Outsourcing is a business practice used by individuals or companies in which a third party is hired to perform activities traditionally handled by internal staff and resources (Handfield). Many companies outsource to save overhead and labor 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 primary drive for outsourcing initiatives; however, today, outsourcing allows companies access to world-class capabilities, improved company focus, specific expertise, and risk sharing with partners (Narayanan).
Many economists believe that outsourcing is a good business strategy that allows companies to deal with globalization – market competition between price and profit. It is one of the underlying factors that affect whether a company 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 instance, if a clothing company like GAP decides to outsource their clothing manufacturing for 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 its shoes, clothing, and sporting equipment while Apple outsource their hardware manufacturing (Pearlstein).
Outsourcing has been a controversial topic because of the growing number of people that believe it is unintentionally creating long term unemployment in the United States, although according to Pearlstein studies have been conducted since the 1990s to prove that global outsourcing has led to more job creations in the United States. Because of the shift of job overseas, the U.S. has created more domestic jobs than were lost, even though the jobs may not have been in the same sectors. These findings, which focused more on multinational corporations, are consistent with the economic theory which states that trade and specialization increase productivity for all parties involved while also boosting economic growth. However, in the last decade, data from the Commerce Department has shown that US multinational corporations have been cutting 2.9 million jobs in the US while adding 2.4 million jobs overseas (Pearlstein). Pearlstein believes that the size of the company partly affects this. Large Companies like Apple that focus on export markets for growth are still able to create new jobs in the US for engineering, design, marketing, and finance. However, small and medium companies that solely focus on the US market are outsourcing US labor for foreign labor in order to save money and remain competitive in the market. In some cases, outsourcing has a negative impact on US companies. For example, US companies found it cheaper to outsource the production of radios and televisions in Japan. However, Japan realized how to redesign and produce their own brands of the same product. After learning this technique, Japan took over the global industry (Pearlstein).
Outsourcing affects multinational corporations in different sectors. The service-sector for instance continues to expand employment overseas and abroad while the manufacturing sector has practically moved all production abroad. Many companies are currently pressuring suppliers to move jobs such as 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 US jobs it has helped to raise profits for many investors and shareholders of companies. Consumers are also benefiting from this because cheap labor and manufacturing allow goods to be purchased at a lower price. These savings allow for the creation of jobs in other sectors and companies. In the recent election, Donald Trump promised to bring jobs back to America by proposing tariffs on imports from other countries. Although this could be beneficial to US employment, the cost of goods would rise significantly. Imposing such laws could potentially close many small US businesses who could not afford to pay US employees proper wages. Another concern with outsourcing would be employee loyalty. If employees know their jobs will eventually be given to third party partners many of them would be less inclined to stay. Losing certain jobs in the US will also have long-term consequences. As mentioned before with the outsourcing to Japan, if certain jobs are only employable through outsourcing that craft will be lost to the US. Finally, outsourcing relies on a respectable relationship between two countries. If either countries relations suffer the international market would suffer as well.
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 Resource Cooperative | Poole College of Management | NC State University, 1 June 2006. Web. 22 Mar. 2017.
Mourdoukoutas, Panos. “The Unintended Consequences of Outsourcing.” Forbes. Forbes Magazine, 23 Dec. 2011. Web. 22 Mar. 2017.
Narayanan, Loral. “Brief History of Outsourcing.” Credit Today Newsletter. N.p., 06 Jan. 2011. Web. 22 Mar. 2017.
Pearlstein, Steven. “Outsourcing: What’s the True Impact? Counting Jobs Is Only Part of the Answer.” The Washington Post. WP Company, 01 July 2012. Web. 22 Mar. 2017.