As business operating costs continue to increase, more organizations seek to outsource aspects of their operation to off-shore entities. This method allows them to reduce overhead costs, enabling the entity to funnel additional funds back into the business. However, many individuals worry that off-shore outsourcing harms the American job market. They also argue that off-shore outsourcing removes the more personalized approach to a business partnership. The following will examine trends and attitudes towards businesses outsourcing to off-shore entities, outlining how a healthy balance between utilizing off-shore resources and stateside operations will likely be a business’s best course of action in the changing global economy.
Off-shore outsourcing has become increasingly popular in recent years and shows no signs of stagnation. According to the global data site Statista, between 2000 and 2019, the market value of outsourced services has more than doubled from $45.6 trillion in 2000 to $92.5 trillion in 2019. This increase reflects the financial benefits of outsourcing of which more businesses have taken advantage in recent years, with decreased overhead freeing up additional resources to direct towards the company’s overall economic health. This rate is projected to continue increasing in coming years, with data site ReportLinker predicting that the value of the outsourcing sector will grow by $75.89 trillion between 2023 and 2027, with a compound annual growth rate of around 6.5%. In the future, off-shore outsourcing will undoubtedly become more common.
When analyzing the role of outsourcing in the American economy, it is important to first examine the benefits of outsourcing on a more microeconomic level in terms of how it affects individual firms. For a business, outsourcing contributes to enhanced productivity and profitability. In Deloitte’s Global 2022 Outsourcing Survey, 52% of surveyed executives confirmed that they use outsourcing for critical business functions. In the same survey, 76% of executives say they outsource IT functions, with 32% planning to increase their budget on traditional outsourcing next year. Outsourcing IT functions is a particularly popular trend, as the Deloitte report identifies it as one of the most common functions a company might outsource. The reason for this stems from the lack of client-facing interactions required by IT, allowing companies to reap the benefits of off-shore outsourcing without sacrificing stateside client interactions.
As off-shore outsourcing continues to gain prominence, it is crucial to understand a company’s reasons for outsourcing. Those reasons influence the development criteria for the most efficient way to integrate off-shore outsourcing into a business’ economic structure and corporate culture. The primary reason for off-shore outsourcing stems from its cost savings, with the Deloitte survey reporting that 57% of surveyed companies cited cost savings as a main reason for outsourcing. Additionally, half of these surveyed companies cited access to new talent as a reason to outsource. They view off-shore outsourcing as giving them access to a greater depth of talent, which helps the company increase productivity and profitability. It also allows the company to stay up to speed with digital transformation, ensuring availability of the highest-quality talent regardless of physical location.
Many individuals and businesses have positive attitudes toward off-shore outsourcing, citing the cost savings and trade benefits. In a University of Pennsylvania research article, Edward Mansfield writes, “U.S. firms have an incentive to outsource tasks…to generate cost savings.” Mansfield argues that “roughly 22-29% of the US workforce is potentially offshorable.” From the perspective of minimizing costs, the natural option is to take advantage of cost savings to save money on overhead costs. By examining IT work specifically, there is no particular reason why IT tasks need to be conducted domestically. Given that firms can access an expansive talent pool abroad, firms are incentivized to outsource to off-shore entities to cut down on costs while accessing new talent. If Mansfield is correct and nearly a quarter of the U.S. workforce is potentially offshorable, off-shoring business tasks will continue to gain popularity well into the future. Additionally, many economists who support off-shore outsourcing view it as another form of free trade. In a Cambridge University study, researchers found that the specific country the work is being outsourced to significantly impacts American attitudes towards that trade. Based on this research, supporters of off-shore outsourcing argue that many opponents of the practice are opposed strictly due to the country where the work is being outsourced. However, this is only one of several factors that opponents of off-shore outsourcing cite as their reasoning for advocating against the practice.
While many business experts endorse outsourcing as a way to generate more revenue, others have a more negative view of off-shore outsourcing. They are concerned about the American labor market, believing that off-shore outsourcing takes away from domestic employment opportunities. In his article, Mansfield interprets this through an academic lens, stating that “economists foresee considerable churning in the U.S. labor market as a result of outsourcing, leading to increased jobs displacement, reduced job security and bargaining power for workers, and downward pressure on benefits and wages.” They worry that this downward pressure on U.S. benefits and wages harms the overall U.S. labor market, ultimately negatively impacting businesses. Additionally, many opponents of off-shore outsourcing believe that “to be in favor of outsourcing is interpreted as being anti-American” (Mansfield). The disagreement between supporters and opponents of off-shore outsourcing stem from their respective perspectives as a whole, with opponents viewing it as anti-American and supporters viewing it as a form of free trade. Furthermore, many clients of businesses feel the business becomes less personable when a function is outsourced to an off-shore entity. By sacrificing the client-facing aspect of their business to an off-shore entity, a business risks losing the personalized touch and the relationships that helped them grow their company in the first place.
To optimize the cost/benefit ratio of off-shore outsourcing while maintaining client-facing interactions, the most effective alternative to off-shore outsourcing often is a hybrid one. This approach differs from traditional off-shore outsourcing in that all client interactions often remain in the U.S., ensuring that each client receives localized and customized service designed for their needs. This same hybrid model utilizes off-shore talent, but in a manner in which the off-shore teams are actually employed by the company. The methodology enables the company to leverage the efficiencies of an off-shore workforce while maintaining its corporate culture and stateside commitment to clients.
A hybrid approach often involves companies moving more administrative and IT-based functions to the off-shore location, which trends indicate will only continue in the coming years. It also ensures that client-facing functions remain in the U.S., minimizing any adverse effects on the U.S. labor market while generating more revenue for the company which ultimately leads to more job creation. Additionally, a hybrid system allows companies to scale their on-demand labor by extending their workday across multiple locations and time zones. By removing time zone constraints, a hybrid approach equips a company with an on-demand labor force available nearly all hours of the day. Furthermore, a hybrid approach gives a company more flexibility with pricing, enabling them to lower costs by leveraging the off-shore team when needed. Companies like Nobility have adopted this hybrid approach to realize its many benefits, including allowing the company to access a wider talent pool and mitigating costs without sacrificing the client-facing interactions that were foundational to the company since its beginning.
Ultimately, outsourcing to off-shore entities is likely to remain a vibrant option and statistics suggest this trend will continue in the coming years. While many individuals support outsourcing to off-shore entities, even they recognize the adverse labor market effects of an over-reliance on outsourcing. Overall, a hybrid approach is the most effective way to incorporate off-shore labor into a business model. Without U.S.-based client interactions, companies considering outsourcing often lose out on the localized support crucial to a business’s long-term success. As more companies outsource business functions to off-shore entities, many will recognize the benefits of a hybrid approach as a way to support the U.S. labor force while optimizing talent and output globally.