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Outsourcing: The real story
by Satya Prakash
Issue 9
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Outsourcing is the latest buzzword and also the bone of contention in many economies across the globe. For some countries it is matter or concern and for others it is seen as some thing which can catapult them to levels of developed country. Outsourcing which is part of the general agreement on trade and services under the World Trade Organization (WTO) is becoming more popular in political circles because the emotional chord it strikes with the masses.

Why does a company outsource any of its activities? Do they outsource because it is the latest buzzword in the economy? Do they outsource just because HBR mentioned it, and if they don’t do it then people will think their CEOs are not reading HBR. Do they outsource just because everyone is doing so? Well, the sole purpose of any business is to ‘maximize the share holder’s equity’ i.e. to earn money. Do you think the community service aspect of corporations don’t have this objective? Think again.

A company will outsource only if they foresee a business benefit, something which cuts back on their operating cost, or increases the revenue thereby leading to profit increase. Take for example a company XYZ Inc doing business in USA outsource few of its activities to Poland. This outsourcing will increase the profit; assume it to be a modest 20 million US dollars. Where this 20 mnUSD goes? Does it go as well to Poland? No, it remains in the US economy, the money will not be sucked, for no economy is a quicksand (even quicksand does not sucks as shown in some movies). The additional 20 mn USD is going to have a cascading effect, the economy of US got richer by 20 mn USD. For a country like USA which has got a deficit economy (spending is more than earning in USA) it holds more meaning than say for economy of Japan (it has highest saving rate in world). The additional money will spawn more business, more jobs, so on and so forth.

Outsourcing or no outsourcing jobs were lost and will continue to be lost, turnover is as natural as creation of jobs. The same IT jobs which are being said to be ‘lost’ due to outsourcing were in the eye of storm couple of decades back when it was said that automation will steal away all the jobs. We can judge for ourselves how that threat came out to be and similarly how credible the present outsourcing threat is? Protectionism is going to do no good for any economy as it happened in the case of USA steel industry. They had to lift away the protectionist regime on steel industry as it increased the price and cost jobs.

Is outsourcing a recent concept? Or what does outsourcing really mean?

According to me neither outsourcing is a new concept nor does it include only services outsourcing. Outsourcing was there since long; if we take the example of India which is widely cursed by anti-outsourcing lobby for stealing IT jobs, there they had and still have foreign products since long. They had and have electrical& electronics appliances from Philips, computers from Dell and IBM, cars from General motors etc, isn’t this outsourcing of market? These products were manufactured in North America and sold in Asian countries so why there wasn’t hue and cry then? Even today majority of medical equipments being used in India are from GE and when the same GE outsource its jobs to India there is cry in USA over lost jobs. When the mighty IBM was selling its application software for even the supermarkets retailing, things were fine but when the same IBM uses Indian work force to build up those software there is an out cry. When the slaves were being used to work in tobacco cultivation in Virginia USA, wasn’t that outsourcing of labor force?

Outsourcing was always there, the thing that has changed is the direct effect of it, people were happy when they were getting more jobs due to outsourcing and now they perceive that there would be job cuts. The opposition that we see is because people go by hearsay and not by analysis. People see on ground level that they have lost jobs, so outsourcing is bad. Well you may have lost the job which you were doing, but now you got to do something else, new jobs are created due to ‘additional’ money which got parked in your economy. Your old job was shifted because now it is being done in much ‘economically efficient manner’.

No economy is static or can survive if they try to be static. The dynamics of an economy will always be making this sort of change and if one has to survive one has to align with this dynamics. The balance will always be shifting. When industrial revolution started in 1750s in Europe and North America, manufacturing was done there, now it is in China and next it could be in Nepal or Bangladesh. Did all those who were in manufacturing lost their means of earning? Well some might have who didn’t re-skill themselves for the new jobs which were created

Globalisation does not mean a one way route; if you are able to sell your products in other countries then they will have access to your market as well, either for products or for services. Outsourcing is not an alien concept but basic tenet of Economics which says "society must use its resources efficiently ". All the angst against outsourcing is nothing facts skewed to suit propaganda.

Satya Prakash writes the My Journey blog.
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