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Outsourcing



 
 
Outsourcing is subcontracting a process, such as product design or manufacturing
Manufacturing

Manufacturing is the use of machine, tool and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to Industry production, in which raw material are transformed into finished good on a large scale....
, to a third-party company. The decision to outsource is often made in the interest of lowering firm or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business
Business

A business is a legally recognized organization designed to provide good s and/or Service to consumers. Businesses are predominant in capitalism economies, most being privately owned and formed to earn profit that will increase the wealth of its owners....
, or to make more efficient
Efficient

Efficient can refer to:*Efficiency *Efficient , winner of the 2007 Melbourne Cup*Efficient Networks, a modem manufacturer now called Gigaset Communications....
 use of land, labor, capital
Capital (economics)

In economics, capital or capital goods or real capital refers to factors of production used to create goods or services that are not themselves significantly consumed in the production process....
, (information) technology
Technology

Technology is a broad concept that deals with an animal species' usage and knowledge of tools and crafts, and how it affects an animal species' ability to control and adapt to its Natural environment....
 and resources . Outsourcing became part of the business lexicon during the 1980s.






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Outsourcing is subcontracting a process, such as product design or manufacturing
Manufacturing

Manufacturing is the use of machine, tool and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to Industry production, in which raw material are transformed into finished good on a large scale....
, to a third-party company. The decision to outsource is often made in the interest of lowering firm or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business
Business

A business is a legally recognized organization designed to provide good s and/or Service to consumers. Businesses are predominant in capitalism economies, most being privately owned and formed to earn profit that will increase the wealth of its owners....
, or to make more efficient
Efficient

Efficient can refer to:*Efficiency *Efficient , winner of the 2007 Melbourne Cup*Efficient Networks, a modem manufacturer now called Gigaset Communications....
 use of land, labor, capital
Capital (economics)

In economics, capital or capital goods or real capital refers to factors of production used to create goods or services that are not themselves significantly consumed in the production process....
, (information) technology
Technology

Technology is a broad concept that deals with an animal species' usage and knowledge of tools and crafts, and how it affects an animal species' ability to control and adapt to its Natural environment....
 and resources . Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour
Division of labour

Division of labour or specialization is the specialization of cooperative Labour in specific, circumscribed tasks and roles, intended to increase the productivity of labour....
.

Overview

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology
Information technology

Information technology , as defined by the Information Technology Association of America , is "the study, design, development, implementation, support or management of computer-based information systems, particularly software applications and computer hardware." IT deals with the use of electronic computers and computer software to data conv...
, human resources
Human resources

Human resources is a term with which organizations describe the combination of traditionally administrative personnel functions with performance, Employee Relations and Resource planning....
, facilities, real estate
Real estate

Real estate is a law term that encompasses land along with anything permanently affixed to the land, such as buildings, specifically property that is fixed in location.
 management, and accounting. Many companies also outsource customer support and call center functions like telemarketing
Telemarketing

Telemarketing is a method of direct marketing in which a salesperson solicits to prospective customers to buy product or Service , either over the phone or through a subsequent face to face or Web conferencing appointment scheduled during the call....
, CAD drafting, customer service
Customer service

Customer service is the provision of Service to customers before, during and after a purchase.According to Turban et al. , ?Customer service is a series of activities designed to enhance the level of customer satisfaction ? that is, the feeling that a product or service has met the customer expectation.?...
, market research
Market research

Market research often refers to either primary or secondary. In secondary research, the company uses information compiled from various sources which appears applicable to a new or existing product....
, manufacturing
Manufacturing

Manufacturing is the use of machine, tool and labor to make things for use or sale. The term may refer to a range of human activity, from handicraft to high tech, but is most commonly applied to Industry production, in which raw material are transformed into finished good on a large scale....
, designing, web development
Web development

Web development is a broad term for any activity related to developing a web site for the World Wide Web or an intranet. This can include e-commerce business development, web design, web content development, Client-side scripting/server-side scripting programming, and web server configuration....
, content writing, ghostwriting and engineering
Engineering

Engineering is the discipline and profession of applying Technology and science knowledge and utilizing natural laws and physical resources in order to design and implement materials, structures, machines, devices, systems, and process that safely realize a desired objective and meet specified criteria....
.

Outsourcing and offshoring
Offshoring

Offshoring describes the relocation by a company of a business process from one country to another -- typically an operational process, such as manufacturing, or supporting processes, such as accounting....
 are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.

With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of India
India

India, officially the Republic of India , is a country in South Asia. It is the List of countries and outlying territories by total area country by geographical area, the List of countries by population country, and the most populous liberal democracy in the world....
n outsourcing companies in the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 and United Kingdom
United Kingdom

The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom , the UK or Britain,is a sovereign state located off the northwestern coast of continental Europe....
. The globalization of outsourcing operating models has resulted in new terms such as nearshoring
Nearshoring

Nearshoring means sourcing service activities to a foreign, lower-wage country that is relatively close in distance or time zone . The customer expects to benefit from one or more of the following constructs of proximity: geographic, temporal, cultural, linguistic, economic, political, or historical linkages....
, noshoring, and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting. They are able to complete tax returns across seas for people in America..

Multisourcing
Multisourcing

Multisourcing is the disciplined provisioning and blending of business and Information Technology services from the optimal set of internal and external providers in the pursuit of business goals....
 refers to large outsourcing agreements (predominantly IT). Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance
Governance

Governance relates to decisions that define expectations, grant power , or verify performance . It consists either of a separate process or of a specific part of management or leadership processes....
 model that communicates strategy
Strategy

A strategy is a plan of action designed to achieve a particular Objective .Strategy is different from Tactic . In military terms, tactics is concerned with the conduct of an engagement while strategy is concerned with how different engagements are linked....
, clearly defines responsibility
Responsibility

Responsibility may refer to:* Responsibility assumption, in spirituality and personal growth* Cabinet collective responsibility, a constitutional convention in governments using the Westminster System...
 and has end-to-end integration
Integration

Integration may refer to:In sociology and economy:*Social integration*Racial integration, refers to social and cultural behavior; in a legal sense, see desegregation...
.

Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain (see Holcomb & Hitt, 2007). Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries.

Process of outsourcing


Deciding to outsource

For any supply chain function, the most significant decision is whether to outsource the function or perform it in-house. The decision to outsource is made at a strategic level and normally requires board approval. Outsourcing results in the supply chain function being performed by a third party. The process begins with the firm identifying the activity to be outsourced and generally using a make-buy
Make-buy

OverviewThe outsourcing decision, as applied to both manufacturing or services, determines what is sourced from outside the firm and what is produced and/or managed internally....
 analysis to justify the decision. Only once a high level business case has been established for the scope of services will a search begin to choose an outsourcing partner.

Due to the complexity of work definition, codifying requirements, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants (see sourcing advisory
Sourcing advisory

Sourcing advisory is the use of third-party advise during the sourcing process. As such, it may refer to advise sought during outsourcing, offshoring or global sourcing....
) or outsourcing intermediaries to assist in scoping, decision making, and vendor evaluation.

Supplier Selection Process


Total Cost of Ownership
When choosing a supplier or vendor, sourcing managers must compare options based on the supplier’s impact on the total cost of ownership (TCO). Several other factors besides purchase price are included in TCO analysis. They may include :
  • Replenishment lead time
  • On-time performance
  • Supply Flexibility
  • Delivery Frequency/Minimum Lot Size
  • Supply Quality
  • Inbound transportation cost
  • Pricing terms
  • Information coordination capability
  • Design collaboration capability
  • Exchange rates, taxes, duties etc.
  • Supplier Viability


There is a three step process to evaluate suppliers using the Total Cost of Ownership
Total cost of ownership

Total cost of ownership is a financial estimate designed to help consumers and enterprise managers assess direct and indirect costs. It is used in many industries and this article...
 concept: 1. Identify all activities to be captured in TCO 2. Quantify cost drivers using activity-based costing
Activity-based costing

Activity-Based Costing is a costing model that identifies activities in an organization and assigns the cost of each activity resource to all products and services according to the actual consumption by each: it assigns more indirect costs into direct costs....
3. Calculate the TCO of each supplier

Supplier proposals

A Request for Proposal (referred to as RFP) is an invitation for suppliers, often through a bidding process, to submit a proposal on a specific commodity or service. A bidding process is one of the best methods for leveraging a company's negotiating ability and purchasing power with suppliers. The Request process brings structure to the procurement decision and allows the risks and benefits to be identified clearly upfront.[1] The Request purchase process is lengthier than others, so it is used only where its many advantages outweigh any disadvantages and delays caused. The added benefit of input from a broad spectrum of functional experts ensures that the solution chosen will suit the company's requirements.

The RFP may dictate to varying degrees the exact structure and format of the supplier's response. The creativity and innovation that suppliers choose to build into their proposals may be used to judge supplier proposals against each other, at the risk of failing to capture consistent information between bidders and thus hampering the decision making process. Effective RFPs typically reflect the strategy and short/long-term business objectives, providing detailed insight upon which suppliers will be able to offer a matching perspective.[2]

Supplier competition

A competition is held where the client marks and scores the supplier proposals. This may involve a number of face-to-face meetings to clarify the client requirements and the supplier response. The suppliers will be qualified out until only a few remain. This is known as down select in the industry. It is normal to go into the due diligence
Due diligence

Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care....
 stage with two suppliers to maintain the competition. Following due diligence the suppliers submit a "best and final offer" (BAFO) for the client to make the final down select decision to one supplier. It is not unusual for two suppliers to go into competitive negotiations.

Negotiations

The negotiations take the original RFP, the supplier proposals, BAFO submissions and convert these into the contractual agreement between the client and the supplier. This stage finalizes the documentation and the final pricing structure.

Contract finalization

At the heart of every outsourcing deal is a contractual agreement that defines how the client and the supplier will work together. This is a legally binding document and is core to the governance
Governance

Governance relates to decisions that define expectations, grant power , or verify performance . It consists either of a separate process or of a specific part of management or leadership processes....
 of the relationship. There are three significant dates that each party signs up to the contract signature date, the effective date when the contract terms become active and a service commencement date when the supplier will take over the services.

Transition

The transition will begin from the effective date and normally run until four months after service commencement date. This is the process for the staff transfer and the take-on of services.

Transformation

The transformation is the execution of a set of projects to implement the service level agreement
Service Level Agreement

A service level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance....
 (SLA), to reduce the total cost of ownership
Total cost of ownership

Total cost of ownership is a financial estimate designed to help consumers and enterprise managers assess direct and indirect costs. It is used in many industries and this article...
 (TCO) or to implement new services. Emphasis is on 'standardization' and 'centralization'.

Ongoing service delivery

This is the execution of the agreement and lasts for the term of the contract.

Benchmarking

Some outsourcing contracts contain clauses giving the client the right to benchmark
Benchmark

The term benchmark originates from the chiseled horizontal marks that surveyors made, into which an angle-iron could be placed to bracket a levelling rod, thus ensuring that the levelling rod can be repositioned in exactly the same place in the future....
 the price paid to the provider at certain milestones during the life of the agreement. A third party benchmarking firm is selected according to the terms agreed to at contract signing (e.g. selected by client, selected by provider, selected by mutual agreement, or pre-selected at contract signing), and conducts a comparison of the price being paid to current market prices. If the terms of the contract provide for it, the provider and client may adjust the pricing based on the results of the benchmark.

Termination or renewal

Near the end of the contract term a decision will be made to terminate or renew the contract. Termination may involve taking back services (insourcing
Insourcing

Insourcing is the opposite of outsourcing; that is insourcing is often defined as the delegation of operations or jobs from production within a business to an internal entity that specializes in that operation....
) or the transfer of services to another supplier.

Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues:
  • Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.
  • Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.
  • Cost restructuring. Operating leverage
    Operating leverage

    The operating leverage is a measure of how revenue growth translates into growth in operating income. It is a measure of Leverage , and of how risky a company's operating income is....
     is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
  • Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
  • Knowledge. Access to intellectual property and wider experience and knowledge.
  • Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
  • Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
  • Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
  • Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
  • Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
  • Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
  • Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
  • Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.
  • Risk management. An approach to risk management
    Risk management

    Risk management is activity directed towards the assessing, mitigating and monitoring of risks. In some cases the acceptable risk may be near zero....
     for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
  • Venture Capital. Some countries match government funds venture capital with private venture capital
    Venture capital

    Venture capital is a type of private equity capital typically provided to early-stage, high-potential, Growth investing companies in the interest of generating a return through an eventual realization event such as an IPO or mergers and acquisitions of the company....
     for startups that start businesses in their country.
  • Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.


Activities for outsourcing


Research & Development

The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:

  • new product design does not work
  • project time and cost overruns
  • loss of key staff
  • competitive response
  • problems of quality/yield.


The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost country sourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm.

Criticisms of outsourcing


Quality Risks

Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such facotr is opportunism
Opportunism

Opportunism is a term used in politics and political science. It forms an important rationale as well for transaction cost economics. It is interpreted in different ways, but usually refers to one or more of the following:...
 by suppliers due to misaligned incentives between buyer and supplier, information asymmetry
Information asymmetry

In economics and contract theory, information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other....
, high asset specificity
Asset specificity

Asset specificity is a term related to the inter-party relationships of a transaction. It has been extensively studied in a variety of management and economics areas such as marketing, accounting, organizational behavior and management information systems....
, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability
Observability

Observability, in control theory, is a measure for how well internal states of a system can be inferred by knowledge of its external outputs. The observability and controllability of a system are mathematical duality ....
 as it related to quality risks in outsourcing: the concepts of testability
Testability

Testability, a property applying to an empirical hypothesis, involves two components: the logical property that is variously described as contingency, defeasibility, or falsifiability, which means that counterexamples to the hypothesis are logically possible, and the practical feasibility of observing a reproducibility series of such count...
 and criticality
Criticality

Criticality may refer to:*Critical mass, critical mass in nuclear reactors;*Self-organized criticality;*Criticality matrix;*Criticality accident...
. Testability, in the context of quality risk in outsourcing a product or service, refers to a product’s or service’s coverage, or the ease of inspecting every single unit. Testability also refers to a product’s or service’s thoroughness, or the ease of inspecting for single possible defect. Thus, the testability of a product or service is measured by where it lies on the coverage and thoroughness axes:
  • Low Thoroughness + Low Coverage = Products or Services with Low Testability
  • High Thoroughness + Low Coverage = Complete Inspections of Few Products or Services
  • Low Thoroughness + High Coverage = Incomplete Inspections of Most Products or Services
  • High Thoroughness + High Coverage = Products or Services with High Testability


Criticality, in the context of quality risk in outsourcing a product or service, refers to the potential negative impact of a quality defect - the higher the criticality of a product or service the higher the potential negative impact.

The quality risk in outsourcing a product or service can thus be summed as a function of its testability and criticality:
  • Low Testability + Low Criticality = High probability of minor defects
  • High Testability + Low Criticality = Lowest Quality Risk
  • High Testability + High Criticality = Low Probability of Critical Defects
  • Low Testability + High Criticality = Highest Quality Risk


Quality fade
There have been numerous reports and media coverage recently focused on the concerns about the quality and safety of certain Chinese exports. There is commentary that Chinese manufacturers are engaging in a practice called quality fade. Quality fade is the deliberate and secretive reduction in the quality of materials in order to widen profit margins. The downward changes in materials are subtle but progressive, and usually unnoticeable by the buyer/importer. The initial production sample meets requirements, however, with subsequent production runs more and more of the critical inputs are missing. Suppliers will continue to reduce the quality of materials, pushing the limits, until they are caught or a catastrophic event occurs.

Public opinion

There is a strong public opinion regarding outsourcing (especially when combined with offshoring
Offshoring

Offshoring describes the relocation by a company of a business process from one country to another -- typically an operational process, such as manufacturing, or supporting processes, such as accounting....
) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union
European Union

The European Union is an economic and political union of 27 European Union member state, located primarily in Europe. It was established by the Treaty of Maastricht on 1 November 1993 upon the foundations of the pre-existing European Economic Community....
 regulations called the Transfer of Undertakings
Transfer of Undertakings (TUPE)

The Transfer of Undertakings Regulations 2006, or "TUPE" are the United Kingdom's implementation of the European Community's new "Acquired Rights Directive" ....
 (Protection of Employment). Labor laws in the United States
United States

The United States of America is a Federal government constitutional republic comprising U.S. state and a federal district. The country is situated mostly in central North America, where its Contiguous United States and Washington, D.C., the Capital districts and territories, lie between the Pacific Ocean and Atlantic Oceans, Borders of the U...
 are not as protective as those in the European Union. A study has attempted to show that public controversies about outsourcing in the U.S. have much more to do with class and ethnic tensions within the U.S. itself, than with actual impacts of outsourcing.

Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.

There are a number of the public who find the linguistic
Linguistics

Linguistics is the science study of natural language. Linguistics encompasses a number of sub-fields. An important topical division is between the study of language structure and the study of Meaning ....
 features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face
Face-to-face

The face-to-face relation refers to a concept in the French philosopher Emmanuel L?vinas' thought on human sociality.L?vinas' phenomenological account of the "face-to-face" encounter serves as the basis for his ethics and the rest of his philosophy....
 encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.

Social responsibility

Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work.

On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.

Quality of service

Quality of service is measured through a service level agreement
Service Level Agreement

A service level agreement is a part of a service contract where the level of service is formally defined. In practice, the term SLA is sometimes used to refer to the contracted delivery time or performance....
 (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price.

There are a number of stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better.

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research. This allows quality to be tracked over time and also for corrective action to be identified and taken.

Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company.

In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center. This inhibits the build-up of employee knowledge and keeps quality at a low level.

Company knowledge

Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail
E-mail

Electronic mail, often abbreviated as e-mail, email, E-Mail, or eMail, is any method of creating, transmitting, or storing primarily text-based human communications with digital communications systems....
 informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.

In the engineering
Engineering

Engineering is the discipline and profession of applying Technology and science knowledge and utilizing natural laws and physical resources in order to design and implement materials, structures, machines, devices, systems, and process that safely realize a desired objective and meet specified criteria....
 discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).

Work, labour, and economy


Net labour movements

Productivity
Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars.

In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.

Standpoint of labor
From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization
Globalization

Globalization in its literal sense is the process of transformation of local or regional phenomena into global ones. It can be described as a process by which the people of the world are unified into a single society and function together....
 (see Krugman, Paul
Paul Krugman

Paul Robin Krugman is an United States economist, columnist, and author. He is a professor of economics and international affairs at Princeton University, a centenary professor at the London School of Economics, and an op-ed columnist for The New York Times....
 (2006). "Feeling No Pain." New York Times, March 6, 2006). While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living - these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river."

The U.S.
'Outsourcing' became a popular political issue in the United States during the 2004 U.S. presidential election
United States presidential election, 2004

The United States presidential election of 2004 was held on Tuesday, November 2, 2004, to elect the President of the United States. It was the 55th consecutive quadrennial election for President and Vice President of the United States....
. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry
John Kerry

John Forbes Kerry is the Junior Senator United States Senate from Massachusetts and chairman of the Senate Foreign Relations Committee.As the Presidential nominee of the Democratic Party , he was defeated by 34 electoral votes in the United States presidential election, 2004 by the Republican Party incumbent President of the United States...
 criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of U.S. tax
Tax

To tax is to impose a financial charge or other levy upon an individual or Legal person by a state or the functional equivalent of a state.Taxes are also imposed by many subnational entity....
es during his 2004 campaign, calling such firms "Benedict Arnold
Benedict Arnold

Benedict Arnold V was a General officer during the American Revolutionary War who originally fought for the American Continental Army, but switched sides to the British Empire....
 corporations". Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby
Zogby

Zogby may refer to:* James Zogby , American founder and president of the Arab American Institute; Brother of John Zogby* John Zogby , American pollster; President & CEO of Zogby International; Brother of James Zogby...
 International poll conducted in August 2004 found that 71% of American voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. One given rationale is the extremely high corporate income tax rate in the U.S. relative to other OECD nations , and the peculiar practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. It is argued that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.

Policy solutions to outsourcing are also criticized.

Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.

Fraud

Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example about the credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank
Citibank

Citibank is a major international bank, founded in 1812 as the City Bank of New York, later First National City Bank of New York. Citibank is now the consumer banking arm of financial services giant Citigroup, one of the largest companies in the world....
 customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank..

See also


Further reading

  • A.D. Bardhan and C. Kroll, (2003).
  • Peter Bendor-Samuel (author), Turning Lead Into Gold: The Demystification of Outsourcing (2000), ISBN 1-890009-87-3
  • Peter Brudenall (editor), Technology and Offshore Outsourcing Strategies (2005), ISBN 1-4039-4619-1
  • Vinaj Couto, Mahadeva Mani, Vikas Sehgal, Arie Y. Lewin, Stephan Manning, Jeff W. Russell, [https://offshoring.fuqua.duke.edu/pdfs/DukeServiceProviderReport_web.pdf Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities] [https://offshoring.fuqua.duke.edu/ Offshoring Research Network] 2007 Service Provider Report.
  • Lou Dobbs, Exporting America Why Corporate Greed is Shipping American Jobs Overseas, 2004 ISBN 0-446-57744-8
  • Christopher M. England, Outsourcing the American Dream, October 2001, Writer's Club Press, ISBN 0-595-20148-2
  • Georg Erber, Aida Sayed-Ahmed, Offshore Outsourcing - A Global Shift in the Present IT Industry , in: Intereconomics, Volume 40, Number 2, March 2005, S. 100 - 112,
  • Thomas L. Friedman, The World is Flat
    The World Is Flat

    The World Is Flat: A Brief History of the Twenty-First Century is an international bestselling book by Thomas L. Friedman that analyzes globalization, primarily in the early 21st century....
    : A Brief History of the Twenty-First Century
    2005 ISBN 0-374-29288-4
  • Ganesh, S. 2007. "Outsourcing as Symptomatic: Class visibility and ethnic scapegoating in the US IT Sector." Journal of Communication Management. 11.1: 71-83.
  • Gary Gereffi and Vivek Wadhwa, (2006).
  • Stephen Haag, Maeve Cummings, Donald J. McCubbrey, Alain Pinsonneault, Richard Donovan "Management Information Systems For The Information Age", 2006, McGraw-Hill Ryerson, ISBN 0-07-095569-7
  • Ron Hira and Anirl Hira, with forward by Lou Dobbs
    Lou Dobbs

    Louis Dobbs , is a CNN news anchor and managing Editing for Lou Dobbs Tonight. He is a conservative editorial columnist and broadcast syndication radio show host....
     Outsourcing America, What's Behind our national crisis and how we can reclaim American Jobs 2005 ISBN 0-8144-0868-0
  • Tim R. Holcomb, Michael A. Hitt. 2007. "Toward a model of strategic outsourcing". Journal of Operations Management, volume 25, issue 2: pp. 464-481
  • Thomas Kern, Leslie P. Willcocks: „The Relationship Advantage“ Oxford University Press 2002, ISBN 0199241929
  • Thomas Kern, Leslie P. Willcocks, Mary C. Lacity: „Netsourcing “ Prentice Hall PTR 2002, ISBN 0130923559
  • Mark Kobayashi-Hillary. 2004. (2nd ed 2005) Outsourcing to India. ISBN 3-540-23943-X.
  • Mark Kobayashi-Hillary, 'Building a Future with BRICs: The Next Decade for Offshoring' (Nov 2007). ISBN 978-3-540-46453-2.
  • Mark Kobayashi-Hillary & Dr Richard Sykes, 'Global Services: Moving to a Level Playing Field' (May 2007). ISBN 978-1-902505-83-1.
  • William Lazonick, Globalization of the ICT Labor Force, in: The Oxford Handbook on ICTs, eds. Claudio Ciborra, Robin Mansell, Danny Quah, Roger Solverstone, Oxford University Press, (forthcoming)
  • Baziotopoulos A. Leonidas (2006), "Logistics Innovation and Transportation", Work-in-Progress Conference paper, EuroCHRIE Thessaloniki, 2006.
  • Arie Y. Lewin and Vinaj Couto, [https://offshoring.fuqua.duke.edu/orn_report.pdf Next Generation Offshoring: The Globalization of Innovation] [https://offshoring.fuqua.duke.edu/ Offshoring Research Network] 2006 Survey Report.
  • Mario Lewis, IT Application Service Offshoring: An Insider's Guide, Sage Publications, 2006, ISBN-10: 0761935258 ISBN-13: 978-0761935254
  • Catherine Mann, Accelerating the Globalization of America: The Role for Information Technology, Institute for International Economics, Washington D.C., June 2006, , ISBN paper 0-88132-390-X
  • Stephan Manning, Silvia Massini and Arie Y. Lewin, "A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent", in: Academy of Management Perspectives, Vol. 22, No.3, October 2008, 35-54.
  • McDonald, SM and Jacobs, TJ (2005) Int. J. Management Practice, Vol. 1, No. 2, pp.152-174.
  • National Academy of Public Administration. (2006). "Off-Shoring: An Elusive Phenomenon". Report for the U.S. Congress and the Bureau of Economic Analysis: Washington.
  • Mario Toledo, Outsourcing and Offshoring: Companies immerged in a complex environment, Institute of Technology and Innovation Management Project Work, Hamburg University of Technology.
  • Bharat Vagadia, "Outsourcing to India: A Legal Handbook", August 2007, Springer, ISBN 978-3-540-72219-9
  • Peter Wiggers, Maritha de Boer-de Wit, and Henk Kok, "IT Performance Management", 2003, ISBN 0750659262


External links


Industry bodies

  • UK trade association.

Journals, publications and research

  • [https://offshoring.fuqua.duke.edu/ Offshoring Research Network]


Articles

  • - by Partha Iyengar and James Popkin (Q2 2007)
  • - by H.J.M. Boersen, W.G. van Gils and M. Zantinge.
  • - by Petros Michaelides (2006)


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