Strategic Trends: Business Outsourcing

Outsourcing has become a way of life in many industries worldwide. The trend to send business out of house is one that economic development leaders need to become better informed about because of its major impact on existing business activities and local jobs tied to those activities.

Outsourcing in general is approximately a $260-billion global industry. Industry revenues continue to grow rapidly, especially in developing nations like China and India.

A significant portion of outsourcing revenue is created in information technology services, including the creation of software and the management of computer centers. Another major portion lies in business process outsourcing (BPO) areas such as call centers, financial transaction processing and human resources management.

Offshoring, on the other hand, covers such a wide variety of nations, products and practices that it would be difficult to put a number on it. A significant share of offshoring revenue is created by contract manufacturing of electronics, including laptop computers, cellular telephones and consumer electronics such as iPods. Another major sector in offshoring is contract manufacturing of shoes, apparel and accessories.

In order to consider the outsourcing and offshoring industry, it is best to define the terms upfront, since the words are often used in conjunction and are sometimes used incorrectly.

To begin with, “outsourcing” can be defined as the hiring of an outside company to perform a task that would otherwise be performed internally by a company (or government agency), generally with the goal of lowering costs and/or streamlining work flow. Outsourcing contracts are often several years in length. Companies that hire outsourced services providers often do so because they prefer to focus on their core strengths while sending more routine tasks outside for others to perform. For example, typical outsourced services include the operation of human resources departments, telephone call centers and computer departments.

Next, “offshoring” refers to the rapidly growing tendency among U.S., Japanese and Western European firms to send both knowledge-based and manufacturing work overseas. The intent is to take advantage of lower wages and operating costs in such nations as China, India, Hungary and Russia. The choice of a nation for offshore work may be influenced by such factors as language and education of the local workforce, transportation systems or natural resources.

For example, China and India are graduating high numbers of skilled engineers and scientists from their universities—thus enabling these nations to attract massive engineering, research and development contracts. Also, some nations are noted for large numbers of workers skilled in the English language, such as The Philippines and India. In many cases, offshoring utilizes less-skilled labor working for low wages in plants that manufacture such items as shoes, apparel and generic computer components.

“Captive offshoring” is used to describe a company-owned offshore operation. For example, Microsoft owns and operates significant captive research and development centers in China and elsewhere that are offshore from Microsoft’s U.S. home base. The goals of captive offshoring include greater company control through direct ownership, along with lower operating costs and the ability to utilize highly educated local workforces.

There is also such as thing as “offshore outsourcing,” and you will occasionally see this phrase used in the press. In this case a company outsources operations, such as manufacturing, to an offshore organization.

Finally, there is “insourcing,” which refers to situations where an outsourced services provider moves into, and sets up shop in or near, a client company’s facility. For example, it is common for major companies to sign agreements with IBM Global Services, EDS, Perot Systems and other outsourcing firms whereby these firms take over and operate a client’s internal computer department. Here’s a non-technology insourcing example: ARAMARK Corporation will build and operate snack bars, employee cafeterias and executive dining rooms within a client company’s facilities.

Want to know more about outsourcing? Contact ED Futures for a price quote on its research services related to outsourcing. Tel: 440.449.0753. Email: dtia@don-iannone.com