When a company contracts out or transfers its labor to another country to save costs what is that process called?
Outsourcing occurs when an organization contracts some of its functions to another organization. For example, a company may decide that it will be more efficient to hire IT developers from another firm than to bring them on as employees. The work may be outsourced to a company in the same country (sometimes called “onshoring”) or to a company in another country (sometimes called “offshoring”). Show
Outsourcing has economic effects, both good and bad. Find out more about how outsourcing works, why companies do it, and its impact on jobs in the U.S. Key Takeaways
What Is Outsourcing?When an organization hires another organization to do some of its business processes, it is outsourcing. Services that are outsourced may include bookkeeping, customer service, programming, marketing, or cleaning. NoteIn theory, any function of a business can be passed to an outside contractor rather than done in-house by employees. Some companies outsource a small project to an independent contractor. Others may hire a major firm to handle all of their customer support functions. As technology improves and new businesses emerge, more and more of a company’s operations can be done outside the organization. Outsourcing to an organization in another country is often called offshoring. If the operation is kept in the same country, it is sometimes referred to as onshoring. Both have potential economic benefits as well as potential problems. Why Do Companies Outsource Jobs?Companies outsource functions for all sorts of reasons. Among them are:
How Outsourcing Can Hurt a BusinessOutsourcing can be a good solution for many businesses, but it’s not right for all of them. Even if it is approached carefully, it can cause problems. For example:
NoteYour staff forfeits expertise in the area that is being outsourced. Your company may lose skills and knowledge by turning the work over to someone else.
Economic Impact of OutsourcingOutsourcing has economic effects, good and bad. It has the greatest impact on jobs and prices. In general, it leads to less employment and lower prices in the business’s home country, but not always. Job ImpactsWhen it comes to employment, outsourcing moves jobs around. Work moves from employees to contractors and from high-cost areas to low-cost areas. This can benefit someone who wants to be self-employed and hurt someone who would prefer employment, just as it leads to job loss in the high-cost area and gains in the low-cost one. Average wages across the economy fall slightly. In the manufacturing sector, it’s estimated that offshoring has led to the loss of nearly 5 million American jobs since 1997. Globally, employment is the same. Price ImpactsIn general, outsourcing leads to lower prices, because the work generally moves to those who earn less. However, some costs may increase. Independent contractors doing specialized work may charge more than an employee would because they are not receiving benefits. Transportation costs and supply-chain disruption may lead to higher prices from offshore manufacturing over time. Eventually, skilled workers even in lower-cost countries will demand higher wages as the demand for their labor grows. Is Outsourcing Bad for the Economy?On a net basis, outsourcing is good for the economy. It lets more people concentrate on what they do best and lowers prices for consumers. However, some people benefit from it more than others. Frequently Asked Questions (FAQs)What is the difference between outsourcing and offshoring?Outsourcing is the process of turning business functions over to an outside organization. If the organization is in another country, then it is known as offshoring. When did outsourcing begin?Businesses have long hired outside contractors for certain functions. Outsourcing was first identified as a distinct strategy in 1989, and it grew in popularity as the internet made it easier to do work remotely. What is it called when a business moves to another country?Offshoring refers to relocating some of a company's operations abroad. The company may move production, accounting, or website maintenance and development abroad. Many large corporations move their call centers to another country. Offshoring may occur because labor is cheap in another country.
What offshoring means?offshoring, the practice of outsourcing operations overseas, usually by companies from industrialized countries to less-developed countries, with the intention of reducing the cost of doing business.
What is offshoring vs outsourcing?Outsourcing occurs when a company contracts a specific process out to a third party, finding someone who specializes in whatever needs to be done. Offshoring happens when businesses send in-house jobs overseas. Both may save a company money, but only offshoring specifically means sending jobs out of the country.
Why would a company outsource or contract out labor?Often, outsourcing is used so that a company can focus on its core operations. It is also used to cut costs on labor, among others. While privacy has been a recent area of controversy for outsourcing contractors, it has also drawn criticism for its impact on the labor market in domestic economies.
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