Offshore Outsourcing made simple


Collection of Definitions of Offshore Outsourcing

Outsourcing is the delegation of non-core business to a third party service provider. The outsourcing can be provided on or off premises; it can be in the same country or in a separate country. Through this a long-term, results-oriented relationship with an external service provider is created.


Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products or services are actually developed or manufactured.

It can be contrasted with offshoring,in which the functions are performed in a foreign country by a foreign subsidiary. Opponents point out that the practice of sending work overseas by countries with higher wages reduces their own domestic employment and domestic investment. Many customer service jobs as well as jobs in the information technology sectors (data processing, computer programming, and technical support) in countries such as the United States and the United Kingdom - have been or are potentially affected.


Offshore outsourcing, a type of business process outsourcing (BPO), is the exporting of IT-related work from the United States and other developed countries to areas of the world where there is both political stability and lower labour costs or tax savings. Outsourcing is an arrangement in which one company provides services for another company that could also be or usually have been provided in-house. Offshore simply means "any country other than your own." The Internet and high-speed Internet connections make it possible for outsourcing to be carried out anywhere in the world, a business trend economists call globalization. In general, domestic companies interested in offshore outsourcing are not only trying to save money in order to be more price-competitive against each other, but also to enable them to compete with businesses in other countries.



Critics of offshore outsourcing worry that if too much IT-related work is farmed out to other countries, home-grown IT talent will "dry up." They point out that once a company begins outsourcing overseas, they will find it difficult to reverse the trend and justify paying more in salaries, taxes, and job benefits for the same work they used to outsource. Proponents maintain that the judicious use of offshore outsourcing will help make all IT workers become more productive and allow companies to develop more agile and responsive business models, which in turn, will raise salaries for domestic workers in all countries.
According to the IT research and analysis firm Gartner, by the year 2004 more than 40% of IT-related businesses will either be investigating the possibility of offshore outsourcing or will have already shipped some IT-related work overseas.



For decades companies expanded their conglomerates by buying other companies. Initially these companies were related businesses, often suppliers. Soon the conglomerates began buying companies with no relation. Profit motives and the desire to be the biggest became sufficient motivation for acquisition. Ultimately, the conglomerates began to collapse under the weight of the acquired companies. Profits started falling and companies began to retract to their "core" businesses.

Next they discovered that they could shed even core functions by hiring them out to companies that could do them more efficiently and, thus, less expensively. Payroll processing was subcontracted. Shipping was farmed out. So was manufacturing. Companies were hired to do collections, customer call centers, and employee benefits. Collectively, this was called outsourcing.
Outsourcing made sense. Specialized companies provided their services to many client companies at lower prices than the client companies could do the work in-house. Both companies, the service provider and the client, profited from the arrangement. Unfortunately, like the building of conglomerates before it, outsourcing got carried to extremes. Companies began outsourcing work to the lowest bidder and lost sight of the effect it had on the company except for finances. Outsourcing this work to "foreign" or "offshore" companies, solely to take advantage of lower labor rates in those countries, became known as offshore outsourcing.

Offshore outsourcing

Offshore outsourcing has been going on for many years. However, it drew little attention when blue-collar job were being lost because of the practice. Companies in the southeast US, for example, closed mills and factories as they shifted their textile manufacturing operations to China and Southeast Asia. Many hard goods manufacturing plants were moved to Central America and Indochina.


Recently, US-based companies have accelerated the practice of offshore outsourcing and have extended its reach to include so called white-collar jobs. Large companies have transferred their call centers to India, for example,

where labor rates can be as low as 50-80% lower than US rates. The offshore outsourcing of professional and technical jobs by US companies is done to save money, but it has raised concerns. As the US struggles to recover from recession, the rate of job creation lags far behind the expected pace. There is growing concern that this is due to offshore outsourcing.

Offshore outsourcing is neither the cure-all it has been portrayed by business nor the economy-destroying monster laid-off workers claim. While offshore outsourcing does have financial advantages for businesses, these advantages are often far smaller than first anticipated due to hidden costs. There are also non-financial costs to businesses from offshore outsourcing, including lowered public perception and reduced morale/productivity from remaining staff. Offshore outsourcing can be beneficial for workers of the US companies because their employers will be financially stronger and better able to compete.


Bottom Line

Outsourcing work to companies that can do it more efficiently and less expensively makes sense, provided that it is actually less expensive at the bottom line, and not just for the department that wants to outsource. If the marketing department wanted to save mailing costs by having every employee of the company hand carry a marketing piece to everyone in their neighbourhood, the CEO would disallow it. The cost savings to the Marketing Department's budget would be more than eaten up by the additional costs to the company for replacing employee who quit because they didn't feel they were hired to do deliveries, of placating potential customers who complained about receiving "junk mail" that was hand-delivered instead of coming through the mail so they could just toss it, of mileage claims from the employees doing the deliveries, etc. It is equally inadvisable for a company to shift their call centre to India to save money if they lose more than that from customers who stop buying their product because they can't communicate with the call centre reps because of heavy accents. Offshore outsourcing makes sense only if it truly saves money at the bottom line. - By F. John Reh, Guide


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