Outsourcing: Effects on People, Economy, and Technology

Introduction: The Rise of Outsourcing

Outsourcing has become an increasingly popular business strategy for transnational organizations. Many U.S. corporations began outsourcing their manufacturing operations in the late 1980s. This was driven by potential advantages — both economic and regulatory — that operating in foreign countries offered. Initially, U.S. firms facing financial difficulties chose to relocate cost-intensive operations, such as manufacturing and call centers, to low-cost countries. As cost benefits were realized, companies across various industrial sectors joined and strengthened this outsourcing trend. The pharmaceutical industry was among the first to see firms shift operations abroad, particularly to developing countries such as China, India, and the broader Asia-Pacific region.

Notwithstanding the economic benefits outsourcing offered, it raised a host of new challenges and issues. Some were related to companies' strategic goals and public perception, while others concerned more subtle economic dynamics. These included the growing number of expatriates moving from the U.S. and European countries to foreign nations, as well as the economic impact on both host countries and the countries of origin. This paper discusses the effects of outsourcing in today's economy, exploring its impact on people, companies, and national economies. Part II reviews the impact of outsourcing on people's lives, particularly on expatriates relocated to countries other than their own. Part III highlights the economic impact of outsourcing. The paper concludes in Part IV with a summary and recommendations for companies seeking to ease the outsourcing process.

There are several people-related impacts associated with outsourcing. From adjusting to a new country as an expatriate, to overcoming language barriers, to experiencing culture shock, outsourcing creates a range of human challenges. The following discussion highlights some of these key effects.

Caligiuri and Di Santo (2001) 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" (p. 27). Key employees are often tasked with establishing operations abroad when a company decides to outsource one or more of its functions to a lower-cost, higher-benefit foreign country. Having assessed that a particular foreign market offers lucrative cost advantages, company management sends select employees abroad — employees who, once they arrive in the host country, are referred to as expatriates.

Companies typically carry out outsourcing in three to four phases: identifying the motivation to move abroad, a preparation phase, implementation of the outsourcing plan, and ongoing management of outsourced operations. Executive management members often take on the responsibility of preparing the firm and may move abroad themselves. Being uprooted from one's home country and tasked with establishing a company in an unfamiliar environment is an immense challenge. The critical skills and knowledge that expatriates bring to the setup of outsourcing operations are mission-critical (Graf, 2004), and these high-stakes foreign assignments demand far more than a typical work routine. Without direct guidance from headquarters, expatriates must navigate obstacles independently. Relocation also disrupts family life: children must change schools, and spouses must adapt to a new social environment entirely different from their own.

Effects on People: Expatriates, Language, and Culture Shock

Language acquisition in the host country is one of the most immediate challenges for expatriates. Since U.S. firms have typically established outsourcing operations in countries such as China, India, Brazil, South Korea, and the Philippines, American expatriates frequently must learn the local language of the host country. Language differences represent an invisible but significant cost to the parent company: the initial phase of setting up outsourcing operations requires substantial knowledge transfer, and if no common language exists between expatriates and local staff, that transfer may fail or be severely impaired.

Gassmann and von Zedtwitz (1998) identified language and culture as among the most prominent challenges that expatriates and organizations face when establishing operations abroad. Beyond operational concerns, language barriers also affect expatriates' personal settlement. Most expatriates who complete long foreign assignments become bilingual, acquiring language skills through daily immersion and interaction with local communities. Language proficiency, in turn, plays a significant role in cultural adjustment. Expatriates who fail to develop adequate language skills in the host country may underperform both professionally and in terms of personal wellbeing. Research has observed that American expatriates often encounter considerable difficulties related to language and culture specifically in China (Gao, 2007). Ultimately, an expatriate's effectiveness — and his or her career advancement within the parent company — depends heavily on cultural intelligence and the ability to assimilate into a foreign culture early in the assignment.

The development of the global economy has brought with it a dramatic increase in the number of people assigned to work in foreign countries. This shift has resulted in many expatriates experiencing what is commonly known as "culture shock." Porter and McDaniel (2007) define culture shock as the anxiety "precipitated by 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" (p. 335).

When expatriates encounter the unfamiliar gestures, norms, customs, and habits of a host country, they may feel disoriented by the inconsistency between the new culture and their own. Expatriates who move through this initial shock relatively quickly are generally well-suited for foreign assignments. However, some individuals experience a prolonged period of culture shock, often because just as they adjust to one cultural difference, they encounter another that is even more striking. Common after-effects of culture shock include:

Espino-Rodríguez and Padron-Robaina (2004) investigated the impact of outsourcing on the organizational performance of hotels in the Canary Islands. The services being outsourced by these hotels were costly in the local environment and raised quality concerns. The authors characterize outsourcing as a strategic alternative for firms, and emphasize that hotels should consider outsourcing only when there is a clear strategic rationale — such as enabling concentration on core business functions. Until an organization is confident about the strategic advantage it intends to achieve, outsourcing purely for cost reduction is not an optimal strategy for the hospitality industry. The study identified the following priorities driving outsourcing decisions among Canary Island hotels:

Companies that outsource services or manufacturing processes are affected in several important ways. There are significant reductions in payroll costs and procurement expenses, as developing economies tend to offer both cheaper labor and lower raw material costs than developed countries. Companies may also experience substantial growth as a consequence of outsourcing, as their operations become established in foreign markets, adding to their knowledge base and expanding their reach across regional and international boundaries.

Mania and Swagel (2006) reported that empirical evidence found no significant link between domestic job losses and the outsourcing of business operations by U.S. firms — a finding that runs counter to the widely held belief that outsourcing companies dramatically reduce local employment. The study is noteworthy in challenging the impression that firms engaged in outsourcing are a primary driver of domestic economic downturns.

In their study of the impact of outsourcing on the U.S. economy — particularly regarding job loss — Mankiw and Swagel (2006) reached findings that challenged prevailing rhetoric. The authors concluded 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" (p. 1). They also suggested that media attention surrounding the 2004 U.S. presidential election had inflated and popularized this misconception. Outsourcing of jobs in fields such as software development and radiology attracted particular concern during that election cycle. The authors argued that there is little incentive to source services domestically if the same services can be obtained more cheaply from foreign markets.

Mankiw and Swagel were well-positioned observers: both served in the Bush administration's Council of Economic Advisers (CEA) in 2004, as chairman and chief of staff, respectively. Their study indicated a positive impact of outsourcing on the domestic U.S. investment climate, finding that for every $10 of capital outflows directed toward outsourcing labor-intensive functions, the same firm invested $15 domestically. Similarly, for every $10 increase in foreign employee compensation, domestic employee compensation at the same firm rose by $18. Drezner (2004), writing in Foreign Affairs, similarly argued that the growing trend of outsourcing would make the U.S. economy more resilient and competitive. He noted that statements like one from an IBM executive — "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" — contributed disproportionately to public fear about domestic job losses (Drezner, 2004, p. 22).

Lee (2001) observed that outsourcing spurred increased technological innovation and the intensification of information systems (IS) functions within businesses. Vendors and buyers coordinate primarily through information technology, and the services being outsourced are delivered via sustained digital networks. IT infrastructure has become the primary channel for transferring services back to the country of origin. Bartel, Lach, and Sicherman (2005) found significant evidence that anticipation of technological innovation influences firms to favor outsourcing their production operations. This pattern was particularly pronounced in the Spanish manufacturing industry.

Outsourcing and People Dynamics: Impact on Companies

Firms have also adopted Information Technology Outsourcing Strategy (ITOS) not merely to reduce IT costs, but to gain competitive advantage by acquiring superior IT capabilities from abroad. Kobelsky and Robinson (2010) found that during the six-year period from 1999 to 2005, U.S. firms engaged in ITOS actually increased their overall IT spending — a counter-intuitive finding that reflects a more complex motivation than simple cost-cutting. Rather than seeking only cheaper labor, many U.S. firms were outsourcing IT services to access capabilities and innovations unavailable domestically. This challenges the popular assumption that outsourcing is driven solely by the pursuit of lower costs, suggesting that product quality and service specialization are equally important factors in the decision to relocate operations abroad.

The widespread outsourcing of production and service operations to foreign countries has had a significant impact on global management practices. Large organizations in Europe and the U.S. have shifted operations to China, India, Brazil, the Philippines, and other non-native English-speaking countries. Call centers and production facilities are among the most commonly relocated business functions. In response, management practices have evolved to incorporate cultural sensitivity and cross-cultural communication skills. There is growing emphasis on emotional intelligence, cultural assimilation, and effective communication between host-country staff and expatriate managers.

The outsourcing of business functions to foreign markets has substantially altered the operational practices of U.S. firms, requiring many business support activities to be tailored to meet the demands of international outsourcing. Customer service management, in particular, has been significantly reshaped by outsourcing. Dunleavy and Hood (1994) proposed that outsourcing would give rise to a "new public management" (NPM) model in countries where public organizations outsource some of their operations, anticipating changes in governance and accountability structures that have since proven prescient.

This paper has examined the specific impacts created by the phenomenon of outsourcing within global economic models. With particular reference to the U.S. economy and to individuals who leave the U.S. to take up foreign assignments, it has explored how the lives and work of expatriates are shaped by outsourcing. Significant effects were identified: employees become expatriates in order to establish their parent companies in foreign markets, and these individuals face barriers related to language and culture in unfamiliar environments. Culture shock — the disorientation felt when immersed in an entirely unfamiliar culture — is a recurring challenge for expatriates.

Conclusion

Lee, Jae-Nam. "The Impact of Knowledge Sharing, Organizational Capability and Partnership Quality on IS Outsourcing Success." Information & Management 38.5 (2001): 323–335.

Porter, Richard E., and Edwin R. McDaniel. Communication Between Cultures. Wadsworth Publishing Company, 2009.