Outsourcing: strategic models and implementation

Outsourcing

Business and Society in the Twenty-First Century: A Brief History and Analysis of Outsourcing

One of the largest and most controversial trends in the business world today is the increasing reliance on outsourcing for a variety of business need, from data entry to customer service. Increasingly efficient and reliable telecommunications technologies and other technological and geopolitical forces have made it possible for companies to utilize large workforces in far-flung regions of the globe where wage requirements are significantly lower than in the United States and other developed countries. This has come at the direct cost of jobs in the developed world, though many proponents of outsourcing claim that it actually creates jobs in the long-term by making these companies more profitable and thus better equipped to sustain larger and longer-term operations and expansions.

Ultimately, there are risks and rewards to businesses and to society at large that arise out of the practice of outsourcing. This paper will not attempt to directly address the controversies raised by the practice or make a determination regarding the overall advisability (or lack thereof) of outsourcing, but rather will attempt to provide an objective analysis of the current state and importance of outsourcing. Regardless of what one thinks about this issue, it cannot be denied that outsourcing is a very important and influential concept and practice today, and an understanding of its history and current impact is essential for individuals working in many areas. This will help lead to assessments of how outsourcing should be approached in the future.

The History of Outsourcing

In some respects, outsourcing has been practiced since at least the beginnings of the Industrial Revolution, when many companies began to hire outside firms to handles tasks such as accounting, insurance provision, certain engineering and manufacturing requirements, etc. (Rose 2011). Though firms that were "outsourced" to were generally domestic (i.e. In the same country as the "outsourcer") and the relationships were somewhat different than what is though of as "outsourcing" today, it was during the latter half of the eighteenth century that companies truly began to rely on each other for the continuation of each others' businesses, where one firm might "outsource" its tool manufacturing rather than making their own tools, for example (Rose 2011). These type of relationships persisted for centuries.

It was not until 1989 that outsourcing was explicitly identified as a particular operational strategy or activity, however (Handfield 2006). The practice of outsourcing certain "ancillary" functions was already a common practice at this time, especially as a response to the diversification of corporations during the 1970s and 80s and the resultant complex and inefficient management structures (Handfield 2006). As companies sought ways to keep the diversity of their operations while cutting costs and streamlining management, many turned to outsourcing certain non-essential operations to other companies (Handfield 2006). In the 1980s, such practices increased as companies in the United States sought a way to remain profitable despite the stagflation that was occurring in domestic markets (Heffner 2010).

Telecommunications capabilities really began to take off in the 1990s, and this allowed companies to begin to outsource even more of their activities on a wider geographic level (Rose 2011; Handfield 2006). The increased geographical spread of potential outsourcing activities meant an increase in the outsourcing opportunities and options available, which has created an even greater cost savings potential from outsourcing activities than in previous decades (Rose 2011). These opportunities have only increased in the twenty-first century, as continuing improvements to satellite communications, Internet interfaces, and other developments like voice over Internet protocol (VOIP) have served to connect disparate parts of the globe on an ever-more efficient (in terms of both time and money) manner (Rose 2011; Handfield 2006; Heffner 2010).

Participants

There are three main participants, willing or otherwise, in outsourcing: workers, corporations, and governments. Workers in the United States and other developed countries often feel threatened by outsourcing, and several reports and studies have concluded that job losses and a shrinking middle class are the direct outcomes of outsourcing on the labor force in corporate home companies (Roberts 2005). Workforces in developing nations that are favorites of outsourcing activities, however, obtain an enormous gain in both employment levels and income levels (Roberts 2005). In general, labor has resisted and attempted to slow down or block many outsourcing attempts due to the perception of damage caused by the practice.

Corporations, of course, see things differently. While there is no avoiding the fact that outsourcing by definition leads to an immediate loss of jobs in a corporation's home country, increasing global capabilities require global operational systems in order for prices to remain competitive (VCG 2011). As free trade agreements proliferate and certain international trade barriers are removed, the labor market simply extends beyond national boundaries, and corporations have a duty to seek out the best value for their labor dollars (VCG 2011; BOO 2009). By so doing, companies are ensuring that they will remain competitive, viable, and profitable into the future, thus ensuring that jobs remain to be had both in the domestic labor market and on an international scale (BOO 2009). In this view, outsourcing is a necessary part of creating value effectively in the modern business environment.

Governments' relationships to outsourcing are complex. On the one hand, many politicians and office holders have fought for free trade agreements that promote outsourcing, and have also spoken for corporations' rights and even duty to take advantage of the most efficient labor resources they can find (Rose 2011; Heffner 2010). Tax revenues going to domestic governments tend to decrease with outsourcing, however, both to reductions in income tax and reduced spending due to job loss in the middle class, which can leave significant burdens for governments in terms of fiscal operational ability (Roberts 2005). Ultimately, governments and politicians must rely on a strong and stable employment level in order to fund activities and maintain authority, and it is unclear whether outsourcing promotes or degrades this ability.

Analysis: Specific Examples

Some real-world examples of how outsourcing activities have played out can help place the participants and effects of outsourcing in a more detailed context. Third party logistics outsourcing, where order fulfillment (for Internet orders especially), warehousing, and transportation needs are handled by an outside firm, has become a common practice for many large corporations in a variety of industries over the past decade or so (NI 2011). This led to revenues of forty-six billion dollars for third party logistics companies servicing Fortune 500 companies in 1999, a sixteen-and-a-half percent increase over the previous year, and growth rates increased throughout much of the following decade (NI 2011). This has represented an enormous cost savings to the companies that have outsourced such operations, and has led to greater efficiency in the supply chains for many goods, enabling more effective, efficient, and affordable service for wholesalers, retailers, and end consumers (NI 2011).

Another surprisingly successful use of outsourcing in our brave new world has begun occurring at drive thru windows. Certain fast food establishments have found that it is easier and more cost effective to have orders taken by remote individuals rather than in-store employees, as it creates better focus for both positions (Santiallano 2010). Operations are completed more efficiently, and order takers can service many locations at once through remote connections, optimizing employee usefulness to the company (Santiallano 2010). Though this is not yet occurring on a large or international scale, this would present tremendous opportunities to companies while placing another sector of the workforce in greater jeopardy.