based

governance system from bureaucracy and the market and underscores the prominent features of
each organizational form in terms of its ruling mechanism: bureaucracy (legal-rational), the
market (price), and algocracy (programming or algorithm). So, global software development
projects, though not insourced, are not outsourced either. They are in-between, in a process that
is sometimes termed Remote In-Sourcing. Projects are developed together where a common
software platform allows different teams around the world to work on the same project together.

Standpoint of labor
From the standpoint of labor, outsourcing may represent a new threat, contributing to worker
insecurity, and reflective of the general process of globalization and economic polarization
(economics).[25]
On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to
increase its manufacturing base employment to 20% of the workforce commenting that the U.S.
has outsourced too much and can no longer rely on consumer spending to drive demand.[26]

Standpoint of government
Western governments may attempt to compensate workers affected by outsourcing through
various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the
issue. The Directive is implemented differently in different nations. In the United States, the
Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected
by international trade agreements. Whether or not these policies provide the security and fair
compensation they promise is debatable.

By country
United States
"Outsourcing" became a popular political issue in the United States, having been confounded
with offshoring, during the 2004 U.S. presidential election. The political debate centered on
outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential
candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate
overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign,
calling such firms "Benedict Arnold corporations".[27]
Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the
costs associated with transferring control of the labor process to an external entity in another
country. A Zogby International poll conducted in August 2004 found that 71% of American
voters believed that outsourcing jobs overseas hurt the economy while another 62% believed
that the U.S. government should impose some legislative action against companies that transfer
domestic jobs overseas, possibly in the form of increased taxes on companies that outsource.[28]
The prediction for 2014 shows that more than 1.3 million positions will disappear because of

"the accelerated movement of work to India ..." and some other countries that willing to accept
outsourced jobs. [29] President Obama came up with an act titled Bring Jobs Home Act that would
help reshore jobs by giving incentives such as a tax cut or a 20 percent tax credit for moving
operations back to the USA. [30]
Union busting is one possible cause of outsourcing. As unions are disadvantaged by union
busting legislation, workers lose bargaining power and it becomes easier for corporations to fire
them and ship their job overseas.[31]
Another given[by whom?] rationale is the high corporate income tax rate in the U.S. relative to other
OECD nations,[32][33][34] and the practice of taxing revenues earned outside of U.S. jurisdiction, a
very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations
in various nations with low tax rates outsource as well, which means that high taxation can only
partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in
1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.[35]
It is argued[by whom?] that lowering the corporate income tax and ending the double-taxation of
foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from
the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign
companies. However, while the US has a high official tax rate, the actual taxes paid by US
corporations may be considerably lower due to the use of tax loopholes, tax havens, and "gaming
the system".[36] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to
lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor
for corporate flight from U.S. jurisdiction.

European Union
Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive
77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to
the safeguarding of employees rights in the event of transfers of undertakings, businesses or
parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in
Directive 2001/23 of 12 March 2001).[37] Under that directive, rights acquired by employees with
the former employer are to be safeguarded when they, together with the undertaking in which
they are employed, are transferred to another employer, i.e. the contractor. An example of a case
involving such contracting-out was the decision of the European Court of Justice in Christel
Schmidt v. Spar- und Leihkasse der frheren mter Bordesholm, Kiel und Cronshagen, Case C392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out
exercise constituted a transfer of an undertaking (see, for example, Ayse Szen v. Zehnacker
Gebudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of
an enterprise outsourcing part of its activities in which they are employed may benefit from the
protection offered by the directive.
Seeking to implement the cost-cutting solutions, many Western European firms have been
transferring tech projects eastward. For example, Deutsche Bank has some of its software
developed in Ukraine, Siemens possess R&D center in Romania. Europe Outsourcing has
produced outstanding results and henceforward they are increasing them in numbers.[citation needed]

Despite unfavorable economic conditions from 2007 to 2009, the outsourcing services market
continued to flourish in Central and Eastern European. In 2008 when the inflow of investment in
Western Europe was down by 48%, it fell by only 9% in Central and Eastern Europe. In Poland
alone, during 2009, the year following the global economic downturn, approximately 10,000 jobs
were created in business process outsourcing (BPO).[citation needed]

Co-sourcing
Co-sourcing is a business practice where a service is performed by staff from inside an
organization and also by an external service provider.[38][39] It can be a service performed in
concert with a client's existing internal audit department. The scope of work may focus on one or
more aspects of the internal audit function. Co-sourcing can serve to minimize sourcing risks,
increase transparency, clarity and lend toward better control over the processes outsourced.[citation
needed]

Examples of co-sourcing services are supplementing the in-house internal audit staff with
specialised skill such as information risk management or integrity services, providing routine
assistance to in-house auditing for operations and control evaluations in peak period activity and
conduct special projects such as fraud investigation or plant investment appraisals. Another
example of co-sourcing is outsourcing part of software development or software maintenance
activities to an external organization, while keeping part of the development in-house.

Identity management co-sourcing

It is an approach to enterprise identity management in which the identity service interacts
directly or through some technical footprint with an organizations Information Technology (IT)
identity backend infrastructure (directories, databases, and other identity repositories). The
organization and the external service provider typically have a shared responsibility for building,
hosting and operating the identity service. The balance of this responsibility can vary depending
on the service levels required, and span from an all on-premise deployment, where the identity
service is built, hosted and operated within the organizations IT infrastructure and managed onpremise by the external service provider. This contrasts with an "all in-the-cloud" service
scenario, where the identity service is built, hosted and operated by the service provider in an
externally hosted, cloud computing infrastructure.

See also

Application Management Services Framework

Business process outsourcing (BPO)

Business process outsourcing in the Philippines

Call center industry in the Philippines

Co-sourcing

Comparative advantage

Contingent workforce

Engineering process outsourcing (EPO)

Farmshoring

Freelance marketplace

Globality

Global sourcing

Homeshoring

Information technology outsourcing (ITO)

Knowledge process outsourcing (KPO)

Legal process outsourcing (LPO)

List of management topics

Offshore software development

Offshoring

Offshoring Research Network

Print and mail outsourcing

Programmers Guild

Recruitment process outsourcing (RPO)

Regional insourcing

Socially responsible outsourcing

Supply chain

Telecentre

Telecommuting

Third-party logistics (3PL)

Transition methodology

Verifiable computing

Vested outsourcing

References
1.

^ "Terms and Definitions". ventureoutsource.com. Retrieved 2007-10-05.

2.

^ a b c Hira, Ron, and Anil Hira. Outsourcing America: What's behind Our National
Crisis and How We Can Reclaim American Jobs? New York: AMACOM, 2008. Print #
67-96.

3.

^ Davies, Paul. What's This India Business?: Offshoring, Outsourcing, and the
Global Services Revolution. London: Nicholas Brealey International, 2004. Print.

4.

^ Overby, S (2007) ABC: An Introduction to Outsourcing. CIO.com.

5.

^ (Q4 2006)Mandatory Multisourcing Discipline Business Trends Quarterly

6.

^ (2006) Mandatory Multisourcing Discipline

7.

^ see Holcomb & Hitt, 2007

8.

^ Olive, B (2004). "Outsourcing Growing, Despite Controversy". Power: 148(4),

1920..

9.

^ Weidenbaum, Murray. Outsourcing : Pros and Cons 19.1 (2004): 23-37.

America: History and Life. Web. 13 Mar. 2012.

10.

^ Buchholz, Todd G. Bringing the Jobs Home: How the Left Created the
Outsourcing Crisis - and How We Can Fix It. New York: Sentinel, 2004. Print 97-118.

11.

^ Hunt, Albert R. "Letter From Washington: As U.S. rich-poor gap grows, so does
public outcry" NY Times 2/18/2007

12.

^ Condon, Bernard. "Study: Tax code slashes tax for hugely profitable
companies" USA Today 8/16/2012.

13.

14.

^ Forey, Gail, and Jane Lockwood. Globalization, Communication and the

Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #2126.
^ The Future Of Outsourcing

15.

^ Koulopoulos, Thomas M.: Driving Innovation and Growth through

Outsourcing. Avon, MA: Platinum/Adams Media, 2006. Print.

16.

^ Lawrence, Robert Z. Single World, Divided Nations: International Trade and

OECD Labor Markets. Washington, DC: Brookings Institution 1996. Print #89-102.

17.

^ Parry, G. and Roehrich, J.K. (2009). Strategic outsourcing of core competencies

in the automotive industry: Threat or opportunity? International Journal of Automotive
Technology and Management. 9(1): 40-53.

18.

^ Maddock, B. & Warren, C. & Worsley A. (2005) Survey of canteens and food
services in Victorian schools.

19.

^ Nadeem, S (2009) Macaulays (Cyber) Children: The Cultural Politics of

Outsourcing in India. Cultural Sociology.

20.
21.
22.

^ Alster, N (2005) Customer Disservice. www.CFO.com.

^ Ribeiro, J (2005) Indian call center workers charged with Citibank fraud.
www.infoworld.com
^ Wadhwa, V (2005) About That Engineering Gap. www.businessweek.com

23.

^ Gereffi, G. & Wadhwa, V. Framing the Engineering Outsourcing Debate:

Placing the United States on a Level Playing Field with China and India. Duke
University.

24.

^ Aneesh, A. Global Labor: Algocratic Modes of Organization, Sociological

Theory 27:4 December 2009

25.

^ Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006.

26.

^ Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S.
economy needs industrial renewal.UK Guardian.. Retrieved on June 28, 2009.

27.

^ Croghan, Lore (February 23, 2004). "Kerry Targets N.Y. Firms: 'Benedict
Arnold' move sending jobs overseas". Daily News. Retrieved March 7, 2011.

28.

^ Zogby International survey results online at zogby.com

29.

^ Bonasia, J. (2010, December 03). Offshoring, for good or ill, comes of age
putting India on the map competitive world markets demand outsourcing, but it does
drain domestic jobs. Investors Business Daily. A04. Retrieved from http://
http://search.proquest.com.mutex.gmu.edu/

30.

^ Congressional Documents and Publications. (2012, May 16). Brown outlines

"Bring Jogs Home Act" aim at encouraging business to bring hobs back to the U.S. 2012
Federal Information and News Dispatch, Inc. Retrieved from
http://global.factivia.com.mutes.gmu.edu/

31.

^ "Tell Xerox to Stop Unionbusting and Shipping Jobs Overseas". American

Rights at Work. Retrieved 2011-03-09.

32.

^ "Veronique de Rugy on Corporate Flight & Taxes on NRO Financial".

Nationalreview.com. 2002-04-18. Retrieved 2010-03-15.

33.

^ "U.S. Lagging Behind OECD Corporate Tax Trends". The Tax Foundation.
2006-05-05. Retrieved 2010-03-15.

34.

^ Tamny, John. "John Tamny on Hillary Clinton Economics on NRO Financial".

Article.nationalreview.com. Retrieved 2010-03-15.

35.

^ Joel Friedman (October 24, 2003). "The Decline of Corporate Income Tax
Revenues" (pdf). Center on Budget and Policy Priorities. Retrieved 2011-03-09.

36.

^ "High Corporate Tax Rate Is Misleading at". Smartmoney.com. Retrieved 201003-15.

37.

^ "Council Directive 2001/23/EC". EUR-Lex. Retrieved 2011-03-09.

38.

^ McIlvaine, Andrew R. (March 16, 2008). "'Co-Sourcing' and More". Human

Resources Executive Magazine. Retrieved May 23, 2012.

39.

^ Khirallah, Diane Rezendes (September 2, 2002). "Out With 'Outsourcing' And

In With 'Co-Sourcing'". Information Week Magazine. Retrieved May 23, 2012.

External links
Look up outsourcing in Wiktionary, the free dictionary.

Job migration at the Open Directory Project

[hide]

International trade

Terminology

Organizations and
policies

Absolute advantage

Balance of payments

Balance of trade

Capital account

Comparative advantage

Current account

Export-oriented industrialization

Fair trade

Foreign exchange reserves

Globalization

Import substitution industrialization

Net capital outflow

Outsourcing

Trade justice

Trading nation

International Monetary Fund

International Trade Centre

United Nations Conference on Trade and

Development

World Bank Group

World Trade Organization

Economic integration

Free trade zone

Trade barrier

Trade bloc

Trade pact

Economic nationalism

Free trade

Mercantilism

Protectionism

ACU

ASEAN

CACM

CAN

Schools of thought

Customs unions

CARICOM

CEMAC

CUBKR

EAC

EAEC

EU

GCC

Mercosur

SACU

WAEMU

Argentina

Canada

China

European Union

India

Japan

Pakistan

United States

Trading partners

Category

Commons

View page ratings

Rate this page
What's this?
Trustworthy
Objective
Complete
Well-written
I am highly knowledgeable about this topic (optional)
Categories:

Business terms

International economics

Management

Offshoring

Outsourcing

Telecommuting

Create account

Log in

Article

Talk

Read

Edit

View history

Main page

Contents

Featured content

Current events

Random article

Donate to Wikipedia

Interaction

Help

About Wikipedia

Community portal

Recent changes

Contact Wikipedia

Toolbox
Print/export
Languages

()

Brezhoneg

Catal

esky

Dansk

Deutsch

Espaol

Esperanto

Euskara

Franais

Bahasa Indonesia

slenska

Italiano

Lietuvi

Nederlands

Norsk (bokml)

Polski

Portugus

Romn

Slovenina

Suomi

Svenska

Trke

Ting Vit

This page was last modified on 30 November 2012 at 20:09.

Text is available under the Creative Commons Attribution-ShareAlike License; additional

terms may apply. See Terms of Use for details.
Wikipedia is a registered trademark of the Wikimedia Foundation, Inc., a non-profit
organization.

Contact us

Privacy policy

About Wikipedia

Disclaimers

Mobile view