Outsourcing is either a dirty word or the holy grail, depending on which side of the debate you’re on.
It’s one of the hottest of the hot button economic issues this political season in the United States, with John Kerry declaring companies who outsource as “modern day Benedict Arnolds”. There is legislation pending in several US States prohibiting outsourcing of state government contracts.
Economists on the other side say it is an inevitable result of globalization: business will go where wages are cheapest and quality is comparable. In the long run, the US will benefit, since more spending power by Indian and Philippine middle-class workers will unavoidably result in more business for American companies. Studies from the World Bank also indicate the potential upside by way of reduced costs is huge: an estimated US $ 138 million for the US banking sector alone. A recent report by the McKinsey Global Institute backs the outsourcing strategy. For every dollar of work moved offshore, the US economy gets back $1.12 to $1.14 in income, says the institute.
What really is Outsourcing?
Outsourcing right now has no standard legal definition. It can be defined as the transfer of a commercial function to an outside service provider, subject to the customer’s retained authority and responsibility to third parties and shareholders for continued success of the customer organization. This normally involves long-term contracts. Virtually any long-term service contract is outsourcing, to some degree. This is distinguished from projects, or “contracting out.”
Outsourcing has been here for quite some time. In the 1960’s, the outsourcing model was successfully used by American car manufacturers to be more competitive with Japan. Instead of manufacturing all of a car’s parts, Ford or GM would source non-vital parts, say carburetors, from specialty sub-contractors. They were then free to concentrate on marketing and distribution. Back then, it was accepted as just another business tactic.
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