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Outsource magazine: thought-leadership and outsourcing strategy | June 26, 2017

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Outsourcing: myths, facts and statistics

Outsourcing: myths, facts and statistics
Martin Conboy

Work is no longer bounded by co-worker proximity or time zone. It also involves a much broader set of ‘workers’ – not just employees, suppliers and partners, but customers, freelancers and an increasingly capable network of smart devices and interconnected systems, all tied together by business processes that span organisations, time and distance. Outsourcing is an integral part of this story.


Myth One: Most companies outsource work to reduce costs

Fact: These days the primary reason for outsourcing is global expansion and to add value in terms of capability and capacity.

Important to remember outsourcing does not necessarily mean offshoring. A lot of outsourcing work doesn’t actually leave Australia’s shores. Admittedly, when offshore outsourcing began, the outsourcer’s biggest focus was cost saving through labour arbitrage. But most outsourcing relationships based purely on cost have a tendency to fail. Research conducted by The Sauce last year (Attach executive summary) showed that cost savings, although important, ranked number eleven. The primary drivers are global expansion and access to skills.

We know that as companies become more sophisticated and better understand the benefits of outsourcing, they move past the basic inhibitor of outsourcing which is “Can someone do this business process more efficiently and better than I can and for a cheaper price?” In the early development of the market, there were serious concerns about security safeguards; however, these days as the market has matured these concerns have largely disappeared as most modern outsourcing vendors have very sophisticated security programs and management in place.


Myth Two: A job outsourced is a job lost.

Fact: Outsourcing means efficiency.

Outsourcing is a means of getting more final output with lower cost inputs, which means lower costs for local business and consumers. Lower prices lead directly to higher standards of living and more jobs in a growing economy.

As we contribute to the growth of developing nations and we see a fast-growing middle class, in return we receive more tourists, university students looking to pay and get high-quality degrees and a market for our higher-value goods and services which leads to better more diverse and tolerant society.

One only has to look at the Philippines, previously trapped in third-world poverty and now the poster child for the global contact centre industry. So much so that last year it was the second-fastest-growing nation in Asia after China and it’s incredible to see how its economy has transformed into a fairer, more equitable community due in large part to the benefits of outsourcing. The multiplier effect for the money that is brought into the country through outsourcing trickles down through the food chain so that everybody gets to share in the wealth.

We in developed first-world countries have a moral responsibility to assist and develop the poorer nations so that the world becomes a fairer and better place. Outsourcing allows us to play our part.


Myth Three: The government should do more to prevent outsourcing of jobs.

Fact: Protectionism is isolationism and has a history of failure.

The Los Angeles Times has just reported on a massive EU tariff hike on American-made women’s denim trousers, jumping from 12 per cent to 38 per cent, enacted in retaliation against continued US protectionism against the EU. This new EU economic nationalist legislation is forcing US jeans makers to consider moving their production out of the country. Brazil has similarly been forcing tech industries like Apple and Asia’s Foxconn to relocate jobs to Brazil by means of subsidies and by threatening to maintain high tariffs on imports.

Economic nationalists, ignoring these inconvenient connections between protectionist legislation and outsourcing, instead more comfortably focus their ire on Free Trade Agreements. Such critics, however, must realise that protectionist policies are not inherently a panacea for the ills commonly associated with neoliberalism.

Nor is protectionism inherently in opposition to the forces of global economic integration, despite what diehard free-market neoliberals might say to the contrary. Rather, protectionist policies, whether by way of high tariff walls, government subsidisation, or currency manipulation, are part and parcel of modern globalisation – and part and parcel of job relocation.

In other words, FTAs do not have a monopoly on outsourcing. Rather, both FTAs and protectionist legislation have the ability to simultaneously send jobs out and bring them in, depending on the job and depending on the sector.


Myth Four: Outsourcing is a one-way street.

Fact: Outsourcing works both ways.

Labour costs in Australia have grown at twice the pace of other OECD countries over the past decade, which would suggest that wages in Australia are out of line with the rest of the world. This has resulted in major announcements from major Australian manufacturing companies that they are either pulling out of Australia or in the case of major service organisations (banks, telcos, Financial companies etc) they are now finding that the cost of the labour price differential in Asia too compelling to ignore.

Over the decade from 2002, on average, labour costs per unit of output rose 3.25 per cent a year in Australia. That is more than twice the 1.4 per cent annual growth in the decade to 2001. It tells us that wages were rising much faster than labour productivity. The gap between wage growth and productivity growth in Australia was easily the highest among the ten largest Western economies. Growth across the OECD averaged about half of Australia’s rate.

Over the decade, unit labour costs rose 37 per cent in Australia, compared with 21 per cent in the US and six per cent in Germany.

However OECD figures show the difference in growth in labour costs between Australia and its peers is less significant than the dramatic rise in the Australian dollar’s value over the same period.

In the year 2000 one Australian dollar brought US$0.55; fast forward to recent times and one dollar brought as much as US$1.10. More recently it has dropped below parity. The point being that the Australian dollar has basically doubled in value in US dollar terms.

It’s not rocket science to know that when costs rise faster in Australia than in other countries, it weakens Australian competitiveness. But the difference between Australia and the rest of the world in labour-cost growth, while significant, is far smaller than the impact of the rise in the value in the Australian dollar, which only amplifies the cost differential when compared to the Philippine peso or the Indian rupee against the US dollar.


Myth Five: Free trade, free labour, and free capital harms the economy.

Fact: Economic freedom is necessary for economic growth, new jobs, and higher living standards.

Economic freedom or economic liberty or right to economic liberty denotes the ability of members of a society to undertake economic direction and actions. This is a term used in economic and policy debates as well as a politico economic philosophy.

As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from classical liberal and right-libertarian traditions emphasizing free marketsfree trade and private property under free enterprise, while another extends the welfare economics study of individual choice, with greater economic freedom coming from a “larger” (in some technical sense) set of possible choices. Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.

The free market viewpoint defines economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.

There are several indices of economic freedom that attempt to measure free market economic freedom. Empirical studies based on these rankings have found higher living standards, economic growth, and income equality, less corruption and less political violence to be correlated with higher scores on the country rankings. (Source: Wikipedia)

Comments

  1. Victoria Masey

    I agree. It reads well. I like the thought that showcases how outsourcing works for us and it’s myths and facts. Nice touch. A section to list some important discussions going on throughout the article, linking to them, would be helpful. With all these pros and cons of outsourcing to be considered before actually approaching a service provider, it is always advisable to specifically determine the importance of the tasks which are to be outsourced. It is always beneficial for an organization to consider the advantages and disadvantages of offshoring before actually outsourcing it. Nice job Martin! Keep up the good work!

  2. Keith Thompson

    I love it, I think it’s a great step in the direction of giving Good Articles the credibility it deserves! Too often have I heard/read facts about Outsourcing and all sorts of derogatory terms and unfavourable comparisons to it. Once I’m more awake and can sort out my ideas in my head, I’ll lay them out since I’m planning to put up a BPO company in the Asia Pacific. Thanks for doing this! Cheers, Keith T.

  3. Paula Jackson

    This article is very informative. Outsourcing has a created an impact with the global market nowadays. The effects of outsourcing are subjective to the industry and the purpose for which the same was undertaken. However across industries outsourcing is primarily undertaken to enable companies to generate better revenue recognition and to provide them an added competitive differentiator. While done with the best of intentions, outsourcing has a telling effect on quality of products and services delivered as a consequence of this, either enhancing or lowering quality.

    While there could either be an increase or decrease in the turnaround time while outsourcing, it could also result in improved or decried customer service. Outsourcing, primarily undertaken to provide companies the competitive edge, can also result in easier management and better productivity based on how effectively the process in managed.

    I write articles with Outsourcing and this gained me knowledge in the industry. I am fascinated by this when I saw the link posted on the web. Looking forward on your succeeding posts Mr. Conboy! Good luck!

  4. Diana Kontsevaia

    Companies are increasingly recognizing that outsourcing can give you far greater benefits than just cutting costs. My favorite quote from IBM research says that only 27% of companies cut costs, but 36% are innovators and another 37% are growth-seekers. Would you agree? This was a great article and inspired one of my blog posts: http://www.intetics.com/benefits-of-outsourcing-beyond-cutting-costs-2/

  5. An informative read indeed on the myths and facts about outsourcing. This is very helpful. Thanks for posting.

  6. Thank you for sharing this wonderful article on the myths and facts of outsourcing. The information are indeed relevant. Cheers!

  7. Lizette Balsdon

    Great post! I hope more people will see the truth in this post. I’m actually going to share it on two of the Facebook pages I manage, Content Cafe and Brainlinkers. :)

  8. Excellent article. Just shared it on our social channels. Our company has been growing Qtr on Qtr and the only reason I can think of is the immense value we deliver to our clients.

  9. Thanks for sharing this article. Your point in number 1 is not a new story. In fact, many company outsource (primarily in the Philippines) not just to reduce cost, which is also somewhat correct in case of the Philippines, but also to elevate quality product and service.

  10. Great article Martin.

    A year on and it is still very relevent.

    Particularly like your statement ‘ We in developed first-world countries have a moral responsibility to assist and develop the poorer nations so that the world becomes a fairer and better place. Outsourcing allows us to play our part.’

    • Michael

      Yeah and now its 2015 and this article is still relevant!

      I like this statement too, but there is another important thing: quality and communication ( “Can someone do this business process more efficiently and better than I can and for a cheaper price?”). In my opinion its not always possible to outsource project to Asia beacuse of many differences in culture and way of thinking ( we have written a few words about factors influencing the decision to outsource there http://www.kurzor.net/english/guide-to-outsourcing ).
      Anyway, cool article – it provides a slightly different view on outsourcing than I’ve read on other sites.

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