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.

Effects on People: Expatriates, Language, and Culture Shock

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.

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:

Outsourcing and People Dynamics: Impact on Companies

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.

Conclusion

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.

The impact of outsourcing on companies is also considerable. Improved firm performance, expanded global reach, and growth in organizational knowledge are among the primary benefits that companies derive from outsourcing operations abroad. Importantly, the people-related dimensions of outsourcing do not necessarily translate into negative macroeconomic outcomes. Empirical research challenges the view that outsourcing damages domestic employment, and there is evidence of an increased propensity for IT investment growth as a consequence of outsourcing. Companies considering outsourcing are advised to establish clear strategic rationales, invest in cross-cultural training and language support for expatriates, and evaluate outsourcing decisions not only on cost grounds but on the broader strategic and technological gains on offer.

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