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Human Capital Risks
Legislation/Regulatory Risks and Privacy Risks
Strategic/Market and Financial Risk
Operations Risks
The idea of outsourcing has been around for hundreds of years, but it did not become a prevalent practice in the United States until the seventies. The term outsourcing, however, did not appear in science until the 1990s (Trocki, 2001). The functions that are outsourced varies greatly based on the needs of the individual business but the most frequently outsourced functions are human resources, facilities management, IT, accounting and finance and procurement with IT being done the most.
While outsourcing may be necessary for most businesses to remain competitive in today's market, it still maintains an air of controversy and is surrounded by negative connotations to many employees of the same businesses. From the management's perspective, it is a cost saving tool that can greatly impact their bottom line and keep the shareholders content. In stark contrast, from the perspective of the workers that potential layoffs and job reassignments would directly affect, they only see years of hard work and loyalty going overseas and their quality of life at risk. It is imperative that business executives are cognizant of all potential consequences of a decision to outsource. This paper will explore the benefits and risks of outsourcing and the impact that it plays on the U.S. job market.
The potential benefits of outsourcing a portion of a business's functions are too numerous to not at least be considered in any business model. The most popular sectors that utilize outsourcing are health and pharmaceuticals, defence and government, IT, retail, telecommunications and media (Krosse, 2020). Even school districts have followed the trend as positions like bus drivers, custodians, cooks and substitute teachers are often contracted to outside agencies (Hux and Nichols, 2016). The big question is why? The reasons provided in Figure 1 provide some insight into this ever growing phenomenon.
Not surprisingly, cost savings is the number one reason reported for outsourcing in Deloitte’s 2016 Global Outsourcing Survey. When implemented correctly, a company could see a savings of 30% - 40% within the first year as a direct result of outsourcing (Engardio, Arndt, & Foust, 2006). These savings primarily are attributed to labor costs which also includes having no training and recruitment expenses as offshore agencies carry those costs as well. Similarly, by utilizing outsourcing, an organization has access to an unlimited pool of talent. This in turn allows companies to accelerate innovating products and the ability to fund development projects that were unaffordable previously (Engardio, Arndt, & Foust, 2006). Further, outsourcing talent allows for a shorter lead time. This is true for CEO Bob Miller of OnStor Inc. who has partnered with HCL Technologies Ltd. for engineering services. He says “If we want to recruit a great engineer in Silicon alley, our lead time is three months,' whereas 'With HCL, we can pick up the phone and get somebody in two or three days.' (Engardio, Arndt, & Foust, 2006).
Another reason many companies choose to outsource certain functions to a BPO company is to improve their customer service. By using outsourced contractors, many customer service actions are performed quicker. Likewise, the difference in time zones allows for live customer service centers to be available around the clock for a fraction of the costs. The improved customer service often leads to large gains in efficiency as well. For example, the CFO of Penske Truck Leasing, Frank Cocuzza, says “the $15 million in direct labor-cost savings are small compared with the gains in efficiency and customer service” (Engardio, Arndt, & Foust, 2006).
As with any innovative strategy, there are always trade offs to the perceived positives. It is no different for the practice of outsourcing. There are potentially devastating risks that must be surveyed when making a decision to outsource. The risks are so great that a new business paradigm was created in the U.S. and abroad called Enterprise Risk Management (ERM) in which the “ framework provides guidance for boards of directors and senior management for analyzing all core business strategy decisions from an ERM perspective” as detailed in Figure 2 (Beasley, Bradford & Pagach, 2004).
Employee displacement is the first downside most people think of when discussing outsourcing. Wisconsin-based manufacturer Paper Converting Machine Co. (PCMC) cut its US employees from 2000 to 1100 in a combined effort to compete and remain profitable (Engardio, Arndt, & Foust, 2006). With the layoffs also comes demoralization of the employees that remain and the possibility of subsequent operational slowdowns, employee turnovers, and even employee strikes if their sentiments are not given appropriate consideration (Beasley, Bradford & Pagach, 2004). Fortunately, employee backlash has encouraged some legislation aimed at curbing the increase of offshore agreements. For example, efforts in California and New Jersey had led to a bill (Senate No. 494) proposing a mandate that American wages be paid for state government work no matter where the work is performed (Beasley, Bradford & Pagach, 2004). Similarly, displaced workers required to train their replacements will be owed severance pay and possibly retention bonuses which would add costs for the company. Further, additional costs may occur for a global business process outsourcing company to hire a legal team if unionized laborers file a class action lawsuit.
An important consideration that must be addressed when discussing a decision to outsource is what regulations need to be followed in the home country and in the country hosting the work being performed. This includes but is not limited to, differing tax and labor laws. Privacy, security, and confidentiality must also be factored in. A data breach by an outsourcing partner that results in damages from unsecured transactions could lead the parent company open to legal and regulatory actions (Beasley, Bradford & Pagach, 2004).
The strategic/market risks associated with outsourcing can be considerable and are often unpredictable. They stem from unanticipated travel required to effectively manage and develop infrastructure to support off-site operations, costs from IT software and hardware requirements, and costs from monitoring the outsourced performance of quality, security, and availability metrics (Beasley, Bradford & Pagach, 2004). Financial risks also arise from proposed federal legislation that could restrict an organization from accessing financial assistance and/or other federal grants (Beasley, Bradford & Pagach, 2004).
The potential operational risk surrounding outsourcing is another key component in the decision to move functions offsite. The top 3 locations for outsourcing are India, China, and Malaysia with India outranking them all (Davis and Davis, 2012). For U.S. firms this creates an issue of language barriers and time zone differences. Further, the quality of the work being done by the contractors may be subpar and damage the reputation of the parent company. This is especially true for outsourced customer service call centers that often employ workers with heavy accents which may be a turn-off for U.S. consumers who find it difficult to understand them.
The implications that outsourcing provides to the U.S. job market are great. While the growth that each organization achieves by offshoring some of its functions is a positive for the job market, employee layoffs can be detrimental. By taking away gainful employment domestically, U.S. workers are left to settle for lower-paying positions that can lower their quality of life. On the other hand, when properly implemented, the growth from an organization's decision to outsource could aid in creating new and more specialized jobs in the U.S. that will make the previously displaced workers more well-rounded and highly sought after. With continued pushback against offshoring, some employers are moving their operations back to the U.S. Starbucks, for example, announced plans to relocate some of their production of coffee mugs back to a dormant plant in Ohio after they had been moved to China (Davis and Davis, 2012).
The decision of whether or not to outsource is a major decision for every organization. Thorough analysis and planning on the part of the management team is necessary for it to actually achieve any of the potential positives. Overall, however, it can be a highly profitable venture for the company and a catalyst to enhance the growth of the U.S. job market. A good balance of investing in human capital while outsourcing some specific functions, considering all factors would ultimately benefit us all.
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