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Outsourcing in Global
Economy & Its Controversy
Presented by:
George Zhu
ChengWei Lu
BUS 515 CSULA Spring 2007
Presentation Outline
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Introduction to outsourcing in global economy
Type of outsourcing
Outsourcing case analysis
Benefits of outsourcing
Criticisms of outsourcing
Analysis and response to criticisms
Conclusions
Introduction to Outsourcing in
Global Economy
• Definition of outsourcing
• Integration of global economy and disintegration of
production process
• Economic theory behind outsourcing
Types of Outsourcing
• Production and manufacturing outsourcing
• Service outsourcing
Types of Outsourcing
• Production and manufacturing outsourcing
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Consumer discretionary products
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Consumer staples products
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Information technology products
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Telecom products
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Industrial products
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Healthcare products
Types of Outsourcing
• Service outsourcing
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Technology services
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Business process outsourcing
Types of Outsourcing
• Service outsourcing
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Technology service
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Electronic commerce ("eCommerce")
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Infrastructure ("Networks")
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Software ("Applications")
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Telecommunications
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Website development &
hosting
Types of Outsourcing
• Service outsourcing
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Business process outsourcing
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Finance/Accounting
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Human Resources
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Management
Dell Computer & Nike Company
Common Requirements
• Market access
• Labor costs and quality
• Transportation & telecommunications infrastructure
• Government incentives
• Industry clusters
Dell Computer & Nike Company
Differential Strategies
Dell Computer
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“Just-In-Time”
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Contract manufacturers
“Build-To-Order”
Outside suppliers
 Higher Educated Labors
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Nike Company
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Contract manufacturers
Supplier investment
 Lower Educated Labors
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Dell Computer & Nike Company
Differential Strategies (cont.)
Nike Company
U.S. Region
Footwear, Apparel,
Equipment
Dell Company
Asia Pacific
Region
Monitors, PCBs, Drives,
Box Builds, Chassis
Europe Region
Monitors, Printers
Scotland Region
PCBs,
EMEA
Region
Footwear, Apparel,
Equipment
Asia Pacific
Region
Footwear, Apparel,
Equipment
Eastern Europe
Region
PCBs, Box Builds,
Americas
Region
Footwear, Apparel,
Equipment
Ireland Region
Chassis
Dell Computer & Nike Company
Differential Strategies (cont.)
Dell’s Service Partners
System integration
- Electronic Data System
Service and repair
- IBM, Unisys, Wang & Banctec
Consulting
- Arthur Anderson and Gen 3
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Nike’s Service Partners
Financing service
- Sojitz Corporation of America
Import-export service
- Nissho Iwai American Corp.
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Benefits of Outsourcing
• Reduce cost - Outsourcing has provided many
companies with opportunity to harvest the benefits of
lower labor costs in developing countries with fewer
worker rights and less environmental restrictions, and
to take advantage of undervalued foreign currencies
(e.g. Chinese Yuan).
Benefits of Outsourcing
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Increase productivity - Outsourcing can
substantially lower firm and consumer costs and
increase productivity/quality to cost ratio.
Focus more on core competencies - Redirect
capital investment and focus on product research
and development, marketing and distribution,
and customer relationship and customer
service.
Benefits of Outsourcing
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Present advantages to developing countries These countries in general will benefit from
outsourcing in terms of increased wages, job
prestige, education, and quality of life.
Eliminate the need to recruit, train and retain staff
in non-core business and to better anticipate
future costs.
Benefits of Outsourcing
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Gain on-going access to experts - The outsourced
firms are usually very experienced and
specialized in certain areas (e.g. shoe
manufacturing in China) and outsourcers will
benefit from their expertise.
Criticisms of Outsourcing
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From the standpoint of labor - Outsourcing represents a
threat to job security and decent wage. Outsourcing
became a popular political issue in U.S., especially during
the 2004 U.S. Presidential election. A Zogby International
poll reports that 71% of American voters believe that
“outsourcing jobs overseas” hurts the economy and
another 62% believe that the U.S. government should
impose some legislative action against companies
that transfer domestic jobs overseas
Criticisms of Outsourcing
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From the political standpoint - In
his 2004 presidential campaign,
Democratic U.S. presidential
candidate John Kerry criticized
US firms that outsource jobs
abroad and that incorporate
overseas in tax havens to avoid
paying their US taxes.
Criticisms of Outsourcing
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Quality of service - Both consumers and
management often focus on a central question:
how does outsourcing production/service affect its
quality as opposed to “in-house” work.
Security issue – there are some security issues
concerning companies giving outside access
to sensitive customer information.
Analysis and Response to Criticisms
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From the standpoint of labor, work, and economy
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International outsourcing is a form of trade. As such,
the basic principles of comparative advantage and the
gains from the trade apply. The threats to overall
employment or the economy is no more valid than
threats from imports.
Anything that increases economic efficiency –
whether by outsourcing or technological
improvement – is likely to cost
somebody’s job.
Analysis and Response to Criticisms
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From the standpoint of labor, work, and economy
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Outsourcing actually sustains American jobs. The flow
of work to the lowest-cost supplier is a healthy market
process that eventually benefits the countries by giving
companies the financial power to develop new
products and services, thus creates a fresh category of
jobs that are a level higher.
Outsourcing also helps the country stay
competitive by constantly innovating
and moving to the next higher level.
Analysis and Response to Criticisms
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Insourcing
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Outsourcing helps to bring higher employment in
developing countries and put more money in the hands
of their consumers.
Increasing purchasing power of these consumers will
spur demand for more U.S. products and services.
While some lower-pay jobs have been
outsourced to developing countries,
more higher-pay jobs have also
been created.
Analysis and Response to Criticisms
• Quality of products and services
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The firm has the freedom to resume management
control and/or decision making for that business
process if quality is adversely affected.
The decision to outsource is like the decision to expand
a business overseas. If outsourcing leads to lower
product quality or service quality, consumer
demand will force firms to shift back
to producing the good or service
in-firm rather than out-firm.
Analysis and Response to Criticisms
• Security
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When a company outsourced service like US Payroll,
the Social Security Number of an U.S. employee can
be one of the vital factors because it can be used for
fraudulent activities. Hence it's very essential for a
company to keep all the data intact, and ensure that no
leakage of data is done. This will ensure
total security and can avoid such cases
of fraudulent activities.
Conclusions
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The world has become increasingly integrated through
trade in the last several decades.
The structure of trade has shifted towards more
outsourcing or vertical specialization.
The emerging tide of outsourcing has engulfed the whole
world and one cannot argue to ban outsourcing.
Outsourcing is beneficial to consumers,
companies, and the economic growth
of the nation.
Conclusions
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Taking a broader view of the general scheme of things in
nature we should realize that just as everything has its
pros and cones, the outsourcing too has its own.
The real challenge for outsourcing is to manage the
transition by grasping the gains while devising policies
and strategies to absorb much of the resultant pains.
The governments shall be mainly responsible for
taking this challenge and devising their policies
and measures to maximize the benefits
of outsourcing for economic growth.
Questions and Answers
Thank You !
From George Zhu
& ChengWei
Lu