The Economic Impact of Outsourcing - Essay Example

? The Economic Impact of Outsourcing International outsourcing has turned out to be an emergent trend in the sphere of global trade. (Hummels et al.,2001). Post the financial crisis of 2008, economists are reconsidering their views against the practice of outsourcing as it becomes a vital, cost cutting tool used in the measures needed to be implemented to bring the global economy back to health. Outsourcing provides them with a way to drastically cut their costs while still being able to maintain consistent quality and retaining their customer base. Outsourcing was identified as one of the biggest trends to improve efficiency in the banking industry for the year 2009, towards the end of the financial crisis of 2008. There were several reasons this practice gained a following in this time period. What was needed desperately was a way to improve asset management, cash flows and margins. The infrastructure demands for the industry were growing but there was a greater need for the business organizations to cut overheads more drastically if they wanted to survive because the budgets were shrinking at an even faster pace. It was this need for cost cutting that spurred the use of the practice of outsourcing in the industry. Of the numerous other benefits of outsourcing, some of the most prominent ones are reducing operating costs, reducing the effect of obsolete technology, using newer technology as soon as it is available for use and letting specialists handle challenging issues etcetera. The lobby against the practice of outsourcing bases their argument on the fact that when a company outsources it loses quite a bit of control over the firm’s operations and additional cost of services rendered etcetera. But a holistic view of the situation makes it clear that the advantages of outsourcing far outweigh any costs that company will have to incur in the process. One factor that cannot be overlooked-however great the benefits-is that of possible risk, but with some modern day transparency measures in place it is easier to make sure that the firm being outsourced to remains committed to what is expected of them. The third party that is outsourced to has a core competency in the services that the firm wants. They use the quickest, most efficient production methods and the latest technology which enable them to produce in more cost effective methods while still preserving the expected quality of production. And the firm that is outsourcing can invest the money saved more wisely, in more productive ventures. (Haynes, M., 2009). People who are against the practice of outsourcing argue that this is a major cause of layoffs in the first world. However, supporters argue that even though the costs for the local industry in terms of layoffs cannot be ignored, the benefits gained tend to overpower the adverse impacts. It is basically a question of going for the overall economy’s gain at the personal expense of a small part of the economy’s labor force. Supporters further argue that if outsourcing is banned, it won’t save a lot of people from being laid off; they say that any protection measures of the sort will result in overall economic loss. Regulation will thus cause inefficiency in the economy. Opponents however, stick to their side of the argument. They want to preserve jobs and prevent livelihoods form being destroyed. To objectively analyze the economic benefits of outsourcing, one needs to look beyond the aspect of jobs lost in the local economy and take a more macro view of the situation. Outsourcing lets firms cut costs and improve efficiency all in one go. Supporters expand on this by saying that outsourcing allows companies to access the latest resources and the best capabilities. Outsourcing allows these companies to share the workload and risk of production processes and frees resources for investment purposes that would otherwise be invariably tied up. But that’s not all, outsourcing aids innovative practices by making it possible for firms to invest in research and development, customer service and marketing research etcetera. It also ends up benefitting the local economy because it frees the laid off employees to take part in other activities, most times these people are repositioned within the firm and this in turn increases efficiency. It is helping companies manage with their tight budgets by remaining competitive in the industry. It is in effect like a technological innovation that lowers costs, raise profit levels and be overall more beneficial for the company’s shareholders. Another consequent effect of outsourcing is the effect it has on the local standards of living. Most economists agree that international trade is beneficial for the economy and has a boosting effect on the incomes of the local labor force; this in turn raises the standards of living in the economy. The practice of outsourcing is also in line with the concept of competitive advantage. The theory of competitive advantage states that countries should only produce those products that they can produce most efficiently, doing this will boost the country’s amount produced and enhance standard of living. To extrapolate from this fact, if the practice of outsourcing is banned it will lower the local economy’s living standards by increasing the prices they have to pay for goods that they would’ve gotten cheaper had outsourcing still been in use. (DeMaiolo, D., 2009). An essay by Professor Sarah Rummery titled “What has Outsourcing done to the Economy?” looks at the possible effects of outsourcing on the local and global economy. The author explains that the concept of outsourcing is very controversial in media headlines and political debates, but in discourse that is related to and based on economic concerns and issues outsourcing has a powerful rationalization. She talks about David Ricardo’s model of economic theory that explains the trade flow between countries. He said that countries should only produce what they have a competitive advantage of production in and this should in turn determine what products and services they export and import. In effect, the world would be economically better off because there would be increased total output and standards of living would be raised. Rummery goes on to explain how the model of competitive advantage is related to the practice of outsourcing and how and why this could be beneficial for the economy. It is assumed that businesses seek to maximize profits and that they operate in a competitive market. Being rational decision makers and wanting to maximize profits, obviously these firms will want to produce in a situation where they get the same service/product in a lesser price. This is where the firms that are being outsourced to come in, for they are capable of providing the same quality service/product in lesser price. Cost savings will be difficult to ignore and so will the rise in the level of profits. Furthermore, there is a consensus between economic scholars that while outsourcing may have its drawbacks, the benefits far outweigh these and thus this practice should be further enhanced instead of restricted. (Rummery, S., 2004). Another study done on the subject found that, outsourcing had more benefits for the exporting countries and firms than it did for countries and firms who were not exporting. The authors elaborated in this study that a possible reason might be that countries and firms operating internationally have more knowledge about this practice and thus face lowers costs in the process. They maintained however that outsourcing is fruitful but suggested the possibility of outliers that cannot be overlooked and thus the need for further research on the topic. (Gorg, H., Hanley, A. and Strobl, E.). In summation though, it is safe to say that the practice of outsourcing has indeed proven to be beneficial for the world economy and while opponents continue to argue otherwise, the fact of the matter which is solidified by considerable research done on the subject confirms that the possible benefits outweigh the possible costs far enough for the costs to be considered but negligible in the process. WORKS CITED 1. Haynes, M. 2009. Rethinking Outsourcing in Light of Economic Conditions. First Data Corporation. 2. DeMaiolo, D. 2009. An Economic Analysis on the Effects of Outsourcing Revisited. The 1st Stocks Essays Contest, Youngstown State University. 3. Rummery, S. 2004. What has Outsourcing done to the Economy? 4. Gorg, H., Hanley, A. and Strobl, E. Productivity Effects of International Outsourcing. 5. Hummels, D., Jun Ishii, and Kei-Mu Yi. 2001. The nature and growth of vertical specialization in world trade. Journal of International Economics 54, 75-96. Read More