Guus Hendriks

Global Environment of Business

22 and 24 October 2019

Outsourcing and Offshoring

Outline

1. What is meant by outsourcing and offshoring?

2. What is the difference between the two? Practical examples

3. Trends in outsourcing and offshoring?

4. Reshoring – a new phenomenon?

5. Theories – (global) value chains

6. What impacts choices for the two?

What is meant by outsourcing and offshoring?

“One important effect of the increasing integration of the world

economy is the rising importance of possibilities to offshore and
outsource value‐creating activities.”
(Mudambi & Venzin, 2010)

• Outsourcing is “the business practice of hiring a party outside a

company to perform services and create goods that traditionally
were performed in-house by the company's own employees and
staff”

• Offshoring is the practice of relocating business processes or

production from one country to another
• Nearshoring when relocating to relative close locations
The difference between the two

Produce in-house Produce in-house

Internalization advantages

Domestically Offshore

Outsource-
offshore decisions

Outsource
Outsource and Offshore
Domestically

Relative foreign location advantages

Outsourcing-offshoring decisions
• Deloitte conducts an annual global outsourcing survey. In 2016,
Deloitte found these reasons to be most important:
Trends in outsourcing and offshoring
• Some observations from their 2018 survey:
• Disruptive outsourcing solutions are the talk of town (e.g. cloud, robotic
process/cognitive automation)
• Although cost-cutting used to be the primary driver behind outsourcing
decisions, this is no longer true
• “In fact, one third [of executives] are willing to accept a cost increase if doing so will
gain them innovative capabilities and improved performance.”
• Effectively managing cyber risk is key to modern outsourcing processes
But it also depends on size…
Reshoring

• Surge of interest into phenomenon of reshoring

• AIB Insights devoted issue to the matter

• Is it a new phenomenon?
• To correct for suboptimal decisions
• Change in macro-economic conditions
• Labour cost gap reduction and cost of logistics
Theoretical frameworks – Firm-level

• Good starting point is Porter’s analysis of value chains

Source: Porter (1985)

Theoretical frameworks – Country-level

• From a country perspective, the concept of global value chains very

relevant
• “full range of activities that firms and workers do to bring a product/good or
service from its conception to its end use and beyond”

Source: The World Bank

Theoretical frameworks – Country-level
• More examples exist:

Source: Mark Johnson, WBS

Perspective: is it good?
• For the firm?
• Cost-cutting may provide value, but a sizeable amount of
outsourcing/offshoring decisions has to be reversed

• Employment – in home or host country

• Case: Barnes and Morris (2008) – South Africa taking part in Global
Value Chain https://www.tandfonline.com/doi/abs/10.1080/09578810701853157
Theoretical frameworks – Country-level
• In 2013, UNCTAD published a report on GVCs and their effect on
development
Some GVC observations
Some GVC observations
Some GVC observations
Some GVC observations
• So according to UNCTAD, value-added trade contributes about 30%
to the GDP of developing countries

• The level of participation in GVCs is associated with stronger levels

of GDP per capita growth

• GVC participation could be a way for countries to have access to

technology and skill development: upgrading

• But, no automatic process that guarantees diffusion of technology,

skill-building and upgrading
What impacts choices?

• Policy measures
• (Tax) incentives
• Regulation

• Factors internal to the firm

• Labour market

• Exposure to new processes and ideas

• Risk - trustworthiness
Source: Deloitte Survey 2016
Relevance for business?

• Ways how to optimise value chains?

• Understand what drives companies’ choices to outsource and

offshore
• Competitive advantage?

• Understand key trends that may affect decisions in the future

• Understand the broader impact of outsourcing/offshoring on

countries and policies