Offshoring - Outsourcing To Extreme

Part 1 of a series

Companies have been outsourcing work for many years. This trend has been carried to an extreme in the case of offshoring - sending work and jobs to other countries where labor is cheaper.

Outsourcing

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 offshoring.

Offshoring

Offshoring 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 offshoring 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 offshoring 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 offshoring.

Offshoring is neither the cure-all it has been portrayed by business nor the economy-destroying monster laid-off workers claim. While offshoring 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 offshoring, including lowered public perception and reduced morale/productivity from remaining staff. Offshoring 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 neighborhood, 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 center 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 center reps because of heavy accents. Offshoring makes sense only if it truly saves money at the bottom line.