Outsourcing Essay

Published: 2020-04-22 15:06:56
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The term outsourcing is not a new one and the practice dates back to as early as the 1980s. The corporate sector has been using outsourcing of non-core organizational and technical operations and functions to mainly the third world countries in order to effectively utilize the worldwide labor, capital, technology and resources. The basic theme is to lower the production costs and to readdress or preserve energy directed at the competencies of a particular industry.

However, where the idea seems extraordinarily lucrative to both, the direct buyer (outsourcing firms) and the direct seller (in-sourcing individuals/firms) , it provides a focal point in the shifting of economic activities for the work forces of different countries. The outsourcing of operations from the developed to the developing countries has led the social scientist to believe that this: creates a gap in the demand and supply of the workforce in the developed countries, leads to a reduction in the quality of services and jeopardizes information security.

With regards to the situation in the United States, a white paper released by the office of the US Senator Lieberman in 2004 states: The United States has enjoyed unparalleled technological leadership for decades. Our capacity for innovation has continued to create jobs and raise living standards despite the ongoing migration of manufacturing to foreign nations in the past decade. However, a new, potentially more dangerous migration is upon us. The rising trend of outsourcing high technology manufacturing and high-end services jobs overseas presents a new and fundamentally different phenomenon.

This new trend is far bigger and more complicated than the current debate suggests. Key components of our innovation infrastructure such as knowledge and capital have become highly mobile. If our engineering, design, and research and development (R&D) capabilities continue to follow the manufacturing and services facilities going abroad, our competitiveness will be weakened, putting our economic prosperity and national security at risk. The revolutionary development of IT and its related fields in the last decade has given rise to this daunting concern for the big nations of the world.

The United States, the biggest democracy of the world, has been hit the hardest by the crisis (Koehler & Hagigh). The impact of this phenomenon has been so massive on the United States economy that this issue was raised even by the Democratic presidential candidate John Kerry during his 2004 US presidential elections campaign. His criticism revolved around two basic principles that the outsourcing firms were not only depriving the US workforce of work but were also depriving the government of its due share of taxes by outsourcing in the tax havens.

The country thus needs immediate reforms in its national policies with regards to its economic structure so as to deal with the issue before it is too late (Koehler & Hagigh). Benefits Outsourcing can be beneficent to the economy in many domains. For the development of small businesses it is especially instrumental. It is widely believed that though, not outsourcing is a big mistake but outsourcing everything is an even bigger mistake. So it all comes down to the balanced and effective outsourcing that helps a firm flourish.

It allows regulating capital costs, converts permanent costs to variable costs and discharges capital for reinvestment in the company. Efficiency is increased due to distribution of different tasks to different but specialized entities rather than a single firm being involved in multitasking and as a result increasing the overall costs of marketing, development, distribution etc. Also, the appointment and training of technical personnel for short term projects may boost up the costs and there is always a chance that these personnel may not be up to the mark.

Moreover, the time factor is very vital in this regard and outsourcing adds the capacity to the firm to immediately start major projects. In case the firm had decided to complete the total project in house, a severe shortage of resources can be observed because then the firm would have to handle matters ranging from capital investment to hiring and training of the correct employees. This in return might take weeks or even a month before the project could be actually started.

Outsourcing also helps keeping the executive group focused on the work that serves the client rather than the secondary jobs. The risk factor is also minimized, since every job outsourced to a specialized company is automatically scrutinized and fine-tuned for its respective risk possibilities by the company. (All Business) By and large outsourcing is considered by most of the corporations as a strong business tactic for the development of products and maintainability of good quality services through an effective, proficient and economic medium.

They believe it to be a profound source of intellectual capital through which they can focus on their core in-house services, plan out future policies while taking preemptive measures for reinvestment and further developmental projects, along with reduced costs. The race for the development of the best strategic edge amongst companies has led them to outsource their minor jobs, including, in some cases, marketing, distribution and sales, to the developing countries where there are lesser labor costs and governments are reluctant to make and abide by constitutional rights of the workers.

More often than not, these are the countries that have exchange rates that have been calculatedly undervalued and the corporations take complete advantage of this. They take advantage of the rate of foreign currencies that have been unnaturally synthesized and maximize their returns, as a result. Led them to outsource their minor jobs, including, in some cases, marketing, distribution and sales, to the developing countries where there are lesser labor costs and governments are reluctant to make and abide by constitutional rights of the workers.

More often than not, these are the countries that have exchange rates that have been calculatedly undervalued and the corporations take complete advantage of this. They take advantage of the rate of foreign currencies that have been unnaturally synthesized and maximize their returns, as a result. Nike, Inc. is the largest supplier of athletic shoes in the world. Yet it out sources 100 percent of its shoe production and manufactures only key technical components of its Nike Air system. Athletic footwear is technology- and fashion-intensive, requiring high flexibility at both the production and marketing levels.

Nike creates maximum value by concentrating on preproduction (research and development) and post-production activities (marketing, distribution, and sales), linked together by perhaps the best marketing information system in the industry¦¦¦Nike even outsourced the advertising component of its marketing program to Wieden & Kennedy, whose creative efforts drove Nike to the top of the product recognition scale. Nike grew at a compounded 2O percent growth rate and earned a 31 percent ROE for its shareholders through most of the past decade. (Hillmer, Quinn 1995)

This is exactly one of the kinds of examples that staunch believers in strategic outsourcing cite in order to proclaim that the phenomenon is beneficent for the world economy. They believe that it enhances the product quality or more importantly, the product to cost ratio. They argue that not only it benefits the economy of the developed countries like the United States by increasing the productivity, but also the developing countries are helped by the inflow of foreign exchange on the fronts of increased education, better paid jobs and elevation of living standards.

The economies of major emerging countries in the field, such as China, India and Philippines, are quoted. (Wikipedia 2006) Countries like India and China have evolved as the major giants in this fierce battle for the gaining of outsourced jobs. Several factors are involved in this competition that allows the two countries to stand out in the picture in this regard. The telecom capacity for instance, between India or China and the United States grew from 0 to 11,000 Gb/S between 19991 to 2001.

Not only has this but the phone call charges from India to the US dropped by almost 80% since January 2000. (The Economist 2003) The gap in the wages of technical labor is also overwhelmingly enticing with a Chinese engineer being paid $15,000 per annum which is about only 10% of what is being paid to an engineer in the Silicon Valley. Similarly the wages of the programmers working in American comes almost to three times of what is being paid to an Indian programmer. (Business Week 2002) The contrasting figures of educated labor force being generated in the three countries are also striking.

The number of graduates in engineering and physical sciences is already decreasing at a rate of 1% per annum (Manufacturing and Technology News 2003) and the engineering graduates in the US represent only 5. 1% of the total graduating students. This is way below than China where the number of engineering graduates surpassed the number of US graduates in 1999 with a ratio greater than that of three is to one (NSF 2002). The huge amounts of subsidies and favorable conditions provided by these countries have become their hallmarks in their quest for becoming global technological giants.

Apart from government funding to the grass root levels for generation of low cost educated labor, such as research and development grants in the universities, the massive infrastructural uplifting has attracted foreign direct investment (FDI). They provide manufacturing facilities with state of the art telecommunication, transportation and energy systems, along with waivers and subsidies on taxes and tariffs and numerous rebates are also offered. China, in this regard is leading from the front and as a result it enjoyed foreign direct investment (FDI) in 2002 that even surpassed the United States.

India is not far behind in this pursuit and it enjoyed a $12 billion IT services export industry in 2003. With a large population of skilled IT personnel having sound English Language proficiency it produces more than 70,000 IT professionals each year. (Karamouzis 2002) The government of India has been quick to capitalize on the situation in the US markets and has established IT and calls centre parks that have been fully equipped with fiber optics and power wiring. This in return has augmented the in sourcing technical projects from the United States many folds.

The vulnerability of the US market on this account has been so alarming that in 2004, according to an article published in the Tribune (India), the US government has been seeking to ban Business Process Outsourcing (BPO) in the country, especially to India. The US trade deficit with India had reached $ 9 billion in the particular year, with Indian BPO industry playing the pivotal role. Challenges In an interview in Geneva, John J. Sweeney, president of the AFL-CIO, during the International Labor Organizations (ILO) ministerial conference about the challenges of globalization and outsourcing and the prospects for employment, said: Since 1998, weve lost about 3. 5 million good, middle-class manufacturing jobs, and these are jobs that were eliminated with outsourcing, and by policies taking part in different parts of our country in the very basic manufacturing industries: auto, steel, rubber and so on. (Washington Times 2006). The declining trend in employment opportunities has been observed in both the manufacturing industry as well as the professional, technical and business services. Since 2000, the US job market has been deprived of more than 207 million manufacturing jobs with over 500,000 being from the high-tech industry.

The industries affected the most are the manufacturers of Computer and Peripheral Equipments, Communication Equipments, Semiconductors and Electronics Components and Electronic Instruments, with a job decrement of 28. 2%, 40. 2%, 36. 5%, and 11. 3% respectively. The condition in the professional, technical, and business services sector has the second highest long-term unemployment. The people seeking white-collar jobs for over six months rose to a staggering rate of 339. 2% in just a span of three years during 2000 and 2003.

The boom of Business Process Outsourcing (BPO) abroad, with data entry, low level processing, customer call centers, telemarketing, collections, accounting, human resources, procurement, and help, all being provided by other countries has led many US based companies to transform their guidelines of targeting personnel. These include chief corporations like Bank of America, Dell, AMEX, Citibank, IBM, Accenture, EDS, Oracle, PG, Delta Air Lines, Prudential, and DaimlerChrysler. (EPI Issue Brief 2004)

A significant aspect of the challenges involved in outsourcing is the risk of jeopardizing Information Security of the business entities involved. In general, the risk factor increases since now both the in house personnel and the staff of the outsourcing company involved gain access to the information systems, and thus leakage of sensitive data can take place. In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call centre workers in Pune, India, acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names.

Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank. An Outsourced project like US Payroll, where the Social Security Number of an US employee can be one of the vital factors which can be used for fraudulent activities. Hence its very essential for a company to keep all the data intact, and ensure that no leakage of data is done. (Wikipedia 2006) Clive Warren Axelrod, in his famous book Outsourcing information Security, specifies the motivation, origination and methodology behind information security breaches through outsourcing networks.

He claims that these breaches can occur due to lapses and deliberate misconduct of employees that are based in house, in the company to which information has been outsourced and even due to a combination of the two. Inefficient and incompetent employees at the in sourcing end may lead to inadvertent infection of the systems by viruses and malicious software, which can be then transmitted to the outsourcing end. This may lead to severe damage to the information security and incur the loss of sensitive data. Another significant problem arises when the corporation outsources a job in which it shares sensitive information with these companies.

If the personnel of the company misuse this information, as in the case of Citibank, not only does this sustain monetary damages but severe defaming of the corporation can also occur with clients loosing faith and even suing the corporation. (2004) Conclusion Unfortunately, the criterion for determining the actual outcome on the United States economy and its people of outsourcing has not been established yet. The immediate benefits of outsourcing are the lowering of commercial costs which is mutually shared by the consumers and the shareholders.

The saved finances enhance profits which can be reinvested in the business; Competition increases raising the quality of the products and output is enhanced. This chain of events increases the standards of living abroad in the in sourcing countries and in return new consumers of the products generated in the US market surface. An illustration is clearly depicted in the fact that during the year 2003, Chinese imports to the US rose by 40. 5% in only nine months.

However, the exports of the US companies to India also jumped from $2. 5 billion in 1990 to $ 4. billion in 2002. On the other hand, the depressing aspects of this outsourcing of high-tech jobs from the United States to the developing countries render the National Security vulnerable. The local work force is left unemployed and even though the corporate sector scrapes all the benefits, the looser, ultimately is going to be the working class. According to the Bureau of Labor Statistics, the potentially biggest employment growth fields are those of registered nurses, post secondary teachers, retail sales persons, customer services representatives etc.

However, ironically, though three out of the ten fastest growing occupations are IT related, the availability of these jobs is limited. Innovation in high technology sectors drives economic growth by creating high value jobs, boosting productivity, raising wages, providing international competitive advantage, and producing the next generation goods and services. Increased efficiency and productivity derived from advanced materials, tools, and processes generated in high technology industries strengthen other industries, ranging from construction to finance.

A continued shift in design and R&D to foreign countries puts all these economic benefits at risk, not to mention may have unintended political and security consequences. (Koehler & Hagigh) The burden of outsourcing is also shared by the information security (IS) professionals, who are responsible for the safeguarding of their companies sensitive data. The IS professionals throughout the United States try to develop and focus on a preventive strategy rather than a curative one. Firstly, they keep a close check on their own systems with regular systems auditing, along with thorough equipment and personnel auditing.

Apart from this put into effect specific measures to counter the misuse of sensitive information. Also, there is a continuous process of upgrading of the systems as well as the training of employees to enhance understanding of privacy and particular training for computer system managers with regard to securing computer systems, frequent threats to information security, access control techniques, risk evaluation and management, intrusion detection, authentication and other related issues. On the other hand, the IS professionals also play a role in determining as to which BPO entity would be their best choice.

For this purpose a the entities work history and background are scrutinized so as to determine their track records with regards to the effective management of information security. For instance, in India, National Association of Software and Services Companies (NASSCOM), has emerged as a very credible trade organization, which addresses data security concerns in the region through regular workshops and thus facilitates the BPO market and the in sourcing partners of the Indian based companies.

Furthermore, the laws governing the information security breaches, theft and other gross misconducts of such nature, in the country where the work is outsourced should also be taken into account. This facilitates in planning out the nature and extent of the outsourcing job as well as laying down a responsive strategy in case there is an issue of such kind.

For instance, in India, there are special laws governing the theft and misconduct by such in sourcing companies, which are immediately enforceable. Apart from this there are special Anti Cyber Crimes cells in which some investigators have been specially trained by the US Department of State. To be acquainted with these domains of the outsourcing is a necessity of todays IS professionals. (Wugmeister and Maughan)

Reference

http://en.wikipedia.org/wiki/Outsourcing

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