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Pros and Cons of Outsourcing & Offshoring, Business and Industry Trends Analysis

While it may sound simple in principle, the barriers to outsourcing and offshoring can be significant.  To begin with, it is politically sensitive.  Political candidates sometimes state that companies that practice offshoring are all but evil, under the theory that they are depriving local workers of jobs.  Consequently, U.S. and European corporations that use offshored services providers often prefer to keep it quiet.  In addition, both offshoring and outsourcing create challenges for corporate management, which may include loss of control, quality issues, lack of flexibility and customer or labor backlash.  It is not uncommon for companies to be quite disappointed by their initial efforts to outsource their needs to offshore firms.
It’s easy to see that the offshoring boom has been beneficial to major outsourced services and contract manufacturing centers such as India and China.  In these two nations alone, tens of millions of jobs have been created, and both GDP and the middle class have been growing at enviable rates.  However, looking at offshoring from the point of view of the nations where client companies are based, including the U.S., Canada, much of Western Europe and Japan, is a more complex matter that often provokes emotional responses.
Let’s start with the displaced worker’s side.  For centuries, shifting labor markets have affected entire nations in an economic sense, but the net results drill down to individual workers as well as national treasuries.  For example, in the mind of an unemployed, former automotive parts factory worker in Detroit whose job has been offshored to China, his unemployment rate is 100% and the economic effect is disastrous—unless and until the worker can be retrained and reemployed elsewhere at similar pay.
From the consumer’s point of view, offshoring leads to substantial benefits in terms of cost savings.  If you live in the U.S. and you are having trouble visualizing the benefits of offshoring, trot out to Best Buy and shop for a DVD player—you’ll be able to purchase a high-quality machine, made in China, for less than $50.  Or go shopping for clothing in a U.S. chain store.  Until recently, broad categories of apparel had been falling in retail price in America, on an inflation-adjusted basis, for many years.  Most of the apparel manufacturing industry has steadily moved offshore from America, Canada, Europe and other developed nations.  For example, the vast majority of running shoes sold in the U.S. are made in China, and a growing portion of apparel sold in America is manufactured at very low cost in Vietnam.
While offshoring has been growing rapidly, some companies continue to prefer to manufacture at home due to myriad factors.  To begin with, manufacturing offshore may require that a company transfer and entrust patents, trade secrets, technologies and operating methods to third-parties.  This means that a company puts at risk the competitive advantages that enabled it to succeed in the first place.  One way to attempt to circumvent this risk is to practice “captive” offshoring—that is, to set up company-owned offices, assembly lines or laboratories in lower-cost nations.  However, there are significant costs and challenges involved even in captive foreign plants.  To begin with, skilled managers and supervisors must be transferred from the home office to the new offshore facility in order to hire and train local workers.  Moving existing employees to offshore locations and developing local talent while navigating foreign government regulators can be daunting at best.  Once these hurdles have been toppled, there are still issues of logistics, quality control and transportation of completed goods to final markets.  Getting a foreign operation up to acceptable productivity levels is another stiff challenge.  The bottom line is that many companies prefer to keep the essential functions, the most highly skilled professionals and the most critical technology-related operations at their home offices.  Non-critical, less-confidential tasks may be easier to offshore or outsource.
Finally, there is the near impossibility of offshoring tasks that require significant levels of face-to-face contact with clients and customers.  Much of this type of work will always remain at home.  For example, consultants need face time with their clients and need to spend time within their clients’ operations and offices.  (This is one reason why major consulting firms have opened local offices around the globe.)  High-ticket industrial and commercial salespeople also need face time with their customers.  Day-to-day work in drafting, design and engineering can be offshored, but the initial concept development, needs analysis, and continuing client communication typically must be done in person.  However, no one should underestimate the potential for white-collar and professional jobs to be offshored, perhaps in huge numbers.
Then there is the question of the net economic effect of offshoring.  In America, for example, it is clear that large numbers of service and manufacturing jobs have been offshored.  Where successful, this offshoring saved U.S. companies hundreds of billions of dollars, and many of those cost savings have been passed on to consumers in terms of lower prices.
What is less clear is whether or not there are net American benefits from the offshoring trend.  Certainly, jobs have been displaced in the U.S. by offshoring.  However, it helps to bear in mind that job displacement is continuous, with or without offshoring, and factors other than offshoring may contribute.  For example, advancing technologies, including the introduction of music file sharing and the digitization of music in general, have displaced jobs in the recorded music industry.  While smartphones and other digital devices that can play music are extremely popular, and they may be manufactured in outsourced, offshore facilities, it would be incorrect to blame the fact that smartphones are manufactured offshore for the general shift in recorded music employment.
Another factor to consider is what is called the “complementary” effect of offshoring.  For example, U.S.-based companies may build or utilize offshore facilities for two purposes.  The first may be to use lower-cost offshore workers to manufacture products for sale back home in the U.S.  The second, however, will most likely be to gain better access to foreign markets.  This means that the U.S.-based company has an opportunity to sell its products at high-value prices in the nation, such as China, where they are manufactured, as well as to ship those products at highly competitive prices to markets nearby in Japan, Australia and the UK.  In other words, by using offshoring, the U.S.-based firm becomes more competitive, both at home and in global markets.  (In fact, a large percentage of the products of multinational, U.S.-based firms that are manufactured by overseas subsidiaries are sold in overseas markets, and profits earned in foreign markets make up a very significant portion of the total profits of the largest firms.)
Next, in order to manage increased global business and take advantage of growing offshore marketing opportunities, the firm may need to hire additional people for certain tasks back home in its U.S. facilities.  This doesn’t eliminate the very real problems faced by workers who may have been laid off in a U.S. factory.
It is also true that many services firms based in the U.S., UK and Europe do business on a global basis.  Meanwhile, a significant number of foreign-owned services providers are setting up U.S. offices, acquiring U.S.-based companies and hiring Americans to work in U.S. facilities, as well as importing foreign nationals to work in America under temporary visas.
The opening of U.S. offices by foreign services firms relates to the fact that some tasks can’t be done effectively without personal contact with the client.  Other tasks are better performed or managed in the nation where they will be utilized.  For example, foreign companies are creating large numbers of lucrative industrial sales and customer relations jobs in the U.S.  Likewise, many foreign-owned manufacturers operate major plants within the U.S., including virtually every major automobile manufacturer from Toyota to BMW to Mercedes Benz.  By 2019 (the latest data available), according to the Organization for International Investment, 7.4 million people in the U.S. were employed by U.S. subsidiaries of foreign firms.
It is certainly clear that displaced workers in many key industries in the U.S. have found it difficult, often impossible, to replace their former levels of pay and benefits.  This is particularly true for people who previously worked in heavy manufacturing industries, such as automobiles and automotive components.  Government-backed programs that offer retraining and job placement assistance are often insufficient or ineffective.  The rapid decline of a domestic industry, or the loss of a large number of local jobs at once, can create significant economic “shocks” that can be difficult to impossible to overcome.

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