Outsourcing: The Hidden Costs

By Garaventa, Eugene; Tellefsen, Thomas | Review of Business, Spring 2001 | Go to article overview

Outsourcing: The Hidden Costs


Garaventa, Eugene, Tellefsen, Thomas, Review of Business


Outsourcing is growing in popularity as a means of cutting costs and increasing flexibility. However, it can also entail a variety of unforeseen consequences. These problems can include administrative costs, reduced employee morale, decreased employee performance, and ethical trade-offs. Managers must consider this full range of consequences to develop a more balanced perspective of the net effect of outsourcing.

Introduction

The 1990s witnessed numerous additions to the vocabulary of business. Two of the more important additions that transcend jargon and slang are the concept of the "virtual corporation" and one of its integral components "outsourcing." The creation of these new dictionary entries represents a fundamental change in the workplace as we know it and a transformation of the American corporate structure.

At the core of this transformation is the advent of the virtual corporation. This new organizational structure is characterized as a legal-financial entity whose physical plant is scattered across the globe and whose people-parts are almost as interchangeable as chips in a motherboard. The ties that bind corporations to people and places are increasingly seen as tentative, temporary, and optional.

A critical element of the virtual corporation is the process of outsourcing, which can be defined as the contracting out of functions, tasks, or services by an organization for the purpose of reducing its process burden, acquiring a specialized technical expertise, or achieving expense reduction. A key aspect of outsourcing is the substitution of full-time workers with part-time, contract, and other contingent workers who receive few or no benefits. Although outsourcing has historically been a major element of the Japanese economy, the concept of workers not having extended or career-long employment with a single firm has until recently been an alien concept in America. Firms historically characterized as paternalistic are now actively seeking to employ temporary workers.

Although outsourcing did not become a significant and wide-spread aspect of the American business environment until the 1990s, it has been used since the early part of the century by manufactures seeking to realize cost savings. At one time limited to the production of component parts, outsourcing has expanded into areas that were assumed to be immune from the process. For example, a recently created firm specializes in leasing scientists to corporate clients. Its roster of employees includes 1,100 chemists, microbiologists, and laboratory technicians.

This expansion has fueled rapid growth of the entire outsourcing industry. A 1999 survey by the Dun and Bradstreet Corporation found that global outsourcing expenditures had nearly doubled in three years and were expected to reach $1 trillion by the end of 2000. The U.S. was the single largest market for outsourcing and was expected to have $340 billion in outsourcing sales by the end of 2000 [13].

Outsourcing has been lauded by numerous management scholars and practitioners, including Peter Drucker and Tom Peters, as the salvation of the manufacturing sector of the American economy. However, an unbounded advocacy often times does not measure all costs associated with outsourcing. Some costs are obvious, whereas other costs are "hidden" -- more subtle an not easily

observed or quantified. Hourly labor costs, costs per unit, and most other financial costs would fall into the first category but there are also inherent expenses that are not as overt. In addition to economic costs, an organization must be willing to accept the existence of administrative, human, and ethical costs as factors in their decision to outsource. Outsourcing is a complex, multi-faceted process, with implications and consequences that span department, division, and corporate boundaries. Consequently, it is essential that organizations contemplating outsourcing be aware of and include the "hidden costs" in their analysis prior to out sourcing. …

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