What Is Outsourcing and How Does It Affect Jobs in the U.S.?

Outsourcing involves contracting a business process to another organization. · The organization that receives the work may be in the same country or in another ... USEconomy GDPGrowth&Recessions WhatIsOutsourcingandHowDoesItAffectJobsintheU.S.? ••• GCShutter/GettyImages TableofContents Expand TableofContents WhatIsOutsourcing? WhyDoCompaniesOutsourceJobs? HowOutsourcingCanHurtaBusiness EconomicImpactofOutsourcing IsOutsourcingBadfortheEconomy? FrequentlyAskedQuestions(FAQs) By AnnLogue FullBio LinkedIn AnnLogueistheauthorof"DayTradingforDummies,""HedgeFundsforDummies,"and"SociallyResponsibleInvestingforDummies." Shehasovertwodecadesofexperiencecoveringinvesting,business,andeconomicsforarangeofoutlets,includingNordeaMarkets,GersteinFisherAssetManagement,andTheBalance. Learnaboutour editorialpolicies UpdatedDecember31,2021 Reviewedby ErikaRasure Reviewedby ErikaRasure FullBio ErikaRasure,istheFounderofCryptoGoddess,thefirstlearningcommunitycuratedforwomentolearnhowtoinvesttheirmoney—andthemselves—incrypto,blockchain,andthefutureoffinanceanddigitalassets.Sheisafinancialtherapistandisglobally-recognizedasaleadingpersonalfinanceandcryptocurrencysubjectmatterexpertandeducator. Learnaboutour FinancialReviewBoard Factcheckedby VikkiVelasquez Factcheckedby VikkiVelasquez FullBio LinkedIn VikkiVelasquezisafreelancecopyeditorandresearcherwithadegreeinGenderStudies.Previously,sheconductedin-depthresearchonsocialandeconomicissuessuchashousing,education,wealthinequality,andthehistoricallegacyofRichmondVAaswellastheirintersectionalitywhileworkingforacommunityleadershipnonprofit.VikkileverageshernonprofitexperiencetoenhancethequalityandaccuracyofDotdash'scontent. Learnaboutour editorialpolicies Outsourcingoccurswhenanorganizationcontractssomeofitsfunctionstoanotherorganization.Forexample,acompanymaydecidethatitwillbemoreefficienttohireITdevelopersfromanotherfirmthantobringthemonasemployees.Theworkmaybeoutsourcedtoacompanyinthesamecountry(sometimescalled“onshoring”)ortoacompanyinanothercountry(sometimescalled“offshoring”). Outsourcinghaseconomiceffects,bothgoodandbad.Findoutmoreabouthowoutsourcingworks,whycompaniesdoit,anditsimpactonjobsintheU.S. KeyTakeaways Outsourcinginvolvescontractingabusinessprocesstoanotherorganization.Theorganizationthatreceivestheworkmaybeinthesamecountryorinanotherone.Outsourcingcanhelpsavemoneyandgiveanorganizationaccesstoskillsthatitdoesn’thave. WhatIsOutsourcing? Whenanorganizationhiresanotherorganizationtodosomeofitsbusinessprocesses,itisoutsourcing.Servicesthatareoutsourcedmayincludebookkeeping,customerservice,programming,marketing,orcleaning. Intheory,anyfunctionofabusinesscanbepassedtoanoutsidecontractorratherthandonein-housebyemployees. Somecompaniesoutsourceasmallprojecttoanindependentcontractor.Othersmayhireamajorfirmtohandlealloftheircustomersupportfunctions.Astechnologyimprovesandnewbusinessesemerge,moreandmoreofacompany’soperationscanbedoneoutsidetheorganization. Outsourcingtoanorganizationinanothercountryisoftencalledoffshoring.Iftheoperationiskeptinthesamecountry,itissometimesreferredtoasonshoring.Bothhavepotentialeconomicbenefitsaswellaspotentialproblems. WhyDoCompaniesOutsourceJobs? Companiesoutsourcefunctionsforallsortsofreasons.Amongthemare: Cost:itisoftenlessexpensivetooutsourceanactivitythanitistohirepeopletodothejob.Thisisespeciallythecaseiftheworkcanbeoutsourcedtoapartofthecountrywithaloweraveragewageortoanothercountrywithasignificantlylowerpayrate. Accesstoskills:Onereasonabusinessmightoutsourceistogainaccesstoskillsandservicesthatitmightnotbeabletoobtainotherwise.Forexample,asmallbusinessmightnotbeabletoaffordkeepingahigh-endgraphicdesigneronstaff,butitcanaffordtocontractonejusttodesignalogo.Manybusinesseshavefoundtheycanfindhigher-levelprogramming,bookkeeping,orhumanresourcesskillsbyoutsourcingthaniftheyhiredin-house. Manufacturingcapabilities:Manycompaniesaregreatatdesigningandmarketingproducts,buttheydon’thavetheabilitytomanufacturethem.Togetthegoods,theycontractthemanufacturingworkouttoacompanythatdoesproduction. Takingadvantageoftimezones:Manybusinesseshavefoundtheycangetmoreworkdoneinlesstimebyoutsourcingittopeopleindifferenttimezones.AU.S.companycanoffer24-hourcustomerservicebyoutsourcingtocallcentersinIndiaandthePhilippines,forinstance.ASwedishinvestmentbankcanturnreportsaroundfasterifithasfreelanceeditorsintheU.S.workonthemwhileEuropeisasleep. HowOutsourcingCanHurtaBusiness Outsourcingcanbeagoodsolutionformanybusinesses,butit’snotrightforallofthem.Evenifitisapproachedcarefully,itcancauseproblems.Forexample: Lackofcontrol:Whenyououtsourceaprojectoraprocesstosomeoneelse,theymightnotthinkit’sasimportantasyoudo,ortheymaynotdoitthewayyouwantitdone.However,thefinaloutcomemaybewhatyouwant.Somemanagersaremorecomfortablegivingupcontrolthanothers.Lossofknowledge:Thiscutsbothways.Theorganizationthattakesoveryourprocessdoesnotunderstandyourorganizationandcultureasmuchasanemployeeonstaffdoes.Thismaymakeitharderfortheworktomeetexpectations. Yourstaffforfeitsexpertiseintheareathatisbeingoutsourced.Yourcompanymayloseskillsandknowledgebyturningtheworkovertosomeoneelse. Customerproblems:Yourcustomersdon’tcareifworkhasbeenoutsourcedorifitisbeingdonebyyouremployees.Theyonlycareaboutwhethertheirexpectationsaremet.Languageproblems,cultureclashes,oroutsourcedworkthatdoesn’tmeetconsumers’standardscanleadtounhappyorlostcustomers. EconomicImpactofOutsourcing Outsourcinghaseconomiceffects,goodandbad.Ithasthegreatestimpactonjobsandprices.Ingeneral,itleadstolessemploymentandlowerpricesinthebusiness’shomecountry,butnotalways. JobImpacts Whenitcomestoemployment,outsourcingmovesjobsaround.Workmovesfromemployeestocontractorsandfromhigh-costareastolow-costareas.Thiscanbenefitsomeonewhowantstobeself-employedandhurtsomeonewhowouldpreferemployment,justasitleadstojoblossinthehigh-costareaandgainsinthelow-costone.Averagewagesacrosstheeconomyfallslightly.Inthemanufacturingsector,it’sestimatedthatoffshoringhasledtothelossofnearly5millionAmericanjobssince1997.Globally,employmentisthesame. PriceImpacts Ingeneral,outsourcingleadstolowerprices,becausetheworkgenerallymovestothosewhoearnless.However,somecostsmayincrease.Independentcontractorsdoingspecializedworkmaychargemorethananemployeewouldbecausetheyarenotreceivingbenefits.Transportationcostsandsupply-chaindisruptionmayleadtohigherpricesfromoffshoremanufacturingovertime.Eventually,skilledworkerseveninlower-costcountrieswilldemandhigherwagesasthedemandfortheirlaborgrows. IsOutsourcingBadfortheEconomy? Onanetbasis,outsourcingisgoodfortheeconomy.Itletsmorepeopleconcentrateonwhattheydobestandlowerspricesforconsumers.However,somepeoplebenefitfromitmorethanothers. FrequentlyAskedQuestions(FAQs) Whatisthedifferencebetweenoutsourcingandoffshoring? Outsourcingistheprocessofturningbusinessfunctionsovertoanoutsideorganization.Iftheorganizationisinanothercountry,thenitisknownasoffshoring. Whendidoutsourcingbegin? Businesseshavelonghiredoutsidecontractorsforcertainfunctions.Outsourcingwasfirstidentifiedasadistinctstrategyin1989,anditgrewinpopularityastheinternetmadeiteasiertodoworkremotely. ArticleSources U.S.SmallBusinessAdministration."10SmallBusinessFunctionsThatCanBeEasilyOutsourced."AccessedNov.12,2021. InstituteforResearchonLaborandUnemployment."DomesticOutsourcingintheU.S.:AResearchAgendaToAssessTrendsandEffectsonJobQuality."Page2.AccessedNov.12,2021. U.S.CensusBureau."ImportCompetitionfromandOffshoringtoLow-IncomeCountries:ImplicationsforEmploymentandWagesatU.S.DomesticManufacturers."Page9.AccessedNov.12,2021. EconomicPolicyInstitute."WeCanReshoreManufacturingJobs,butTrumpHasn’tDoneIt."AccessedNov.12,2021. McKinseyGlobalInstitute."ExplodingtheMythsAboutOffshoring."Page11.AccessedNov.12,2021. NCStateUniversity."ABriefHistoryofOutsourcing."AccessedNov.12,2021. Share Tweet Share Email WhatYouShouldKnowAboutOutsourcingJobs 7CausesofUnemployment WhatToKnowBeforeLendingMoneytoEmployees ProsandConsofFreeTradeAgreements DoesITOutsourcingTakeAwayJobsfromAmericans? WhyIt'sHardertoFindaJobNowinSomeIndustries WhatIsTradeProtectionism? 15OptionsforWhattoDoAfterCollege WhatIsProductivity? WhatAreCapitalGoods? WhatIsUnemployment? WhatIsDisguisedUnemployment? HowHumanResourcesOutsourcingAffectstheU.S.Economy WhyIsaBorderAdjustmentTaxEffective? WhatIsIRSFormW-9? WhatIstheLaborForceParticipationRateFormula?