Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. Usually done as a cost-cutting measure, it can affect jobs ranging from customer support to manufacturing to the back office.
Reasons for outsourcing
Companies primarily outsource to reduce certain costs, which may include peripheral or “non-core” business expenses, high taxes, high energy costs, excessive government regulation or mandates, and production or labor costs.
The incentive to outsource may be greater for U.S. companies due to unusually high corporate taxes and mandated benefits like social security, Medicare, and safety protection. At the same time, it appears U.S. companies do not outsource to reduce executive or managerial costs. For instance, executive pay in the United States in 2007 was more than 400 times more than average workers a gap 20 times bigger than it was in 1965. Other reasons include:
- Reducing and controlling operating costs.
- Improving company focus.
- Gaining access to world-class capabilities.
- Freeing internal resources for other purposes.
- Streamlining or increasing efficiency for time-consuming functions.
Outsourcing of white-collar work has grown rapidly since the early 21st century, despite a focus on manufacturing outsourcing. The digital workforce of countries like India and China are only paid a fraction of what would be minimum wage in the US. On average, software engineers are getting paid between 250,000 and 1,500,000 rupees (US$4,000 to US$23,000) in India as opposed to $40,000–$100,000 in countries such as the US and Canada.
Outsourcing has also expanded to include many different countries; Costa Rica has become a big source for outsourcing work as it offers the advantage of a highly educated labor force, a large bilingual population, stable democratic government, shares similar time zones with the United States, and it takes only a few hours to travel between Costa Rica and the US. Companies such as Intel, Procter & Gamble, HP, Gensler, Amazon and Bank of America have big operations in Costa Rica.
In the recent years there has been an exponential growth in white collar work with service providers emerging in a wide range of activities, from banking and legal services to companies like Resources US, a pioneer in outsourcing services for architecture firms in United States. Unlike outsourced manufacturing, outsourced white collar work, offers workers the flexibility to choose their working hours, and which companies to work for.
With many individuals telecommuting from home, the companies that require this type of work do not need to allocate additional funds for setting up of office space, management salary, and employee benefits as these individuals are contracted workers.