Offshore outsourcing - AbsoluteAstronomy.com

Offshore outsourcing is the practice of hiring an external organization to perform some business functions in a country other than the one where the products

Product (business)

In general, the product is defined as a "thing produced by labor or effort" or the "result of an act or a process", and stems from the verb produce, from the Latin prōdūce ' lead or bring forth'. Since 1575, the word "product" has referred to anything produced...

or services are actually developed or manufactured. It can be contrasted with offshoring

Offshoring

Offshoring describes the relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Even state governments employ offshoring...

, in which the functions are performed in a foreign country by a foreign subsidiary. Opponents point out that the practice of sending work overseas by countries with higher wage

Wage

A wage is a compensation, usually financial, received by workers in exchange for their labor.Compensation in terms of wages is given to workers and compensation in terms of salary is given to employees...

s reduces their own domestic employment and domestic investment. Many customer service jobs as well as jobs in the information technology

Information technology

Information technology is the acquisition, processing, storage and dissemination of vocal, pictorial, textual and numerical information by a microelectronics-based combination of computing and telecommunications...

sectors (data processing

Data processing

Computer data processing is any process that a computer program does to enter data and summarise, analyse or otherwise convert data into usable information. The process may be automated and run on a computer. It involves recording, analysing, sorting, summarising, calculating, disseminating and...

, computer programming

Computer programming

Computer programming is the process of designing, writing, testing, debugging, and maintaining the source code of computer programs. This source code is written in one or more programming languages. The purpose of programming is to create a program that performs specific operations or exhibits a...

, and technical support

Technical support

Technical support or tech support refers to a range of services by which enterprises provide assistance to users of technology products such as mobile phones, televisions, computers, software products or other electronic or mechanical goods...

) in countries such as the United States

United States

The United States of America is a federal constitutional republic comprising fifty states and a federal district...

and the United Kingdom

United Kingdom

The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...

- have been or are potentially affected.

Types

There are four basic types of offshore outsourcing:

ITO — Information Technology Outsourcing
Information Technology Outsourcing
Information technology outsourcing or ITO is a company's outsourcing of computer or Internet related work, such as programming, to other companies...
BPO — Business Process Outsourcing
Business process outsourcing
Business process outsourcing is a subset of outsourcing that involves the contracting of the operations and responsibilities of specific business functions to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca Cola that outsourced large segments...

covers things like running call centers, processing insurance claims.
Software R&D — offshore software development
KPO - Knowledge Process Outsourcing
Knowledge process outsourcing
Knowledge process outsourcing is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost...

covers things that require a higher skill set such as reading X-Rays, performing investment research on stocks and bonds, handling the accounting functions for a business or executing engineering design projects.

Criteria

The general criteria for a job to be offshore-able are:

There is a significant wage difference between the original and offshore countries;
The job can be telework;
The work has a high information content;
The work can be transmitted over the Internet
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

;
The work is easy to set up;
The work is repeatable.

The driving factor behind the development of offshore outsourcing has been the need to cut costs while the enabling factor has been the global electronic internet network that allows digital data to be accessed and delivered instantly, from and to almost anywhere in the world.

One of the main factors influencing the beginnings of the offshore outsourcing movement were a combination of pressures to reduce labor costs, save on operational cost such as payroll, administrative cost, utilities and to improve productivity, and an expanding, economical labor in other countries. When companies outsource the idea is to save money if they can keep the prices of their product lower than competitors.

Countries involved

Some of the major countries/districts that provide such services are India

India

India , officially the Republic of India , is a country in South Asia. It is the seventh-largest country by geographical area, the second-most populous country with over 1.2 billion people, and the most populous democracy in the world...

(Full Spectrum Services), Mexico

Mexico

The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...

(Full Spectrum Services), Ukraine

Ukraine

Ukraine is a country in Eastern Europe. It has an area of 603,628 km², making it the second largest contiguous country on the European continent, after Russia...

(Programming and R&D), Bolivia

Bolivia

Bolivia officially known as Plurinational State of Bolivia , is a landlocked country in central South America. It is the poorest country in South America...

(Web & Software Programming, Game Development, IT Support, Network Solutions, Offshore Outsourcing Service), Brazil

Brazil

Brazil , officially the Federative Republic of Brazil , is the largest country in South America. It is the world's fifth largest country, both by geographical area and by population with over 192 million people...

(Web & Software Programming, Game Development, IT Support, Network Solutions, Offshore Outsourcing Service), Argentina

Argentina

Argentina , officially the Argentine Republic , is the second largest country in South America by land area, after Brazil. It is constituted as a federation of 23 provinces and an autonomous city, Buenos Aires...

(Full Spectrum Services), Indonesia

Indonesia

Indonesia , officially the Republic of Indonesia , is a country in Southeast Asia and Oceania. Indonesia is an archipelago comprising approximately 13,000 islands. It has 33 provinces with over 238 million people, and is the world's fourth most populous country. Indonesia is a republic, with an...

(Programming, R&D, IT Support, Data Entry, Customer Support), China

China

Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

(Programming, Data Entry, Customer Support, F&A), Philippines

Philippines

The Philippines , officially known as the Republic of the Philippines , is a country in Southeast Asia in the western Pacific Ocean. To its north across the Luzon Strait lies Taiwan. West across the South China Sea sits Vietnam...

(Customer Support, IT Support, Programming, Animation, Transcription), Russia

Russia

Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

(Programming and R&D), Pakistan

Pakistan

Pakistan , officially the Islamic Republic of Pakistan is a sovereign state in South Asia. It has a coastline along the Arabian Sea and the Gulf of Oman in the south and is bordered by Afghanistan and Iran in the west, India in the east and China in the far northeast. In the north, Tajikistan...

(Full Spectrum Services), Panama

Panama

Panama , officially the Republic of Panama , is the southernmost country of Central America. Situated on the isthmus connecting North and South America, it is bordered by Costa Rica to the northwest, Colombia to the southeast, the Caribbean Sea to the north and the Pacific Ocean to the south. The...

(Programming, Customer Support), Nepal

Nepal

Nepal , officially the Federal Democratic Republic of Nepal, is a landlocked sovereign state located in South Asia. It is located in the Himalayas and bordered to the north by the People's Republic of China, and to the south, east, and west by the Republic of India...

(Programming, Customer Support), Bangladesh

Bangladesh

Bangladesh , officially the People's Republic of Bangladesh is a sovereign state located in South Asia. It is bordered by India on all sides except for a small border with Burma to the far southeast and by the Bay of Bengal to the south...

(Web & Software Programming, Game Development, IT Support, Network Solutions, Offshore Outsourcing Service), Bulgaria

Bulgaria

Bulgaria , officially the Republic of Bulgaria , is a parliamentary democracy within a unitary constitutional republic in Southeast Europe. The country borders Romania to the north, Serbia and Macedonia to the west, Greece and Turkey to the south, as well as the Black Sea to the east...

(Programming and R&D), Belarus

Belarus

Belarus , officially the Republic of Belarus, is a landlocked country in Eastern Europe, bordered clockwise by Russia to the northeast, Ukraine to the south, Poland to the west, and Lithuania and Latvia to the northwest. Its capital is Minsk; other major cities include Brest, Grodno , Gomel ,...

(Programming, R&D), Romania

Romania

Romania is a country located at the crossroads of Central and Southeastern Europe, on the Lower Danube, within and outside the Carpathian arch, bordering on the Black Sea...

(Programming and IT), the Philippines

Philippines

(Programming, R&D, Data Entry and Customer Support, Egypt

Egypt

Egypt , officially the Arab Republic of Egypt, Arabic: , is a country mainly in North Africa, with the Sinai Peninsula forming a land bridge in Southwest Asia. Egypt is thus a transcontinental country, and a major power in Africa, the Mediterranean Basin, the Middle East and the Muslim world...

(Customer Support and Programming), Malaysia (Customer Support and R&D), Mauritius

Mauritius

Mauritius , officially the Republic of Mauritius is an island nation off the southeast coast of the African continent in the southwest Indian Ocean, about east of Madagascar...

(ITO and BPO), Republic of Macedonia

Republic of Macedonia

Macedonia , officially the Republic of Macedonia , is a country located in the central Balkan peninsula in Southeast Europe. It is one of the successor states of the former Yugoslavia, from which it declared independence in 1991...

(Web Software, Mobile Software, Game Development, Network Solutions, Offshore Outsourcing Service, R&D) and many others.

Impact of the Internet

The widespread use and availability of the Internet has enabled individuals and small businesses to contract freelancer

Freelancer

A freelancer, freelance worker, or freelance is somebody who is self-employed and is not committed to a particular employer long term. These workers are often represented by a company or an agency that resells their labor and that of others to its clients with or without project management and...

s from all over the world to get projects done at a lower cost

Cost

In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this...

due to lower wages and property prices. Crowdsourcing

Crowdsourcing

Crowdsourcing is the act of sourcing tasks traditionally performed by specific individuals to a group of people or community through an open call....

systems such as Mechanical Turk

Amazon Mechanical Turk

The Amazon Mechanical Turk is a crowdsourcing Internet marketplace that enables computer programmers to co-ordinate the use of human intelligence to perform tasks that computers are unable to do yet. It is one of the suites of Amazon Web Services...

have added the element of scalability, allowing businesses to outsource information tasks across the Internet to thousands of workers.

This trend runs in parallel with the tendency towards outsourcing in larger corporations, and may serve to strengthen small business

Small business

A small business is a business that is privately owned and operated, with a small number of employees and relatively low volume of sales. Small businesses are normally privately owned corporations, partnerships, or sole proprietorships...

' capacity to compete with their larger competitors capable of setting up offshore locations, or of arriving at major contracts with offshore companies. See Freelancing on the Internet.

Source of conflict

There are different views on the impact on the various societies affected, which reflects the attitude of Protectionism

Protectionism

Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

versus Free Trade

Free trade

Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

. Some see it as a potential threat to the domestic job market in the developed world and ask for government protective measures (or at least closer scrutiny of existing trade practices), while others, including the countries who receive the work, see it as an opportunity. Free-trade advocates suggest economies as a whole will obtain a net benefit from labor offshoring, but it is unclear if the displaced receive a net benefit.

One issue offshoring of technical services has brought more attention to is the value of education as an alleged solution to trade-related displacements. Education may no longer be a comparative advantage

Comparative advantage

In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

of high-wage nations because the cost of education may be lower in the nations involved in the controversy.
http://www.latimes.com/news/education/la-na-outsource6mar06,1,3461071.story?page=1&coll=la-news-learning&ctrack=1&cset=true While it is true that education is usually considered helpful to competitiveness in general, an "education arms race

Arms race

The term arms race, in its original usage, describes a competition between two or more parties for the best armed forces. Each party competes to produce larger numbers of weapons, greater armies, or superior military technology in a technological escalation...

" with low-wage nations may not pay off.

Sources

Economist.Com Recommendations from November 11, 2004 Special Survey Edition

For a new topic, outsourcing has produced a huge volume of research, not all of it worthwhile. Here is a sprinkling of some of the better stuff:

From the McKinsey Global Institute

“Offshoring: Is It a Win-Win Game?”, August 2003

“New Horizons: Multinational Company Investment in Developing Economies”, October 2003

“Can Germany Win from Offshoring?”, Diana Farrell

Diana Farrell

Diana Farrell was a member and one of two Deputy Directors of the United States National Economic Council in the administration of President Barack Obama. She was also a member of the Presidential Task Force on the Auto Industry. On November 22, 2010, Farrell announced that she would be leaving...

, July 2004

“Exploding the Myths of Offshoring”, Martin Baily and Diana Farrell

Diana Farrell

, July 2004

From the Boston Consulting Group

“China: The Pursuit of Competitive Advantage and Profitable Growth”, July 2003

“Capturing Global Advantage”, April 2004

From the Offshoring Research Network

“A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent”, Stephan Manning, Silvia Massini and Arie Y. Lewin, in: Academy of Management Perspectives, Vol. 22, No.3, October 2008, 35-54.http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1287369

“Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities”, Vinaj Couto, Mahadeva Mani, Vikas Sehgal, Arie Y. Lewin, Stephan Manning and Jeff W. Russell, Duke University and Booz & Co., 2008.

“Next Generation Offshoring: The Globalization of Innovation”, Arie Y. Lewin and Vinaj Couto, Duke University and Booz Allen Hamilton, 2006.

From The Brookings Institute

“Offshoring Service Jobs: Bane or Boon - and What to Do?”, Lael Brainard and Robert Litan, April 2004

“Offshoring, Import Competition, and the Jobless Recovery”, Charles Schultze, August 2004

“The Outsourcing Bogeyman”, Daniel Drezner

Daniel Drezner

Daniel W. Drezner is currently a professor of international politics at The Fletcher School of Law and Diplomacy at Tufts University, the author of several books, the author of many Op-Ed pieces in major publications, a blogger, and a commentator.In 2005, he was denied tenure by the University of...

, Foreign Affairs, May/June 2004

“Hardheaded Optimism About Globalisation”, Amar Bhide, Columbia University, forthcoming

From the Bureau of Labour Statistics

“Occupational Employment Projections to 2012”, Daniel Hecker, Monthly Labour Review, February 2004

“The 1988-2000 Employment Projections: How Accurate Were They?”, by Andrew Alpert and Jill Auyer, Occupational Outlook Quarterly, Spring 2003

From Forrester

“3.3m US Services Jobs To Go Offshore”, John McCarthy, November 2002

“Low-Cost Global Delivery Model Showdown”, John McCarthy, August 2004

“Two Speed Europe: Why 1 Million Jobs Will Move Offshore”, Andrew Parker, August 2004

From Other Research

“The New Wave of Outsourcing”, Ashok Deo Bardham and Cynthia Kroll, University of California at Berkeley, Fisher Centre for Real Estate and Urban Economics Research Report, Fall 2003

“Globalisation of IT Services and White Collar Jobs: The Next Wave of Productivity Growth”, Catherine Mann, Institute for International Economics, December 2003

External links

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