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Outsourcing has become a “charged’ word. It is an important concept to understand because of its business applications (both for corporations and for small businesses) and because of its political implications. The following is intended as a primer on the main topics related to outsourcing. We have included a (hopefully) balanced summary of the “offshoring debate” without a definitive conclusion as we do not intend to take a political stance on this issue.
Definition of Outsourcing
Outsourcing is the act of obtaining services from an external firm.
Business Process Outsourcing
In the corporate environment, the term “outsourcing” often refers to a particular type of outsourcing, business process outsourcing (BPO). BPO occurs when an organization turns over the management of a particular business process (such as accounting or payroll) to a third party that specializes in that process. The underlying theory is that the BPO firm can complete the process more efficiently, leaving the original firm free to concentrate on its core competency.
Roots of Outsourcing
The concept of outsourcing was first made popular by Ross Perot when we founded Electronic Data Systems (EDS) in 1962. EDS would say to a potential client, “You are good at designing and manufacturing widgets, but we are skilled with managing information technology. We will sell you the IT services that you require, and you can pay us periodically with a minimum commitment of two years.” Today, EDS is a multi-billion dollar company with over 70,000 employees and is only one of many global BPO firms.
Offshore outsourcing, or “offshoring”, refers to outsourcing to firms in foreign countries, often to take advantage of labor arbitrage. In the past 10 years, business process outsourcing contracts have increasingly been given to firms in developing countries. Typically educated workers in developing countries, such as India or China, work for a much lower wage than do similarly educated workers in developed countries, such as Japan. Savings from the lower wage rate must exceed the increased costs of management and risk associated with offshore outsourcing for it to be economically viable.
The Politics of “Offshoring”
Offshore outsourcing has recently become a hotly-debated issue in the national media. When the American economy began to pull out of recession in 2001, unemployment did not decrease as expected. Offshore outsourcing was blamed as a contributing factor to this “jobless recovery”. Information Technology was a particularly soft sector, and many American programmers lost their jobs to lower-paid foreign counterparts. Many economists however have recently conjectured that the higher-than-expected unemployment numbers were not the result of offshore outsourcing, and that offshore outsourcing has actually had a positive impact on the American economy. Undoubtedly the debate will continue into the presidential campaign.