Effects of Outsourcing in Today\'s Economy

Outsourcing Its Impact

The effects of outsourcing in today's economy

Effects on People

Being an expatriate

Breaking the language barrier

Culture Shock

Outsourcing and people dynamics: Impact on company

Effects on Economy

Capital flows

Impact on technology

Global management and outsourcing

The effects of outsourcing in today's economy

Outsourcing has become an increasingly popular business strategy for transnational organizations. Many of the U.S. corporations started outsourcing their manufacturing operations since late 1980s. This was due to the potential advantages, both from an economic as well as regulatory perspective that business operations in foreign lands provided to these businesses. Initially, the U.S. firms running in financial troubles chose to set their cost intensive operations abroad such as manufacturing and call centers in low cost countries. Gradually, when the cost benefits were realized, other companies from various industrial sectors also strengthened this trend of outsourcing. Pharmaceutical industry was the first to witness firms from this industry shifting their operations abroad, specifically in developing countries such as China, India, and rest of the Asia Pacific region.

Notwithstanding the economic benefits that outsourcing offered to these companies, there raised plethora of challenges and new issues. Some were related to the companies' strategic goals as well as their public perception whereas others were related to more subtle aspects of economy. These included the growth in number of expatriates in foreign countries from the U.S. And the European countries and the impact on the economy of host country as well as the country of origin from where expatriates belonged. This paper has been organized to discuss 'the effects of outsourcing in today's economy'. The effects on people, companies, and the economies will be explored. This paper is divided in sub-segments to develop clarity of written material. Part two of this paper will review the impact of outsourcing on people's lives, specifically with relation to the impact of outsourcing assignments on expatriates being relocated to other than their country of origin. Part III will highlight the economic impact of outsourcing. The paper will be concluded in part IV followed by recommendations for companies to ease out the process of outsourcing.

II- Effects on People

There are several people related impacts of outsourcing that are experienced while companies engage in this practice of outsourcing their operations, completely or partially. From being an expatriate to learning new language for adjusting one's self, and from having to go through a 'culture shock' to a totally new experience for the company as well, there are several people-related implications that outsourcing has. Following discussion highlights some of these effects of outsourcing on people.

Being an expatriate

Caligiuri and Santo (2000) defined expatriates as "employees who are sent from a parent company to live and work in another country for a period ranging from two to several years" (pp. 62). Key employees of a company are tasked with setting up operations abroad to outsource one or more of departmental operations from a low-cost high-benefit foreign country. The motivation to abroad with some of the company operations, usually manufacturing and production, primarily lies with the company management. Having assessed that a particular foreign market may offer lucrative cost-related advantages to the firm, the management decides to set up operations abroad. The key employees that are tasked with supervising this decision by moving abroad are called 'expatriates' once these key employees land in the foreign country. Usually, the companies involved in outsourcing do so in three to four phases such as identification of motivation to move abroad, preparation phase, implementation of outsourcing plan, and finally the management of outsourced operations. Members from the executive management of the firm take up the duty of preparing the firm to outsource. For this, these top management members move abroad. Dislocation from one's own country and moving out to an unfamiliar country and further establishing the company abroad is an uphill task for the expatriates. The companies chose these expatriates to help initiate operations abroad due to several reasons. Critical skills and knowledge carried by expatriates in starting outsourcing operations is mission critical (Graf, 2004), thus these high paying foreign jobs demand much more from expatriates than usual work routine. Without hand on guidance from headquarters of the parent company, the expatriates struggle and succeed their way to establish the parent company. This dislocation experiences usually involves disturbance to their families as children have to be relocated in host country and their education institutions also gets changed. The spouses of these expatriates also have to adjust themselves in new social system, totally different from their own.

Breaking the language barrier

Language acquisition for host country also becomes the most preliminary task for the expatriates and people moving abroad due to their jobs. Since it has been observed that the U.S. forms have usually set up outsourcing operations in China, India, Brazil, South Koreas, Philippines, and other developing countries, the U.S. expatriates have to learn the language of host country. One of the invisible costs for the parent company for moving operations and people abroad is that language difference may make or break their business prospects. The initial phase of settling in a foreign country for setting up outsourcing operations is difficult as there is considerable amount of knowledge to be transferred as well as acquired from the host country. If there is no common language as medium of communication between the expatriate and hosts, the knowledge transfer may fail or be severely hampered. Gassmann and Zedtwitz (1998) also termed language and culture issue as being top most prominent issues that expatriates and organization experience when faced with setting up operations abroad for the purpose of outsourcing. The lack of language frequency may hinder the setting up of business operations as well as handling other issues related to outsourcing from the host country. The issue of language is not only important in the context of setting up operations but is also related to the expatriates' settlement in host country. The impact on language of expatriate is that most of the expatriates become bilingual after their stints at foreign assignments. The intermingling of expatriates in host countries allows them to acquire the requisite language skills while managing their own settlement as well as the settlement of their parent company in the host culture. Language in itself plays a great deal of role in cultural adjustment of expatriates in host countries. The expatriates that fail to acquire sound language skills in host countries may not perform well both for their own promotion as well as the interest of their company. It has been observed that American expatriates usually come across significant difficulties relates to language and culture in China (Gao, 2007). Thus, the progress of outsourcing operations and an expatriate's own promotion within parent company largely depends on his/her cultural intelligence and ability to assimilate within a foreign culture with ease and in early stage of settlement.

Culture Shock

The development of global economy has become an overly observed reality rather than a mere theory of economic development. With increased reliance on regional and cross-regional trade, more number of people is assigned jobs in foreign countries as compared to the previous decades. This shift in trends of job deployment has resulted in many expatriates going through the phenomenon of 'culture shock'. The feeling that an expatriate goes through while being disoriented due to his/her presence in an unfamiliar culture' is termed as the culture shock. Porter and McDaniel (2007) define that "culture shock is precipitated by anxiety that results from losing all our familiar signs and symbols of social interactions. These signs or cues include the thousand and one ways in which we orient ourselves to the situation of daily life, how to give orders, how to make purchases" (pp. 335).

When expatriates face and experience new gestures, norms, customs, and habits of host country residents, he/she is forced in situation of 'shock', the feeling of being in an unfamiliar and often inconsistent culture with one's own cultural norms and habits. The expatriates who overcome this after a brief period of shock may be well suited for the foreign assignments. But some people have an extended period of going through the culture shock. The usual reason for this is that after these expatriates adjust and conform to one or two culture differences, they are faced with new and ever more striking difference in host and culture of origin. Usual after effects of culture shock can be:

Disillusion from new environment, even becoming antagonistic towards host culture

Feeling of being lost or misplaced

Home sickness

Loss of status and influence over one's identity and self

Feeling of withdrawal (Porter and McDaniel, 2007)

Outsourcing and people dynamics: Impact on company

Espino-Rodr?

guez, Tomas and Padron-Robaina (2004) investigated the impact of outsourcing on the organizational performance of hotels in Canary Islands. The services being outsourced by these hotels were expensive in host environments and there were quality delivery issues as well. The author terms outsourcing as a strategic alternative for the firms and emphasis on hotels to consider outsourcing only when there is strategic aspect of such a decision such as concentration on core business. Till the organizations are not sure about the strategic advantage they intend to achieve from outsourcing, merely outscoring due to cost related benefits is not an optimal choice for hotel industry. The author described that the propensity of Canary Island hotels has been due to some specific priorities such as

Competitive priorities

Reduction of cost

Increasing profitability of firm

Service improvement

Quality enhancement

The companies that decide to outsource some of their services or manufacturing and production processes are impacted in several manners. Firstly, these are a great deal of cost reduction in payroll and procurement of materials. It has been observed that developing economies not only have cheaper human resources but raw materials are also low cost as compared to the developed countries. The companies experience unprecedented growth as a consequence of outsourcing as their operations are then established in foreign countries. Significant knowledge is added to their knowledge base for improving operations and expanding the operations across regional and international boundaries. Mania and Swage (2006) reported that empirical evidence suggested that there was not any significant link between joblessness and the outsourcing of business operations by the U.S. business firms. This observation was contrary to the popularly held belief that companies that outsource manufacturing and services from other countries significant lower the number of people employed locally. These companies, it was said, emphasized on cost advantages only when deciding about outsourcing. Nonetheless, the study by Mania, et al. (2006) is noteworthy in dispelling this impression that firms engaged in outsourcing are responsible for downturn of the economy.

III- Effects on Economy

In their study regarding impact of outsourcing on the U.S. economy in context of loss of jobs, the Mankiw, et al. (2006) made surprising and striking indications that despite the popular rhetoric, there was little indication that outsourcing of services and operations caused economic impact on the U.S. economy. The authors in fact stated that "the empirical literature is able, however, to conclude that offshore outsourcing is unlikely to have accounted for a meaningful part of the job losses in the recent downturn or contributed much to the slow labor market rebound" (Mankiw, et al., 2006; 1). The authors also suggested that it is media attention due to the presidential elections in 2004 that caused this misplaced notion to achieve wide held popularity. Outsourcing of jobs specifically in the field of software development and radiology was of major concern at the time U.S. presedential elections in 2004. The main rationale of authors was that there is little incentive to generate service from domestic market (the U.S.) if same services were cheaply available from foreign markets. Following are some of the major effects of outsourcing in recent years.

Capital flows

Mankiw and Swagel were in an influential position before publishing this study as both served as chairman and chief of staff of Council of Economic Advisers (CEA) respectively in the Bush administration in 2004. The study by Mankiw, at al. (2006) indicated that there was a positive and healthy impact of outsourcing on investment climate in domestic market of the U.S. The study found that for each $10 of capital outflows aimed at outsourcing labor intense functions of a firm, there was $15 of investment being made by the same firm domestically. The increased capital mobility as a result of increase in outsourcing was healthy for the U.S. economy. Similarly, for each $10 increment in foreign compensation, there was an increase of $18 in domestic compensation of employees of the same company. Drezner (2004) while writing an article for Foreign Affairs Magazine also hinted that growing trend of outsourcing will make the U.S. economy more resilient and competitive as opposed to the popular belief that it shrinks the labor market in the U.S. The author observed that statements such as one issued by an IBM executive added to the fear that outsourcing is cutting jobs in domestic market. The statement of IBM executive read that "[Globalization] means shifting a lot of jobs, opening a lot of locations in places we had never dreamt of before, going where there's low-cost labor, low-cost competition, shifting jobs offshore." (Drezner, 2004; 22).

Impact on technology

Lee (2001) observed that there was an increased technological innovation and information systems (IS) intense business functions due to outsourcing. The vendors and buyers coordinate with each through information technology (IT) means whereas the service being outsourced is also delivered through sustained delivery networks. The IT devices and networks are used as primary source of transferring services to the country of origin. The companies that develop IT solutions also focus on delivering high tech solutions to large companies. Bartel, Lach and Sicherman (2005) stated that there was significant evidence that expectation of innovation in technology makes firms to decide favorably for outsourcing their operations. The majority of the firms that expected to gain from technological changes in production have decided to outsource their manufacturing concerns from abroad. Specifically, it has been stated true for the Spanish manufacturing industry.