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OUTSOURCING AND OFFSHORING Outsourcing is defined as “a process where a company contracts parts of its non-core business, to a third party either domestic or foreign, to complete the same services for less money.” It is commonly mistaken that outsourcing is noted identically to the term “offshoring”, which is not true. Offshoring is defined as “a company taking a function out of their business and relocating it to another country.” Offshoring is foreign, whereas outsourcing can be either foreign or domestic. However, when companies relocate parts of their business to another facility in the same country, it is usually known as “insourcing.”

TOP REASONS FOR OUTSOURCING

The most common reasons why companies decide to outsource include cost reduction and cost savings, the ability to focus on core parts of its business, access to more knowledge/talents and experience, and revenue or profit.

Many companies decide to outsource because it cut costs such as labor costs, regulatory costs, and training costs. The difference in labor wages are where most of the costs are reduced. Foreign countries tend to have workers who will complete the same amount of work as here in the United States, but for less than half the salary that an American employee will make. This motivates companies to outsource overseas to find foreign workers who are willing to work for these wages. Not only is the labor cheaper in other countries, but it is less expensive to educate these future employees in a foreign country. The company can spend up to half the usual cost to train these workers to become experts in a different country. In regards to companies spending less money on foreign workers, even those who may be domestic immigrants, lower regulatory costs are an addition to companies saving money when outsourcing. Comparing the costs to employing a worker in the United States to a worker in China, it is noticed that the employer in the U.S. has to pay for social security, Medicare, safety protection (OSHA regulations) and also FICA (taxes). Companies are able to focus their money and resources more towards improving the core aspects of its business when outsourced. For example a company can hire new personal, or investments. Non-core services can be outsourced to higher expertise companies who specialize in that specific function. For example an insurance company may outsource its landscaping functions to a service provider that specializes in landscaping since it is irrelevant to the core company, insurance. This allows the outsourcing company to build onto its core functions that keep the business running smoothly, such as an insurance company’s accounting agency which is crucial to the company. Another example is that companies and public entities such as a public school district who are now outsourcing functions such as their payroll offices to companies like ADP which specializes in that specific field. In the turning to of outsourcing, companies can often find more talent, and more experienced employees which will improve the performance of the business. In the case of outsourcing, corporations are finding in some cases that workers in foreign countries are provide better customer support than they had found using domestic services. When companies provide better customer support, then consumers tend to continue to come back to that service to receive the same excellent support which can increase a company’s profits. For example a the coffee company in the article written by Business week, advocates about a online coffee shop owner who moved his calling center to the Philippines because he found that his customers received better customer support from workers in this country.

Revenue and profit plays a large role in the reason for a company outsourcing. Since the costs are cheaper in different countries for a corporation to run it, as well as to train the employees, this saves the company a large sum of money. More profit comes in when the vendors are able to purchase products at a less expensive rate and continue to sell them at a reasonable price for consumers. The prices are reduced for services as well as products when purchased at a cheaper price.

RISKS When companies outsource, even though it may not be the core parts of the business, the noncore parts of the business bring jobs to foreign countries. By moving the jobs overseas, this decreases the chances for citizens to obtain these types of jobs. This relocation of jobs overseas hurts the country’s economy. Another large risk companies are also taking is the security of their business along with its services. Companies lose money when they supply third party workers with passwords to accounts and the workers take money from those accounts, this is constituted as fraud.

ADVANTAGES Companies are able to provide services and products to consumers at a cheaper price while still having a large margin for profit. This profit margin benefits both the company as well as the consumer. The cheaper prices lead to an increase a company’s economy. Although losing jobs hurts the economy because more citizens become unemployed, the cheaper prices allows customers to purchase more products and services which helps to rebuild an economy.