Monday, January 9, 2012

The Pros and Cons of Outsourcing in Supply Chain Management

 “Outsourcing,” the practice of one firm hiring another to perform tasks that were originally performed in-house, is often viewed a way of maintaining or increasing a firm’s competitiveness.  With a general goal of lowering costs and/or streamlining workflow, a firm is able to concentrate on strengthening its core competencies.   Others view outsourcing, both domestically and internationally, in a negative light, questioning its effect on America’s workforce and economy.  Weidenbaum’s emphasis in the above-titled 2005 article is on the pros and cons of the overseas outsourcing of the activities of a firm, which has become a controversial issue in the U.S. and is becoming more so in light of the upcoming 2012 presidential election.
Why companies began outsourcing.  
Many service companies began creating jobs abroad to gain access to overseas markets, many of which have grown quickly, while some domestic markets have become mature, if not saturated.  For example, approximately 60 percent of the revenue of American information technology markets originates overseas.  Leading firms in various industries, such as banking and consumer products, report that their foreign revenues exceed those of their domestic sales.  U.S. companies also began hiring specialized workers overseas in response to U.S. immigration limits that hindered their ability to find qualified workers, particularly in science and engineering.  In so doing, many companies became accustomed to using modern technology to shift the location of work, as well as to the benefits of lower operating costs and pay scales in foreign countries.  Additionally, telecommuting paved the way to extend the process of shifting work to new suppliers, both at home and abroad.  Overseas outsourcing has accelerated in recent years due to globalization and to technological changes, primarily in the telecommunications and transportation sectors.

Advantages of outsourcing
Fundamentally, businesses that outsource are able to focus resources on core business processes in order to operate efficiently in an increasingly competitive global marketplace.  Expertise can often be acquired at a lower cost than hiring in-house when tasks are outsourced to vendors with special equipment and knowledge.  In addition, outsourcing certain parts of a company’s business process to a specialist facilitates risk-sharing and better analysis of risk-mitigating strategies.  Cost reductions can generate new market opportunities for U.S. companies and thus generate additional jobs domestically.   Large software companies such as Microsoft and Oracle have simultaneously increased outsourcing and their domestic payrolls.  Other advantages include the ability to provide constant coverage for consumers who require 24-hour support, especially when foreign and domestic competitors are doing so.

Limits and dangers of outsourcing
Companies who join the “outsourcing” bandwagon may be surprised by unexpected costs and complications, particularly in the overseas arena.  Research reveals that almost one-half of outsourcing agreements end up being terminated for a variety of reasons (Lutchen, 2004).  Some overseas vendors encounter financial difficulties or are acquired by firms with different procedures and priorities.  Unreliable suppliers may put current work aside when a more important client is gained, or they may have rapid turnover of skilled employees who find jobs with more desirable firms.  Typical Indian operations in business processing often lose 15 to 20 percent of their workforce annually.  Moreover, overseas managers often do not understand American business practices such as high quality-control and expectations for prompt delivery of goods and performance of services.  Dell, for example, moved its customer-support call center back to the U.S. in 2003 after consumers revolted against receiving vague, hard-to-understand answers to technical questions from non-native English speakers (Morphy, 2006).  Boeing’s 2007 scheduled release of its 787 Dreamliner aircraft was delayed more than three years by problems caused by a complex supply chain of over 50 global suppliers and a splintered international engineering team (Peterson, 2011).

U.S. firms may also encounter a variety of unanticipated difficulties in foreign nations such as arcane legal systems, theft of intellectual property, requirements of tax and regulatory agencies, and political upheavals such as the riots that accompanied the overthrow of Indonesia’s president in 1998.  Furthermore, they may encounter corrupt officials in the public sector.  In the mid-1990s, officials of a Halliburton subsidiary were involved in a Nigerian joint venture project that resulted in a decades-long bribery scheme to secure contracts in Nigeria (Olorunyomi & Mojeed, 2009).  Other costly complications and hidden costs may arise such as a lack of reliable sources of electricity, transportation networks that need to be upgraded, or business customs that must be observed.

Net effect on the U. S
Over the years, far more new jobs have been created in the U.S. than have been outsourced.  The current debate on overseas outsourcing frequently focuses on short-term job losses  in industries such manufacturing, while ignoring long-term benefits to consumers and businesses.   Outsourcing helps companies stay competitive, resulting in more investment and, in turn, the creation of new or better jobs.   In the long run,  outsourcing is not a zero sum game, but rather one where net gains are positive.

Copyright 2012 James L. Alyea. All Rights Reserved.


Introduction to the outsourcing & offshoring industry. (2011).  Plunkett Research, Ltd.  Retrieved from

Lutchen, M. D. (2004, May).  Outsourcing IT headaches is no answer.  Chief Executive.  Retrieved from

Morphy, E. (2006, January 30).  Dell pumps up Indian outsourcing operations.  CRM Buyer. Retrieved from

Olorunyomi, D. & Mojeed, M. (2009, May 1).  The Halliburton bribe takers. Retrieved from Halliburton_bribe_takers_.csp#

Peterson, K. (2011, January).  A wing and a prayer:  outsourcing at Boeing.  Reuters.  Retrieved from

Weidenbaum, M. (2005,  July-August).  Outsourcing:  pros and cons.  Business Horizons.  Retrieved from