Outsourcing and off shoring
Most
people conflate these two terms, Outsourcing and Off shoring. Outsourcing is
contracting out a part of the business process to a third party / organisation.
Whereas off shoring is relocating a part of the business process or the
business unit to a different country. Off shoring results in creation of jobs
in a different country, i.e offshore. This eventually results in sending off
jobs to offshore country. These two issues have been the bone of contention in recently
held U.S. Presidential Elections. These terms have changed the facade of Indian
Economy to a considerable extent with IT exports of more than $10 billion
annually. The effects have been imminent. It has paved way for the creation of vibrant
middle class, which is more empowered and started dreaming of a bright and
unbridled world.
Companies
like GE have flagged their presence in India by setting up their first
off-shore fully equipped private office in Gurgaon in 1997. Slowly several IT
companies from west started percolating Indian markets by establishing
state-of-art centres at various locations in India. During 1990’s rapidly
developing west has found developing countries to be a lucrative places for
setting up their offshore offices. Adequate availability of skills and lower
labour costs have been the rationale behind setting up their fleet.
Productivity was high as people were willing to work in night shifts. This has
increased their profit margins. Further, governments of putative off shore
counties stretched out themselves by providing subsidies and tax holidays to
promote their investments.
Countries
like China, Taiwan, Malaysia, Thailand have been favoured for setting up bigger
manufacturing units. India has lagged behind in wooing manufacturing industries
owing to poor infrastructure and lack of supply network chains. But India has
been a hot favourite for business services, especially IT owing to availability
of good number of graduates/Engineers every year. Good English speaking and
communication abilities has given India an edge over other east Asian
countries. Philippines has been another contender with India for business
services owing to their closeness to the American connections and English
accent of majority of the people was good.
China
prevailed as the most preferred off-shore destination country for three
decades. Consistent financial growth over past one decade has changed the face
of the Chinese economy. There has been rapid increase in the labour wages.
Labour unions became stronger entities. Strikes have become a common event
drastically effecting the productivity. Slowly, it moved away from the status
of "sought after off-shore" to that of a "lucrative market".
This has changed the dynamics of the off shoring and outsourcing marketing
strategies of Western countries. Big companies are no longer able to maintain
their profit margins due to costly labour. Added to this increase in transport,
freight charges and the exercise duties had a dampening effect. Transportation
of goods to the potential markets was taking weeks. Business become
counter-productive. As a result, companies are making a big U-turn and slowly
shifting the manufacturing units nearer to R&D so that innovation doesn’t
lack behind. Some of them are venturing into far east Asian countries like
Thailand, Indonesia where labour wages are nominal.
The
financial crisis in 2008 world has hard hit the world economy, leading to major
revamp of business strategies by major companies. With mounting political
pressures in home countries, due to rise in the unemployment, companies are
forced to "re-shore". Owing to threat of job displacement,
semi-skilled workers are willing to work for optimum wages. This sudden change
in the attitude of the workers has started turning tables in favour of parent
companies. Re shoring business can cut down transport charges and delivery of
goods to markets will be faster. R&D can also make quick advances this
would result in better innovations. Already companies like GE, GM are seriously
contemplating on re-shoring businesses. If this trend continues, off shoring
will be completely withdrawn by 2025 (The Economist). Optimal profit calculations indicate, if labour cost makes upto 15% or less of their product costs, it is advisable to re shore.
America
and Britain are two major giants that has off shored most of their business
activities. Economic scenario in Europe is little different. It has large
number of family owned business and those companies tend to be loyal to the
countries of origin. In Europe, labour markets are relatively inflexible and
costly. Due to restrictive rules in firing employees it is difficult and
expensive to shut down capacity. Most firms are held back by political and
social pressures especially in Italy and Spain. But some of them are
contemplating the idea of “near-shoring”like sending of their workto eastern
European countries where wages are little lower and this also avoids some of
the transport costs and cultural differences of sending back the product to
their home countries.
In
spite of serious thoughts of re shoring, Western countries have major set
backs. Poor out turn of graduates and high school drop out is major hindrance
for obtaining personnel. If they plan to re shore, majority of the processes
will be highly automated hence the manpower requirement will be less. World
class skills and training, along with flexibility and motivation of workers,
extensive cluster of supplies and sensible regulation will still thrust areas.
Outsourcing
and off shoring had a great impact on the economies of developing countries. If
major stake holders wish to pull back their investments, nations would
experience severe monetary losses in terms of exports of services. They would
be immediately burdened with the arduous task of providing employment to the
educated youth. Though it might have great impact initially, nations would be
forced to rethink about alternative strategies to better their individual
economies.
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