Outsourcing
Outsourcing is a business practice in which companies use external providers to carry out business processes that would otherwise be handled internally, [1][2] or in-house.[3] Outsourcing sometimes involves transferring employees and assets from one firm to another.
Not to be confused with Offshoring.
The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981 at a time when industrial jobs in the United States were being moved overseas, contributing to the economic and cultural collapse of small, industrial towns.[4][5][6]
The concept, which The Economist says has "made its presence felt since the time of the Second World War",[7] often involves the contracting out of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center/call center support.
The practice of handing over control of public services to private enterprises (privatization), even if conducted on a limited, short-term basis,[8] may also be described as outsourcing.[9]
Outsourcing includes both foreign and domestic contracting,[10] and therefore should not be confused with offshoring which is relocating a business process to another country but does not imply or preclude another company.[11] In practice, the concepts can be intertwined, i.e. offshore outsourcing, and can be individually or jointly, partially or completely reversed,[12] as described by terms such as reshoring, inshoring, and insourcing.
History[edit]
20th century[edit]
Following the adding of management layers in the 1950s and 1960s to support expansion for the sake of economy of scale, corporations found that agility and added profits could be obtained by focusing on core strengths; the 1970s and 1980s were the beginnings of what later was named outsourcing.[32] Kodak's 1989 "outsourcing most of its information technology systems"[33] was followed by others during the 1990s.[33]
In 2013, the International Association of Outsourcing Professionals gave recognition to Electronic Data Systems Corporation's Morton H. Meyerson[34] who, in 1967, proposed the business model that eventually became known as outsourcing.[35]
Implications[edit]
Performance measurement[edit]
Focusing on software quality metrics is a good way to maintain track of how well a project is performing.[72]
Management processes[edit]
Globalization and complex supply chains, along with greater physical distance between higher management and the production-floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as voice over IP, instant messaging, and issue tracking systems, new time management methods such as time tracking software, and new cost- and schedule-assessment tools such as cost estimation software.[73][74][75]
The term "transition methodology"[76] describes the process of migrating knowledge, systems, and operating capabilities between the two sides.[77]
Practices[edit]
Agreements[edit]
Two organizations may enter into a contractual agreement involving an exchange of services, expertise, and payments. Outsourcing is said to help firms to perform well in their core competencies, fuel innovation, and mitigate a shortage of skill or expertise in the areas where they want to outsource.[155]
United States[edit]
Protection of some data involved in outsourcing, such as about patients (HIPAA) is one of the few federal protections.
"Outsourcing" is a continuing political issue in the U.S., having been conflated with offshoring during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry called U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes "Benedict Arnold corporations".
A Zogby International August 2004 poll found that 71% of American voters believed "outsourcing jobs overseas" hurt the economy while another 62% believed that the U.S. government should impose some legislative action against these companies, possibly in the form of increased taxes.[156][157] President Obama promoted the Bring Jobs Home Act to help reshore jobs by using tax cuts and credits for moving operations back to the U.S.[158][159] The same bill was reintroduced in the 113th U.S. Congress.[160][161]
While labor advocates claim union busting as one possible cause of outsourcing,[162] another claim is high corporate income tax rate in the U.S. relative to other OECD nations,[163][164] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. Some counterclaim that the actual taxes paid by U.S. corporations may be considerably lower than "official" rates due to the use of tax loopholes, tax havens, and "gaming the system".[165][166]
Sarbanes-Oxley has also been cited as a factor.
Europe[edit]
Council Directive 77/187 of 14 February 1977 protects employees' rights in the event of transfers of undertakings, businesses or parts of businesses (as amended 29 June 1998, Directive 98/50/EC and 12 March 2001's Directive 2001/23). Rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e., the contractor.
Case subsequent to the European Court of Justice's Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994] have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]). In principle, employees may benefit from the protection offered by the directive.
Asia[edit]
Countries that have been the focus of outsourcing include India and the Philippines for American and European companies, and China and Vietnam for Japanese companies.
The Asian IT service market is still in its infancy, but in 2008 industry think tank Nasscom-McKinsey predicted a $17 billion IT service industry in India alone.[167]
A China-based company, Lenovo, outsourced/reshored manufacturing of some time-critical customized PCs to the U.S. since "If it made them in China they would spend six weeks on a ship."[96]
Article 44 of Japan's Employment Security Act implicitly bans the domestic/foreign workers supplied by unauthorized companies regardless of their operating locations. The law will apply if at least one party of suppliers, clients, labors reside in Japan, and if the labors are the integral part of the chain of command by the client company, or the supplier.
