Outsourcing Grows as a Business Strategy

Market pressures are looming at every corner of the globe and corporate executives are doing whatever they can to bring down costs in order to be more competitive. Before the economic slowdown, companies used to send non-core work to low-cost countries. But as the state of economies worsen, firms started to see offshore outsourcing in a different perspective.

A growing number of companies are sending core business operations overseas. In the auto industry, General Motors (GM) plans to build 23% of the cars it sells in the U.S. in low-cost countries over the next five years, up from current statistics of 15%. According to numerous reports in the first quarter of this year, technology firm International Business Machines Corporation (IBM) also plans to boost its offshoring activities. The following month, IBM issued a press release announcing it had renewed and extended its EUR 3.2 million outsourcing contract with Amway GmbH for three additional years.

Firms have started to incorporate outsourcing in their business strategies. Publicly traded companies experienced a surge in key financial indicators whenever they publicize plans of outsourcing business operations or functions. In fact, the Wall Street Journal reported that Sprint Nextel Corporation (S) is in final discussion to outsource management of its cellular network to Telefon AB LM, a move that would transfer 5,000 to 7,000 U.S. jobs to the equipment vendor. A day later, investors responded by sending shares of Sprint up sharply.

Intel Corporation (INTC) will be closing some assembly and testing plants that are not cost-efficient and will outsource its Southbridge chips to Taiwan-based Advanced Semi-conductor Engineering Inc. (ASX). Intel predicts the deal will increase its operating revenue by 40% in the second quarter of 2009 compared to its previous quarter.

As more and more companies move work overseas, offshore service providers are rushing to get a chunk from the incoming opportunities. Dallas-based Affiliated Computer Services (ACS) wants one-half of its workforce in offshore locations in an effort to keep up with rivals such as Wipro Ltd. (WIT), TCS, and Infosys (INFY). In the last quarter of 2008, ACS announced its plan to move higher-level IT jobs offshore. Back then, ACS has an estimated 63,000 workforce where 20,000 or about 32% are in offshore locations. Today, the company still has about the same percentage of workforce in offshore centers in China, Malaysia, India, and the Philippines but in greater numbers.

A 50-50 split in local and offshore operations is an aggressive strategy by ACS as U.S. President Obama announced just last week that he plans to end tax breaks to firms shifting jobs overseas. Such political pressure led student loan company Sallie Mae (SLM) to move 2,000 offshore jobs back to the U.S. during the next 17 months.

Comments

[epeon:]

Is this true? Is outsourcing to Indian and China the next giant wave? It certainly was true a decade ago, but is it true today?

In businesses that I have personal knowledge of, there seems to be a lot of discontent with Indian outsourcing. First, the exchange rates are not as favorable as they were. Secondly, the quality of the Indian technology is not what it was cracked up to be. Everyone in India has the title of engineer, but most of them are really IT people. In fact, most would be called IT techs, good for phone support but not a lot else. And, when you do get good Indian engineers they have to be trained and then you have a 30% turnover issue.

Finally, many companies are realizing that transferring core technologies to a third party will atrophy the support of that technology in the home company. And, this third party looks at you at just another client. They have no qualms about using that technology for other clients.

Of course, I could be wrong. But, look at WIT and INFY. Those stocks have not done anything for a decade. GE was the great outsourcer and their stock has not lit the world afire. Talk to GE people and many of them will tell you that they have invested a ton of money in India and it isn’t clear that there has been a good roi on it. Of course, since Jack Welch said it was great, I am sure that the paper trail will say it so.

As far as GM transferring more production overseas that hardly is typical. They have the burden of UAW labor rates and labor attitude. Any other company with that burden would have long ago been on the slag heap of bankruptcy.

So, I am not sold on this. I just don’t see it as the new wave.

May 18 04:28 AM

[Thomas Victor:]

The IBM Amway deal is the other way around. Amway GMBH's computer work is being outsourced to IBM - IBM is not outsourcing anything to Amway.

Amway is the company that goes around door to door selling cleaning materials. I was thinking - what can Amway do for IBM??

But I agree that we will see increases in outsourcing, I think it will come due to desperation - as demand keeps falling, US companies will do anything to decrease costs

May 18 09:04 AM

[nobull:]

I think this article should have been dated 1999, not 2009.

May 18 09:04 AM

[Gregman2:]

You've really pointed to the serious disconnect between global corporations and national governments. The strategy is to pass liabilities of onto national governments. This explains why the U.S. has no sovereign wealth.

May 18 10:56 AM

[Trane250:]

The 70s to 2000s was the era of outsourcing manufacturing jobs. Now it's service jobs. Pretty soon the only jobs left will be running our Swiss-made intaglio printing presses that turn out our fiat currency to pay for all of this outsourcing.

May 18 11:12 AM

[ain't no fo...:]

Thomas Victor writes : "But I agree that we will see increases in outsourcing, I think it will come due to desperation - as demand keeps falling, US companies will do anything to decrease costs"

Yes, and by shipping more jobs overseas that means fewer jobs here and that means LESS demand here and that means a vicious circle just keeps getting more vicious as more outsourcing to cut costs causes more job losses here and housing gets pulled into the vortex...

May 18 12:07 PM

[slowdown:]

You are out of touch - in the last 18 months all of my US based Engineers with the exception of two, have been replaces with Engineers in Mexico and China. As for me...I'm training my replacements and they will return to China. That said...IT/Clerical and Help Desk are already in India.....looks like my career change will be Teaching.


On May 18 09:04 AM nobull wrote:

> I think this article should have been dated 1999, not 2009.

May 18 01:17 PM

[slowdown:]

We've been saying that for the last couple of years. Who's going to buy the cars or houses for that matter?


On May 18 12:07 PM wpdragon wrote:

> Thomas Victor writes : "But I agree that we will see increases in
> outsourcing, I think it will come due to desperation - as demand
> keeps falling, US companies will do anything to decrease costs"<br/>
>
> Yes, and by shipping more jobs overseas that means fewer jobs here
> and that means LESS demand here and that means a vicious circle just
> keeps getting more vicious as more outsourcing to cut costs causes
> more job losses here and housing gets pulled into the vortex...<br/>
>
>

May 18 01:20 PM

[slowdown:]

It absolutely is true in many industries. Only now it's hitting the white collar workforce instead of just manufacturing.


On May 18 04:28 AM epeon wrote:

> Is this true? Is outsourcing to Indian and China the next giant wave?
> It certainly was true a decade ago, but is it true today?
>
> In businesses that I have personal knowledge of, there seems to be
> a lot of discontent with Indian outsourcing. First, the exchange
> rates are not as favorable as they were. Secondly, the quality of
> the Indian technology is not what it was cracked up to be. Everyone
> in India has the title of engineer, but most of them are really IT
> people. In fact, most would be called IT techs, good for phone support
> but not a lot else. And, when you do get good Indian engineers they
> have to be trained and then you have a 30% turnover issue.
>
> Finally, many companies are realizing that transferring core technologies
> to a third party will atrophy the support of that technology in the
> home company. And, this third party looks at you at just another
> client. They have no qualms about using that technology for other
> clients.
>
> Of course, I could be wrong. But, look at WIT and INFY. Those stocks
> have not done anything for a decade. GE was the great outsourcer
> and their stock has not lit the world afire. Talk to GE people and
> many of them will tell you that they have invested a ton of money
> in India and it isn’t clear that there has been a good roi on it.
> Of course, since Jack Welch said it was great, I am sure that the
> paper trail will say it so.
>
> As far as GM transferring more production overseas that hardly is
> typical. They have the burden of UAW labor rates and labor attitude.
> Any other company with that burden would have long ago been on the
> slag heap of bankruptcy.
>
> So, I am not sold on this. I just don’t see it as the new wave.
>

May 18 01:21 PM

[Dirk McCoy:]

Division of labor and specialization are two of the most powerful forces behind the rise in human living standards (along with cheap oil and technology), which is why you don't grow all your own food and do surgery on yourself (and are better off for it).

The bigger problem as I see it is that our government has interfered with market forces by putting a minimum wage in place that acts as a price control on entry level workers. This then impacts higher level workers and entire industries, and just as New York City apartments were in short supply, so are entry level jobs- causing many of these workers to just give up. After world war 2 when much of the world's industry was in shambles and when our lead in using technology was greater, we could afford this, but, with unemployment now at 20% by unofficial estimates, and out-of- control growth in entitlement spending, we really have to ask ourselves if we can afford this, or if we should allow competition to increase productivity and real living standards again.

If the answer continues to be more government control and support for entrenched labor, then we'll see outsourcing continue to grow until we adopt protectionism and full-bore adoption of other discredited Soviet policies (maybe we can have entry level workers paint tree trunks white). As manufacturing and operations move overseas, engineering and business management follow- especially when the growing markets are there as well.

May 18 02:49 PM

[greed is 0:]

I see this as a final battle between the plutocratic corporate oligarchy and the United States of America. The authors and supporters of this corporate war need to remain personally vigilant and have highly trained security. The American public might find out what the real plan is.

At the bottom of this is not the government, nor the unions, nor the productivity of the American worker. It's still the culture of greed.

May 18 03:24 PM

[stockholder:]

Outsourcing will not stop by itself. The US government must take measure to discourage it; otherwise, jobs will continue to be moved overseas. This will cause fundamental errosion of the earning power of Americans, as more and more Americans will be losing employment, and the tax burden of those remaining employed will increase. Ultimately, the earning power of the US dollar will diminish as the US will lose its ability to produce exports (by abandoning its manufacturing to the Asian countries), which it needs in order to pay for the goods it will be importing. A service economy, which is what the US is becoming, cannot maintain its standard of living.

May 18 03:41 PM

[SouthernCEO:]

As a business man I can say that until we stop raising taxes on business and stop with all of the red tape then jobs will go overseas. Businesses will go where they are treated best. It just costs too much to do business in the US for many industries. Go buy an American made TV, radio, shirt, pair of shoes, etc. Sure we can make that stuff but we can't do it at a profit.

May 18 05:01 PM

[Al-USA:]

Dirk McCoy wrote:

"Division of labor and specialization are two of the most powerful forces behind the rise in human living standards (along with cheap oil and technology), which is why you don't grow all your own food and do surgery on yourself (and are better off for it).

The bigger problem as I see it is that our government has interfered with market forces by putting a minimum wage in place that acts as a price control on entry level workers
"

With all due respect, you bought the capitalist propaganda "hook line and sinker" friend. Consider that a husband in 1973 now earns less, adjusted for inflation, then the husband and wife together earn today. This was true even before the Greater Depression hit. So, we have had a few decades of massive outsourcing and what does civil society have to show for it? The greatest recession, possibly Depression, since the 1930's... Not a very good historical record on which to shell out the same old capitalist propaganda now, is it?

For the record, I am a capitalist, but I'm not interested in seeing the USA devolve into a third world country, like Mexico, where the ones remaining with some wealth are taken hostage, held for ransom, or taxed disproportionately. The masses, once mobilized, are an unstoppable force, as the early 20th century showed. What's the solution? It's not more outsourcing, in my opinion.

May 18 08:39 PM

[stockholder:]

American businessmen may go and set up shop wherever they please. But if they want to sell to the US, they should be faced with restrictions/tariffs. Any business that wants to sell to the US should either create jobs in the US or pay higher taxes/tariffs. That is the only way a business incorporated in the US will contribute to the US economy.


On May 18 05:01 PM SouthernCEO wrote:

> As a business man I can say that until we stop raising taxes on business
> and stop with all of the red tape then jobs will go overseas. Businesses
> will go where they are treated best. It just costs too much to do
> business in the US for many industries. Go buy an American made TV,
> radio, shirt, pair of shoes, etc. Sure we can make that stuff but
> we can't do it at a profit.

May 18 11:43 PM

[Tom B:]

The quality of Chinese and Indian goods in my field is terrible, and yet, out-of-touch upper management fails to comprehend this and continues to outsource. Outsourcing to domestic vendors will still save you 30-40% and you won't sacrifice quality, typically. Plus, you'll have less management (time zone/language) overhead.

May 19 08:57 AM

[Dirk McCoy:]

It's funny you pick Mexico- that chose socialism and protectionism- to picture a country where what little wealth is left is taxed or attacked. So, OK, I plead guilty to buying the capitalist propaganda, it beats the alternatives. As imperfect as it is, it has shown the ability to create productivity gains leading to an adequate supply of goods and services for freely expanding populations- leading to educated populations that actually procreate less and live longer.

But we haven't had complete capitalism in this country for a long time (if ever). Democracy gives us the ability to vote for various methods to assure adequate distribution of goods and services. I'm a fan of state's rights because I'd like to see how states fare making their own decisions in this regard. But I ultimately have faith that free people will realize when they've gone too far- so you have the Reagan Revolution or what we've seen happen in China and India and the USSR where the inadequacy of Communism is finally unmasked.

Not sure how long that will take in this current environment, though the death of the liberal media isn't hurting our chances for a sooner rather than later turnabout.

As for this economic mess, perhaps you should read my instablog about when the Obama Economy actually started- a few years ago.

May 19 03:17 PM

[Irko:]

Lots of complaining, but like this latest rececssion I think it's great - - American workers will have to reinvent themselves, as the supply of workers seeking work increases, wages will drop and best of all consumption will get back to the basics of what we need to live vs the Jones' idea that of wanting the biggest TV, latest game console and fanciest car parked in front of a home with more bedrooms than they have kin. Can you spell opportunity....?

May 19 03:40 PM

[Ms Researcher:]

This is so true, when all the greedy people found out ways to legally still from hard working everyday people, they jumped right on it. Now it's coming back to haunt them and all they want to do is keep their rich's at the expense of anyone who threatens it being loss. Greedy people don't know how to feel, they just eat sleep and drink stock stock stock ways to get rich rich rich so what in no one else knows their " secret ."


On May 18 03:24 PM greed is 0 wrote:

> I see this as a final battle between the plutocratic corporate oligarchy
> and the United States of America. The authors and supporters of this
> corporate war need to remain personally vigilant and have highly
> trained security. The American public might find out what the real
> plan is.
>
> At the bottom of this is not the government, nor the unions, nor
> the productivity of the American worker. It's still the culture of
> greed.

May 30 11:28 AM