The Outsourcing Dilema

The Outsourcing Dilemma

Introduction

According to Daniel W. Drezner, Assistant Professor of Political Science at the University of Chicago and author, "Outsourcing actually brings far more benefits than costs, both now and in the long run. If its critics succeed in provoking a new wave of American protectionism, the consequences will be disastrous - for the U.S. economy and for the American workers they claim to defend." (Drezner, 2004)

History is in the making as we listen and read about the heated debate on outsourcing from our "somewhat comfortable" suburban lives in the Midwest. Our comfort levels are being challenged, however; as we are made aware of friends, others close by, and the media reporting on those losing their jobs to outsourcing. What gage can be accurately used to measure the true effect of this phenomenon? The truth seems to elude our grasp as we hear those who are passionate speak out on both sides of the issue.

Outsourcing: Its Roots

Lou Dobbs, CNN anchor, known for his anger toward outsourcing believes that outsourcing's origins began with "the collapse of the telecom and communications bubble in 2000." He believes that "moving from the manufacturing offshoring to outsourcing was really a creation of the Internet", stating that "the bandwidth made it all possible." (Fleischer, 2005) Braun Consulting pinpoints the outsourcing industry's beginnings to be quite earlier, going as far back as sixteen years. "After the end of the Cold War more countries began opening up their doors to international trade and the exchange of jobs and services. The trend towards globalization began to increase dramatically." (Braun Consulting News, 2004) Still other sources renounce the idea of outsourcing as a trend or fad revealing this explanation. "In some ways, the beginnings of business process outsourcing (BPO) can be traced back to the Second World War, when engineering and quantitative analysis tools were introduced to improve the manufacture and distribution of war materials." (Jones, 2006) Being aware of the origins of outsourcing's beginnings can help to bring our understanding to a higher level. Until one is able to precisely trace its beginnings, it is almost certain that it would be difficult to predict the effects of outsourcing or where it will take us as individuals, let alone a nation.

Outsourcing: Why?

IBM's chairman and CEO, Sam Palmisano, delivered a hard punch by expressing this opinion, "Big corporations need to radically change their thinking, get their heads out of the sand and fully embrace the world as one big integrated operation lest a bunch of antiglobalization zealots bring down the world economic house." (Cooney, 2006) From Palmisano's perspective resistance to outsourcing and globalization is seen as a threat to the world's economy.

"According to a 2003 study by the McKinsey Global Institute, outsourcing delivers large and measurable benefits to the U.S. economy. It reduces costs for IT and other services by as much as 60 percent, keeping U.S. companies competitive in global markets, benefiting workers and shareholders alike. It stokes demand abroad for the export of U.S.-supplied computers, telecommunications hardware, software, and legal, financial, and marketing services. It returns profits to the United States from U.S.-owned affiliates abroad, and it allows U.S. companies to re-deploy workers in more productive jobs here at home." (Griswold & Buss, 2004)

U.S. Companies are adopting outsourcing for several reasons. Purportedly jobs can be "done at a lower cost, increasing the profit margin and productivity. Productivity increases are made possible by the 24-hour work day; when the office in the US is ready to close, its Indian counterpart is ready to begin, thus creating a continuous work cycle." (Ghimire, 2006) From an accounting viewpoint for small businesses, "Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you're able to pump more capital directly into revenue-producing activities." (All Business: Champions of Small Business, 2006)

Outsourcing Hurdles

Just recognizing the positive bottom line benefits that are possible is not an automatic assurance that if your company decides to outsource that the experience will go smoothly. There are some costs that some companies have failed to count before they start. For outsourcing to be a successful venture there must be sufficient planning and due diligence. Surveyed "c-level executives and outsourcing suppliers found that there was a lack of alignment between suppliers and customers."(Ranger, 2006) In hind site over two thirds of companies wished they had paid more attention to whether or not their supplier could actually come through with their promises. The concern was also expressed that perhaps companies don't understand the "level of expenditure that is necessary to deliver a successful deal."(Ranger, 2006)

In the U.S., it is now very common to do a background check on employees before they are hired, and the average company pays less than $20 to get a very good background check in the U.S. Outside the U.S., the average cost of a background check on an employee is $20,000. (Ramsaran, 2004) With this kind of cost, it is likely to surmise that companies may have to forgo their standards if they want to utilize some types of outsourcing.

Outsourcing is not without risk. It seems important that companies would take the necessary steps to ensure proper risk management before embarking in an area where they have little or no experience. The risk can be directly related to the reputation of the company as well as the value and level of service that is actually received from the endeavor. In a recent survey performed by consultancy firm, Deloitte, "half of CIOs (56%) said they were unsure if outsourcing business activities to drive value was actually better than providing the service themselves in-house." (ContractorUK.com, 2005) For this reason it is suggested that a system of "ongoing assurance" between business and its third party be instituted.

Outsourcing and the Human Factor

Despite the influential backers and supporters of outsourcing and even in spite of all the logical reasons presented as to why we should embrace outsourcing, there is another