Project Outsourcing

Outsourcing is being carried out to quite a noticeable extent in order to alleviate costs. It is actually a subcontracting of tasks. Outsourcing of employees to low-cost countries is to take advantage of cheap labor and to get the work in an inexpensive way. Some of the most common services provided by outsourcing companies include finance, accounting, payroll management, benefit administration, researches, data processing, information technology, and many other activities. It actually originated in a recessionary environment when tasks that were not that important strategically were contracted out to companies in other countries (Makhnach, 2007).

Outsourcing IT employees is being broadly considered as the accepted strategy to curtailing costs, especially in America and other Western countries. It is believed that outsourcing information technology functions will improve job prospects in the home country and create better market opportunities. The core concept behind outsourcing lies in the fact that the workings of the main sectors of companies is dumped onto the companies that specialize in the tasks and thus, are able to reduce costs and improve productivity (Weidenbaum, 2004; Makhnach, 2007).

A research report carried out by Davison states that in reality, most IT organizations save 15%-25% during the first year; by the third year, cost savings often reach 35%-40% as companies “go up the learning curve” for offshore outsourcing and modify operations to align to an offshore model.

This is not a recent phenomenon, however. Outsourcing of IT employees had started years before, when IT companies in the US wanted to capture some share of the foreign markets. Apparently, 60 percent of the revenue of American information technology companies is originated overseas. This is due to the fact that domestic market has been saturated and companies face a decline in sales revenue as a direct result of this (Weidenbaum, 2004).

Outsourcing IT employees can help a company survive in a market where cut-throat competition prevails. Besides, an IT firm is forced to turn towards outsource as a last resort when its rival firms start benefiting from it and strengthen their market power. Global outsourcing can enable the companies to customize their products to meet the needs of local demands, besides allowing them to give 24 hours coverage, 7 days a week (Weidenbaum, 2004)

The results of a research report carried out by Weidenbaum in 2004 show that about 400,000 U.S. positions in information technology have gone offshore. Meanwhile, total U.S. employment rose from 129,000,000 in 1993 to 138,000,000 in 2003–mainly in services. Only about 1.4% of the $120,000,000,000 spent on information technology (IT) services in the U.S. in 2003 moved offshore. (p. 1)

The positive impacts of outsourcing include lower inflation, increased productivity and lower interest rates. (Global Insight,2004) This gives a boost to business and consumer spending and improves the overall state of economic activity. In the US, global outsourcing of IT employees has improved the Gross Domestic Product quite to a substantial extent.

The research paper, Global Insight states that by 2008, real GDP is expected to be $124.2 billion higher than it would be in an environment in which offshore IT software and services outsourcing does not occur.” (p. 4)

However, it can not be denied that outsourcing IT employees from other low-cost countries causes IT employees in USA to lose their jobs. In contrast to that, it creates more employment opportunities because economic activity undergoes an improvement and thus, global outsourcing has increased net employment in the US and IT workforce in the US is expected to grow (Global Insight, 2004; Makhnach, 2007).

The report of Global Insight affirms that the incremental economic activity that follows offshore IT outsourcing created over 90,000 net new jobs as of 2003 and is expected to create 317,000 net new jobs by 2008.” (p. 6)

The impact of global sourcing on employment differs by industry sector. The major industry groups that are expected to gain a significant number of incremental jobs over the next few years are education and health services, transportation and utilities, construction, wholesale trade, financial services, professional, business and IT services, and manufacturing (Global Insight, 2004)

Moreover, it is also being noted that as global outsourcing of IT employees has increased productivity and lowered inflation rates, employees currently in the US are enjoying higher level of wages than before. (Global Insight, 2004) As the impact of global outsourcing continues to escalate, the wages are also expected to rise in the near future. The overall effect of this leads to increased efficiency and a higher output which depicts the well-being of the economy (Global Insight, 2004)

“With lower inflation and higher productivity, real wages were 0.13% higher in 2003 and are expected to be 0.44% higher in 2008.” (Global Insight, 2004, p. 1)

Furthermore, as outsourcing IT employees from low-cost countries such as China and India, leads to a decline in total costs, outsourcing lowers the overall price of the products which in turn makes the products more attractive for the buyers in other countries and increases exports. That is again beneficial for the economy as it improves the balance of trade of a country (Global Insight, 2004; Makhnach, 2007).

“Real exports were $2.3 billion higher in 2003 and are expected to be $9 billion higher by 2008.” (Global Insight, 2004, p. 2)

Global outsourcing has caused IT professionals to redefine their roles and created opportunities for developers to move into design, architecture, understanding of domestic customer, managerial experience, process knowledge and product management while the non-core tasks are offshored. Weidenbaum, 2004 In many cases, the higher productivity often offsets the cost of operating overseas. These core outsourcing advantages help companies to achieve their goal and increase their profitability. It is also argued that employees in the US that are displaced due to outsourcing are freed up to engage in more lucrative work. (Weidenbaum, 2004)

“In the software and services area, the economy is expected to create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 without it. Of these 516,000 new jobs, 272,000 are expected to go offshore, while 244,000 are expected to remain onshore. Thus, the U.S. IT workforce will continue to grow.” (Global Insight, 2004, p. 1)

Conversely, outsourcing has marked negative impacts as well, especially for the outsourcing country, such as the US. Firstly, outsourcing for some companies has created more complexities than were present before. This often leads to unnecessary costs and creates problem in the value chain, thus giving rise to a lot of managerial requirements. In many cases, some outsourcing companies are anticipating a lot of benefits and get disappointed when it does not work for them due to the increase in complexity which they find hard to tackle (Singhatiya, 2005. Weidenbaum, 2004)

Even more so, organizational problems such as conflicting objectives put a company’s image, products and quality at stake when its operations are spread out to other countries as well. Outsourcing raises concerns about data security because transferring operations to different countries increases the risk of losing confidential data to third party. This has raised many questions about the usefulness of outsourcing (Singhatiya, 2005).

Subcontracting often leads to lack of control and there is a risk of the company being outsourced misinterpreting the tasks that need to be done and the requirements of the outsourcing company. To operate in different regions or to take full advantages an outsourcing company might need to contact more than one company which leads to a lot of communication hassle. Some companies set a fixed limit as to the number of employees that will be outsourced but encounter problems dealing with unfathomable legal systems, protecting their intellectual property, and meeting the tax requirements besides putting up with the corruption in the outsourced country (Singhatiya, 2005).

Outsourcing might also result in a loss of control of operations which instead of increasing profitability are likely to create chances of losses for the outsourcing company. Besides, as outsourcing continues to increase steadily, students in the US are discouraged to take IT as their major subjects as they know that they have little chances to be employed. This might affect the future innovation of a country. With record levels of the US IT unemployment, it is unlikely that the workers displaced will find profitable work soon. Weidenbaum, 2004

In addition to all of this, subcontracting of tasks to other countries might put a downward pressure on domestic wages and create unrest among the present workers. It might even add to unemployment in the country, when the companies in the US decide to operate offshore, displacing countless domestic employees. Singhatiya, 2005 Weidenbaum, 2004

Experiences show companies that overseas managers barely understand the corporate culture of the outsourcing company, the high quality standards set and the importance given to prompt delivery of orders. Sometimes, companies also have to face problems due to geopolitical crises in the outsourced country which is of course, highly undesirable (Weidenbaum, 2004).

Research reports have also shown that outsourcing IT employees has reduced flexibility to react to market changes in the outsourcing companies because the deal concerning the contracting of tasks is often made for a number of years and it is difficult to adapt processes to changes in customer demand and local needs. Singhatiya, 2005 When outsourced companies are pressed to short deal lengths, they often increase their prices, which ultimately bring a cost increase to the outsourcing companies. Singhatiya, 2005

As knowledge, control and processes are being transferred to foreign countries, the outsourcing companies face an increasing dependence on the outsourced companies, even though the subcontracted tasks are not strategically important. This transfer weakens the organization and tightens the hold of the outsourced company which gains a bargaining position and might increase prices to its advantage. Singhatiya, 2005 To counter this, companies are turning towards multi-vendor models, where more than one company is outsourced. But second outsourcing is not very effective as far as services are concerned and is sure to increase complexity and demands more resources from the outsourcing organization (Singhatiya, 2005).

Moreover, there is limited transparency where the vendor’s pricing strategies and cost structures are concerned so its difficult to predict the cost savings that outsourcing company will manage to gain. When more than one service is being outsourced, it becomes difficult to calculate the per unit cost and the amount saved, if any. Sometimes, vendors have influential marketing strategies which might prove misleading for the outsourcing companies (Singhatiya, 2005).

National welfare also suffers as a result because outsourcing companies don’t have to pay any federal or state kind of taxes for the outsourced employees. The impact of all this is that worker’s living standards are declining, and the income distribution gap between the rich and poor is widening while fears regarding job insecurity are spreading (Singhatiya, 2005).

Many organizations have bought operations back in-house after being affected by the negative impacts of outsourcing. However, whatever the positive and negative impacts of outsourcing IT employees might be, it has become a genuine fact that it is here to stay as firm’s survival is being endangered with the opening of more possibilities and product markets. Outsourcing companies are become more aware of which tasks to outsource and which tasks to keep away from subcontracting while vendors are becoming increasingly aware of their importance and are trying to be selective in making deals. (Singhatiya, 2005) (Weidenbaum, 2004).

Organizations are constantly trying to find out ways to protect their confidential data while outsourcing IT employees and are trying to maintain their control while only subcontracting non-core tasks. Moreover, it is predicted that organizations will only settle for short-term deals to tackle the flexibility issue and will only outsource a smaller percentage of operations (Singhatiya, 2005).

Amid all the discussions of the negative impacts of outsourcing, things which cannot be denied include that low inflation follows as a result of outsourcing, while it even makes the economy of the country thrive and develop and it encourages export by making the products appear cheaper to domestic and foreign customers. Sometimes, it even pushes wage rates upwards and offers more lucrative jobs to workers who were displaced initially because of the outsourcing of employees. This is all a sign of a healthy economy and thus it can be concluded that the positive impacts of outsourcing offsets the negative impacts.

“It is important to note that the total number of IT software and services jobs that have been lost since 2000 when the dot-com bubble burst is 372,000. That is, 10% of all IT software and services jobs in the U.S. have disappeared since 2000, but only 2.8% of the total IT software and services jobs were lost because of offshore ITO” (Global Insight, 2004, p. 2)

References

Work’s cited

 

Executive Summary: The comprehensive impact of offshore IT software and services outsourcing on the U.S economy and the IT Industry. Global Insight. 2004. <www.itaa.org/itserv/docs/execsumm.pdf>

Makhnach, Olga. “Outsourcing Advantages and financial benefits of outsourcing.” 03 April 2007. 20 May 2007 <http://ezinearticles.com/?Outsourcing-Advantages-and-Financial-Benefits-of-Outsourcing&id=513658>.

Singhatiya, Arvind. “Outsourcing: a Complex Series of Tradeoffs.”

28 October 2005. 20 May 2007 <http://ezinearticles.com/?Outsourcing:-a-Complex-Series-of-Tradeoffs&id=88571>.

Weidenbaum, Murray. “Outsourcing is a good thing-mostly.” May, 2004. <http://findarticles.com/p/articles/mi_m1272/is_2708_132/ai_n6019795>