Outsourcing refers to the practice of delegating to a third party the performance of some parts of the value chain that used to be done in-house. The make-or-buy decision is usually based on the cost-benefit analysis and aims to eliminate non-value adding activities or processes that the company does not have competitive advantage in. It is possible to distinguish between onshore and offshore outsourcing. Onshore outsourcing implies that the partner companies are located in the same country, while offshore outsourcing or offshoring implies that the outsourced activities are going to be performed by foreign entities (Jacques, 2006).
Originally outsourcing was conducted for labour-intensive manufacturing, thus taking advantage of the low cost of labour in some regions of the world. However, today outsourcing is not limited to the blue-collar jobs, but can also affect the task performed by skilled workers. The benefits of outsourcing white-collar jobs mostly refer to cost reduction. Some countries possess a significant pool of highly qualified workers, who can perform complex tasks but are willing to work for a smaller remuneration. Therefore, by outsourcing white-collar jobs companies may significantly reduce their costs. This process is further facilitated by the improvements in IT and communication technologies, making it rather easy to hire people from other countries. Thus, India has been a destination of white-collar jobs outsourcing due to the high level of education among the population as well as the absence of language barrier, since most people in India speak English. However cost-cutting is not the only benefit of outsourcing. The relatively slow growth of traditional markets makes it necessary for companies to explore new opportunities in the emerging countries. However, in order to effectively penetrate new markets it is important to possess some knowledge about the region. Therefore, hiring people from developing nations could help to adapt to the local requirements. Thus, China has become one of the most attractive regions and outsourcing the marketing function to Chinese companies could significantly enhance the chances of appealing to the local consumers.
Although the benefits of offshoring are quite significant, this practice generates not only winners but also losers. The main category of people, who is threatened by the outsourcing of white-collar jobs, is the white-collar workers in the developed nations. The slow economic growth and the general outsourcing trend will make it harder to find new positions for people, who have lost their jobs. Research shows that outsourcing of low-skilled jobs led to a wage decrease in the developed economies as workers there had to compete with low-cost labour from developing nations (Geishecker & Gorg, 2004). The most common argument to advocate the outsourcing of blue-collar jobs is the possibility to create new places in the sectors, which yield higher margins and pay higher wages. Hence, the goal for the economies of the developed world was to expand knowledge-intensive and strategic industries, where it is easier to gain competitive advantage. However, as outsourcing has expanded beyond low-skilled jobs the governments of developed countries should start to get alarmed. Thus, some transactional activities, such as software development, call-centres and accounting function have been outsourced to India for a long time. Today, even medical professions are not immune to the outsourcing trend, as the transcription of patients’ record as well as some analysis of the results is quite often performed by Indian doctors. The outflow of high-skilled jobs and the relocation of companies from the developed countries can lead not only to higher unemployment, but also to the loss of competitiveness of the economy as a whole. If companies permanently relocate their research and development, accounting and financial departments abroad, over time developed countries will fall behind in scientific development and would no longer set standards in legislation and financial activities. In addition to that, it is important to consider the vicious circle of poverty in the developed countries that can be easily triggered by the decline in local consumption in response to job insecurity and unemployment. Therefore, the governments should interfere in the evolution of local economies in order to protect not only local workers but the economy as a whole.
It is hard to give a precise evaluation of the effects of the outsourcing activity and to decide with certainty whether government interference is necessary. On the one hand outsourcing makes local companies more competitive in the marketplace, while the prohibition of outsourcing could make enterprises vulnerable to the foreign rivals. On the other hand, however, free market is unable to provide job security and does not guarantee economic growth. Moreover, continuous job relocation enabled by technology may lead to a “race to the bottom”, where countries will continuously lower wages in order to become more attractive to global companies. Therefore, governments be active in controlling outsourcing and should search for a balance between protecting its people and jobs without damaging local companies.
Geishecker, I., & Gorg, H. (2004). International outsourcing and wages: Winners and losers.
Retrieved from http://www.etsg.org/ETSG2004/Papers/Geishecker.pdf
Jacques, V. (2006). International outsourcing strategy and competitiveness: Study on current
outsourcing trends. Paris, France: Editions Publibook.