The Trend of Outsourcing Jobs

Did the major companies in America not think of global competition as they started to expand their operations and increase the salaries of the workers? Why is it such a hot topic now, why didn't this act of outsourcing start long ago? What effect does outsourcing have on the American economy, will we be able to stop this trend, and if so what will be the effect. In this paper I will be looking at and discussing why companies are outsourcing the jobs overseas. What benefits that companies are getting out of it, and the problems that face management, as outsourcing seems to be the trend of big business.

INTRODUCTION

Outsourcing is the delegation of tasks or jobs from internal production to an external entity (such as a subcontractor). Most recently, it has come to mean the elimination of native staff to staff overseas, where salaries are markedly lower. There has to be a reason that companies are going to outsourcing rather than hiring people within their own country. The bottom line, the single thing that drives every company in the world. What ever can increase the bottom line you can expect that companies will do everything possible to reach higher profits. Living in Michigan almost my whole life, and being feed from the hand of General Motors outsourcing hits close to home. I feel that the one thing that has increased outsourcing is the results of the union. Back in the time when the union started I believe what they were doing was something that had to be done, and served a very good purpose. Helping employees get the rights that they deserved. But of course the union could not do this with just volunteer work. The people that were running the union of course had to get paid, and all of the people that were involved in the union had to pay dues. The union since the day that it evolved has been negotiating more and more money for its members and benefits fit for a king. Having done all of this has increased wages to rates that are just to high for the jobs that people are performing. Companies are feeling this effect now. If a product can be made here in the United States by a worker making 27 dollars an hour plus medical and a whole different array of benefits, then you can make that same product over in China or India with a worker making 3 dollars an hour which one would be a better business move? After all it is the bottom line we are chasing here. Why would you not take the job overseas?

In order for a company to successfully outsource a job the human resources department has a hard job on its hands. They have to be able to make sure that the people that will be doing the job will understand what has to be done and at the quality in which the products or services have to be. In some cases the outsourcing company will send over some of the workers to learn in the United States how to do the job. And the employees whose jobs will be eliminated are the ones training the new workers. How does the HR dept. handle this kind of situation? They sometimes just have to be honest with the employees that they are laying off. Let them know that their job is going to be eliminated here in the US. Tell them why their job is being eliminated and always keep them in the loop as far as what is going on. Doing this will at least give you some sort of respect by the employees you are terminating. Laying off American employees as a result of your offshore contract poses other sometimes-unanticipated costs. To begin with, you have to pay many of those workers severance and retention bonuses. You need to keep employees there long enough to share their knowledge with their Indian replacements. "People think if they give generous retention bonuses it will destroy the business proposition. They cut corners because they want quick payback. But then they lose the people that can help with the transition and incur the even bigger cost of not doing the transition right." Layoffs can also cause major morale problems among in-house "survivors," in some cases leading to disaffection and work slowdowns. What some companies have not learned yet is that there are some serious issues with outsourcing, for one the cost. It is not exactly cheap to have a part of your company outsourced to another country. With any outsourced service, the expense of selecting a service provider can cost from .2 percent to 2 percent in addition to the annual cost of the deal. In other words, if you're sending $10 million worth of work to India, selecting a vendor could cost you anywhere from $20,000 to $200,000 each year. These selection costs include documenting requirements, sending out management from the HR dept and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. And then there are the legal fees.

Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship. With most outsourcing in today's market everything seems to be going overseas. To me this only seems beneficial to larger companies. I don't see a small company outsourcing the HR duties to a company overseas. If companies of this smaller size do outsource it will usually be to a company that is in the same area that can handle a few small accounts. "For months now, the business press has been regurgitating claims from offshore vendors that IT work costing $100 an hour in the United States can be done for $20 an hour in Bangalore or Beijing. If those figures sound too good to be true, that's because they are."

In fact, such bargain-basement labor rates tell only a fraction of the story about offshore outsourcing costs. The truth is, no one saves 80 percent by shipping IT work to India or any other country. Few can say they save even half that. As just one example, United Technologies, an acknowledged leader in developing offshore best practices, is saving just over 20 percent by outsourcing to India. For many companies, it simply may not be worth it. "Someone working for $10,000 a year in Hyderabad can end up costing an American company four to eight times that amount," says Hank Zupnick, CIO of GE Real Estate. Yet all too often, companies do not make the outlays required to make offshore outsourcing work. And then they are shocked when they wind up not saving a nickel.

If you are a HR manager how do you try to explain this? You do all of this work to get the outsourcing to work and only to find out that you are not saving any money. Now not only do you look bad to the bosses but also the American public. You would be known in the community in which you reside in as the company that takes jobs overseas. And who would want to come to a company like that to work. It would always be in the back of your mind that your job may not be there tomorrow. Not only can outsourcing not save you any money but it can also cost you more money in the long run. Trying to overcome the cultural differences and being so far from the work that is being done for you.

I know from reading my management textbooks that workers overseas are trained to do certain jobs and that is it. Have any of these companies ever thought that overseas workers may not be as beneficial to their companies as American workers. If there is something that is wrong with the way a system is running would a foreign worker speak up to management to notify them of a potential problem or a way to make the system faster and more efficient. Not to say that every American worker would do this, but in a situation like this I do not know of anyone who would not speak up and try to make the process easier.

As outsourcing grows to very worrying levels I do think at sometime it will balance it self out. Like I stated before I believe that the unions have a lot to do with the outsourcing issues that we face. There is still another factor that is pushing the jobs overseas. Health care. The growing cost of health care in this nation is growing much faster than our economy can keep up with. I just don't understand how our government can sit back and allow these costs to continually rise to levels that are almost to the point to where know body can afford them. Outsourcing jobs relives you of these high costs. How long before companies that outsource jobs overseas will incur these costs? I believe that someday in the near future that these issues will come about in the outsourcing field. Unions will spawn up in the third world someday, and with the unions will come higher wages and benefits. Then what will the companies do?

The lower wages that these companies pay to outsourced workers will make its way back to the United States. Our whole economy will have to take a shift backwards. More jobs may become available but at significantly lower wages. And our economy will have to accommodate this. Lower cost on houses, services and hopefully one day health insurance. It is not like we would be starting over but making the playing field throughout the world even. We are in a different world now. We no longer are the only ones who can produce a great product, and as Americans we have to realize and understand this. There is a greater global competition know any country with any kind of resources will learn to jump on the band wagon to make money. But the days of making close to 30 dollars an hour for a job that literally a monkey could do is over. The unions will start to lose their power when it comes to bargaining for wages and benefits. They and the companies know what will happen, the jobs will go elsewhere. I think that outsourcing is a way to stay competitive in the global market, though it is not that good for the jobs here in America but it should be an eye opener to those entering college or the job market. If you want to be employed and stay employed we as Americans have to work harder and smarter than we ever have before.

It is 2:00 A.M. and you have been surfing the Internet all night. Your computer starts to slow down and suddenly stops. You cannot explain why; you have tried everything in your power to get it running again. It is early in the morning and you are tired, so what are your options? You decide to call the computer company’s help desk. You know it is late, so you are surprised that someone answers your call. The person on the other end of the phone is an outsourced employee. The language barrier makes it difficult to understand, and you become upset. At this moment your main concern is to get your computer working again, so you continue to let the technical support representative help you. After a short time of being on the phone, the representative helps you, and your computer is fixed. Now that your computer is in working order, you return to the thought that you received help from an outsourced office. You were not happy to get a representative from overseas, but now that your problem is fixed, you realize it wasn’t that bad. Many people have the same reaction to this scenario. It is common today to get upset about the use of job outsourcing. The increase of companies that use offshore help is making people talk. The upfront concern is that the use of outsourcing is taking away from jobs in the United States. This may be the popular consensus, but it is not completely true. In reality, the use of job outsourcing does not have a negative effect on the economy in the United States.
Americans complain about the loss of jobs to outsourcing, so we need to take a look at our unemployment rate. It would naturally make sense that if a job is placed overseas, it is being taken away from an American worker. “In truth, companies have outsourced since the Industrial Revolution” (Kakumanu, Portanova, 2006, p. 1). The use of outsourcing jobs is not a new concept; it has just become more popular. “Offshore outsourcing of labor first became prevalent in manufacturing industries. Labor in other countries was cheaper than America workers, and transportation fell. This made sending work offshore more economical and began a large wave of outsourcing” (Kakumanu, Portanova, 2006, pg 1). Would this then mean that if jobs are being sent overseas in these large waves, there would still be jobs left for American workers? There are an estimated 5.8 million more jobs than there were just 5.5 years ago, according to a recent Labor Department report (Akst, 2006). “The household employment survey of Americas indicates that there are 1.9 million more Americans employed since the recession ended in November 2001” (Kane, Schaefer, & Fraser, 2004, p. 1). “The most alarming prediction, by Forrester research, estimates that 3.3 million service jobs will be outsourced between 2000 and 2015-an average of 55,000 jobs outsourced per quarter, or only 0.71 percent of all jobs lost per quarter” (Kane, Schaefer, & Fraser, 2004, p. 1). The amount of jobs lost to outsourcing is less than one percent. If you look at it this way, outsourcing has very little impact on the big picture. The number of American jobs seems to be growing even with the use of offshore hiring. Our current unemployment rate is at 5.6 percent, an all time low (Kane, Schaefer, Fraser, 2004). Outsourcing is a way to obtain work at a lower cost, and has been for decades. “Outsourcing is a means of getting more final output with lower cost inputs, which leads to lower prices for all U.S. firms and families. Lower prices lead directly to higher standards of living and more jobs in a growing economy” (Kane, Schaefer, & Fraser, 2004, p. 2). Lower prices on the items we buy as consumers can be a direct reflection of why companies use offshore help. They can produce the same product for less if the cost for paying employees is lower and the materials are cheaper.
The main driver in outsourcing is often cost reduction. Labor cost savings overseas are too great to ignore, and with well-trained talent available, companies are often compelled to at least try outsourcing. Many offshore providers can leverage low labor costs to provide cheaper cost. These lower costs can attract many companies looking to better their bottom line. More and more countries are setting themselves up to provide these low cost services as a way to boost employment and help their economies. This increasing competition will drive prices even lower. (Kakumanu, Portanova, 2006, p. 2)
In some cases a company will have no choice but to look outside of their own area to look for employees. The availability of help is not accessible in smaller populated cities. Outsourcing gives potential companies the ability to not only add help at a lower cost but also obtain the professionalism they require.
Utilizing the time zone differences between the offshore and U.S. based companies enables a non-stop business approach. The benefits of having an office open twenty-four hours a day is to increase productivity and provide excellent client service to the consumer. Companies who need technical support offered around the clock can find outsourcing a true advantage. “Farming out some tasks frees up talent to work on new product and new ideas. It creates greater workers flexibility and allows firms to put the right resources in the right places at the right times” (Siems, 2006, p. 4). Turning over the “back office” jobs to outsourcing such as payroll, call centers, and even IT jobs can open the work performed here in the U.S. The use of outsourced vendors generates more appealing hours of service that we Americans have become accustomed to.
According to Kakumanu and Portanova (2006), another overlooked fact about outsourcing is that the vendors purchase items from the United States. As companies overseas become more economically dependent on the U.S., they purchase items such as computers, machinery, and even every day items. The use of in sourcing also has a dynamic affect on the economy. “Toyota and Honda, for example, have thousands of employees in the United States” (Akst, 2006, p. 4).
The number of jobs coming from other countries to the U.S. is growing at a rate faster than jobs lost overseas. According to the Organization for International Investment, the number of manufacturing jobs in sourced to the United States grew by 82 percent, while the number outsourced overseas grew only 23 percent. Moreover, these in sourced jobs are often higher paying than those outsourced (Kane, Schaefer, & Fraser, 2004, p. 2).
The dependency on each other to generate jobs also creates money. This global trade is good for the economy of both partners.
The advantage to American workers is more money in their pockets and lower cost in health care benefits. According to Akst (2006), companies are withdrawing from their longstanding role as providers of medical insurance due to soaring health care costs. “They have also moved away from providing long-term job security or traditional defined-benefit pensions” Akst (2006). The cost to hire an offshore employee does not include the added expense of health care benefits. Removing that cost from the employers’ budget allows the savings to be dispersed to the U.S. employees. The increasing cost of health care is a concern of many workers, and the use of offshoring will help in lowering that price. The more a company can save by using outsourcing can be a direct affect on how its current employees are paid. The more a worker is compensated, the better the employee retention.
The choice to use outsourcing is not something that a company can go into half- heartedly. The repercussions of making this decision may hurt a company in some circumstances. If a company weighs its pros and cons, it may find that outsourcing may not be for them. But, in most situations the use is not a replacement of employees but an extension of a company to offer better pay, service, and cost to its consumers.
The effect of outsourcing on the economy is minimal. The more outsourcing benefits a company and its employees, the more we will see outsourcing grow. Did you ever take a look at the items you purchase? Not everything is made in the United States. Our economy requires the help of outsourcing to assist with lowering prices, better benefits, and convenient around-the-clock service. So, the next time you talk to an offshore employee, remember to be as flexible as the economy.