Outsourcing is a business practice used by individuals or companies in which a third party is contracted to perform activities traditionally managed by internal personnel and resources (Handfield). Many companies outsource to save overhead and labor costs, improve efficiency / productivity, and in some cases avoid government regulations or mandates. Outsourcing did not become a formally identified business strategy until the early 1990s. During this time, companies began to focus more on cost-saving measures to increase revenue. Traditionally, cost reductions were the main driver of outsourcing initiatives; However, today outsourcing companies are accessing world-class capabilities, an enhanced business focus, targeted expertise, and risk sharing with partners (Narayanan).
Many economists believe that outsourcing is a good business strategy that enables companies to deal with globalization – market competition between price and profit. It is one of the underlying factors that affect whether a business prospers or closes. However, outsourcing does not provide a competitive advantage as it cannot be patented or prevented from adapting to others (Mourdaoukoutas). For example, if a clothing company like GAP decides to outsource its clothing manufacturing to gain a competitive advantage, other competitors such as Old Navy, American Apparel, and J. Crew will follow suit. Today, many of the largest companies in the world use this strategy. Companies like Nike outsource all of their shoes, clothing and sports equipment, while Apple outsources its hardware manufacturing (Pearlstein).
Outsourcing has been a controversial issue due to the growing number of people who believe that it is inadvertently creating long-term unemployment in the United States, although according to Pearlstein there have been studies since the 1990s to show that global outsourcing has led to more job creation in the United States. the United States. Due to the job change abroad, the United States has created more domestic jobs than were lost, although the jobs may not have been in the same sectors. These findings, which focused more on multinational corporations, are consistent with economic theory that trade and specialization increase productivity for all parties involved while driving economic growth. Yet in the last decade, Commerce Department data has shown that US multinational corporations have cut 2.9 million jobs in the US and added 2.4 million jobs in the US. foreigner (Pearlstein). Pearlstein believes that the size of the company partly affects this. Large companies like Apple that focus on export markets for growth can still create new jobs in the US for engineering, design, marketing, and finance. However, small and medium-sized companies that focus solely on the US market are outsourcing US labor to foreign labor in order to save money and remain competitive in the market. In some cases, outsourcing has a negative impact on American companies. For example, American companies found it cheaper to outsource radio and television production to Japan. However, Japan figured out how to redesign and produce its own brands of the same product. After learning this technique, Japan took over the global industry (Pearlstein).
Outsourcing affects multinational companies in different sectors. The service sector, for example, continues to expand overseas and overseas employment, while the manufacturing sector has virtually shifted all production abroad. Today, many companies are pushing vendors to move jobs like IT services, software programming, and call centers closer to home. This would help increase US employment in these sectors (Pearlstein).
Although outsourcing has reduced the number of jobs in the US, it has helped generate profits for many investors and business shareholders. Consumers also benefit from this because cheap labor and manufacturing make it possible to buy goods at a lower price. These savings allow job creation in other sectors and companies. In recent elections, Donald Trump promised to return jobs to the United States by proposing tariffs on imports from other countries. Although this could be beneficial to American employment, the cost of goods would increase significantly. The imposition of such laws could potentially shut down many small American businesses that are unable to pay adequate wages to American employees. Another concern with outsourcing would be employee loyalty. If employees know that their jobs will eventually be handed over to outside partners, many of them would be less willing to stay. Losing certain jobs in the United States will also have long-term consequences. As mentioned above with outsourcing to Japan, if certain jobs can only be employed through outsourcing, that trade will be lost in the US Lastly, outsourcing is based on a respectable relationship between two countries. If the relations of any of the countries suffer, the international market will also be affected.
Handfield, Rob. “A brief history of outsourcing”. A Brief History of Outsourcing – SCM | Supply Chain Resources Cooperative (SCRC) | North Carolina State University. (SCRC) Supply Chain Resource Cooperative | Poole College of Management | North Carolina State University, June 1, 2006. Web. March 22, 2017.
Mourdoukoutas, Panos. “The Unintended Consequences of Outsourcing”. Forbes. Forbes Magazine, December 23, 2011. Web. March 22, 2017.
Narayanan, Loral. “Brief history of outsourcing”. Credit Today Newsletter. Np, January 6. 2011. Web. March 22, 2017.
Pearlstein, Steven. “Outsourcing: What’s the Real Impact? Counting jobs is only part of the answer.” The Washington Post. WP Company, July 1, 2012. Web. March 22, 2017.