outsourcing - what has it changed?

anushahanna used Ask the Experts™
I am looking for a big picture commentary on the revolutionary outsourcing efforts that has taken over the business world lately.

1)Since outsourcing came into effect couple of decades, what actually has happened to the business world? Has the bottom line difference made up for any deficiency.
2)Has it affected the unemployment rates in the developed countries? and has it really lifted up the unemployment rate in the developing countries?
3)The business wins and also the consumer; but what about the employee - is he taken care of?
4)what are the unshakable benefits of this phenomenon and what could be adverse effects of it in the future, that may be overlooked?

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False savings for consumers,

huge profits for those engaging in labor arbitrage, lower wages in developed countries


can you explain what do you mean by false savings?
There is outsourcing and outsourcing. The one case is to offload the management of a company with those things which are not in the companies primary interest. It then allows the company's management to concentrate on those thing which make the company money. Quite often some essentially service department takes up far too much management time - a case of the tail wagging the dog.

The modern mistake is to treat outsourcing as a cost saving measure. If you are a company making widgets your management effort should go into make widgets more profitably (by better widgets, cheaper widgets, saving on material and so on). You won't make widgets more profitably by saving 30% on the IT department*.

If you outsource a department, you don't want to have to worry about it. It should function smoothly without your constant attention. Companies which provide this as a service for you fall into many categories but essentially the ones which will do a good job and won't cause you any pain MUST make a profit on it. Therefore you can't expect the see outsourcing as a cost cutting measure.

The most common mistake is to go for the cheapest possible provider. For these people to make a living they cut corners, reduce quality, reduce service. If you make the mistake and let them have ANY contact with your customers (product delivery, after sales service and so on) it will be your reputation which will fall.

We here at RatSoft host applications for our customers, allowing them not to bother about their IT. We're not cheap, and often the customer will not save any money. But he has no worries - we take care of all the problems of updating the app, backing up databases, switching to more modern servers, providing internet access, proving application support (no call liomits!) and all that sort of stuff.

* Yes of course saving 30% on the IT budget will change the corporate bottom line. But the corporate bottom line is the difference between the sales revenues and the production costs (including raw materials, energy, labour etc) and the corporate overhead. IF THE LATTER IS NOT SMALL, then you have a serious problem with your organisation! Otherwise saving 30% of nothing is nothing. You corporate management effort should be going into sales revenues and production costs. Too often corporate management plays games, vists the Rotary Club, gets involved in politics, and so on. Nobody is then looking after the store!
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lower wages in developed countries- is it better than no wages?


BigRat, is my summary of your points on target:
"outsourcing is good provided it is from a quality vendor, but that mean more money to shell out, but may not be bigger bottom line, but less stress and enjoyment of work."

Is your analysis the same for both international and local outsourcing?

How does wal-mart/china kind of outsourcing fit in the above? Walmart has lot of complaints about cheap products in quality. Can you think of someone who does outsourcing to china but does a quality and good job, that they may not even be seeing a bigger margin of profits.
>> but less stress and enjoyment of work."

It has nothing to do with stress nor enjoyment, but effectiveness. Managers of a company must manage things, and indeed those things which are of primary interest to the company. Wasting time on side issues is the major cause of company collapse.

Walmart does not outsource in China. Wal mart is a shopping chain which sells products. Where the products are made is primarily irrelevant.

I'm not privy to Wal Mart's upper management, but I suspect that Wal Mart sees itself in the mass market where price is important. Hence they'll buy stuff in from cheap producers since quality is not a brand mark of Wal Mart.

If you take a company like F.A.O.Schwarz in New York - it is a quality toy seller - they'll have few products from China, but many from quality manufacturers like Steiff.

There are a number of problems in manufacturing in China. The first is copyright of the industrial process. This is virtually non-existant, and many western companies have found out that soon after they started manufacturing in China, a Chinese company started making almost identical products cheaper. the second problem is maintaining quality. Because of the boom in China raw materials are difficult. The effect is that the local management, often Chinese, will switch materials to cheaper not so good ones. The third problem is maintaiining a loyal work-force. Staff turn over is very large. You have to train the people in the first place and they leave to go to your Chinese competitor. The next problem is flexibility. It takes weeks if not months to move the products out of China into the markets (since very few western companies manufacture for the Chinese market) and this means that you have a lot of work-in-progress underway, so planning far ahead is essential. In some cases this means you cannot run short production runs and change product design often, which is far easier when you are close to market.

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