Outsourcing is a business practice used by natural or legal persons in which a third party is contracted to carry out activities traditionally handled by internal personnel and resources (Handfield). Many companies outsource to save labor and overhead costs, improve efficiency/productivity, and in some cases avoid government regulations or mandates. Outsourcing did not become a formally identified business strategy until the early 1990s. During this time, companies began to focus more on cost-saving measures to increase revenue. Traditionally, cost reductions were the main driver for outsourcing initiatives; however, today, outsourcing allows companies to access world-class capabilities, better business focus, specific expertise, and shared risk with partners (Narayanan).
Many economists believe that outsourcing is a good business strategy that allows companies to cope with globalization: market competition between price and profit. It is one of the underlying factors that affect whether a business thrives or goes out of business. However, outsourcing does not provide a competitive advantage as it cannot be patented or prevent others from adapting to it (Mourdaoukoutas). For example, if a clothing company like GAP decides to outsource its clothing manufacturing to gain a competitive advantage, other competitors like Old Navy, American Apparel, and J. Crew will do the same. Today, many of the world’s largest companies use this strategy. Companies like Nike outsource all their footwear, clothing and sports equipment, while Apple outsources the manufacturing of hardware (Pearlstein).
Outsourcing has been a controversial issue due to the growing number of people who believe it is unintentionally creating long-term unemployment in the United States, although according to Pearlstein, studies have been conducted since the 1990s to show that global outsourcing has led to more job creation in the United States. Due to the shift of jobs abroad, the US has created more domestic jobs than it has lost, although the jobs may not have been in the same sectors. These findings, which focused more on multinational corporations, are consistent with economic theory that trade and specialization increase productivity for all parties involved while driving economic growth. Yet over the past decade, Commerce Department data has shown that US multinational corporations have been cutting 2.9 million US jobs while adding 2.4 million jobs abroad ( Pearlstein). Pearlstein believes that the size of the company partly affects this. Big companies like Apple, which focus on export markets for growth, can still create new jobs in the US for engineering, design, marketing and finance. However, small and medium-sized businesses that focus solely on the US market are outsourcing US labor for foreign labor in order to save money and remain competitive in the marketplace. In some cases, outsourcing has a negative impact on American businesses. For example, American companies found it cheaper to outsource the production of radios and televisions to Japan. However, Japan figured out how to redesign and produce its own brands of the same product. After learning this technique, Japan took over the world industry (Pearlstein).
Outsourcing affects multinational corporations in different sectors. The service sector, for example, continues to expand employment abroad and abroad, while the manufacturing sector has virtually all production offshore. Today, many companies are putting pressure on providers to move jobs like IT services, software programming, and call centers closer to home. This would help increase US employment in these sectors (Pearlstein).
Although outsourcing has decreased the number of jobs in the US, it has helped increase profits for many investors and business shareholders. Consumers are also benefiting from this because cheap labor and manufacturing make it possible to buy goods at a lower price. These savings allow the creation of jobs in other sectors and companies. In the recent election, Donald Trump promised to bring jobs back to the United States by proposing tariffs on imports from other countries. Although this could be beneficial for employment in the US, the cost of goods would increase significantly. The imposition of such laws could potentially shut down many small American businesses that cannot afford to pay adequate wages to American employees. Another concern with outsourcing would be employee loyalty. If employees know that their jobs will eventually be handed over to third parties, many of them may be less willing to stay. Losing certain jobs in the US will also have long-term consequences. As mentioned above with outsourcing to Japan, if certain jobs can only be employed through outsourcing, that trade will be lost to the US. Finally, outsourcing is based on a respectable relationship between two countries. If the relations of any of the countries suffer, the international market will also suffer.
Handfield, Rob. “A Brief History of Outsourcing”. A Brief History of Outsourcing – SCM | Supply Chain Resource Cooperative (SCRC) | North Carolina State University. (SCRC) Supply Chain Resources Cooperative | Poole College of Management | North Carolina State University, June 1, 2006. Web. March 22, 2017.
Mourdoukoutas, Panos. “The Unintended Consequences of Outsourcing”. Forbes. Forbes Magazine, December 23, 2011. Web. March 22, 2017.
Narayanan, Loral. “A Brief History of Outsourcing”. Credit bulletin today. np, 06 jan. 2011. Internet. March 22, 2017.
Pearlstein, Steven. “Outsourcing: What’s the real impact? Counting jobs is only part of the answer.” Washington Post. WP Company, July 01, 2012. Web. March 22, 2017.