Outsourcing and Offshoring

Outsourcing and offshoring are two additional strategies that a business can use in order to take advantage of the global market.

outsourcing

Outsourcing happens when a business makes an agreement to have an outside party complete part of their business process.

You may be familiar with outsourcing if your college has outsourced the bookstore to a national chain, such as Barnes & Noble or Follett, or if food services are provided by a company such as Marriott or Aramark. Although the employees work on your college campus, they are employed by the external company.

offshoring

Offshoring is the actual relocation of a business process from one country to another—typically it’s an operational process, such as manufacturing, or sometimes a supporting process, such as accounting.

In the case of offshoring, the employees still work for the company that’s offshoring its operations, but instead of working in a facility within the United States, they are located in a foreign country. In general, outsourcing and offshoring are strategies that companies use to try to lower their costs.

If a business chooses outsourcing as a way to engage with the global market, it might have a single component part manufactured in, say, Mexico, and then shipped back to South Carolina where the factory workers would use the outsourced part in the assembly of the final product. The business would have a contract with the company making the component part at an agreed-upon price, but it would not have an employer-employee relationship with the workers in Mexico. On the other hand, if the business wants to take advantage of offshoring, it would move the entire plant from South Carolina to Mexico and hire workers in Mexico who would work directly for the business.

Advantages of Outsourcing and Offshoring

Offshoring and outsourcing are both the subject of ongoing heated public debate—both in the U.S. and in other countries. Those in favor assert that these strategies benefit both sides of the arrangement: free trade is enhanced, the destination country gains jobs, and the origin country gets cheaper goods and services. Some supporters go further and assert that outsourcing and offshoring raise the gross domestic product (GDP) and increase the total number of jobs domestically, too. This claim is based on the theory that workers who lose their jobs will move to higher-paying jobs in industries where the origin country has a comparative advantage.

Disadvantages of Outsourcing and Offshoring

On the other hand, job losses and wage erosion “at home” have sparked opposition to offshoring and outsourcing. Many argue that the jobs that are shipped overseas are not replaced by better, higher-paying ones. And it’s not just low-skilled workers who are feeling the pain. Increasingly, critics say, even highly trained workers (such as software engineers) with high-paying jobs are finding themselves replaced by cheaper workers in India and China. Some firms, while realizing financial gains from lowering their production costs, are finding that offshoring and outsourcing are very costly in terms of lack of control over product quality, working conditions, and labor relations. For example, companies like Nike and Apple have come under fire by human rights organizations and consumers over reports of worker abuse, dangerous working conditions, and ridiculously low wages. We will explore some of the ethical issues raised by offshoring and outsourcing later in the course in the business ethics module.