Outsourcing is the act whereby a company or an organisation pays another firm or organisation to produce goods or offer services on their behalf (Blokdjik, 2008). The outsourcing company could have produced the goods or offered the service on its own but this would involve higher costs. Offshoring on the other hand is a business process whereby a company or an organisation relocates its operations to lower cost locations, mainly overseas (Trojahn, 2009).
Outsourcing and offshoring began around four or five decades ago. Companies seek these services due to a number of reasons. A company may lack the competence to offer certain services which are vital to its operations, lack the resources and machinery required for production, be short of skilled labour or try to cut its operating costs. Whatever the reason, the rate at which companies are outsourcing and offshoring their services is increasing.This has led to the globalization of services, boosting trade and commerce all around the world.
The level of trade has grown remarkably over the last few decades as a result of the advancements that are being experienced in the field of information, communications and technology (ICT) (Jovanovic, 2011). These advancements have also increased the number of tradable services in the field of IT and ICT which have made the offshoring and outsourcing of services to be much easier. The ease in the tradability of these services coupled with the increased independence of the location has contributed to the offshoring of services by many companies in the west (Kapila, 2009). Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing for services is much cheaper and the end result is desirable. The development in IT and ICT has led to the globalization of services all around the world. India is the country which provides most of these services in the world.
India is a prime location for IT outsourcing and offshoring. It has a strong labour force that is composed of personnel who are skilled and talented. Their high number increases the competition for employment. This has made the country to have a workforce that is composed of relatively cheap labour force. India also has a high number of competent personnel in almost all the fields of the economy. These individuals are highly educated, are professionals and have a lot of experiences, knowledge and skills which are required to execute their respective tasks effectively and efficiently. This group can also speak and write fluent English; an aspect which makes them to stand at a competitive edge over rival countries such as China, Singapore and Malaysia.
With the revolution in IT and ICT, location is not of a high concern as it used to be. The advancement in technology has made the transmission of inputs and outputs to be much easier. These processes can now be conducted digitally and transmitted via electronic means. Companies have therefore offshored much of their services especially white collar jobs to improve their sustainability and efficiency. The customer care for the giant computer manufacturer Dell, for example, is located in India (Kurtz, 2010). When local residents call the customer care, they are being served with an operative who is located in India. Many employers have embraced this move and replaced much of their staff in the US and UK to reduce their operating expenses.
The development of IT service offshoring can be attributed to the intense efforts put in in the late 20th century and the beginning of the 21st century in the telecommunication industry especially in the advancement of the internet (Oshri and Corbett, 2011). This was then followed by the digitalization of many services that made it easier to shift the operations of organisation to cheaper destinations.
Despite the benefits accrued from outsourcing and offsoring, there has been a lot of debate on the effectiveness and sustainability of this new trend. It is evident that offshoring and outsourcing benefits both the origin and destination country. The destination country enjoys increased rates of employments and free trade. The origin country on the other hand enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial since both of their GDP will increase in the short run and in the long run.
Outsourcing and offshoring has been referenced with success, effectiveness and efficiency. As a result, a lot of companies have adapted these mechanisms. However, there are some analysts who claim that such companies may lose the control of their overseas organisations; an occurance which maybe very risky (Plunkett, 2006). Lack of control and visibility of outsourced chains may cause a downfall in the operations of a firm. The company may start to produce low quality goods, offer poor services, develop poor organisation skills and culture and finally become unsustainable. Under such condition, it will be difficult for such companies to achieve their goals and targets.
Outsourcing and offshoring might also result to increased competition (Plunkett, 2009). China, for example is selling the manufactured goods directly to its overseas market without passing through the protocols required by the mother company. This created competition for goods between the supply chains and the original company. From the late 90’s and the beginning of the 21st century, American automakers offshored and outsourced most of their manufacturing and production services to China. They offered adequate training and knowhow to their overseas staff to ensure that their operations are effective and efficient. After some years, China announced that it will start to manufacture its own auto parts and sell it to its domestic market and also to international markets in America and Europe. This led to an intense competition between the Chinese manufacturers and American companies.
IT outsourcing has resulted into increasing threat of homogeneous organizations that have equivalent core competencies which results into loss of business core competencies through exploitation of best practices in IT competitive advantage. IT market competitiveness has provided opportunities for equivalence of service level which result into loss of brand identity and brand community and decreased market share.
These criticisms of outsourcing and offshoring raise a lot of questions as to the effectiveness and efficiency of outsourcing. Outsourcing and offshoring has made trade to grow to a new level, enhanced globalization and improved the operations of organisations all around the world. These outcomes have only been experienced in the short run. The sustainability of outsourcing and offshoring still remains a big mystery. This is because there are a number of drawbacks that are coupled with outsourcing and offshoring of IT services. These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing and offshoring.
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Jovanovic, M. (2011). International Handbook on the Economics of Integration: Competition, Spatial Location of Economic Activity and Financial Issues. Sacramento: Edward Elgar Publishing.
Kapila, U. (2009). Indian Economy Since Independence. New Delhi: Academic Foundation.
Kurtz, D.L. (2010). Contemporary Marketing 2011. New York: 2011.
Oshri, I. and Corbett, F. M. (2011). Offshoring Strategies: Evolving Captive Center Models. Detroit: MIT Press.
Plunkett, J. W. (2006). The Almanac of American Employers 2007. L.A: Plunkett Research.
Plunkett, J. W. (2009). Plunkett’s outsourcing and offshoring industry almanac 2009. L.A: Plunkett Research.
Trojahn, M. (2009). Development of an Assessment-Tool for Procurement Business Process Outsourcing. London: GRIN Verlag.