Business Environment-5

OUTSOURCING

Meaning of the term outsourcing

Outsourcing refers to procurement (sourcing) than outside a firm of goods and services which previously introduced by the firm or could have been produced by the firm itself without significant new investment.

Outsourcing of physical inputs

Outsourcing of physical inputs refer to situations when firms expanded their purchases of manufactured inputs like car companies that purchased window cranks and seat fabrics from outside the firm rather than making them inside. This involves vertical disintegration in international trade.
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Examples of vertical disintegration

WTO Report details the production of an American car as follows: Thirty percent of cars value goes to Korea for assembly, 17.5% to Japan for components and advance technology, 7.5% to Germany for design, 4% to Taiwan and Singapore for minor parts, 2.5% to UK for advertising and marketing services and 1.5% to Ireland and Barbados for data processing. This means that only 37% of production value is generated in the USA.
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Examples of vertical disintegration

A Barbie doll in the USA is made of plastic and hair procured in Taiwan and Japan ; it uses the mould in the USA and assembled in Indonesia and Malaysia with Chinese doll clothing and US paints. Inputs from six countries are involved.

Long distance purchase of services

Outsourcing of professional services through telephone. Fax and Internet is a prominent example of a new type of trade. Examples include transaction by firms like phone call centers staffed in Bangalore to serve customers in New York and x-ray transmitted digitally from Boston to be read in Mumbai or with direct consumption of individuals like hiring an offshore firm to provide plans for interior decoration.
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Special relationship
Outsourcing means more than just the purchase of raw materials and standardized intermediate goods. It means finding a partner with which a firm can establish a bilateral relationship and having the partner undertake relationship specific investments so that it becomes able to produce to goods and services to fit the firms particular needs. Example, KFC and BRAC Poultry agreement in Bangladesh.

Types of outsourcing
Outsourcing includes serving several industries like travel, insurance, financial services, health care, professional services, manufacturing, distribution and retail, and providing essential corporate functions such as financing and accounting, payroll, research and analysis.

Advantages of outsourcing
1.Cost saving. For every dollar of corporate spending that is outsourced, US Companies save 58 cents, most of this coming from labor saving. For example, the wage of software developers in the USA is eight times higher than that of similar workers in India.

Social benefits
2. The benefits of outsourcing are not limited to reduction of cost to companies. They involve social gains. According to Daniel W. Brezner, for every dollar spent on outsourcing in India, the USA reaps between $1.12 to $1.14. US firms save money and become more profitable, benefiting shareholders and increasing returns on investment. Foreign facilities boost demand for US products such as computers and telecommunication equipment, necessary for their outsourced functions. Displaced labor is reallocated to more productive jobs
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Social benefits
For example, although 70,000 computer programmers lost their jobs between 1999 and 2003, in the USA more than 115000 computer software engineers found higher paying jobs during the same period.

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Benefits of outsourcing
3. Better deal for consumers. The consumers get a better product at a cheaper price. Global outsourcing of components has reduced the cost of IT hardware by more than 30 percent since 1995. Because of low price, additional demand of $230 billion for computers was created in the US alone.
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Benefits of outsourcing
4.Boosting of world economy. Outsourcing creates new demand for cheap, efficient and new products. New jobs are also created. This expands world GDP. 5. New markets. Outsourcing creates new markets for knowledge-based economies.

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Benefits of outsourcing
6 Gains in the form of profit and new jobs. Most Indian outsourcing firms are owned in whole or in part by US companies such as GE and EDS and repatriate their profits. On the other hand, as US loses jobs in call centers and data processing, new opportunities are created for jobs in research and development. Contrary to the belief that US is importing massive amount of services from low wage countries, in 2002, it ran $64.8 billion surplus in services.

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Benefits of outsourcing
7. Outsourcing facilitates the production of new goods and services. Without outsourcing, a producer will have to create capacity for producing all components. This would delay the launching of a new product. The failure to launch a new product in time may give an advantage to a competitor. For a new producer, there is no choice, for them it is a life and death question.
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Benefits of outsourcing
8. Outsourcing is advantageous for small firms. Outsourcing can help small firms act big by giving them access to the same economies of scale, efficiency and expertise that large companies enjoy.

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Disadvantages of outsourcing
1. A large number of workers suffer from outsourcing. Outsourcing eliminates jobs in industrial countries. Even if new jobs are created, they may not go to persons who lost jobs. New training is needed for new jobs. Relocation may be necessary for new jobs. Finally, the new jobs may be inferior to old jobs. Thus outsourcing is viewed as a threat by labor.
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Disadvantages of outsourcing
2. Continuous surveillance in quality control in outsourcing is needed. Otherwise the benefits of outsourcing would be considerably eroded.

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Emerging Trends of outsourcing

1. The fear of job loss owing to outsourcing is exaggerated for three reasons. (a) All jobs in service sector cannot be outsourced. Close to 90 percent of jobs in USA require geographic proximity. Such jobs include everything from retail and restaurants to marketing and personal care. (b) jobs are lost in the manufacturing sector mainly because of technological change and not because of outsourcing. Developing countries are not getting more manufacturing jobs because developed countries are losing them. During 1995 to 2002, US lost 11% manufacturing jobs. China saw 15% decrease and Brazil a 20%.

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Issue of job loss

(c ) Protectionism is no answer to outsourcing. The US steel prices are higher. If steel workers are protected, the workers working in industries using steel would suffer, In the USA steel users employ roughly 40 times more people than do steel producers. When US government imposed higher tariff to protect Steel industry, 45000 to 75000 jobs were eliminated in steel using industries. When US tried to protect sugar industry, the industries which used sugar (such as candy) were relocated.
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2,Change in size and industrial relations

1. The small is not only beautiful, it is becoming more efficient. The old assembly line production is disappearing. Management style must change and knowledge based production shall be the new wave. 2. Old trade unionism based on concentration of large number of workers in small places will disappear.
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3. Uneven benefits of out sourcing

The benefits of outsourcing particularly in services are not evenly distributed. India gets 60% preference amongst the global companies and China 32% preference. India controls nearly half of the global off shoring market. The market is highly competitive.

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Issues for discussion

1. What is outsourcing? Discuss the main types of Outsourcing. 2. Discuss the main advantages and disadvantages of outsourcing. 3. Do you agree with the view that outsourcing is causing job losses in the USA. Give reasons for your answer.

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