Outsourcing occurs when an organization contracts some of its functions to another organization. For example, a company may decide that it will be more efficient to hire IT developers from another firm than to bring them on as employees. The work may be outsourced to a company in the same country (sometimes called “onshoring”) or to a company in another country (sometimes called “offshoring”).
Outsourcing has economic effects, both good and bad. Find out more about how outsourcing works, why companies do it, and its impact on jobs in the U.S.
- Outsourcing involves contracting a business process to another organization.
- The organization that receives the work may be in the same country or in another one.
- Outsourcing can help save money and give an organization access to skills that it doesn’t have.
What Is Outsourcing?
When an organization hires another organization to do some of its business processes, it is outsourcing. Services that are outsourced may include bookkeeping, customer service, programming, marketing, or cleaning.
In theory, any function of a business can be passed to an outside contractor rather than done in-house by employees.
Some companies outsource a small project to an independent contractor. Others may hire a major firm to handle all of their customer support functions. As technology improves and new businesses emerge, more and more of a company’s operations can be done outside the organization.
Outsourcing to an organization in another country is often called offshoring. If the operation is kept in the same country, it is sometimes referred to as onshoring. Both have potential economic benefits as well as potential problems.
Why Do Companies Outsource Jobs?
Companies outsource functions for all sorts of reasons. Among them are:
- Cost: it is often less expensive to outsource an activity than it is to hire people to do the job. This is especially the case if the work can be outsourced to a part of the country with a lower average wage or to another country with a significantly lower pay rate.
- Access to skills: One reason a business might outsource is to gain access to skills and services that it might not be able to obtain otherwise. For example, a small business might not be able to afford keeping a high-end graphic designer on staff, but it can afford to contract one just to design a logo. Many businesses have found they can find higher-level programming, bookkeeping, or human resources skills by outsourcing than if they hired in-house.
- Manufacturing capabilities: Many companies are great at designing and marketing products, but they don’t have the ability to manufacture them. To get the goods, they contract the manufacturing work out to a company that does production.
- Taking advantage of time zones: Many businesses have found they can get more work done in less time by outsourcing it to people in different time zones. A U.S. company can offer 24-hour customer service by outsourcing to call centers in India and the Philippines, for instance. A Swedish investment bank can turn reports around faster if it has freelance editors in the U.S. work on them while Europe is asleep.
How Outsourcing Can Hurt a Business
Outsourcing can be a good solution for many businesses, but it’s not right for all of them. Even if it is approached carefully, it can cause problems. For example:
- Lack of control: When you outsource a project or a process to someone else, they might not think it’s as important as you do, or they may not do it the way you want it done. However, the final outcome may be what you want. Some managers are more comfortable giving up control than others.
- Loss of knowledge: This cuts both ways. The organization that takes over your process does not understand your organization and culture as much as an employee on staff does. This may make it harder for the work to meet expectations.
Your staff forfeits expertise in the area that is being outsourced. Your company may lose skills and knowledge by turning the work over to someone else.
- Customer problems: Your customers don’t care if work has been outsourced or if it is being done by your employees. They only care about whether their expectations are met. Language problems, culture clashes, or outsourced work that doesn’t meet consumers’ standards can lead to unhappy or lost customers.
Economic Impact of Outsourcing
Outsourcing has economic effects, good and bad. It has the greatest impact on jobs and prices. In general, it leads to less employment and lower prices in the business’s home country, but not always.
When it comes to employment, outsourcing moves jobs around. Work moves from employees to contractors and from high-cost areas to low-cost areas. This can benefit someone who wants to be self-employed and hurt someone who would prefer employment, just as it leads to job loss in the high-cost area and gains in the low-cost one. Average wages across the economy fall slightly. In the manufacturing sector, it’s estimated that offshoring has led to the loss of nearly 5 million American jobs since 1997. Globally, employment is the same.
In general, outsourcing leads to lower prices, because the work generally moves to those who earn less. However, some costs may increase. Independent contractors doing specialized work may charge more than an employee would because they are not receiving benefits. Transportation costs and supply-chain disruption may lead to higher prices from offshore manufacturing over time. Eventually, skilled workers even in lower-cost countries will demand higher wages as the demand for their labor grows.
Is Outsourcing Bad for the Economy?
On a net basis, outsourcing is good for the economy. It lets more people concentrate on what they do best and lowers prices for consumers. However, some people benefit from it more than others.
Frequently Asked Questions (FAQs)
What is the difference between outsourcing and offshoring?
Outsourcing is the process of turning business functions over to an outside organization. If the organization is in another country, then it is known as offshoring.
When did outsourcing begin?
Businesses have long hired outside contractors for certain functions. Outsourcing was first identified as a distinct strategy in 1989, and it grew in popularity as the internet made it easier to do work remotely.