There are many advantages and disadvantages of outsourcing to foreign countries. Outsourcing is defined as contracting or sub-contracting work related activities to a third party that are not core tasks in order to open up cash, time, and personnel (“Outsourcing”). Some of these jobs contracted out includes but not limited to data processing, manufacturing, marketing, payroll, etc. (“Outsourcing”). Damodar Golhar and Satish Deshpande quoted in their study about outsourcing for financial success that, “Strategic outsourcing can allow firms to achieve gains in competitive advantage, spend more time on core activities, and focus on addressing external threats and opportunities.” The purpose of outsourcing is for firms to provide products or services to their customers at a much quicker and less expensive rate (Deshpande and Golhar). In a survey, which was conducted by CAPS Research and A.T. Kearney Inc., of executives responsible for purchasing found that over 80 percent of the respondents felt that reduction of cost and the need to focus on central business activities were the key drivers for outsourcing (Deshpande and Golhar). It is estimated that over three million American jobs, approximately $136 billion in wages, will be outsourced to foreign countries within five years (Deshpande and Golhar). Some advantages of outsourcing to foreign countries are it can save firms money and help distribute risk (Meyer). A disadvantage of outsourcing is the difference in language from the country outsourcing to the foreign country.
Outsourcing to foreign countries can reduce costs for firms. Costs that go along with employees of the firm are generally higher than the costs of service provided outside of the firm (APT Services). One particular cost that can be reduced by outsourcing is overhead cost. James Bucki, who has seventeen years or corporate experience and led a team of representatives to examine ways to outsource some of the operation’s of the county he works in quoted, “Overhead costs of performing a particular back-office function are extremely high.” For example, a firm is located in an expensive area and needs to expand its office space for outbound telemarketing (Bucki). It would be cheaper for the firm to outsource the telemarketing jobs because the firm would not have to pay for the additional office space (Bucki). Also, firms can save money by economies of scale. There should most definitely be an economic advantage from bigger size to larger numbers in order to save money through economies of scale (Meyer). An example of economies of scale is when volume increase, unit costs should decrease (Meyer). Now after discussing how a company can cut costs, let us go into another advantage of outsourcing.
Sharing risk is another benefit of outsourcing. Dean Meyer, founder of NDMA Inc. which focuses on organizational transformation compared sharing risk to diversification of an investment portfolio. He said:
Why does diversification reduce risk? If the whole market goes down, you’ll lose, no matter what you do. But if the market goes up while one company makes some serious mistakes, the rest of your portfolio may still do well… (Meyer).
This relates to sharing the risk through outsourcing because there are situations where it would be best to have activities performed at various locations rather than at one. If a manufacturing company has all their work processed at one factory, a labor dispute or other factors could put the company out of business but if the work was distributed amongst a few factories, a negative factor in one country may not affect the operations of other (Meyer). After assessing the advantages of outsourcing, now it is time to talk about a negative factor to outsourcing.
A disadvantage of outsourcing to a foreign country is the language of one country to the other country. This problem shows up more often when outsourcing inbound and outbound telemarketing jobs. APT Services, an outsourcing firm in India quoted:
When a function that needs handling of calls is outsourced to a foreign location and the first language of that nation is different from the nation which outsources the function, it may lead to low quality call handling. (APT Services).
This low quality call handling is seen a lot when calling certain customer service representatives such as a credit card company. Usage of words and phrases and accents varies from country to country, therefore making it more difficult to understand the person (APT Services). Overall, it is risky for a firm to outsource jobs to a foreign country that does not have a great deal of knowledge of the main language used in the country that is outsourcing the job.
There are many factors a firm must consider before deciding whether to outsource or not. A firm can benefit from saving time and cost enabling them to focus on other task that are more essential. Also, firms can share risk of negative occurrences with the foreign country they are outsourcing to. On the downside, language from country to country can be tough when outsourcing certain functions. If it would be more beneficial all across the board for a firm to outsource then the firm should take the chance in order to reap the return.
Work Cited
APT Services. “Outsourcing: Pros and Cons”. PRLog Free Press Release . 3/20/2010 .
Bucki, James. “Top 7 Outsourcing Advantages”. About.com. 3/21/2010 .
Deshpande, Satish P and Damodar Y Golhar. “Outsourcing for financial success? An exploratry study.”. Advances in Competitiveness Research Jan 1, 2009 < http://www.thefree library.com/Outsourcing+for+financial+success?+An+exploratory+study.-a02 04480540>.
Meyer, Dean. “4 Advantages to Outsourcing”. Sourcingmag. 3/21/2010 .
“Outsourcing.” BusinessDictionary.com. 3/20/2010 .
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