Outsourcing is used by businesses to realize cost savings and increase flexibility. It is the contracting out of functions, tasks, or services by an organization and can often involve replacing a core workforce with part-time or contract workers who receive fewer benefits. The act of outsourcing transforms the fundamental nature of the corporate structure. It goes hand-in-hand with the advent of the virtual corporation whose physical plant is scattered across the globe; its connection to its people is seen as tentative, temporary, and optional.
Originally, outsourcing may have evolved in Japan where it was well-known and accepted as a large part of the economy. By the 21st century, it had become a global phenomenon that continued to grow in scale, favored by organizations that saw it as a way to cut costs and gain resources or specialist knowledge. Outsourcing often involves the substitute of a workforce from a high-wage country for workers in developing countries who may be paid as little as 10 or 20 percent of their wage. These countries are a valuable resource for companies wanting to reduce their costs as there is an almost unlimited supply of educated workers waiting for jobs.
In its early days, the practice was limited to a few business sectors or cases where an organization's own skills fell short and needed augmenting by specialists in that area. One example might be a car firm outsourcing the production of component parts. Savvy 21st century businesses however began to outsource a wide array of jobs, from information technology to accounting, newspaper reporting to medical and legal services.
A highly divisive example of outsourcing is the shipping overseas of call-centre operations. This has been used by some banks and retailers who use cheaper labor abroad to deliver their services. In many cases it has proved to be an emotive subject, with a major pitfall being the handling overseas of personal information, particularly financial data. Another unpopular aspect of this is the perceived loss of the organization's cultural identity. One of the main arguments against outsourcing is the loss of domestic jobs to overseas workers. This is also called "offshore outsourcing" or "offshoring." There is a risk that the repercussions of offshoring may far outweigh the short-term positive outcomes. There is much debate on the effect of outsourcing on the economy, jobs and security. In the United States, for example, a 2004 report predicted that approximately 3.5 million white-collar jobs would move overseas by 2015 and $151 billion in wages would also be lost to foreign workforces.
Other problems may include greater administrative costs for the organization, the reduced morale of the workforce, decreased employee performance and ethical trade-offs. In fact, outsourcing can cripple a business if not handled in the correct way. The company may find itself with inadequate staffing and no corporate memory, having lost core skills that would be difficult and expensive to reestablish. To reduce the risks, stringent checks should be made in the form of a risk assessment. This will evaluate the suitability of the outsourcing company to the contract firm; it will take into account the cost (including any hidden costs) and any long-term disadvantages (one of those being the loss of knowledge gained through the outsourced activity.)
Key factors in the success of outsourcing are the way in which contractors are managed and the type of activities being outsourced. Consideration should be given to how the contract labor may fit in culturally with the organization. It is important to remember that the outsourced workforce does not work for the parent organization and may not have its best interests at heart; and if something were to go wrong, the buck would stop with the business that had outsourced the work rather than with the contracted workforce. Outsourcing works best when used for non-core skills. Core skills, as a general rule, should be kept in-house; if these skills are lost then the business would grind to a halt. However, the outsourcing of non-core functions can often be completed quickly, efficiently, and cost-effectively by an outside specialist. Although the main reason for outsourcing is down to financial benefit, other factors may come into play such as avoiding wage-related employment costs like the pension, or leave and vacation pay. Organizations should not be lulled into a false sense of security though, and legally liability may still fall with the outsourcing company rather than the contracted one.