Global Outsourcing Is the Strategic

Global outsourcing is the strategic use of outside resources to perform activities that are traditionally handled by internal staff and resources. It is a management strategy by which an organization delegates major, non-core functions to specialized and efficient service providers, or as Corbett, a leading consultant on global outsourcing asserts, "outsourcing is nothing less than the wholesale restructuring of the corporation around core competencies and outside relationships" (Corbett, 1999). The traditional global outsourcing emphasis on tactical benefits like cost reduction - cheaper labor cost in low-cost countries - have more recently been replaced by productivity, flexibility, speed and innovation in developing business applications, and access to new technologies and skills (Wild et al., 1999).

Outsourcing in the United States and Europe

There has been considerable debate over the impacts of international trade and outsourcing on income inequality in the United States and Europe. Because of the notion of comparative advantage, outsourcing is expected to improve economic efficiency and raise aggregate welfare in all countries. Yet conventional trade theory also suggests that outsourcing may increase income inequality within countries by altering patterns of demand and wages for skilled and unskilled workers. The Storper-Samuelson theorem, in particular, indicates that outsourcing will benefit factors of production that are relatively abundant in each country and will harm factors that are relatively scarce (Rodrik 1997). Within the United States, research has suggested that outsourcing has contributed to widening dispersions between the wages of high-skill and low-skill workers by causing a decline in the relative demand for unskilled labor (Cline 1997,2001; Bernard and Jensen 1995; Krugman 1995; Wood 1994). Other studies, however, have found little empirical evidence of the effects of outsourcing on wage premiums. (Sachs and Shatz 1996; Lawrence and Slaughter 1993). Even among researchers who have linked trade to inequality, the severity of the effects of trade have been disputed. In a review of the literature on U.S. national-level trade and inequality, Cline (2001) concluded that only 6% of the rising inequality in the United States from the early 1970s to the early 1990s was a result of the influence of outsourcing. Yet other studies have found that this share may have been as high as 20% (Wood 1998).

Outsourcing is finally beginning to crack the European market. But here, it comes with a twist: a heavy sprinkling of local representatives from the same cultural background as the target clients. European spending on outsourcing is expected to rise to more than 129 billion euros ($156 billion) in 2008 from 82 billion euros in 2002, according to Forrester Research, the Cambridge, Mass., consulting and research company. And the number of firms that spend more than 20% of their outsourcing budget abroad will go from 7% in 2004 to 20% in 2008, according to a Forrester survey. (Compay, 2004)

Local presence was a must for the customers" in Europe, says Sangita Singh, Wipro's chief marketing officer. European businesses "want to be sure that their voice can be heard within a large organization that doesn't have its center of operations in Europe," she says. Using locals also provides "the cultural and linguistic ties that make the clients smile, and help us build stronger relationships," Ms. Singh adds.

For years, as U.S. And British companies outsourced service jobs to lower-cost locations, the Continent's more conservative managers mostly stayed away from the practice. Many felt it was too risky to send their business to faraway undeveloped countries. But now, with competition tougher and more global, more European businesses are slowly handing out some of their operations to outsourcers to see whether they can deliver promised efficiencies and cost savings.

Despite the growing interest, European companies still outsource far less than their U.S. counterparts, of which more than 20% will spend over 20% of their outsourcing budget offshore this year, Forrester says. To be sure, serious obstacles still remain in Europe -- most notably, the rigid labor laws that make relocating jobs a long and costly process. For example, while it's relatively easy for companies in the U.S. To fire employees whose jobs they want to outsource, to lay off an employee in Germany, a company first has to justify its decision to the union and then give its worker a notice period of four weeks to seven months.

The difference in attitudes goes back to the way both regions developed, says Richard Hill, an intercultural consultant with Europublic, a Brussels-based agency that advises companies in international business. "America was based on a can-do mentality, which is a reflection of the first Europeans who got to a huge, open, immensely rich country and were able to exploit it without any inhibitions," Mr. Hill says. On the other hand, Germany became a nation from the unification of many small principalities, where life was carried out on a local scale, with people less willing to break the rules or stand out, he says.

German firms send roughly 60% of their "offshore" work to eastern Europe, and only 40% to India. American firms steer much more of their offshore work to the subcontinent, which is cheaper. While firms in both Germany and America are able to cut costs steeply by offshoring, the Americans save 20% more. Moreover, says the study, America's economy is more likely to benefit from all those Indian body-shops buying American products, ranging from Dell computers to the Coca-Cola that fuels programmers' late nights. German products are less enticing. And American shareholders are more likely than German investors to have a stake in an Indian offshoring company, further increasing America's gains. Yet all of this still only explains a small part of America's offshoring advantage.