Disadvantages of outsourcing

Outsourcing is the act of contracting your part of work for a lower price to another vendor.
This is usually done to cut on costs and improve revenues. Most companies outsource their
work to third-world economies where labor is cheap and resources are abundant. It is often
done by the bigger companies by transferring their workload to free-lancers and demanding a
higher price for the project because of their developed image. However the word outsourcing
can have different meaning for different people. If an area lost jobs because the company
outsourced its project to some low-paid economy then these people will have a bad view for
outsourcing. And the people who received jobs because of this act will always consider
outsourcing a positive term.
For a company outsourcing is a way risky step to take. In a way because there is always a
possibility of losing managerial control over the outsourced department or project. Despite of
the signed contract the managerial actions and decisions will still be performed by an outsider
and it is a huge risk. The contract is always prepared by the other company so you are at
disadvantage here as well. Any additional work that may come up during the project and is
not mentioned in the contract will cost you additional charges. It will not be your own
department who works for the company but will be an outsourcing company who are
interested in their money. Not only that, but the biggest issue is business confidentiality. As
you will have to give the private information to the new company or freelancer you have
hired. This information can be very secretive and may be misused by the other end. It gets
difficult when you are dealing with the other party for the first time. To be on the safe side it
is advisable to include as much details in the contract as you can in case anything goes wrong
you have your securities written and signed. The worst part in dealing with such companies is
that they are not concerned with your corporate image; their only motivation is the profit they
will earn. For this very reason they will try their best to increase the profit as much as they
can by cutting down on expenses. This means they might hire cheap resources or use low
quality material in manufacturing your product or finishing your task.
Outsourcing may save a company some cash but the risk is far higher. It may result in
complete loss of goodwill and ruin the company image forever.
Argumentative Essay on Effects of Outsourcing in America
Published on 2013-04-25

Introduction
In todays global business competitive environment, business organizations
must innovative and adapt new strategies to sustain revenue generation, value while
remaining competitive. Organizations have embraced outsourcing principles and
adopted them to help in expanding to new markets (Odu 19). Outsourcing has
enabled US multinational corporations to reduce costs and compete effectively in the
global market. While the proliferation of outsourcing has been beneficial to short
term growth by taking advantages of; low wages, taxes and investment incentives in
developing countries, it will significantly dissolve the competitive advantages the
United States enjoys. The outsourcing approach changes the historical model of

economies of scale, the resulting intangible and hidden trade costs of outsourcing
shall have a heavy bearing on the US economy. The competitive advantage of high
technology, support for startups will be gradually eroded, enabling developing
countries to compete directly with the United States.
Economist view outsourcing as new form of international trade. Currently more
commodities are traded than it was in the past, this can be either good or bad from
differing perspectives. Most Americans hold the assumption that jobs, skills, money,
and experienced are being shipped to foreign countries, and recipient countries are
making financial, socio-economic and development progress while the U.S economy
stagnates (Currie 47). This view has been strongly expressed leading up to the last
two presidential elections, with candidates pledging to bring back jobs.
Consumers have been accustomed and aware to the fact that significant proportions
of manufactured goods are produced abroad by corporations taking advantage of low
production costs. A new trend catching is outsourcing services with India taking a
huge chunk of call centers catering for the American consumer.
The notable divisions which companies outsource are customer support, human
resources, accounting and manufacturing. This has not been limited to these
divisions, skilled personnel in information technology, engineering, pharmaceutical
and Research and Development are facing greater threats to losing workers abroad.
No American worker or politician is keen on promoting outsourcing. For example, a
software engineer at an Information Technology firm can embrace the thought of
losing his/her job to an engineer in India, willing to take half of the pay. There is the
prediction that by 2015, more than 3.3 million white-collar jobs and wages
amounting to over US$136 billion shall be lost in the economy. In addition the
economy will be affected by worker dissatisfaction combined with risks occurring as
a result of outsourcing (Hira and Anil 63).
The resolution to outsource is most arrived at the interest of lowering firms
operational costs, increasing competency, making efficient use global capital, labor,
scarce resources, infrastructure and technology. Outsourcing differs from off shoring,
it is relative to the firm restructuring and organization of labor within and between
societies. Off shoring takes place when a segment of production process is moved off
shore; sold or still under the control of a national firm.
Companies outsource tactically to reduce and control operational coasts, am most
importantly increase profits. Access to low operation costs, college-educated
workforce at a fraction of U.S nationals wages compels firms to take advantage of
short-term outsourcing benefits. Partnership with other organization abroad
provides U.S companies with access to new technology, tools and techniques that
they may not posse, structured methodologies, procedures, documentation, and
expanded skills offering competitive advantages. The partnership between Apple Inc.
and Foxxcon Group provides a good example, in this arrangement Apple is freed up
from manufacturing while taking advantage of Foxxcon capabilities. Outsourcing has
been used successfully to achieve cost saving propelling companies to venture into

foreign markets, these benefits however, do not offset the projected long-term
impacts on United States industries and the economy.
Countries trade to achieve and maximize economies of scale in production. No single
country can produce want it requires domestically. Each country specializes in
producing goods or services at large scale to lower costs which formulate a
comparative advantage in exports. This trade advantage allows it to import goods
that have high production costs domestically.
Benefits of Outsourcing
Cost reduction is the key reason why a company might consider outsourcing.
Tasks that are costly to be done in-house get outsourced to partners who can offer
the services at lower prices. For example, if a firm requires urgently a specialized
software engineer it will be much cheaper to outsource the service than training a
staff member. The hired expert will accomplish the task faster, efficiently and cost
effectively. Access to experts does not only lower long term costs but providers
companies with opportunities to explore new possibilities and venture into diverse
work specialization enabling them to prosper in this changing times.
Outsourcing presents firms with opportunities to enhance competitive strategies
suited for the global market. By outsourcing product quality can be improved,
lowering production costs which in turn are passed down to the consumer and
increasing overall productivity of the business.
With outsourcing, firms enjoy increased operational flexibility presented in several
ways. For one, a firm has access to a large workforce at its disposal relived of
maintaining it on permanent basis. This means that a firm is able to benefit from
contact personnel minus the stress of worrying about layoffs or idle workforce. This
flexibility presents companies with freedom to adjust workforce capacity and
production capacity according to changing requirements and market trends.
Additionally, with outsourcing firms are equipped to handle unforeseen events like
unanticipated delays, work errors or changes in management or production plans.
More importantly, by being flexible firms can deliver on projects timely to the
satisfaction of the clients (Ching 34).
Proponents of outsourcing point out that by doing so firms can free up capital funds
and limited time to focus on core business activities. Ancillary jobs can be performed
by contacted firms or individuals. Firms especially in manufacturing are able to
access latest production technologies and equipment without purchasing or
maintaining them. Good outsourcing relationship presents firms with unmatched
opportunities to access a network of business partners. For example, electronic
assembling firms in China partner with more than two electronic manufactures,
firms sharing one assembler can benefit from the supply chain such as sourcing from
a chip maker or glass display maker.
Negative Effects

The United States has a comparative advantage in industries that require

highly skilled labor and capital investment. The highly skilled workforce with a
strong knowledge base gives the U.S edge in the global economy. No other country
has a high turnover rate of business startups as compared with the U.S. Corporations
by shifting some of these jobs overseas to benefit from reduced costs distribute
knowledge and facilitate spillovers. Economies such as India or China, receive
spillover benefits from influx of knowledge enabling them to advance their
economies. A direct result is that competitiveness of U.S technology is placed at risk
as its competitive edge advantage is lost from the U.S control (Mascarenhas 53).
Additionally, the U.S must compete directly with emerging economies in highly
specialized areas that it has enjoyed greater monopoly. Aerospace manufactures that
now outsource subassemblies are at risk in the long term of creating competitors.
These partners now building components may one day build whole jets largely due to
technology, trainings and contacts provided by U.S firms. U.S aerospace firms do not
have guarantees that their intellectual properties shall be protected.
Manufacturing is vital to a nation, it fosters a strong domestic economy, generates
employment sustaining family wages and salaries, resulting in decent standard of
living for the working class. Manufacturing firms large and small are bastions of state
and local economies, supplying jobs and tax revenues to finance essential public
services. Manufacturing creates economic activity spillovers in other sectors that
supply intermediate goods and services. It also stimulates creation of numerous
high-end job services such engineers and programmers in software technology
within local economies. Additionally it drives economic productivity, innovation and
engine of overall economic growth.
Manufacturing of semiconductors, the basis of modern electronic devices,
prominently add value to the U.S economy proving high-value-added production,
high-wage jobs, efficiency and productivity gains, and wage growth. Notwithstanding
this, the United States is losing capacity and leadership in production of
semiconductors. William J. Spencer (Emeritus of International Sematech chair),
summarizes the leadership concerns by suggesting that a blend of market forces and
foreign policies is creating powerful incentives to reallocate new chip fabrication
overseas. If the trend persists, U.S leadership in chip design and manufacturing will
erode with unpleasant consequences. Productivity growth will slump down severely
impacting the economy spilling over to military security and might. These warnings
have been raised by the National Security Agency and independent institutes.
The semiconductor business demonstrates the problems arising from outsourcing
key industrial sectors critical for preservation of critical national security
requirements. Natural disasters in South East Asia were chip production is being
outsourced; possess a fundamental threat to electronics supply chain. For example
the 1999 earthquake measuring 7.6 on the Richter scale that struck Taiwan shut
down factories in Hsinchu industrial district disrupting the supply of wafers.
Additionally, offshore sourcing and production of chip presents a potential threat to
classified information embedded in chip designs. It greatly increases the possibility
of unfriendly governments or non-state actors embedding Trojan horses, worms or

malware in foreign manufactured chips to be used in military or intelligence

applications.
As other nations execute strategic industrial policies to build up their technological
capacities and strong, modern manufacturing base, U.S. policies continue to
encourage U.S. manufacturers to shift their operations offshore. A comprehensive
strategy aimed at reversing the decline in the nations manufacturing base will be
sufficient for safeguarding and revitalizing the industrial base in the coming decades
in face of looming competitive global commerce.
Another long term affect that poses much greater in addition to knowledge spillovers
is the lack of local talent available to be utilized in the economy. College enrollment
for courses leading to high skilled jobs as suffered a setback due to uncertainties
associated with outsourcing of these jobs. In addition, the U.S economy is at risk of
losing its attractiveness to skilled immigrants.
Outsourcing disrupts education evident with the college students shunning to pursue
high-tech fields and opting for business oriented courses. Students are concerned
that by pursuing these course coupled with instability in the labor market they face
risks of losing out due to outsourcing. Studies show the proportion of graduates
planning to major in computer science or engineering is now 70% below its peak in
the early 1980s (Santos 87). With companies shipping IT operations to countries
such as India and China, these countries are capitalizing by investing heavily in
education and training to continue to attract, retain best talents, and maintain
competitive edge in the global IT industry.
The increasing deficit in trade posses long term effects on the growth of the U.S
economy. The U.S economy consumes more than it produces. This deficit cannot be
scaled down if economic activities continue to be exported overseas. Goods and
services produced and provided by U.S firms are being imported back to the U.S
worsening the deficit situation. Outsourcing also diminishes the purchasing power of
workers and shrinks their presence in the consumer market.
Most outsourced jobs to developing countries are not replaceable and present
difficulties returning them back. It also means that the few remaining positions,
individuals willing to take them must accept wage cuts and reduced benefits that they
would have received if these jobs were not outsourced (Bureau of Economic Analysis
and Bureau of Labor Statistics). Outsourcing creates a population of underemployed
and severely affects the middle class purchasing power.
Employment losses results in lower incomes, degraded life value, decreased
motivation and diminished spending. Failure by consumers to spend puts a strain on
the economy; if money is not ploughed back the economy struggles to grow
(Schniederjans, Ashlyn and Dara 6). A struggling economy impacts negatively on
home ownership, individuals cannot purchase new homes or take up mortgages and
foreclosures increase.

Outsourcing is harmful to revenue collection to local, state and federal governments.

Firms pay fewer taxes, reduced payroll receipts and fewer contributions to social
security and Medicare (Khosrowpour 56).
Managing Outsourcing
If foreign outsourcing on balance raises economic well-being, policies aimed at
arresting that activity would have a net economic cost. There are, however, other
avenues for policy response that most economists think could be generally beneficial.
One avenue is to work to expand overseas markets through further removal of
foreign trade barriers against American exports. A second avenue would be to use
policy to boost the benefits of trade by correcting deficiencies in the economys ability
to create new products and processes that could become attractive exports.
A third avenue is to use economic policy to remove any unwarranted bias against the
economys tradable goods sector caused by an elevation of the incentives toward
foreign outsourcing that arise from the economic forces generating the trade deficit
(Taylor and Akila 26). A fourth avenue would be to use policy to address the
hardships and inequities arising from trade and foreign outsourcing by extending
compensation and more effective tools for adjustment to those who are hurt by the
disruptive effects of foreign outsourcing and other market forces.
Signs of Changing Trends
The U.S. Congress of recent has taken action to limit outsourcing and off
shoring by adjusting the nations inter-national commerce policies, however, further
measures must be done. The President has backed creation of more employment
opportunities rallying for greater investments in infrastructure and moving rapidly
towards clean energy driven economy. State like Ohio have implemented policies and
passed laws limiting the flow of public funds to foreign firms. In addition, some
corporations and entrepreneurs have begun to question the wisdom of outsourcing,
deciding to set up new facilities in the United States, expand their operations within
the country and establish firms taking advantage of American workforce skills,
knowledge and capabilities. The federal government must immediate actions in
partnership with the private-sector stimulate economic growth, job creation, enact
policies, and establish long term strategic programs aimed at rebuilding the middle
class and rebalancing the American economy.
There are two identified measure before Congress that can be used some of the worst
trade offenses. The first recognizes the manipulation of the Chinese currency,
undervalued approximately 40 percent with respect to the U.S. dollar. Thus, costing
the U.S. economy more than 3 million jobs. The Chinese government continues to
violate its international obligations with respect to championing and safeguarding
workers rights, human rights, illegal subsidies, currency manipulation, and respect
for intellectual property rights by its citizens. Congress has been urged to enact a
comprehensive trade bill enabling the federal government with tools to address these
challenges combined with strengthening trade laws and their enforcement.

The current tax regulations permits U.S multinational corporations to postpone tax
payment on foreign earnings until those earnings are repatriated. These provisions
encourage continued investment in foreign economies with low tax rates at the
expense of creating jobs in the U.S economy, and further tilting trade deficit in favor
of emerging economies. Comprehensive tax reforms reflecting the changing
situations need be recommended and enacted. These regulations must be punitive to
businesses or hinder foreign investments and expansion by U.S firms.
Conclusion
Outsourcing has transformed the ways in which nations interact. Corporations have
fragmented their operations internationally in order to concentrate exclusively on
their core competencies. Short-term benefits, such as cost savings were identified,
however several intangible consequences and hidden costs were overlooked that will
have an effect on the U.S. economy in the subsequent years ahead. There is still a lot
we do not know about outsourcing, largely because the available data does not
provide information needed to fully understand its magnitude, the reasons behind it,
and the actual effects it has on the economy. However, there is still substantial
information that can be examined to analyze the long-term consequences that will
alter our economic status. The sudden increase in outsourcing highly skilled
professional jobs may be suspending our position in the world as a lead economic
power. Companies must realize that their strategic advantages will thrive based on
maximizing their knowledge-base, which is achieved through employing highly
educated U.S. workers.

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