Outsourcing is Good. It’s Here to Stay. Accept It

by Darwin on March 9, 2011

Outsourcing has always had a negative connotation in the US.  It immediately conjures up images of hard-working Americans out of work because some “foreigner” is willing to do the same job for less.  Not only is this a closet xenophopic reaction, but it is economically naive.  Societies are best-served when their assets and resources are exerted toward high value objectives while outsourcing activities and services that can be done at a lower cost per output with trading partners.  While this may sound like pie-in the-sky mumbo jumbo at first glance, there are entire careers and studies dedicated to this notion.  The key economic descriptor at work here is the Law of Comparative Advantage.

Law of Comparative Advantage Described

According to wikipedia,

“In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced. It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good using less resources than the other.

Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade.

In essence, when you look at the net cost to the whole system (multiple countries, companies, households, whatever), it would be vastly higher to perform all the activities individually as opposed to trading with those who specialize in performing the service most efficiently.

Real-Life Examples

At Home – Oil Changes, Haircuts and Housework – Am I better off learning how to change the oil on a foreign car where it’s tough to get to everything, buy the oil & filter, dispose of the oil & filter, and clean up when this will take me over an hour?  Or is the local shop or Jiffy Lube more efficient?  I pay a barber instead of having my wife cut my hair.  When I grew up, my mom cut my hair and it usually looked terrible.  I’m still scarred.  So, I pay a pro 12 bucks once a month.  Everyone’s got their priorities.  Personally, I mow my lawn and we don’t use a housekeeper.  Many of our friends outsource both.  It’s a matter of personal needs, preferences, time and money at the end of the day.  But you get the picture – even in your personal life, there are certain things you outsource – just because it makes sense.

At Work – Outsourcing non-core roles – Where I work, they eventually outsourced the landscaping crew.  We’re a biopharma developing and manufacturing complex molecules.  Mowing the lawn and trimming the bushes isn’t core to the business.  Sure, it’s nice work if you can get it, but should it really be a normal expectation that one can secure lifetime employment with handsome benefits with a function that’s clearly not core to the business?  It probably wouldn’t be realistic to expect that in today’s society.  This is where things are headed.  Companies need to think long and hard about their costs – everything from healthcare to pensions (if they still have them).

What’s Coming – Given how all we see in the press (and coming out of our wallets) is how expensive healthcare is, doesn’t it make sense to outsource what we can to lower costs, provided the same service, quality and security is maintained?  For instance, there’s an entire industry developing to outsource X Ray/Radiology services to India (India Times).  Not only is there a strong cost benefit, but time zones can help as well.  It’s sometimes tough to get a read when you’re in the ER at 2AM.  It’s morning in India!  They can have it to you in 30 minutes.

How about technical activities like CAD services?  Rather than paying someone $50/hr or more in the US, you can often get equivalent delivery from India, Philippines, or elsewhere for under $10/hr.  Again, you also have time zones on your side on top of the financial savings.  What someone to take a look at a design and it’s 6PM?  In the US, they won’t look at it til morning.  Overseas, when you get into work in the morning, it’s on your desk!

Historically, we’ve seen the decline of textiles, base chemical production and other “low-skill” manufacturing and services.  As the phenomena moves higher up the chain of complexity to functions like even legal services and outsourcing sales forces (see Pharma Sales Reps for rent), one might question where this is going.

On one front, there’s obviously the people impacted.  It’s a terrible personal tragedy when job loss occurs.  In aggregate though, there’s no stopping the tide.  See, if companies aren’t doing it here, then their competitors overseas are.  It’s a virtual race to the bottom in cost control.  As long as the same level of service and key attributes can be achieved, the trend will continue.

What To Do?  Embrace It!

If you haven’t done so already, it’s time to assess your professional situation.  Are you in a role that could be outsourced within the next few years?  Are you an innovator or leader in your organization?  If so, you may be insulated.

If you work in manufacturing, maybe it’s time to consider trying to get into Purchasing/Procurement or whatever it’s called there.  That would be the group that would eventually outsource services and require knowledge of people from your area to get it right.  Supply chain management would be another area that would be heavily involved in shifting work around.  The ideas and options are endless, but it starts with an honest assessment of your current role and what kind of competitive pressures your company is under.

Have You Faced Up to the Economic Realities of Outsourcing?

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1 Neil March 10, 2011 at 3:41 pm

All this is very true. I was employed for many years as a programmer but a lot of these types of jobs were getting outsourced. I managed to get a job in my corporation as a business analyst (a bit higher up the value chain) just before the programmers were made redundant. I can’t rest though – I need to keep moving up to a more strategic level of analysis to keep my job safe (as it can be).

2 Worker March 22, 2011 at 11:55 am

What about the fact that jobs and manufacturing is going to different countries because of lax standards of pollution and emissions? Sure, they can do it cheaper, because the have zero regulations ,unlike the standards imposed within the US to (hopefully) not poison our own people.
Then the whole discussion of ‘sweat shops’ come into play and child labor. Again, many manufacturing plants are overseas because these lax employment standards are not enforced so you can pay somebody ¢50 a day to make tennis shoes that sell for $150. Then consider the costs, efforts and fuel to get these products half way around the world into our shopping malls. When gas prices are going to hit $4/gal or more, if less tankers were being used, it would increase the supply and lower the cost to people like us.
You can also take this into a smaller scale. If you buy a pencil from the local store down the street for $2 but can purchase the same pencil for $1.80 online with no tax and free shipping, then yes, you are saving money. But what you are going to sacrifice is the benefits of supporting a local business, the taxes paid going back into YOUR community, keeping your neighbors employed, keeping your streets clean, etc…
I personally would like to see more Americans employed again and less support going to China. I for one do NOT want to see what would happen if the Yuan became the international standard of currency. Especially when we have enough intellect and resources within our own country to make that happen.

3 Stock Market Hacker June 10, 2011 at 12:37 pm

I agree. The faster that outsourcing occurs, the faster that the wages in other countries increase and the faster those jobs return back to their country of origin. The next big country for outsourcing seems to be Vietnam and companies are looking into ways to leave China and enter Vietnam. The problem is the lack of trained workers in Vietnam, but that could be easily solved by the corporations.

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