The Outsourcing Industry
History of Outsourcing
Looking at the history of human development, the history of outsourcing dates back to the industrial development that began in the late 17th century. For instance, the making of America’s covered wagon covers and clipper ships’ sails was a job outsourced to workers in Scotland, with raw material imported from India. England’s textile industry became so efficient in the 1830s that eventually Indian manufacturers couldn’t compete, and that work was outsourced to England. (Kelly, 2003, p.3) The ancient Chinese empire and the Japanese were also adept at outsourcing to their conquered nations. Looking at recent times, in the USA many computer companies used to outsource their payroll processing in the 1970s and 1980s. Learning that outsourcing existed since the early days of our civilization, one may wonder why no one talked about it, let’s say, 10-15 years back? The reason outsourcing stayed out of the news is because it used to happen on a small scale and was concentrated in some specific regions, like the USA, Europe. But now outsourcing is a $400 billion a year industry and the world cannot afford to ignore it. Globalization, explosive growth of Internet, and the development of information society in every region of the world has made outsourcing an integral part of the world economy.
In our study we are focused on Information Technology (IT) outsourcing. IT outsourcing gained momentum after the Internet started bringing together every corner of the world, and globalization brought down national barriers. Nowadays American companies such as Intel and Sun Microsystems have larger research and development outside the United States than within the nation, Citibank has card processing outsourced to India, and customer support at Dell comes from the Philippines.
Some look at outsourcing as a way in which developing nations can have access to the new technology enjoyed by the developed nations and a way towards economic and social empowerment.
Relevant Research on Outsourcing
The most relevant research conducted is that done by LOMA, which explores the pros and cons of outsourcing and offshoring. The focus of the research report is on information technology (IT) outsourcing and offshoring to IT service companies in the Unites States and India. Sources for the report include SEC filings, Internet sites, press reports, and government research. The topics in the report include: a) Explanation of Outsourcing, b) Explanation of Offshoring, c) Process of Selecting Providers, d) Reasons Why Outsourcing and Offshoring Are Rising, e) Evidence of Impact of Outsourcing and Offshoring on Jobs.
However, it must be stated here that we found a lack of theoretical research on outsourcing. The knowledge base of the industry does not focus on theoretical research but on financial data and global economic and political trends. What we have observed is that the IT industry is looking at outsourcing as an economic phenomenon and is not focusing on research the way it has for the field of software, microprocessors, the Internet etc.
Why is outsourcing an important issue? Referring to our problem statement, we would like to stress that the problem is significant not only because of its impact on IT outsourcing industry but also because of its impact on the global economy as whole. We know that outsourcing is a $400 billion a year industry and IT outsourcing is a vital part of the industry. A slump in IT outsourcing would mean a loss for the global economy.
Since the problems facing IT outsourcing (such as political pressure in the USA and lack of infrastructure in the host developing countries) can seriously slow down the growth of IT outsourcing, the problem facing this industry is significant.
In conclusion, we would like to state that nothing should be judged in a void. If we judge outsourcing by itself we would not be able to say whether it is good for society or not, but if we view outsourcing from the perspective of the global economy, increasing globalization, rising cost of production in USA, and lower costs in developing countries, we can see that outsourcing has a positive side too. Although fewer than 20% of the total American software companies outsource their jobs, in general offshore outsourcing (“offshoring”) is seen as something bad for America. We hope that with this study we would be able to present a balanced picture of outsourcing.
Inside The Outsourcing Debate: How DuPont Benefited from Outsourcing to China
When we began looking at the debate surrounding outsourcing, we came across DuPont, which has outsourced its project of creating online database of fabrics to China. The report published in Outsourcing Asia’s website said that by outsourcing to China the company was able to create a 24/7 operation and complete the project before schedule. The report also pointed out why the company had selected China as its destination and also talks about China’s future as outsourcing destination. (Rosenthal, 2005, p.6)
How US Government Can Benefit From Outsourcing
Looking at the example of DuPont, where outsourcing helped the company to complete a project in time and also saved costs, we decided to look at how outsourcing might help the government. We came across a report on the US government’s IT challenge and how outsourcing can be of help in Outsourcing Asia’s website. The report said that, in the year 2005, 50 percent of the federal government’s 70,000 IT workers would become eligible for retirement, according to a 1999 study. Also, the Government’s IT legacy systems have also aged. So even if young people join the work force they are not trained in the old system. They have to be trained, which means increase in cost and expenses for Government. This gap has opened doors to the suppliers to offer outsourcing as a solution to the problem. (Harney, 2005, p.2) The report mentioned that many Unions and Government workers are against outsourcing because they fear that it will raise unemployment in USA. Although there is a general fear of outsourcing among the public, we believe that if we are able to create a mutually beneficial outsourcing relationship between the two parties and show the benefits to the people, they will begin to feel positive about it.
Creating A Mutually Beneficial Outsourcing Relationship
The report titled “Creating a Win-Win Culture” in Outsourcing Journal talks about QinetiQ which was reaching the end of an existing outsourcing contract and realized the need to have a single source solution to provide a wide range of services and also reduce its total cost for IT services. In the year 2003, the company signed a contract with Accenture to provide broad range of applications; hardware and data center services, as well as purchasing and program management. To achieve early savings, the two companies bought into a structure and effective governance along with establishing good relationship at all levels at both the organizations. They were able to exceed the savings target in the first year of their partnership with the help of open communication, continuous innovation and win-win based solutions. Looking at the example of QinetiQ and Accenture we can say that good outsourcing relationships can create a win-win culture, which can benefit both sides. More and more companies are trying to copy the success of these two companies. (Garner, 2005, pp.4)
Having discussed about the positive side of outsourcing, the benefits it can offer to the business and the Government, we now turn our discussion to the negative side of outsourcing namely declining satisfaction among the outsourcing clients, security risks, social effects and public opposition. Declining satisfaction among outsourcing clients Report on declining satisfaction among outsourcing clients published on ZDnet talks about Diamond Cluster International’s study, which found out that the number of buyers satisfied from their offshoring provider has dropped from 79% to 62%. Also the number of buyers terminating their offshoring contracts prematurely has doubled and reached 51%. (Frauenheim, 2005, p.2)
Security Risks In Outsourcing
This declining rate of satisfaction will not be helped by recent reports on security breaches at the call centers in India. It was reported on the BBC by Zubair Ahmed that some employees of Indian call center Mphasis in Pune transferred large sums of money to the fake account they created from the accounts of American customers of Citibank, whose call operations were handled by the company. This incident has brought into focus the lack of integrated security management system in India’s call centers. The industry is still in the growing stage, and not much attention is paid to ensure that proper security procedures are followed. It’s only after this incident that the companies have started doing background checks on the employees and have made the background checks a norm in their hiring process. This incident raises many questions regarding the safety and security of data when processes are outsourced; also the capacity of Indian companies to handle data securely is in question. (Ahmed, 2005, p.2)
Social Effects of Outsourcing
While data security in outsourcing is being questioned, there is a question about the social effects of outsourcing too. This issue has largely being sidelined because the industry is mostly concerned with the more visible effects of outsourcing like the cost saving and profits, rather than look for the slow but steady social change outsourcing is causing. Kaushik Basu talks about this issue in his article, “The Politics of Business Outsourcing,” published on Project Syndicate’s website. In his article he says that job loss due to outsourcing may lead to protectionism and nativism. In the long run this can lead to racism and other discriminatory practices. So it’s very important to help the laid off workers so that they do not develop these kind of feeling toward the country where his job went. (Basu, 2004, p.9)
Unions Opposing Outsourcing IT
Unions in America have looked at one side of the social effects of outsourcing – job loss and the effect it has on the family and society. They are protesting against outsourcing and pushing the Government to pass laws to ban outsourcing. In his report “Unions step up anti-outsourcing efforts,” Juan Carlos Perez says that Information Technology Unions are fighting to keep American jobs in America. Leading this struggle is the International Federation of Technical and Professional Engineers (IFPTE), which is trying to convince the United States Congress to pass laws that will protect jobs from being outsourced. The Union is also lobbying hard to get the working visa, especially H1B regulations tightened so that whatever jobs stay in America goes to Americans. (Perez, 2005, p.4) Although it concerns us that the Unions are painting outsourcing as the sole reason for job losses in the IT industry, while they turn a blind eye to other reasons like stagnating industry, high costs and increasing competition from foreign-based companies. It would be better for the industry and also for the IT professionals if they start looking at the whole picture instead of targeting outsourcing as the sole evil.
Depleting IT Talent Pool in USA
To understand why outsourcing is happening we must realize that the USA has a fast depleting talent pool in technical fields like Computer Science and Physics. So the companies are forced to seek talent outside the country or to send the job to country where there is a large talent pool. India and China are the best examples for this. India has a large population of engineering graduates who have refined technical skills and are able to do the job for less. Also China produces largest number of Computer engineers every year. So to compete against them United States should try to encourage its students to enter technical fields and should also introduce courses in schools and universities to increase technical skills. The report “Inside the Debate over Outsourcing Information Technology Service Jobs Overseas,” published by Manufacturing News, talks about the issue of talent shortage in America. The reports also discusses about the rising number of job protection groups, some of whom have websites; although these groups are trying to bring into focus the job loss and economic hardships caused to the American workers by outsourcing, some of their sites have included racist and biased remarks. And instead of using reasons they are resorting to insulting the foreigners who are talking their job overseas. (Manufacturing News, 2005, p.6)
Having discussed in length about the issues in outsourcing like security concerns, questions on job loss, depleting talent pool in America, and others, we now move our discussion to the outsourcing destinations and the IT infrastructure in those destinations. Outsourcing Destinations India and China have emerged as the leading destination IT job outsourcing. For out study we did an analysis of China as an outsourcing destination.
The report “Country Analysis: China” talks about China as an outsourcing destination. The highlights of the report have been summarized as follows: The software outsourcing market in China is a US$1.5 billion market with annual growth rate of about 35%. The present position of China is where India used to be 12 years ago. The growth in this sector is fuelled by the large supply of low-cost and qualified manpower and a large internal market. Although the Chinese market is promising it is suffering from some serious problems like the lack of English language proficiency among the programmers and managers, the Chinese companies do not have established quality control procedure like their Indian counterparts. Also the large problem of software piracy in China is not helping it to become a credible destination for software development. The Chinese government is launching programs to encourage and develop the software industry. But it does not have a good international image because of its un-democratic style of governance and many European companies and US companies are hesitant of doing business in China because of this.
Although China has a large supply of IT professionals, those qualified in software engineering and software are very limited because the Chinese universities still emphasize the traditional engineering fields like mechanical engineering and electrical engineering. Also, China has made great improvements in the telecommunication infrastructure but the developments are concentrated in the big cities and near the costal regions. The heartland and the rural areas are still far behind. This limits the Chinese market for software sales and development. We can see that China is a promising destination for IT outsourcing, but then it has some problems too. The country is trying to take the position India has in the outsourcing market, which it may be able to if we look at the IT infrastructure and other surrounding issues affecting IT development in the South Asian market.
A report titled “Struggling with the Digital Divide, Internet Infrastructure, Policies and Regulations,” published in South Asia Net, talks about the problems facing the South Asian IT industry. The highlights of the report can be summarized as follows:
The Internet made way to the South Asian region in the late 1980s through bulletin boards, government and non-government initiatives. In India, in the year 1995 government-owned VSNL started offering Internet access to the public. Private companies entered the market in 1998. In Nepal, the Internet was introduced in 1993 and in 1996 the people were given access to the World Wide Web. In the beginning only the big cities in the region had access to the Internet, but now Internet usage has spread to the rural areas too. For example: In India many villages’ government agencies have set up their own websites and offer many of their services online.
Although the Internet is spreading in South Asia, the lack of infrastructure, antiquated legislations, language barriers and the high cost of Internet access are hampering growth. We can see that the South Asian IT infrastructure is facing problems, but the industry is trying to overcome it and keep its position as a favored outsourcing destination. (Rao, Bhandari, Iqbal, Sinha & Siraj, 1999, p.7)
References
Ahmed, Zubair. (2005, June 16). “Security risks in outsourcing,” Retrieved June 16, 2005, from http://news.bbc.co.uk/2/hi/business/4094894.stm
Basu, Kaushik. (2004, February). “The Politics of business outsourcing,” Retrieved June 26, 2005, from http://www.project-syndicate.org/commentary/basu4
Country Analysis: China Retrieved July 01, 2005, from http://www.american.edu/initeb/js5518a/Country-analysis-china.html
Frauenheim, Ed. (June 7, 2005) “Offshore outsourcing satisfaction drops,” Retrieved June 16, 2005, from Offshore outsourcing satisfaction drops
Garner Jr., Oynx. (June, 2005). “Creating a Win-Win Culture,” Retrieved June 16, 2005, from http://www.outsourcing-journal.com/ Outsourcing – Creating a Win-Win Culture.htm
Harney, Josh. (2005, May) “The US government’s IT challenge: how outsourcing can help,” Retrieved June 10, 2005, from http://www.outsourcing-asia.com/ The US Government’s IT Challenge How Outsourcing Can Help.htm
“Inside the debate over outsourcing information technology service jobs overseas.” (2003, October 17), Retrieved July 08, 2005, from http://www.manufacturingnews.com/news/03/1017/art1.html
Kelly, T. “A brief history of outsourcing,” Retrieved July 03, 2005, from http://www.globalenvision.org/library/3/702/
“LOMA research report explores the pros and cons of outsourcing and offshoring,” Retrieved July 03, 2005, from http://www.loma.org
Perez, Juan Carlos. (1999, April). “Unions step up anti-outsourcing efforts,” Retrieved July 08, 2005, from http://www.computerweekly.com/Articles/2003/08/05/196432/Unionsstepupanti-outsourcingefforts.htm
Rao, Madanmohan. , Bhandari Raj, Sanjib. , Iqbal, S M., Sinha, Anjali. & Siraj us Wahaj. (1999, April). “Struggling with the digital divide, Internet infrastructure, policies and regulations,” Retrieved July 01, 2005, from http://216.152.71.161/digitaldivide.htmlStruggling with the Digital Divide Internet InfrastructurePoliciesandRegulations
Rosenthal, Beth Ellyn. (2005, May). “How offshoring to China saved the day at DuPont,” Retrieved June 10, 2005, from http://www.outsourcing-asia.com/dupont.html How Offshoring to China Saved the Day at DuPont.
