Outsourcing to a Foreign Country
In the beginning outsourcing to a foreign country may seem as
a risky and scary decision, especially for small companies that
can’t afford trial and error. Fortunately in the world today, as
outsourcing to foreign countries has become very common, there
is a lot on knowledge and expertise available.
Outsourcing services to a foreign country does not only
provide benefits to multinational companies that receive economies
of scale, but also to small companies that cannot afford not to
outsource. Creating and maintaining all possible services in-house
can be very costly for small companies. And most small companies
have been outsourcing many of their services from the very
foundation of their company. It is only outsourcing to foreign
countries that has become a new trend. In today’s global world
companies are beginning to realize that they have the possibility of
utilizing the services and expertise of specialized companies in
foreign locations.
Nowadays a company must outsource to stay competitive. Leading
companies worldwide acknowledge that to stay ahead, they need to
reduce costs, provide the best quality, use the latest high-tech
skills, as well as be reliable and creative. The most effective way
to do this is to outsource to a foreign company.
Of course when making the decision to outsource, a company must
consider its own requirements against the conditions of a certain
market area. For example the outsourcing of call centers and
customer care centers has mainly concentrated on India, due to its
large English speaking workforce. This could not be done in China
for example. Also India offers high quality IT expertise, which is
why IT services often find their way to India. China on the other
hand has a more manufacture based outsourcing industry. These are
things a company must consider when outsourcing to a foreign
company. In addition cost issues are of course extremely relevant.
In addition not only does outsourcing to foreign countries
have benefits it also has positive implications on larger level.
Outsourcing to a foreign location will ensure that companies can
pass the reduced costs to national consumers or to investors to
reinvest. New revenues will be created as outsourcing to a
foreign country will establish demand for US products,
especially in high-tech products. Although some national jobs may be
lost in the outsourcing process, other jobs will then be
filled generating additional value for the economy. Thus there is a
misconception in current discussion on outsourcing, because to
problem is neither trade nor globalization at such, but more
specifically how a country allocates its benefits from international
trade.
According to McKinsey, offshoring will allow the US to capture
economic value through multiple channels:
• Reduced costs - Savings from reduced costs can be passed to
consumers or to investors to reinvest. In the US, companies save 58
cents for every dollar of spending on back office service functions
and IT jobs they move to India. These savings can be reinvested in
new business opportunities with higher value-added, passed on to
consumers in the form of lower prices (which then spark growth in
demand), or distributed to shareholders.
• New revenues - Offshoring creates demand in destination countries
for US products, especially for high-tech items. Offshoring thus
boosts exports. Outsourcing providers - whether in India or
in Poland and whether subsidiaries of multinational companies or
independently owned businesses - buy many goods and services abroad.
A call center in Bangalore, for instance, might purchase Dell
computers, HP printers, Microsoft software and Siemens telephones.
Not surprisingly, exports from the US to India grew from $3.7
billion in 2000 to $5 billion in 2003.
• Repatriated earnings - Several providers serving the US market are
incorporated in America, which means they repatriate their earnings
to the US. An additional 4 cents of every dollar spent on offshoring
services to India thus returns to the US in the form of repatriated
profits.
• Redeployed labor - US workers who lose their jobs to offshoring
will take up other jobs, which will in turn generate additional
value for the economy. In fact, it has been found out that many in
the US whose work is outsourced move on to other, higher value-added
activities. From 1979 to 1999, 69% of US workers who lost their jobs
as a result of trade in sectors other than manufacturing found new
work within half a year. On average, they received similar wages in
their new jobs, though roughly half took pay cuts, while the rest
found better-paid jobs.
The current debate on outsourcing is misplaced because the problem
is neither trade itself nor globalization more broadly, but rather
the question of how a country should allocate the benefits of global
trade. Trade in services, like other forms of international trade,
benefits the US as a whole by making the economic pie bigger and
raising the standard of living. Outsourcing jobs abroad can help
keep companies profitable, thereby preserving other US jobs.
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