Outsourcing: Its Importance and Economic Relevance!

As far as we are concerned and as far our observation could reach, it is a fact that outsourcing nowadays has been developing extensively since the past decade. Outsourcing first appeared in the IT industry in the 1980s. This was the time when companies recognized the benefits of having IT service partners in order to develop complex systems, and enhance the way that a business process or service is managed (Schumacher, 2005). It developed a new genre of business approach, and in todays world it have become an entity, important at that, enhancing every business system.

But how important outsourcing is in todays world? How important is it in this contemporary milieu? As we can see, outsourcing has grown because of economic and competitive pressures that have made it a requirement for organizations of all sizes to equip their products and services with highly competitive quality. It have been known that outsourcing is one of the effective tools in boosting sales. Aside from the fact that it leverages alternatives that could deeply reduce cost it also renders an efficient operating manner.

So what are the benefits of such? The main driver for outsourcing is cost reduction. Labor cost savings overseas are just too great to be ignored. In knowledge-intensive industries such as Analytics and Data Mining Services, Research and Development, and Intellectual Property Research, companies can save significantly – as much as 40-50% – by offshoring work to low-wage countries. Destinations such as India, China and Russia are ideal for these services as they provide a large pool of engineers and even PhDs at a substantially lower cost. According to Boston Consulting Group, a typical annual salary for an Indian IT engineer is USD 5,000, and for a graduate with a masters degree in Business is USD 7,500 – about one tenth of their American equivalents (London, 2006).

The cost differential between a PhD in the Sciences and Engineering in the US and in India (or in Russia) can range between USD 60,000 and USD 80,000, respectively. Besides India and Russia, countries such as the Philippines, Chile and Mexico are setting themselves up to provide high-end services at low-end prices as a way to boost employment and help their economies. Hence the increasing competition will drive prices even lower than the existing level (Kakumanu and Partanova, 2006).

Another early driver of outsourcing is the shortage of skilled labour. Developed economies such as the US, the UK, and Western European countries are already facing a shortage of highly trained and specialized professionals in some knowledge-intensive, high-skill sectors, such as R&D in very large scale integration, engineering design, IT, and financial risk management. One way to mitigate these skills shortage is to source talent from low-wage developing countries. India alone produces 441, 000 technical graduates, nearly 2.3 million other graduates and more than 300, 000 postgradutes every year (London, 2006).

According to a NASSCOM-McKinsey study this is about 30% of the available supply of skilled manpower in low-cost countries (Balaji, 2005). Having one or more offshore centers can also provide flexibility in terms of human resource and time management. Outsourcing allows companies to add or reduce personnel far easier than a company can do in house, hence avoiding an expensive layoff process. By utilizing the time difference between different parts of the globe, development can take place constantly. The ability to send massive data amounts anywhere via the internet allows continual collaboration on a large scale (Kakumanu and Partanova, 2006).

As we could see, outsourcing does not only upholds quality service but economic aides as well. It is one of the economic paradigm a country could benefit from.

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