In the beginning outsourcing to a foreign country may seem as a risky and scary decision, especially for small companies that can’t afford trial and error. Fortunately in the world today, as outsourcing to foreign countries has become very common, there is a lot on knowledge and expertise available.
Outsourcing services to a foreign country does not only provide benefits to multinational companies that receive economies of scale, but also to small companies that cannot afford not to outsource. Creating and maintaining all possible services in-house can be very costly for small companies. And most small companies have been outsourcing many of their services from the very foundation of their company. It is only outsourcing to foreign countries that has become a new trend. In today’s global world companies are beginning to realize that they have the possibility of utilizing the services and expertise of specialized companies in foreign locations.
Nowadays a company must outsource to stay competitive. Leading companies worldwide acknowledge that to stay ahead, they need to reduce costs, provide the best quality, use the latest high-tech skills, as well as be reliable and creative. The most effective way to do this is to outsource to a foreign company.
Of course when making the decision to outsource, a company must consider its own requirements against the conditions of a certain market area. For example the outsourcing of call centers and customer care centers has mainly concentrated on India, due to its large English speaking workforce. This could not be done in China for example. Also India offers high quality IT expertise, which is why IT services often find their way to India. China on the other hand has a more manufacture based outsourcing industry. These are things a company must consider when outsourcing to a foreign company. In addition cost issues are of course extremely relevant.
In addition not only does outsourcing to foreign countries have benefits it also has positive implications on larger level. Outsourcing to a foreign location will ensure that companies can pass the reduced costs to national consumers or to investors to reinvest. New revenues will be created as outsourcing to a foreign country will establish demand for US products, especially in high-tech products. Although some national jobs may be lost in the outsourcing process, other jobs will then be filled generating additional value for the economy. Thus there is a misconception in current discussion on outsourcing, because to problem is neither trade nor globalization at such, but more specifically how a country allocates its benefits from international trade.
According to McKinsey, offshoring will allow the US to capture economic value through multiple channels:
- Reduced costs - Savings from reduced costs can be passed to consumers or to investors to reinvest. In the US, companies save 58 cents for every dollar of spending on back office service functions and IT jobs they move to India. These savings can be reinvested in new business opportunities with higher value-added, passed on to consumers in the form of lower prices (which then spark growth in demand), or distributed to shareholders.
- New revenues - Offshoring creates demand in destination countries for US products, especially for high-tech items. Offshoring thus boosts exports. Outsourcing providers - whether in India or in Poland and whether subsidiaries of multinational companies or independently owned businesses - buy many goods and services abroad. A call center in Bangalore, for instance, might purchase Dell computers, HP printers, Microsoft software and Siemens telephones. Not surprisingly, exports from the US to India grew from $3.7 billion in 2000 to $5 billion in 2003.
- Repatriated earnings - Several providers serving the US market are incorporated in America, which means they repatriate their earnings to the US. An additional 4 cents of every dollar spent on offshoring services to India thus returns to the US in the form of repatriated profits.
- Redeployed labor - US workers who lose their jobs to offshoring will take up other jobs, which will in turn generate additional value for the economy. In fact, it has been found out that many in the US whose work is outsourced move on to other, higher value-added activities. From 1979 to 1999, 69% of US workers who lost their jobs as a result of trade in sectors other than manufacturing found new work within half a year. On average, they received similar wages in their new jobs, though roughly half took pay cuts, while the rest found better-paid jobs.
