When a company outsources some of its functions to another company, it is known as outsourcing. For example, a company may decide that hiring IT engineers from another firm is more efficient than hiring them as employees. Work may be outsourced to a company in the same country (known as "onshoring") or to a company in a different nation (known as "offshoring"). Outsourcing has both positive and negative economic consequences. Learn more about outsourcing, including how it works, why corporations do it, and how it affects jobs in the United States.
Key Takeaways
- Contracting a business process to another company is known as outsourcing.
- The organization that receives the work may be located in the same nation or abroad.
- Outsourcing can help a company save money while also providing access to expertise it lacks.
Outsourcing: What Is it?
Outsourcing occurs when a company contracts another company to do some of its business processes. Bookkeeping, customer support, programming, marketing, and housekeeping are examples of outsourced services. In theory, any business function can be delegated to an outside contractor rather than handled by a staff in-house. A modest job may be outsourced to an independent contractor by some businesses. Others may engage a large company to handle all of their customer service needs. More and more of a company's operations can be done outside the organization as technology improves and new businesses arise. Offshoring refers to outsourcing to a company based in another country. Onshoring is a term that refers to keeping an operation in the same country. Both offer potential economic advantages as well as drawbacks.Why Do Companies Outsource Jobs?
Companies outsource functions for all sorts of reasons. Among them are: Cost: Outsourcing activity is frequently less expensive than hiring employees to perform the task. This is especially true if the task may be outsourced to a region of the country where the average wage is lower or to a country where the pay rate is much lower. Access to skills: One reason a company might outsource is to acquire access to expertise and services it wouldn't otherwise be able to get. A small business, for example, may not be able to afford to maintain a high-end graphic designer on staff, but it may be able to hire one to design a logo. Many organizations have discovered that outsourcing allows them to locate higher-level programming, bookkeeping, and human resources than hiring in-house. Manufacturing capabilities: Many businesses excel in designing and marketing items but cannot often produce them. They hire a production business to handle the manufacturing to obtain the items. Taking advantage of time zones: Many firms have discovered that outsourcing work to workers in other time zones allows them to complete more work in less time. For example, by outsourcing to call centers in India and the Philippines, a US corporation can provide 24-hour customer assistance. When a Swedish investment bank hires freelance editors in the United States to work on reports while Europe is sleeping, it can turn them around faster.How Outsourcing Can Hurt a Business
Outsourcing can be a viable answer for many firms, but it isn't perfect for everyone. Even if addressed with caution, it has the potential to produce difficulties. Consider the following scenario: Lack of control: When you outsource a project or a process to someone else, they may not value it as highly as you do, or they may not complete it in the way you wish. Some managers are more at ease with relinquishing authority than others. However, the end result may be exactly what you want. Loss of knowledge: This is true in both directions. The company that takes over your process does not have the same understanding of your company and culture as a full-time employee. This could make it more challenging to meet deadlines. Your employees give up their knowledge in the outsourced field. Turning the work off to someone else may cause your company to lose skills and knowledge. Customer problems: Your clients don't care whether work is outsourced or completed by your personnel. They are simply concerned with whether or not their expectations are met. Unhappy or lost clients can result from language issues, cultural incompatibilities, or outsourced work that does not fulfill consumer expectations.Economic Impact
Outsourcing has both positive and negative economic consequences. It has the most significant impact on employment and prices. In general, it leads to fewer jobs and lowers costs in the company's home country, but this is not always the case.Job Impacts
Outsourcing shifts work around when it comes to employment. Employees give way to contractors, while high-cost locations give way to low-cost places. This can help those who want to be self-employed and damage people who want to work, just as it causes job losses in high-cost areas and gains in low-cost areas. Employment is the same all across the world. Wages are marginally lower on average across the economy. Since 1997, it is projected that offshore has resulted in the loss of almost 5 million American manufacturing jobs.Price Impacts
Outsourcing often reduces prices because the labor is distributed to individuals who earn less. Some costs, though, may rise. Because they do not receive benefits, independent contractors who perform specialized labor may charge more than employees. Transportation expenses and supply-chain disruptions may cause offshore manufacturing prices to rise. Even in low-cost countries, skilled workers will eventually demand better compensation as demand for their services develops.Good or Bad for the Economy?
Outsourcing is beneficial to the economy in the long run. It allows more people to focus on what they do best while also lowering consumer pricing. However, some people are better off due to it than others.Frequently Asked Questions (FAQs)
When it comes to outsourcing and offshoring, what's the difference?
Outsourcing is the process of handing over business functions to a third party. Offshoring occurs when a company is located in another country.What are the origins of Outsourcing?
For many years, businesses have used outside contractors to perform specific tasks. Outsourcing was initially defined as a unique approach in 1989, and when the internet made it easier to accomplish work remotely, it expanded in popularity.