Effects of Outsourcing in the Economy
In the modern world outsourcing has become an important technique to maintain the competitive edge of a business. Outsourcing is an agreement whereby a company or firm contract out a fraction if their internal operations to another firm. Over the past two decades, the gravity and magnitude of outsourcing has increased significantly, and companies regard it as an important management practice that has made it possible to perform business operation that would otherwise consume colossal sums of money to perform. In the last two decades, the economic importance of outsourcing, its strategic significance and density of outsourced activities has intensified, developing from the usual simple non- value adding activities, for instance, catering and security to core functions, such as accounting, design and information technology (Saleem, 2013). This paper will seek to evaluate the economic impacts of outsourcing in the economy.
Outsourcing has undergone myriad of changes over the past three decades and it has evolved from just buying products and services from external sources to relocating the function of the physical business and the related knowledge. The increased boundary of the modern business enterprises plus the pressure to reduce cost of operation, improve functional competitiveness and desire to keep pace with the technological changes, has totally and completely altered the normal ancient business configuration. Business configuration refers to the manner in which companies and other business entities are designed to operated and managed (Milberg & Winkler, 2013). These adjustments have impacted on the performance of business films but also affected their contribution to the larger economy.
Reasons for outsourcing
There are various reasons that make it necessary for firms to outsource Top on the list is the goal of cost minimization through saving on wages and other related payment benefits. The other factors behind outsourcing include, reducing uncertainty through demand transfer to external parties and access to specialized skills, expertise and input a firm does not possess. The increased level of specialization especially in the business world has made it necessary for firms to outsource in order to sustain economies of scale and the durability of demand for the activity in question. Competition has increased with new firms and companies entering the market each day. It is become important for firms to devise ways to differentiate themselves and their products from those of their competitors. Production of quality products and services has become the main area for product differentiation. Where a firm cannot access the requisite skills, expertise and knowledge from internal workforce, outsourcing has been the solution. Outsourcing allows access to expertise, competency and skills and increases the focus of prospective suppliers and physical coverage (Milberg & Winkler, 2013).
Outsourcing offers immense powers that may be lacking within the premise of an organization. This power has many facets, for instance improvement in product quality emanating from innovation and the expansion of service products may result to fresh demands. Other facets of company power emanating from outsourcing include, access to resources, complex and dear technology and economies of scale (Knaus, 2007). This power has the potential of significantly reducing the operation costs for a firm, since the outsourced firm (the suppliers specializing in a particular business operation) has access the appropriate skills and expertise, capital needed for investment in expensive technology and is therefore, able to perform business functions more effectively that the interior organizational departments of the outsourcing firm (buyer). Outsourcing increases the playing ground of organizations through offering bigger capacity for flexibility, particularly in the acquisition of fast developing technologies and a multitude of multipart systems (Saleem, 2013).
Macro-economical Effects of Outsourcing on Economy
The negative aspect of outsourcing unskilled or skilled posts from outside the country is that it takes way employment opportunities from the state where the enterprise is located. Consequently this removes wealth from the economy. While it serves well for the company, outsourcing can greatly hurt the economy when the real effect is analyzed (Hira & Hira, 2008). This problem will be eliminated possibly, when all nations become a closely incorporated global economy. In the current setup where separation still exist in a country`s economic circumstances outsourcing will continue to be detrimental to the economic system.
Outsourcing during Economic Slump
During an economic slump outsourcing is particularly disastrous to the economy as the various macroeconomic elements work to bring the economy back on its feet. It injures the economy to create jobs in foreign countries while the local system is in jeopardy (Saleem, 2013). It is usually advisable to create job opportunities in the economy during an economic downturn to stimulate the economy through increasing their purchasing power to sparkle demand.
When companies employ locally instead of outsourcing, individuals in the domestic market acquire income that will be used to buy products from domestic firms. Individuals with money must spend it, and when they cannot find job opportunities then their interaction with business entities is limited. The seller-buyer relationship forms a cycle where each one is important in the transaction of business. Seller offers job opportunities through the production process marketing and conversion of the raw materials to finished good. The buyer on the other hand, has the required skills and knowledge to be used in the productive process or service delivery in the various sectors of the economy. The higher income individuals depend on the lower and middle income individuals generating enough income to purchase services and products from their enterprises. Therefore, companies that depend on the domestic consumers can be hurt when organization outsource, especially from foreign countries (Knaus, 2007).
Negative effects of Outsourcing
. While outsourcing may help save finances and open new opportunities, especially for the domestic citizens holding jobs at an upper level, its impact on the economy may be disastrous. Many Americans citizens lose their jobs to citizens from foreign countries and this negatively impacts on the economy of the US. Demand of commodities is determined by many factors but key among them level of consumer income. When citizens lose jobs, it translates to low disposable leading to reduced demand for commodities produced by the domestic firms. On the other hand, cheap imports become very attractive to citizens whose income has reduced. The result is that, the domestic firms will lose their market share. Reduction in market share will affect their production process forcing them to downsize on the number of employee. This creates unemployment, and leads to loss of colossal sums of money, which would have accrued to firms inform of profits. Loss of competitive edge by Domestic firms to other firms in foreign countries will be a permanent phenomenon and domestic workers plus the economy will lose eternally (Hira & Hira, 2008).
Loss of jobs as a result of outsourcing is not only restricted to individuals of possessing minimal educational qualification but also individuals with higher qualification, both skilled and unskilled. Unskilled and minimally skilled individuals find it increasingly hard to find a job in an economy where most firms are outsourcing part of the internal functions. Poverty significantly affects domestic organizations through reduction in consumer income and tax for the national government (Saleem, 2013). The economy is hurt as a huge proportion of income is los and that benefits firms in foreign countries.
Study reveals that the outsourcing causes unemployment to individuals` especially those that are not very skilled or specialized in any field (Hira & Hira, 2008). For example, research carried out by the University of California on the manufacturing sector in USA revealed that workers displaced in the labor intensive industries, for example, clothing and leather because of outsourcing found it increasingly difficult to find another job, for a period of three years. Those that were able to find other job opportunities experienced a considerable reduction of their wages ( Organisation for Economic Co-operation and Development, 2007).
As argued by Saleem (2013), out sourcing has adversly affected the level of government spendings in various parts of the world. This is due to the fact that, there has been a decrease in payroll tax receipts as well as few contributions to medicare and social securities.
Positive effects of Outsourcing
Outsourcing is especially crucial for companies especially in developed nations such as the US and Britain. United States investors, consumers and shareholders profit hugely through outsourcing. Little capital outlay is required to outsource simple services and assembly work jobs, meaning a lot is saved. Cost is only incurred when paying displacement workforce in the USA and training workers in foreign nations. Jobs are outsourced from less developed countries where the cost of labor is comparatively lower than that prevailing in the US markets, companies save colossal sums of dollars through reduced costs. Such countries are able to improve their economies and consequently intensify their trade with the US. Outsourcing also increases the ability of the less developed countries to pay back huge sums of money they owe USA (Saleem, 2013).
Companies that actively outsourced especially in foreign states where minimally skilled workers are used to perform various functional roles of the organizations have superior productivity. This is due to the fact that work continues for 24 hours uninterrupted due to different time zones. Additionally, with the modern telecommunication devices it is easy and simple to coordinate work and augment production particulars in states with a low labor overheads on a 24/7 basis. Consumers are accorded an advantage of lower prices for various goods and services that are of equally high quality. In the local market this intensifies completion further reducing the prices of commodities (Milberg & Winkler, 2013). Demand is stimulated when prices of commodities are maintained at low levels. By producing such goods locally it would cost more, since prices for consumer goods have to internalize the cost of wages. Higher prices reduce demand and consumption and this means firms have to reduce their production capacity, probably downsize workforce to remain competitive and lower production means lower taxes for government.
The modern economy would find it difficult to operate without outsourcing. Outsourcing is the cog that keeps the economy wheel moving by making business lucrative through cost reduction that profit the consumer and that allows the economy of any nation to remain competitive in the global market. Outsourcing provides an opportunity for economies to focus on innovation and use the most skilled individuals to perform functions that cannot be performed by the company without hand from external sources. It neither is worth noting that, business do not outsource because of lack of enough confidence on the domestic labor nor is it meant to cause unemployment through downsizing. It is a means to sustain firms that generate employment opportunities while offering affordable consumer products and services. One of the negative effects of out sourcing is the adverse affects to the level of government spendings in various parts of the world. This is due to the fact that, there has been a decrease in payroll tax receipts as well as few contributions to medicare and social securities
As aforementioned the increased boundary of the modern business enterprises plus the pressure to reduce cost of operation, improve functional competitiveness and desire to keep pace with the technological changes, has totally and completely altered the normal ancient business configuration. Outsourcing served to solve the many bottlenecks that modern day organizations face. Strategic advantage is now a thing of the past, with outsourcing business operations can continue for 24 hours a day in any part of the world. The benefits of outsourcing on the economy greatly supersede it`s the negatives impacts. The world is slowly becoming a global village and outsourcing will remain a useful means of maintaining business competitiveness and satisfying consumer needs.
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Knaus, M. (2007). Macro economic issues of offshore outsourcing. München : GRIN Verlag.
Milberg, W. S., & Winkler, D. (2013). Outsourcing economics : global value chains in capitalist development. New York: Cambridge University Press.
Organisation for Economic Co-operation and Development. (2007). Staying competitive in the global economy : moving up the value chain. Paris: OECD.
Saleem, H. (2013). How Outsourcing Affects The U.S. Economy. Economy, Finance, General Business.Retreived from http://www.dirjournal.com/business-journal/how-outsourcing-affects-the-us-economy. on 10 December 2013.