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1) Introduction to the Outsourcing
and Offshoring Industry.
Outsourcing in general was approximately a $240-billion global
industry during 2004. A significant portion of outsourcing
revenue is created in information technology services, including
the creation of software and the management of computer centers.
Another major portion lies in business process outsourcing
(BPO) areas such as call centers, financial transaction processing
and human resources management.
Offshoring, on the other hand, covers such a wide variety
of nations, products and practices that it would be difficult
to put a number on it. A significant share of offshoring revenue
is created by contract manufacturing of electronics, including
laptop computers, cellular telephones and consumer electronics
such as iPods. Another major sector in offshoring is contract
manufacturing of shoes, apparel and accessories.
In order to consider the outsourcing and offshoring industry,
it is best to define the terms upfront, since the words are
often used in conjunction and are sometimes used incorrectly.
To begin with, “outsourcing” can be defined as
the hiring of an outside company to perform a task that would
otherwise be performed internally by a company (or government
agency), generally with the goal of lowering costs and/or
streamlining work flow. Outsourcing contracts are often several
years in length. Companies that hire outsourced services providers
often do so because they prefer to focus on their core strengths
while sending more routine tasks outside for others to perform.
For example, typical outsourced services include the operation
of human resources departments, telephone call centers and
computer departments.
Next, “offshoring” refers to the rapidly growing
tendency among U.S., Japanese and Western European firms to
send both knowledge-based and manufacturing work overseas.
The intent is to take advantage of lower wages and operating
costs in such nations as China, India, Hungary and Russia.
The choice of a nation for offshore work may be influenced
by such factors as language and education of the local workforce,
transportation systems or natural resources. For example,
China and India are graduating high numbers of skilled engineers
and scientists from their universities—thus enabling
these nations to attract massive engineering, research and
development contracts. Also, some nations are noted for large
numbers of workers skilled in the English language, such as
The Philippines and India. In many cases, offshoring utilizes
less-skilled labor working for low wages in plants that manufacture
such items as shoes, apparel and generic computer components.
"Captive offshoring” is used to describe a company-owned
offshore operation. For example, Microsoft owns and operates
significant captive research and development centers in China
and elsewhere that are offshore from Microsoft’s U.S.
home base. The goals of captive offshoring include greater
company control through direct ownership, along with lower
operating costs and the ability to utilize highly educated
local workforces.
There is also such as thing as “offshore outsourcing,”
and you will occasionally see this phrase used in the press.
In this case a company outsources operations, such as manufacturing,
to an offshore organization.
Finally, there is “insourcing,” which refers to
situations where an outsourced services provider moves into,
and sets up shop in or near, a client company’s facility.
For example, it is common for major companies to sign agreements
with IBM Global Services, EDS, Perot Systems and other outsourcing
firms whereby these firms take over and operate a client’s
internal computer department. Here’s a non-technology
insourcing example: ARAMARK Corporation will build and operate
snack bars, employee cafeterias and executive dining rooms
within a client company’s facilities.
China, India and similar offshore work centers will remain
low-cost providers of services and manufacturing for the foreseeable
future. At the same time, as their economies grow, their business
structures and middle classes will grow, and they will offer
lucrative markets for exported intellectual property, goods
and services created in the U.S., Europe, Japan and elsewhere.
Fully developed nations such as America have been shifting
to knowledge-based economies for decades, as automation takes
over factory floors (displacing factory workers) and additional
manufacturing shifts overseas. The challenge for developed
nations such as the U.S. and Japan is to maintain their leads
in such areas as intellectual property, investment in R&D
and higher education. There is fierce competition among nations
to foster advanced education, develop well-trained and motivated
workforces, boost productivity and create high incentives
for entrepreneurship and investment. Nations that succeed
in this regard will invent the new technologies, services,
consumer goods and business processes that can be sold to
businesses and consumers in other nations.
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