Outsourcing in Global Economy & Its Controversy

Presented by:

George Zhu

ChengWei Lu

BUS 515 CSULA Spring 2007

Presentation Outline

• 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 Consumer discretionary products

Consumer staples products

Information technology products

Telecom products

Industrial products

Healthcare products

Types of Outsourcing

• Service outsourcing Technology services

Business process outsourcing

Types of Outsourcing

• Service outsourcing Technology service

Electronic commerce ("eCommerce")

Infrastructure ("Networks")

Software ("Applications")

Telecommunications

Website development & hosting

• Service outsourcing Business process outsourcing

Finance/Accounting

Human Resources

Management

Types of Outsourcing

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

Nike Company Contract manufacturers

Supplier investment Lower Educated Labors

Dell Computer “Just-In-Time”

Contract manufacturers

“Build-To-Order”

Outside suppliers Higher Educated Labors

Dell Computer & Nike Company

Nike Company

U.S. RegionFootwear, Apparel,

Equipment

EMEA Region

Footwear, Apparel, Equipment

Asia Pacific Region

Footwear, Apparel, Equipment

Americas Region

Footwear, Apparel, Equipment

Dell CompanyAsia Pacific

RegionMonitors, PCBs, Drives,

Box Builds, Chassis

Europe Region Monitors, Printers

Scotland Region PCBs,

Eastern Europe Region

PCBs, Box Builds,

Ireland Region Chassis

Differential Strategies (cont.)

Dell Computer & Nike Company

Dell’s Service PartnersSystem integration

- Electronic Data SystemService and repair

- IBM, Unisys, Wang & BanctecConsulting

- Arthur Anderson and Gen 3

Differential Strategies (cont.)

Nike’s Service PartnersFinancing service

- Sojitz Corporation of AmericaImport-export service

- Nissho Iwai American Corp.

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

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

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

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

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

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

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

From the standpoint of labor, work, and economy 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

From the standpoint of labor, work, and economy 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

Insourcing 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 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 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

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

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