Outsourcing is widely practiced by a range of companies of different sizes and types, which includes trade-offs between certain inputs, such as labor, materials, and supplies. Companies can exchange capital for materials and overheads to save on costs. For instance, a manufacturing company can outsource the production to a low-labor country, while other companies hire foreign labor in countries where the conditions allow higher effectiveness. For example, the countries with high technological advancement, low labor costs, advanced technical skills, and availability are the most attractive ones to outsource. The US companies have been benefiting from outsourcing; however, they have faced several disadvantages.
Although cutting on labor costs is the main perceived reason for outsourcing, the US companies shift jobs abroad for a variety of other purposes. The labor costs are significantly lower in developing countries, attracting American companies to get products or services produced overseas. According to Schieberl and Nickles (2014), “It is estimated that workers in China are willing to work for approximately one-fourth of the amount of comparable U.S. workers, while workers in Mexico, on average, are paid $2.65 per hour”. Along with the low labor costs, companies can benefit from less strict legal regulations. In the case of outsourcing, many regulatory costs can be reduced. These regulations include medical insurance, social security, unemployment insurance, and many others. Conversely, producing in the US implies higher taxes and regulation costs (Schieberl & Nickles, 2014). More effective business maintenance is another advantage of outsourcing to low labor-cost countries. In general, outsourcing helps an enterprise to focus on its core activities while delegating other tasks to be performed by a foreign supplier.
India has been one of the most favorable countries to outsource. The 2019 Global Services Location Index surveyed the outsourcing landscape, assessing the countries with the strongest index on people’s advanced technical skills, financial attractiveness, and business environment (Sethi et al., 2019). According to the Index, India is the leading country on the inputs for productivity improvement, China – the second, Malaysia – the third (Sethi et al., 2019). As Sethi et al. (2019) stated, India offers the largest number of English-speaking skilled population compared to any other low labor-cost country. The Indian government has substantially supported the outsourcing industry in the country by investing in technology and offering a lower interest rate. In accordance with Sethi et al. (2019), “Indian IT companies and ITES companies have established more than 1,000 delivery centers in approximately 80 different countries, and about 75 percent of global digital talent resides in the country”. Thus, the lack of barriers to communication privileges India as an attractive country to outsource.
However, along with the benefits, outsourcing has been facing several drawbacks. The major risk is the lower control that includes, but is not limited to, the threats of exposing confidential data, product quality, and customer focus. The research conducted by Aswini (2018) used a sample of 20 managers in 20 medium and small-sized organizations in various industries of Chennai, which have used the outsourcing systems. The findings related to disadvantages indicated that the risk of exposing confidential data was 86 percent, the lack of customer focus – 90 percent, wrong partners – 84 percent, and hidden costs – 91 percent. Aswini (2018) stated that when an organization outsources recruitment and HR services, it involves a risk of the access to confidential company information and technology by third parties. Also, the wrong partners can result in an extension of a delivery date and low product output. In this case, producing in the US or using domestic sources is more preferable in terms of these factors.
More to the point, some other disadvantages of global sourcing can directly or indirectly affect the US economy. Schieberl and Nickles (2014) described a study revealing the detrimental effect on employment opportunities for US citizens and foreign graduates. Namely, it is noted that shifting jobs to India and other developing countries have led to high domestic unemployment. Hay and Fricker explained that families and societies face economic losses due to job replacement (as cited in Schieberl & Nickles, 2014). Besides, the limit for job placement based on job shift affects US foreign skilled graduates. According to Shao and Smith, quite often, US-educated foreign graduates leave the country and work with foreign-based American organizations (as cited in Schieberl & Nickles, 2014). Consequently, as more jobs are replaced by outsourced countries, US graduates find a better alternative in their home countries.
Based on the mentioned trade-offs, inputs, and advantages, it is possible to recommend the US companies to continue outsourcing to India for its lower costs and higher productivity. While outsourcing some parts of the production to foreign partners, the companies can focus on the development of business, paying attention to investment, technology, and employee talent areas (Aswini, 2018). In addition, the core business strategy can be reconsidered to adjust them, meeting the market requirements and customer needs. On a larger scale, outsourcing should become an integral part of the US companies since it allows for focusing on the key issues of the business, including growth and competitiveness.
To conclude, outsourcing can benefit any company if properly used and handled based on the thorough assessment of the inputs. Companies can employ low-skilled workers and high-skilled ones to reduce their production and operational costs, which would be a lot higher in case of domestic employment. India’s position in the outsourcing industry is highly attractive due to the development of technologies, the increasing rate of skilled graduates, and encouraging business environment. To fully benefit from outsourcing, it is important to comprehensively examine the possible advantages and drawbacks.
References
Aswini, K. (2018). Advantages and disadvantages of outsourcing. Shanlax International Journal of Commerce, 6(1), 7-9. Web.
Schieberl, J., & Nickles, M. (2014). Outsourcing U.S. jobs abroad: Why? International Business & Economics Research Journal (IBER), 13(2), 253-258. Web.
Sethi, A., Gott, J., & Suman, V. (2019). Digital resonance: The new factor influencing location attractiveness. Kearney. Web.