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Outsourcing & Offshoring OVERVIEW

Outsourcing was an approximately $575 billion global industry in 2020 (according to Plunkett Research estimates), 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. Global outsourcing revenues for 2020 overall were likely below the 2019 level, due to the effects of the Coronavirus pandemic. However, variability by industry sector, economic conditions and volatility during 2020 make this a difficult number to estimate. Some industries, such as ecommerce related logistics saw revenues soar. Others, such as outsourced apparel manufacturing, suffered immense downturns.

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 has changed dramatically over the past few years, as consumers more and more tend to use their smartphones as multipurpose devices, such as cameras, game players and music players. However, the growing popularity of internet-connected personal assistants, such as Alexa and Google Home, help to boost manufacturing activity, and sudden intense demand for laptops and PCs for work-from-home during the Coronavirus pandemic caused considerable disruption to the supply chain.

Offshore cost savings have become less advantageous in many cases, 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 servers.

The use of robotic process automation or “RPA,” is growing very quickly and is having a profound impact on the outsourcing of business services and day-to-day tasks. RPA utilizes artificial intelligence, voice recognition and advanced computer programs to manage customer account details, and to answer questions from online sites/chat boxes and customer telephone calls. The end result will be the elimination of a very large number of human employees in such tasks, particularly those in major call centers that are typically run on an outsourced basis.

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 English language.

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 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 2017, it reached 130,000. IBM also had major research centers distributed around six continents worldwide.

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.