Outsourcing will be an approximately $500 billion global industry in 2011, 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, laptop computers, tablet computers, cellular telephones and items such as iPods. Another major sector in offshoring is contract manufacturing of shoes, apparel and accessories.

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 offshore firms become more global and mature in nature. Performance and customer satisfaction are as important as cost.

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—a clear indication of globalization at work. For example, Apple’s extremely popular smartphones are manufactured by offshore contract electronics firms in Asia. While Apple’s products are sold in North America and Europe, a growing portion of their sales is in Asia itself, where the products are made.

In order to consider the outsourcing and offshoring industry, it is best to define the 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. Typical outsourced services include the operation of human resources departments, telephone call centers, distribution centers, research needs, computer services 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 operate their own computer servers.

Offshoring refers to the tendency among many U.S., Japanese and Western European 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 China, India, Mexico, Hungary, the Philippines and Romania. The choice of a nation for offshore work may be influenced by factors such as the language and education of the local workforce, transportation systems or natural resources. 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 are noted for large numbers of workers skilled in the English language, such as the Philippines and India. 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.

Captive offshoring 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 elsewhere. 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.

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, HP and other outsourcing firms whereby these companies take over and operate a client’s internal computer department. Here’s a non-technology insourcing example: ARAMARK Corporation will build and operate snack bars, employee cafeterias and executive dining rooms within a client company’s facilities. (Occasionally, the term “insourcing” has also been used to describe the creation of jobs in America by foreign firms.)
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