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OUTSOURCING REVISITED:
A CONCEPTUAL REVIEW OF OUTSOURCING DIMENSIONS
Robert Moussetis
Department of Management and Marketing
North Central College
Naperville, IL 60540
630-637-5475
630-637-5260 (Fax)
[email protected]
George Nakos
School of Business
Clayton State University
Morrow, GA 30260
(770) 961-3507
Ali Abu-Rahma
California School of Business & Organizational Studies
Alliant International University
San Diego, CA 92131-1799
(858) 635-4571
Abstract: This paper summarizes the various concepts of outsourcing. It aspires to provide a preliminary
model for researchers to begin developing outsourcing strategies comprehensively. It includes,
manufacturing, R&D, social responsibility, economic implications, competitive and strategic issues.
Finally provide a preliminary direction for future research.
Key Words: Outsourcing, Strategy Competitive, Social Responsibility, Ethics.
Introduction: “The essence of a great world power is its edge in producing not services, but
manufactured products” (Uchitelle 2003). By that standard, in the year 2000 the two greatest world
powers were Turkmenistan with 39.8 percent of its GDP attributed to manufacturing and Cuba with 37.2
percent (Reynolds 2003). Obviously, neither Cuba nor Turkmenistan is world powers. Outsourcing jobs
overseas, or off shoring, is not new to Americans (Kelly 2002; Rabushka 2004; Rutherford et al., 2005).
Off shoring has been a key business strategy used by many companies in many industries for more than a
quarter of a century (Blascovich et al 2005, Kelly 2002). Automobile companies have been outsourcing
manufacturing since the early 1980s, when outsourcing began to emerge as a potentially powerful force in
transforming global economies (Blascovich et al 2005, Kelly 2002). At about the same time,
manufacturing productivity in the United States was recovering (Rae, 2001). Companies like NCR,
learned that assembling circuit-boards in the United States was not a very profitable operation, and opted
to outsource the process (Peterson 1998). Across many industries, a significant shift came in the early
1990’s when manufacturing work began to migrate to areas that offered lower labor costs (Baily et al.
2004, Blascovich et al 2005, Kelly 2002). Formulating effective strategies for achieving business goals
has been one of the most important concerns of business leaders; and in this context, no other
organizational practice has captured more of the attention of academics and practitioners than offshore
outsourcing (Kedia and Lahiri, 2005). Managers need to understand how outsourcing affects strategy
formulation at the level of the company, and how this practice can result in competitive advantage by
adding value to the company’s core activities. Current scholarly and practitioner-oriented literature on
outsourcing tends to suggest that businesses pursue this practice to achieve lower costs of operation,
access to the latest technology, and flexibility, leading to better financial performance and increased
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competitiveness (Kedia and Lahari, 2005; Kimsey and Kurokawa, 2002). This is seen in responses from
U.S. business leaders. When asked questions about competing in the global economy, typical U.S.
executives respond with outsourcing because so many companies have used it to shave costs and
operating expenses. But outsourcing just to reduce operating and labor costs is narrow thinking (Hagel
and Brown, 2005). In the larger, emerging global economy, efficiency and cost savings alone won’t yield
a sustainable competitive advantage. New competitive pressures from overseas will demand bigger, more
radical approaches in the form of global process networks (Hagel and Brown, 2005). Issues of
outsourcing are not contained within the manufacturing but extend to services, technology and R&D as
well. Moreover, we have to consider the societal component surrounding outsourcing (social
responsibility, ethics, stakeholders, etc.). Thus, the topic has advanced to the level where comprehensive
exploration is needed to investigate the strategic issues surrounding outsourcing holistically. In this paper,
we will attempt to provide a conceptual map to integrate manufacturing, services, technology, economics,
strategy, geography, and ethics as they relate to outsourcing (Figure1). It is our aspiration that such a
guiding tool will provide a launch base for approaching outsourcing as a comprehensive strategic tool
available to firms and NFPs (not-for-profit) organizations.
Manufacturing: For many, the word “outsourcing” conjures up images of manufacturing jobs in decline.
Although Americans like to pick on China and say that all of these jobs are going there, that is not the
case (Iverson, 2003). The United States is far from alone in losing manufacturing employment. In fact,
there are suggestions to indicate that one of the largest losers of manufacturing jobs has been China
(Iverson, 2003, Reynolds 2003, Ritter, et al 2004). Between 1995 and 2002, China lost 15 million
manufacturing jobs compared with 2 million in the United States (Anonymous 2004b, Ritter et al 2004).
The loss of traditional manufacturing jobs in America has become a grim reality for the past two decades
(Averett 2004, Iversen 2003). Over the past decade alone, U.S. manufacturing jobs have declined by more
than 11 percent (Iverson 2003; Testa, 2004) while in India, growing use of automation is holding down
manufacturing job growth despite the large amount of outsourcing work that is flowing to the country
(Iversen, 2003). The level of outsourcing in India today is about the same as it was during the late 1990s
(Iversen 2003). Negative perceptions of the industry and a lack of qualified candidates are two of the
biggest long-term threats to domestic manufacturing. Old stereotypes of assembly lines just do not appeal
to the upcoming generation of workers. Public esteem for careers in manufacturing has fallen
dramatically in the United States (Anonymous, 2004c; Stamm, 2003). Despite the negative perception of
manufacturing jobs, they actually pay, on average, 18 percent more than jobs in other sectors (Averett
04). The reason behind the decline in manufacturing jobs can be attributed to several causes, including
improved machinery and skills, lean methodology, and increased automation (Averett 2004, Reynolds
2003). Reducing labor in countries like China, that have such low labor costs, usually has no significant
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impact on the total cost (Ting 2004a, Brown 2005). Through automation people are becoming more
productive (Ivensen, 2003; Reynolds 2003, Testa 2004). Manufacturing is cyclical and automation
contributes to its cyclical nature (Reynolds 2003, Iversen 2003). U.S. Manufacturers who invest in
sophisticated automation technology at home can gain the upper hand for a time over lower-priced
imports, thanks to the higher quality product allowed by automation (Reynolds, 2003). Most economists
see a natural, if somewhat uncomfortable, transition taking place as American manufacturers learn to
compete in the global economy (Averett 2004). While manufacturing made up a third of the American
workforce in 1950, it represents only 12 percent of the work force today (Averett 2004, Reynolds, 2003;
Testa, 2004). Despite this, more goods are being produced at a higher level of complexity than ever
before. Weakness in manufacturing is one factor causing the job market to trail the economy. Estimates of
the actual number of jobs outsourced are sketchy (Reaser, 2004).
Technology: Over the past ten years outsourcing in the United States has largely entailed the transferal of
certain technology-based jobs - such as computer programming, technical support services, and data
processing that used to be handled domestically - to countries like India, China, Singapore, Malaysia,
Slovakia, and Poland, where the same jobs can be done less expensively (Sullivan, 2004). Because
technology advances have allowed remote capabilities for almost any type of business process –
accounting, computer programming, and some legal and medical services – nearly every major U.S.
Company is outsourcing or considering it for one or more of its business process functions (Babcock,
2004). The question to outsource could be looked at from the standpoint of core competencies: focus in
and internalize those things that one does well (core competency) and shed (outsource) those activities it
does not do well or that adds little value (Munsch, 2004; Kantor, 2005; Kedia and Brown, 2005). But
what started with the outsourcing of back-end process functions, those not considered core competencies
to the company, has now become an established practice for the global information system and software
development (Huang, 2004). Asian companies, who are emerging as hidden powers of the technology
industry, are “the vanguard of the next step in outsourcing – of innovation itself” (Engardio and Einhorn,
2005).Why outsource innovation? The R&D budget is the biggest single remaining controllable expense
that corporations can work on reducing. Furthermore, acquiring knowledge from external sources will
become even more critical to producing ever more complex products well into the foreseeable future
(Kimzey and Kurokawa, 2002). Are there risks inherent in the outsourcing of technology and innovation?
Some economists say the outsourcing of design, is the leading edge of a longer-term trend toward reduced
innovation and competitiveness among U.S. companies (Koch, 2005; Lok, 2004). In the technology
arena, the tremendous surge of US. Companies participating in China and elsewhere in the manufacturing
and design of very advanced systems are accelerating the emergence of these nations as first-tier
competitors in many of the most advanced, high value economic activities (Lok, 2004). Moreover, loss of
the intellectual property, employment, investor confidence are among of the issues associated with
technology outsourcing. As technology and innovation are outsourced by more and more companies, a
new model of innovation, and in turn, a new form of strategic management, is needed - one that employs
global networks of partners (Quinn, 2000; Engardio and Einhorn, 2005). Sustainable competitive
advantage in the future will come from a capacity to work closely with other highly specialized
companies around the globe to get better faster (Quinn, 2000; Hagel and Brown, 2005). To reach this goal
companies in all industries and of all sizes will have to undergo a three-stage transformation: deepen their
specialization within the enterprise; mobilize best-in-class capabilities across enterprises, and ultimately,
accelerate learning across broad networks of enterprises (Hagel and Brown, 2005).
Competitive Implications of Outsourcing: Are there risks inherent in the outsourcing of technology and
innovation? Some economists say the outsourcing of manufacturing, and now design, is the leading edge
of a longer-term trend toward reduced innovation and competitiveness among U.S. companies (Koch,
2005; Lok, 2004). Losing the capability in the United States for the most advanced manufacturing of very
complex systems, because that is directly related to the innovation process, would be a major competitive
loss, because in the course of manufacturing, you often create an innovation that takes you to the next
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generation (Lok, 2004). In the technology arena, the tremendous surge of U.S. companies participating in
China, India and elsewhere in the manufacturing and design of very advanced systems is accelerating the
emergence of these nations as first-tier competitors in many of the most advanced, high value economic
activities (Lok, 2004). There is no question that countries such as India and China, where wages remain
low and new engineering graduates are abundant, will likely continue to be the biggest gainers in
technology employment and become increasingly important suppliers of intellectual property (Engardio
and Einhorn, 2005). To ensure we have skilled people at the forefront of design and engineering in the
United States, we must increase the number of graduates in the areas of math, science, and engineering
(Lok, 2004; Challenger, 2004). But the number of Indians graduating with degrees in math, science and
engineering is five to ten times greater than in the U.S. (Challenger, 2004). We also need strong federal
investment in the knowledge enablers of the future - in the mathematical, physical, and material sciences
(Lok, 2004). Another risk companies face when outsurcing technology and innovation is the message they
send to investors. Outsourcing manufacturing, tech support, and back-office work makes clear financial
sense. But ownership of design strikes close to the heart of a corporation’s intrinsic value (Engardio and
Einhorn, 2005). Will investors continue to support companies where the ownership of actual intellectual
property is in question?
Strategic Issues of Outsourcing: Formulating effective strategies for achieving business goals has been,
still is, and will continue to be one of the most important concerns of business leaders; and in this context,
no other organizational practice has captured more of the attention of academics and practitioners than
offshore outsourcing (Kedia and Lahiri, 2005). Managers need to understand how outsourcing affects
strategy formulation at every level of the company, and how this practice can result in a competitive
advantage by adding value to the company’s core activities. Current scholarly and practitioner-oriented
literature on outsourcing tends to suggest that businesses pursue this practice to achieve lower costs of
operation, access to the latest technology, and flexibility, leading to better financial performance and
increased competitiveness (Kedia and Lahari, 2005; Kimsey and Kurokawa, 2002). In the larger,
emerging global economy, efficiency and cost savings alone won’t yield a sustainable competitive
advantage. New competitive pressures from overseas will demand bigger, more radical approaches in the
form of global process networks (Hagel and Brown, 2005). And as technology and innovation are
outsourced by more and more companies, a new model of innovation, and in turn, a new form of strategic
management, is needed - one that employs global networks of partners (Quinn, 2000; Engardio and
Einhorn, 2005).
Sustainable competitive advantage in the future will come from a capacity to work closely with other
highly specialized companies around the globe to get better faster (Quinn, 2000; Hagel and Brown, 2005).
This can be accomplished by the use of offshore service providers. Innovative managers can use offshore
service providers to perfect ways to organize their extended operating processes. Offshore service
providers are generally smaller companies with highly specialized capabilities. They’ve located their
operations to take advantage of local business ecosystems. For example, computer design and
manufacturing businesses are located in Taipei, Taiwan, to capitalize on the presence of many other
complementary high-technology companies and the availability of highly-skilled and relatively low-cost
engineering talent. In mainland China, data-networking companies are located in Shenzhen; automobile
companies have clustered in Shanghai; and motorcycle companies are operating in Chongqing. Similarly,
software companies have found a congenial setting in Bangalore, India. These companies have developed
world-class capabilities by clustering with other, similarly specialized companies in a single geographic
area. As such, companies that partner with them are on their way toward a sustainable competitive
advantage (Hagel and Brown, 2005). This use of global process networks is nothing less than a dramatic
shift in the rationale for the modern business organization. Existing theories will be challenged by new,
dynamic views that incorporate accelerated capability building and a deepening of the talent pool. The
center of gravity for value creation will inexorably move to talent markets (Hagel and Brown, 2005). The
winners of the outsourcing of innovation will be the ones most adept at marshaling the creativity and
skills of workers around the world (Engardio and Einhorn, 2005; Hagel and Brown, 2005).
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Economic Implications: The battle lines have been drawn, and depending on who you talk to,
outsourcing is either great for our economy or extremely detrimental. This conundrum is echoed in a
multitude of outsourcing literature (see Lok, 2004; Challenger, 2004; Grimm, 2004; Budman, 2004;
Babcock, 2004; Engardio and Einhorn, 2005, etc). What effect will outsourcing have on the U.S. and
global economy? Among observers and practitioners of outsourcing, many would say that the corporate
world, and in turn the U.S. economy, has yet to discern all of the consequences of sending white-collar
jobs abroad (Vu, 2004). But the fear among U.S. white collar workers and the rhetoric generated during
the past presidential election is a clear indicator that the outsourcing of white collar jobs in any form is a
real concern for many Americans (Greenemeier, 2004). Similar rhetoric is being heard in various state
legislatures where more than a dozen bills are being considered. On the federal level, President Bush
signed an appropriations bill in January of 2004 that contained an amendment forbidding certain
government agencies from outsourcing work (Babcock, 2004).
Critics of the outsourcing trend say the United States stands to lose continuous high-paying jobs,
technical knowledge, and innovative capacity by employing and training workers in foreign countries,
rather than advancing the nation’s own workforce (Babcock, 2004; Budman, 2004). But free-market
purists say the furor is protectionist alarmism that unfairly exploits our current economic straits (Grimm,
2004). Each economic era has seen massive displacement of workers, of families and entire industries.
The loss of manufacturing jobs is just another chapter of technological progress in our economy, and the
ongoing white-collar volatility, like economic upheavals before it, is absolutely necessary (Budman,
2004; Grimm, 2004; Babcock, 2004). A country advances by replacing lower level jobs. That’s how
economic growth happens - new jobs have to have higher value-added, higher productivity. We need to
be generating enough people with the kind of high-level technical knowledge to do the innovation in the
new technologies – such as biotech, energy, and nanotechnology - and in the realms of innovation that are
going to be dominant in the next quarter century (Budman, 2004; Challenger, 2004; Lok, 2004;
Malachuk, 2002).
Ethics and Social Responsibility: Although the arguments for and against corporate responsibility are
not new (Friedman 1962; Easterbrook & Fischel, 1991; Coelho, McClure, Spry, 2003; Davis 1975; Jones,
2005), the issues surrounding outsourcing and ethics are critical since it, primarily, involves jobs. The
basic idea of corporate social responsibility is that business and society are interwoven rather than distinct
entities (Wood 1991). The conflicting theories regarding a corporation’s appropriate level of social
responsibility lead to the debate of whether or not to outsource, for example, U.S. jobs. Most firms pursue
outsourcing as a cost saving device and improved profitability since corporations have a responsibility to
their shareholders to increase profits (Schimmoller, 2004). Corporate stakeholders that are not considering
investing in China or India are expected to provide compelling reasons to board members; hence, the
decision to outsource is a socially responsible act towards the primary stakeholders of the firm (Jones,
2005). Nevertheless, this leads also to “stateless” corporations with increased bargaining power and
employees competing for jobs (Jones, 2005).
In considering the ethical and social responsibilities implication on the economies, we explore the past
effects of outsourcing. The outsourcing process allocates resources—money and people—to where they
can be most productive, and helped by competition, including outsourcing that lowers prices. In the long
run, higher productivity is the only way to create higher standards of living across an economy. This view
of outsourcing sees a historical pattern of foreign outsourcing leading to short-term job loss and long-term
productivity gains, which in turn leads to long-term creation of new jobs, often in a different employment
sector, and lower prices. Furthermore, as manufacturing jobs were outsourced to foreign labor in the past,
there were increases in jobs in business services and healthcare (Economist, Feb 21st, 2004; Amiti & Wei,
2004). However, outsourcing reduces wages and leads to wealth for some countries and employment;
consequently, workers are displaced with little or no capability to pursue better jobs and disconnect
between value creation and geographic location (Levy, 2005; Amiti & Wei, 2004). In addition, issues
such as lay-offs, poverty, human rights, low wages, unlivable conditions, and poor working environment
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are generating a plethora of strategic implication for the firm. Even if a certain practice within a country is
clearly wrong to western minds, shouldn’t we have “a respect for the right of people to govern their own
affairs (Boatwright, 2002, p. 416)?” On the other hand, are there some violations of human rights that
simply should not be allowed under any circumstances? Thomas Donaldson published what he considers
to be a “moral minimum” with regard to human rights to the right to freedom of physical movement, the
right to ownership of property, the right to freedom from torture, the right to a fair trial, the right to
nondiscriminatory treatment, the right to physical security, the right to freedom of speech and association,
the right to minimal education, the right to political participation, and the right to subsistence (Donaldson,
1989).
Geographic Implications: The outsourcing activity gravitates around certain geographical areas as a
result of a location competitive advantage. For example, low labor cost wages are the primary causes of
outsourcing to China (Matteo 2005, Ting 2004, Zhongua 2004, Nolan 2001). Companies are seeking to
take advantage of labor, low margins markets, skilled workers, engineering, etc. (Ting, 2004; Zhongua,
2004; Nolan, 2001). The increased business activity invites additional foreign investment (Hongying,
2001); therefore, it lowers the cost of outsourcing to China. Other geographic destinations of outsourcing
are India, Eastern Europe, Thailand, Malaysia, Philipines, etc. India and China are attracting most of the
attention due to their population size; it will take several years before the unskilled and skilled labor is
saturated into the markets, hence, observing a rise of wages to offset the economic, competitive and
strategic advantages of China and India. In contrast, the wages in Hungary and the Czech Republic have
risen relatively quickly; hence, these countries are experiencing a diminishing competitive advantage as
an outsourcing destination. Geographic destinations though are riddled with complex issues such as
hidden costs (Jorgensen 2005; Cohen,2004; Hogan, 2004), finding the right partner, legal issues (Ernst &
Young, 2004; Hogan, 2004; Honguying, 2001; Zhigang, 2001; Nolan 2001), corruption, incompetence
and administrative intervention (Patisson 2003 Hongying 2001). Furthermore, there are geographical
issues associated with cultures rendering outsourcing complex and challenging (Lee, 2005; Vanhonacker;
2004).
Discussion: It is clear from the literature that outsourcing is here to stay. The success of outsourcing is
indicative of the future of this controversial topic. And the flood of other business process operations that
have followed has cemented the concept, whether it is controversial or not. The advent of the information
technology revolution has removed the concept of “locality” in business today. A high speed connection
means that Bombay is as close as Boston or Phoenix. What started with back-office functions such as
basic data entry, transaction processing, and documentation management, has progressed up the value
chain of business process functions: customer contact functions, such as call centers and on-line customer
contact; common corporate functions, such as accounting and procurement; knowledge service and
decision analysis, such as research services and portfolio analysis; to the highest level of corporate
function on the value-chain: research and development.
Do we need to worry about the implications of the outsourcing of our technology and innovation
functions – the top of our value-chain? As the literature indicates, there are competitive dangers. The loss
of our R&D functions could lead to a downward trend in innovation and competitiveness among U.S.
companies. If we are not designing and producing the products and ideas that will create the next
generation of innovation and job opportunities, we could lose the “leading edge” in innovation and
technology that the U.S. has enjoyed since World War II. With industries as diverse as software,
electronics, telecommunications, pharmaceuticals, automobiles, aerospace, computers, chemicals, health
care, financial services, and energy systems all shipping out technology and innovation functions, the
dangers seem very real and very wide-ranging. Additionally, the loss of technical employment and the
intellectual property that naturally follows that employment is a critical issue.
But as the literature also indicates, these dangers are not necessarily inherently bad. As indicated,
each economic era has seen massive displacement of function and workers –and has recovered each time.
Some argue that economic upheavals of this type are necessary to advance the progress of our economy.
202
The strength and robustness of the U.S. economy will depend on us – consumers, workers, educators,
politicians, and strategists. There is also a strong argument for outsourcing as a way to improve the
economies of those countries that benefit from the new job opportunities. The argument holds that
outsourcing helps build strong markets for the nation that exports the jobs. As the literature indicates,
business functions are no longer constrained by borders, and to be effective in the emerging global
economy, companies will have to formulate new models of strategic innovation to build global networks
of partners. This is the only way to sustain competitive advantage while competing with the emerging
nations that are becoming first-tier competitors in many of the most advanced, high-value economic
activities. With this being the case, the center of the gravity for value creation will move to the talent
markets, as indicated in the literature. The U.S. must make sure that it remains a talent market by
encouraging the study of math, science, and engineering for the young people entering the workforce.
The internet, and the information age that has come about as the result of it, has changed people’s
views and expectations about the scope and breadth of the world. It has opened up the world to all of us.
Now we must all embrace that world and work for a strong and profitable global economy that can
support us all. Building strong multinational companies through outsourcing, from back-end office
functions to research and development, is the right step.
Future Research Directions: The issue of outsourcing has become so comprehensive that research is
needed to address the managerial and strategic implications of the firm. So far, most companies are
treating outsourcing as an issue, but not part of integrated functional management. It is suggested, though,
that this process requires research to explore whether firms are progressively integrating this process as
part of regular functional/operational strategies and whether managers and executives confront this as a
comprehensive strategic issue as opposed to an isolated event.
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