Outsourcing

EXECUTIVE SUMMARY

Did the major companies in America not think of global competition as they started to expand their operations and increase the salaries of the workers? Why is it such a hot topic now, why didn't this act of outsourcing start long ago? What effect does outsourcing have on the American economy, will we be able to stop this trend, and if so what will be the effect. In this paper I will be looking at and discussing why companies are outsourcing the jobs overseas. What benefits that companies are getting out of it, and the problems that face management, as outsourcing seems to be the trend of big business.

INTRODUCTION

Outsourcing is the delegation of tasks or jobs from internal production to an external entity (such as a subcontractor). Most recently, it has come to mean the elimination of native staff to staff overseas, where salaries are markedly lower. There has to be a reason that companies are going to outsourcing rather than hiring people within their own country. The bottom line, the single thing that drives every company in the world. What ever can increase the bottom line you can expect that companies will do everything possible to reach higher profits. Living in Michigan almost my whole life, and being feed from the hand of General Motors outsourcing hits close to home. I feel that the one thing that has increased outsourcing is the results of the union. Back in the time when the union started I believe what they were doing was something that had to be done, and served a very good purpose. Helping employees get the rights that they deserved. But of course the union could not do this with just volunteer work. The people that were running the union of course had to get paid, and all of the people that were involved in the union had to pay dues. The union since the day that it evolved has been negotiating more and more money for its members and benefits fit for a king. Having done all of this has increased wages to rates that are just to high for the jobs that people are performing. Companies are feeling this effect now. If a product can be made here in the United States by a worker making 27 dollars an hour plus medical and a whole different array of benefits, then you can make that same product over in China or India with a worker making 3 dollars an hour which one would be a better business move? After all it is the bottom line we are chasing here. Why would you not take the job overseas?

In order for a company to successfully outsource a job the human resources department has a hard job on its hands. They have to be able to make sure that the people that will be doing the job will understand what has to be done and at the quality in which the products or services have to be. In some cases the outsourcing company will send over some of the workers to learn in the United States how to do the job. And the employees whose jobs will be eliminated are the ones training the new workers. How does the HR dept. handle this kind of situation? They sometimes just have to be honest with the employees that they are laying off. Let them know that their job is going to be eliminated here in the US. Tell them why their job is being eliminated and always keep them in the loop as far as what is going on. Doing this will at least give you some sort of respect by the employees you are terminating. Laying off American employees as a result of your offshore contract poses other sometimes-unanticipated costs. To begin with, you have to pay many of those workers severance and retention bonuses. You need to keep employees there long enough to share their knowledge with their Indian replacements. "People think if they give generous retention bonuses it will destroy the business proposition. They cut corners because they want quick payback. But then they lose the people that can help with the transition and incur the even bigger cost of not doing the transition right." Layoffs can also cause major morale problems among in-house "survivors," in some cases leading to disaffection and work slowdowns. What some companies have not learned yet is that there are some serious issues with outsourcing, for one the cost. It is not exactly cheap to have a part of your company outsourced to another country. With any outsourced service, the expense of selecting a service provider can cost from .2 percent to 2 percent in addition to the annual cost of the deal. In other words, if you're sending $10 million worth of work to India, selecting a vendor could cost you anywhere from $20,000 to $200,000 each year. These selection costs include documenting requirements, sending out management from the HR dept and evaluating the responses, and negotiating a contract. A project leader may be working full time on this, with others chipping in, and all of this represents an opportunity cost. And then there are the legal fees.

Some companies hire an outsourcing adviser for about the same cost as doing it themselves. To top it off, the entire process can take from six months to a year, depending on the nature of the relationship. With most outsourcing in today's market everything seems to be going overseas. To me this only seems beneficial to larger companies. I don't see a small company outsourcing the HR duties to a company overseas. If companies of this smaller size do outsource it will usually be to a company that is in the same area that can handle a few small accounts. "For months now, the business press has been regurgitating claims from offshore vendors that IT work costing $100 an hour in the United States can be done for $20 an hour in Bangalore or Beijing. If those figures sound too good to be true, that's because they are."

In fact, such bargain-basement labor rates tell only a fraction of the story about offshore outsourcing costs. The truth is, no one saves 80 percent by shipping IT work to India or any other country. Few can say they save even half that. As just one example, United Technologies, an acknowledged leader