Outsourcing: good for companies, bad for Spain?

<a href="http://www.ie.edu/eng/sobreie/sobreie_expertos_detalle.asp?id_exp=349">Oswaldo Lorenzo.</a> Professor. IE Business School

21 March 2007

Many developed countries have a poor opinion of outsourcing because it inevitably brings job loss in its wake. But companies need to be competitive, which means manufacturers and governments must work together to help companies create jobs with more value added.

What outsourcing means to developed countries

When one speaks out about outsourcing, it is tough not to stir up passionate reactions from potentially affected workers. Is it good? Is it bad? The answer seems to depend on who the aggrieved party is. For example, for the citizens of Puerto Real, in Cadiz, the feeling is best described as one of complete frustration. The closure of the Delphi plant will affect directly about 1,500 employees and, indirectly, another 1,300 jobs. From this viewpoint, outsourcing is damaging for Spain. However, Delphi does not seem to have many other alternatives for reducing its operating costs and ensuring the company´s economic viability.

What seems to be beyond any doubt is that outsourcing is an irreversible trend of globalisation and it is having a profound impact on society, employment, companies and governments. We can define outsourcing as the process of moving some (or all) of a company´s business processes from one country to another. This is done mainly to reduce costs. However, it is important to point out that other variables must also be analysed before the processes are relocated, such as worker skills and quality control.

Delphi is one of the world’s largest companies in the automotive sector. In 2005, when it had almost 200,000 employees and 159 production centres, it went into receivership, despite its excellent operating performance. Delphi is one of the American companies that most succeeded at introducing the Japanese practice of waste reduction and efficiency improvement (lean manufacturing) in the automotive sector. But that wasn’t enough to guarantee the viability of the business. Another set of factors, such as higher labour costs and greater flexibility, brought about the shutdown of companies in the USA and Western Europe.

The phenomenon of outsourcing also is seen in the services sector, albeit with some differences. There are companies in the banking, telecommunications and insurance sectors that are outsourcing their payroll and credit application processing, data input processes, as well as call centres. This has been possible thanks to the drop in telecommunication costs and the possibility of transforming services based on physical documents (paper) to digitalised processes that can be carried out anywhere in the world. India and the Philippines are two of the preferred outsourcing sites by Anglo-Saxon companies.

Developing countries – becoming the factories of the world

The potential that developing countries have for becoming the factories of the world is immense. Not only are we talking about cheap labour, but also of the ability of these countries to provide skilled workers. In India, Wipro and Inforsys are two large business processing and technology multinationals that are taking on a high percentage of outsourced technical work from the USA. Whereas software programmers in the USA cost $60/hour, they cost $6/hour in India. In addition, the number of new engineering graduates every year is incredible. China alone produces 450,000 engineers a year. These countries are bound to become large design and development centres in areas such as electronics, aerospace and technical consultancy services.

Easing the pain of outsourcing

The citizens of developed countries see outsourcing as a negative force that threatens job security. However, in theory, it creates value for more developed economies (such as Spain) by creating value for the companies in these countries and freeing up resources for activities with higher value added. The challenge is moving the workers who lose their jobs to new jobs with higher value added.

However, neither companies nor governments are taking measures to help manage this global shift in employment trends. What can we do to reduce the suffering and frustration of those who are left jobless? How can we soften the painful blow of outsourcing to our society? How can companies take advantage of the new global supply network?

To mention only a few ideas, some multinational companies are developing programmes to help reemploy workers who lose their jobs. They are creating alliances with companies that specialise in personnel selection. Other companies are developing programs that provide special financial aid to workers left jobless until they are relocated. And in some countries, specialised insurance policies are being offered as protection against this phenomenon.

As for the companies that depend on outsourcing for survival, the challenge lies in designing and building a supply chain that benefits from the advantages of globalisation. The activities that can be carried out anywhere must be clearly defined and a destination for them chosen. And, finally, the mechanisms (of government) for governing the new supply chain need to be established. All this must be done while taking into account the social and ethical responsibilities of the company.

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