Outsourcing

Outsourcing as an Effective Measure for the Company an the State Completed by University of Outline 1. Introduction 2. Outsourcing as a measure for strain reduction 3. Outsourcing as an economic measure 4. Outsourcing’s benefits 5. References Introduction This paper argues that outsourcing jobs to foreign countries is very beneficial both to the firm and to the state because outsourcing creates valued added for the products made nationally and opens room for higher or advanced technologies on the domestic market. There are various issues involved in this situation, both private and government ones. Before discussing the benefits of outsourcing, it helps to understand the nature of economic activity. At its most basic level, it can be thought of as two distinct activities: production and exchange. Production involves transforming raw materials into finished goods and services, using labour, capital, and other inputs. Exchange means entering into transactions by which goods or services are traded for others, sometimes through barter, but more commonly using money as a medium of exchange. The extent to which economic activity generates wealth depends on the efficiency of both production and exchange. Improvements in production have depended directly on technological advances. The Industrial Revolution, which first stirred in England in the middle of the eighteenth century, was propelled by significant innovations in spinning and weaving technology, followed by major developments in transport (railways) and other industries which benefited from the application of steam technology. Rapid advances in information and communications technology over the past two decades are said to be ushering in a new Industrial Revolution, a knowledge-based society whose ultimate character is still the subject of much speculation. Outsourcing of jobs to foreign countries involves both a narrower and broader set of conditions: moving production to a foreign country can mean either an outsourcing with a private firm there or organization to provide a service or in a case with the state, a government simply withdrawing from providing a service or "load shedding," thereby allowing private firms or non-profit groups to do so (e.

g., electric utility service or social services) (Savas 1992). Outsourcing to a foreign country, however, does not include a full withdrawal of company-provided services, only the choice of a different means of provision. Also, outsourcing can occur between two governmental firms and therefore not involve any degree of moving the provision of a service to the private sector. While outsourcing and privatization differ in these respects, the force and logic for both is similar: to reduce, make more efficient, and reform the existing services. Outsourcing as a measure for strain reduction Even though outsourcing to a foreign country does not involve load elimination, it may involve a partial shedding of what until that time had been a firm’s responsibility (Savas 1992). Outsourcing can potentially provide an opportunity to reduce services by allocating less resources in the contract than were being used to provide the service through company personnel. Sometimes the result can be less service being provided (e.g., limb pick-up once every three months rather than once every two months). Perhaps more frequently, however, the reduction in service is likely to occur because of reduction in quality of the personnel providing the service. Workers in the private sector, in many areas such as sanitation that are frequently outsourced by governments, tend to be paid less and receive fewer benefits than comparable government workers (Pierce and Susskind 1986). The issue of whether reduction is occurring because of outsourcing has received little attention, and the evidence for reduced quality is also less than clear and convincing. A study comparing services in twenty cities in the Los Angeles area, for example, found that private contractors did have lower labor costs, but not because they paid their employees less. Rather, they were able to reduce labor costs because they used less labor, had younger workers and less absenteeism, used more capital with their labor, and had managers perform a more diverse set of duties (Stevens 1994). Outsourcing as an economic measure Outsourcing to a foreign country also has the goal of efficient production. This can occur through a number of mechanisms, including (1) restoring competition, (2) tapping economies of scale, and (3) discovering the most efficient production techniques.

By creating conditions for market-like competition, outsourcing proponents argue that, over time, service provision will become cheaper. Unfortunately, for some services there exist factors or circumstances that limit competition (Smith and Smyth 1996). Recently, there appears to be a consensus emerging among public-administration researchers that outsourcing in many cases can have better long-term results if public managers include public sector providers in the mix of potential competitors whenever possible. This can increase the number of competitors and guard against "low-balling." Some analysts simply argue that the efficiency of outsourcing comes primarily from competitors' desire to survive, creating a pool of low-cost contractors. Economies of scale can be very important in services that involve high levels of capitalization. Small local governments, for example, have long benefited from contracts (typically intergovernmental contracts) for water, sewer, and other utility services. These contracts were more efficient primarily because substantial investments in equipment and generating and recycling facilities could be spread across a larger clientele base. When the existence of competition or economies of scale are not relevant to an outsourcing to foreign country decision, proponents of outsourcing will still argue that private services are cheaper because foreign firms are often more efficient in their operations. This efficiency may be due to experienced foreign firms avoiding startup costs, having lower labor costs, having immediate access to skilled personnel and specialized equipment, avoiding governmental red tape and regulation, and being able to sanction personnel who do not meet efficiency standards. More generally, private foreign firms often have greater flexibility in decision making so as to respond more quickly to changes in labor markets and technology. We do not know the proportion of cost control that each of these measures may contribute to the effectiveness of outsourcing to the foreign country. However, we can expect that there would be a difference between intergovernmental contracts and those between governments and private firms in foreign countries.

The findings of Stevens (1994) study, which suggests that foreign private firms have an advantage in managing and controlling labor cost and behavior, would not apply, for example, to intergovernmental contracts in which the government providing the service probably would not have substantially different personnel management powers and policies from the government outsourcing the service. As a result, foreign private firms often have lower costs because they pay lower wages and benefits than those demanded by public employee unions in the US. They often also find dismissal of unsatisfactory workers easier and can use part-time employees freely. Vickers and Yarrow emphasize superior incentives and better methods of monitoring management as well as the promotion of advanced techniques (cited in Wessel 1995). Foreign contractors, however, are not always more efficient, especially in the marginal utility field when competition is absent. Outsourcing’s efficiency Proponents and opponents of the cost-effectiveness of outsourcing argue about the nature of the calculations used to determine the relative efficiency of domestic versus foreign providers. Proponents frequently note the tax advantage of outsourcing with foreign providers and argue that administrative and overhead costs of domestic provision are not always included in the calculations used when governments go about determining whether to privatize or not. Opponents of outsourcing to foreign countries will frequently note that the same costing-out process rarely identifies all the service qualities that domestic provision provides. This is the case because domestic (or rather public) employees are frequently called on to provide records and reports and peripheral services on an ad hoc basis. Typically these additional services would not be included in a service contract because the need for them could not always be foreseen. As such, private providers would request additional payment for these services, raising the cost of the initial contract. Many argue that governments regularly omit the cost of contract preparation, administration, monitoring, and the use of government equipment in the cost-benefit calculations related to the decision to outsource.

He also notes the high probability that for-profit providers will cut corners, be less motivated to respond to citizen groups, less flexible with respect to doing tasks that are not in the contract, and more likely to foster an environment where bribes, conflicts of interest, and charges for work not performed are likely to take place. Finally, transaction cost economics suggests that the efficiency of outsourcing may involve certain natural limits. Conclusion However proponents of outsourcing are strongly persuaded in the beneficial nature of outsourcing jobs to foreign countries. Advocates of outsourcing believe that democratic values are promoted in the process because citizens and their representatives can only make decisions about appropriate service levels when they know the true cost of these services. Similarly, holding company officials accountable for service delivery is only possible when service costs are known. Outsourcing is also theorized to promote reform or improvement of service quality. The logic here is the same as the logic of the market: When a firm’s success is dependent on satisfying the customer, the company is more likely to perform in ways that will meet customers' needs. Improvements of this type are most likely to occur when the outsourcing situation sets in place multiple service providers that produce the goods (e.g. electronic parts) from which citizens or consumers can choose. The production of quality is another benefit of outsourcing although such improvements may be the most controversial of the supposed benefits of service outsourcing.