Outsourcing & Offshoring OVERVIEW
A significant share of offshoring revenue is created by contract manufacturing of electronics, including laptop computers, tablet computers, cellular telephones and items such as iPods.
Another major sector in offshoring is contract manufacturing of shoes, apparel and accessories.
Contract electronics manufacturing was estimated at $390 billion for 2016 by Plunkett Research.
This market has changed dramatically over the past few years, as the demand for personal desktop consumers is weak as consumers more and more tend to use their smartphones as multipurpose devices, such as cameras, game players and music players. Offshore cost savings have become less advantageous, as wages and operating costs have been rising rapidly in the business and manufacturing centers of China and India.
Leading offshore services providers, such as IT consulting giant Wipro, have been opening offices and making acquisitions in America and Europe—the locales of some of their leading customers—as these international firms become more global and mature in nature. A large portion of the
Outsourcing will be an approximately $548.5
billion global industry in 2016, with significant emphasis on three broad
areas: 1) logistics, sourcing and
distribution services; 2) information technology services, including the
creation of software and the management of computer centers; and 3) business
process outsourcing (BPO) areas such as call centers, financial transaction
processing and human resources management.
Offshoring, as opposed to outsourcing, covers
such a wide variety of nations, products and practices that it is difficult to
put a number on the size of the market.
A significant share of offshoring revenue is created by contract
manufacturing of electronics, including laptop computers, tablet computers,
cellular telephones and items such as iPods.
Another major sector in offshoring is contract manufacturing of shoes,
apparel and accessories. Contract
electronics manufacturing was estimated at $390 billion for 2016 by Plunkett
Research. This market has changed
dramatically over the past few years, as the demand for personal desktop
consumers is weak as consumers more and more tend to use their smartphones as
multipurpose devices, such as cameras, game players and music players.
Offshore cost savings have become less
advantageous, as wages and operating costs have been rising rapidly in the
business and manufacturing centers of China and India. Leading offshore services providers, such as
IT consulting giant Wipro, have been opening offices and making acquisitions in
America and Europe—the locales of some of their leading customers—as these
international firms become more global and mature in nature.
A large portion of the products manufactured
offshore for corporations that are headquartered in the U.S., Canada, Japan and
other developed nations are very often intended for sale in offshore markets,
rather than at home—a clear indication of globalization at work. For example, Apple’s extremely popular
smartphones are manufactured by offshore contract electronics firms in
Asia. A large portion of their sales are
in Asia itself, where the products are made. There are often advantages to conducting
manufacturing close to the business and consumer markets of Asia.
In order to consider the “outsourcing” and
“offshoring” industry, it is best to define these terms up front, since the
words are often used in conjunction and are sometimes used incorrectly:
Outsourcing can be defined as the
hiring of an outside company to perform a task that would otherwise be
performed internally by a company, organization or government agency—generally
with the goal of lowering costs and/or streamlining workflow. Outsourcing contracts are often several years
in length. Companies that hire
outsourced service providers often do so because they prefer to focus on their
core strengths while sending more routine tasks outside for others to perform. Other companies replace existing employees
with outsourced services in hopes of lowering total costs.
Typical outsourced services include the
operation of human resources departments, telephone call centers, distribution
centers, research needs, computer services, software design and the design
and/or engineering of components or end-products. For example, in addition to selling products
such as books via its massive online store, Amazon also offers outsourced
services. It provides warehousing and
shipping services to businesses, large and small, that want to rely on Amazon
for handling and shipping their merchandise to end users. Amazon also provides outsourced computer
cloud services to firms that do not want to own and operate their own computer
Offshoring refers to the tendency
among many firms to send both knowledge-based and manufacturing work to
third-party firms in other nations.
Often, the intent is to take advantage of lower wages and operating
costs in such nations as India, Mexico, Hungary, the Philippines and
Romania. The choice of a nation for
offshore work also may be influenced by factors such as the language and
education of the local workforce or the quality of transportation systems and
other local infrastructure. For example,
China and India are graduating high numbers of technicians, engineers and
scientists from their universities—thus enabling these nations to attract
massive engineering, research and development contracts. In addition, some nations, such as the
Philippines and India, are noted for large numbers of workers skilled in the
In many cases, offshoring utilizes less-skilled
labor working for low wages in plants that manufacture such items as shoes,
apparel and generic computer components.
In other cases, offshore manufacturing contracts go to firms in nations
that have developed very advanced technology and industrial bases with
highly-skilled and educated workers. For
example, final manufacturing of laptop computers and other electronics is
frequently offshored to very high quality firms in Taiwan and South Korea. In China, Hon Hai Precision Industry Co. has
more than 1 million employees who do contract electronics manufacturing.
is a term used to describe a company-owned offshore operation. For example, IBM and Microsoft each own and
operate significant captive research and development centers in China and India. The goals of captive offshoring include
greater company control through direct ownership, along with lower operating
costs and the ability to utilize highly educated local workforces. IBM first opened a research lab in India in
1998. By 2010, IBM’s headcount in India
had grown to more than 80,000, and by 2012, it reached 112,000. As of mid-2015, IBM also had major research
centers in Sao Paulo and Rio de Janeiro, Brazil.
Insourcing refers to situations
where an outsourced services provider moves into, and sets up shop in, a client
company’s facility. For example, it is
common for major companies to sign agreements with IBM Global Services and similar
IT outsourcing firms whereby these companies take over and operate a client’s
internal computer department. Here’s a
non-technology insourcing example:
ARAMARK Corporation builds and operates snack bars, employee cafeterias
and executive dining rooms within a client company’s facilities.
Future of Outsourcing and Offshoring: China,
India and similar mature offshore work centers will remain moderate-cost
providers of services and manufacturing for the foreseeable future. At the same time, as their economies grow,
their business structures and middle classes will grow, and they will offer
lucrative markets for intellectual property, goods and services sold by firms
based in the U.S., Europe, Japan and elsewhere.
In some cases, such goods will be imported. In others, they will be created locally at
facilities owned by foreign firms. (For
example, Kraft has significant manufacturing plants and thousands of employees
within China, where it makes processed food products that have been adapted to
suit the needs of Chinese consumers.)
Meanwhile, developing nations face immense challenges, including the
need to build infrastructure such as dependable electricity networks, roads and
highways; extend their education systems; control pollution; enhance access to
basic health care services; and provide greater opportunities to residents in
rural and remote areas.
Many Chinese cities are experiencing
significant difficulties with pollution and road traffic. The most popular Indian business centers,
such as Bangalore and Gurgaon, are experiencing daunting shortages of
infrastructure of all types, including electricity, while competition for
workers is driving wages higher and higher.
Despite the recent construction of new highways in India, traffic delays
and inefficiencies are an immense burden.
The offshoring boom does not touch all residents in India or China,
despite impressive growth in the middle classes. Income inequality remains a significant
problem. Clearly, there is room for
substantial investment, outside of major cities, in education, transportation
and development of rural industries.
China, since its far-reaching business and
economic reforms were launched in 1978, has been a bigger beneficiary of
foreign investment than has India. This
is one reason why China’s economic growth has been so impressive. In recent years, Chinese firms in many cities have
faced difficulties in attracting enough employees, while strikes, government
regulations and worker unrest had forced employers to boost wages
The biggest advances in developing nations are
yet to come. Hundreds of millions of
people will rise above poverty to enter the middle class in emerging economies
in Asia, Africa and Latin America in coming decades.
Fully developed nations such as the U.S. have
been shifting to knowledge-based economies for decades, as automation continues
to take over domestic factory floors (displacing factory workers), while much
of the rest of manufacturing has shifted overseas. The challenge for developed nations such as
the U.S. and Japan is to maintain their leads in such areas as intellectual
property, investment in R&D and higher education. There is fierce competition among nations to
foster advanced education, develop well-trained and motivated workforces, boost
productivity and create high incentives for entrepreneurship and
investment. Nations that succeed in this
regard will invent the new technologies, services, consumer goods and business
processes that can be sold to businesses and consumers in other nations. Offshoring and outsourcing will continue to
play a pivotal role in the fields of research, manufacturing and business
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