Business Outsourcing: History, Participants, and Impact

Introduction

One of the largest and most controversial trends in the business world today is the increasing reliance on outsourcing for a variety of business needs, from data entry to customer service. Increasingly efficient and reliable telecommunications technologies and other technological and geopolitical forces have made it possible for companies to utilize large workforces in far-flung regions of the globe where wage requirements are significantly lower than in the United States and other developed countries. This has come at the direct cost of jobs in the developed world, though many proponents of outsourcing claim that it actually creates jobs in the long term by making companies more profitable and thus better equipped to sustain larger and longer-term operations and expansions.

Ultimately, there are risks and rewards to businesses and to society at large that arise from the practice of outsourcing. This paper will not attempt to directly address the controversies raised by the practice or make a determination regarding the overall advisability of outsourcing, but rather will attempt to provide an objective analysis of its current state and importance. Regardless of one's position on the issue, it cannot be denied that outsourcing is a very important and influential concept and practice today, and an understanding of its history and current impact is essential for individuals working in many fields. This understanding can help lead to assessments of how outsourcing should be approached in the future.

The History of Outsourcing

In some respects, outsourcing has been practiced since at least the beginnings of the Industrial Revolution, when many companies began to hire outside firms to handle tasks such as accounting, insurance provision, and certain engineering and manufacturing requirements (Rose 2011). Though the firms being outsourced to were generally domestic — that is, located in the same country as the outsourcing company — and the relationships were somewhat different from what is thought of as "outsourcing" today, it was during the latter half of the eighteenth century that companies truly began to rely on one another for the continuation of their businesses. One firm might, for example, outsource its tool manufacturing rather than producing its own tools (Rose 2011). These types of relationships persisted for centuries.

It was not until 1989 that outsourcing was explicitly identified as a particular operational strategy or activity (Handfield 2006). The practice of outsourcing certain ancillary functions was already common at this time, especially as a response to the diversification of corporations during the 1970s and 1980s and the resultant complex and inefficient management structures (Handfield 2006). As companies sought ways to maintain the diversity of their operations while cutting costs and streamlining management, many turned to outsourcing non-essential operations to other firms (Handfield 2006). In the 1980s, such practices increased as companies in the United States sought ways to remain profitable despite the stagflation occurring in domestic markets (Heffner 2010).

Telecommunications capabilities really began to take off in the 1990s, and this allowed companies to begin outsourcing even more of their activities across a wider geographic range (Rose 2011; Handfield 2006). The increased geographical spread of potential outsourcing activities meant a greater number of outsourcing opportunities and options, which created an even larger cost-savings potential than in previous decades (Rose 2011). These opportunities have only grown in the twenty-first century, as continuing improvements to satellite communications, Internet interfaces, and developments such as Voice over Internet Protocol (VoIP) have served to connect disparate parts of the globe in an ever-more efficient manner, in terms of both time and money (Rose 2011; Handfield 2006; Heffner 2010).

Participants: Workers, Corporations, and Governments

There are three main participants, willing or otherwise, in outsourcing: workers, corporations, and governments. Workers in the United States and other developed countries often feel threatened by outsourcing, and several reports and studies have concluded that job losses and a shrinking middle class are the direct outcomes of outsourcing on the labor force in corporations' home countries (Roberts 2005). Workforces in developing nations that are favored destinations for outsourcing activities, however, obtain an enormous gain in both employment and income levels (Roberts 2005). In general, labor has resisted and attempted to slow down or block many outsourcing efforts due to the perceived damage the practice causes.

Corporations, of course, see things differently. While there is no avoiding the fact that outsourcing by definition leads to an immediate loss of jobs in a corporation's home country, increasing global capabilities require global operational systems in order for prices to remain competitive (VCG 2011). As free trade agreements proliferate and certain international trade barriers are removed, the labor market simply extends beyond national boundaries, and corporations have a duty to seek the best value for their labor expenditures (VCG 2011; BOO 2009). By doing so, companies ensure that they remain competitive, viable, and profitable into the future, thus helping to sustain jobs both in the domestic labor market and internationally (BOO 2009). In this view, outsourcing is a necessary component of creating value effectively in the modern business environment.

Governments' relationships to outsourcing are complex. On one hand, many politicians and officeholders have supported free trade agreements that promote outsourcing, and have argued for corporations' rights — and even their duty — to take advantage of the most efficient labor resources available (Rose 2011; Heffner 2010). On the other hand, tax revenues going to domestic governments tend to decrease with outsourcing, both due to reductions in income tax and reduced consumer spending caused by job loss in the middle class, which can place significant burdens on governments' fiscal capacity (Roberts 2005). Ultimately, governments and politicians depend on strong and stable employment levels to fund public activities and maintain authority, and it remains unclear whether outsourcing promotes or undermines this ability.

Conclusion

Ultimately, only time will tell whether outsourcing will prove as beneficial to the workforces of developed nations as corporate heads and many politicians claim. It is clear that outsourcing is of enormous benefit to corporations, and because of this it is equally clear that businesses will not be able to compete on an international level without some degree of outsourcing. Balancing cost savings with overall societal benefits needs to be the shared work of all three interested parties: workers, corporations, and governments.