Outsourcing or sub-servicing often refers to the process of contracting to a third-party.

Overview

A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used inconsistently. However, outsourcing is often viewed as involving the contracting out of a business function - commonly one previously performed in-house - to an external provider. In this sense, two organizations may enter into a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing (which are odd terms because doing business with another country does not mean you have to go offshore) In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as nearshoring,multisourcing and strategic outsourcing.

Reasons

Organizations that outsource are seeking to realize benefits or address the following issue:

§  Cost savings — The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, and cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.

§  Focus on Core Business — Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies.

§  Cost restructuring — Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

§  Improve quality — Achieve a steep change in quality through contracting out the service with a new service level agreement.

§  Knowledge — Access to intellectual property and wider experience and knowledge.

§  Contract — Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

§  Operational expertise — Access to operational best practice that would be too difficult or time consuming to develop in-house.

§  Access to talent — Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.

§  Capacity management — An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

§  Catalyst for change — An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.

§  Enhance capacity for innovation — Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.

§  Reduce time to market — The acceleration of the development or production of a product through the additional capability brought by the supplier.

§  Commodification — The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.

§  Risk management — An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

§  Venture Capital — Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.

§  Tax Benefit — Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

§  Scalability — The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.

§  Creating leisure time — Individuals may wish to outsource their work in order to optimise their work-leisure balance.

Implications

Management, the corporation and consumers

Quality of service

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research.

Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.

Call center agents may speak a variety of the language with different linguistic features such as accents, word use and phraseology, which may make them more difficult to understand for the clients. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties. In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or mis-communications.

Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They are no longer directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.

Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.

In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).

Public opinion

In the United States there is a strong public opinion against outsourcing (especially when combined with offshoring) because it leads to job displacement.^{[citation needed]} However, outsourcing supporters^[who?] draw on mainstream economics to argue that outsourcing should bring down prices, providing greater economic benefit to all.

Standpoint of labor

From the standpoint of labor outsourcing may represent a new threat, contributing to worker insecurity, and reflective of the general process of globalization.

On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.

Standpoint of government

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, theTrade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.

By country

United States

'Outsourcing' became a popular political issue in the United States during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations".

Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll conducted in August 2004 found that 71% of American voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. One given rationale is the extremely high corporate income tax rate in the U.S. relative to other OECD nations, and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.

It is argued that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and attempts to "game the system". Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.

Industrialisation is the process of social and economic change that transforms a human group from a pre-industrial society into an industrial one. It is a part of a wider modernisation process, where social change and economic development are closely related with technological innovation, particularly with the development of large-scale energy and metallurgy production. It is the extensive organisation of an economy for the purpose of manufacturing.

Industrialisation also introduces a form of philosophical change where people obtain a different attitude towards their perception of nature, and a sociological process of ubiquitous rationalisation.

There is considerable literature on the factors facilitating industrial modernisation and enterprise development.Key positive factors identified by researchers have ranged from favourable political-legal environments for industry and commerce, through abundant natural resources of various kinds, to plentiful supplies of relatively low-cost, skilled and adaptablelabour.

One survey of countries in Africa, Latin America, the Caribbean, and the Middle East and the rest of Asia in the late 20th century found that high levels of structural differentiation, functional specialisation, and autonomy of economic systems from government were likely to contribute greatly to industrial-commercial growth and prosperity. Amongst other things, relatively open trading systems with zero or low duties on imported goods tended to stimulate industrial cost-efficiency and innovation across the board. Free and flexible labour and othermarkets also helped raise general business-economic performance levels, as did rapid popular learning capabilities.

Positive work ethics in populations at large combined with skills in quickly utilising new technologies and scientific discoveries were likely to boost production and income levels – and as the latter rose, markets for consumer goods and services of all kinds tended to expand and provide a further stimulus to industrial investment and economic growth. By the end of the century, East Asia was one of the most economically successful regions of the world – with free market countries such as Hong Kong being widely seen as models for other, less developed countries around the world to emulate. The first country to industrialise was Great Britain during the Industrial Revolution.

Description

According to the original sector classification of Jean Fourastié, an economy consists of a "Primary sector" of commodity production (farming, livestock breeding, exploitation of mineral resources), a "secondary sector" of manufacturing and processing, and a "Tertiary Sector" of service industries. The industrialisation process is historically based on the expansion of the secondary sector in an economy dominated by primary activities.

The first ever transformation to an industrial economy from an agrarian one was called the Industrial Revolution and this took place in the late 18th and early 19th centuries in a few countries of Western Europe and North America, beginning in Great Britain. This was the first industrialisation in the world's history.

The Second Industrial Revolution describes a later, somewhat less dramatic change that came about in the late 19th century with the widespread availability of electric power, internal combustion engines, and assembly lines to the already industrialised nations.

The lack of an industrial sector in a country is widely seen as a major handicap in improving a country's economy, and power, pushing many governments to encourage or enforce industrialisation.

History of industrialisation

Most pre-industrial economies had standards of living not much abovesubsistence, among that the majority of the population were focused on producing their means of survival. For example, in medieval Europe, 80% of the labour force was employed in subsistence agriculture.

Some pre-industrial economies, such as classical Athens, had trade and commerce as significant factors, so native Greeks could enjoy wealth far beyond a sustenance standard of living through the use of slavery. Famineswere frequent in most pre-industrial societies, although some, such as the Netherlands and England of the seventeenth and eighteenth centuries, theItalian city states of the fifteenth century, the medieval Islamic Caliphate, and the ancient Greek and Roman civilisations were able to escape the famine cycle through increasing trade and commercialisation of theagricultural sector. It is estimated that during the seventeenth century Netherlands imported nearly 70% of its grain supply and in the fifth century BC Athens imported three quarters of its total food supply.

Industrialisation through innovation in manufacturing processes first started with the Industrial Revolution in the north-west and Midlands of England in the eighteenth century. It spread to Europe and North America in the nineteenth.

Industrial revolution in Western Europe 

In the eighteenth and nineteenth centuries, Great Britain experienced a massive increase in agricultural productivity known as the British Agricultural Revolution, which enabled an unprecedented population growth, freeing a significant percentage of the workforce from farming, and helping to drive the Industrial Revolution.

Due to the limited amount of arable land and the overwhelming efficiency of mechanisedfarming, the increased population could not be dedicated to agriculture. New agricultural techniques allowed a single peasant to feed more workers than previously; however, these techniques also increased the demand for machines and other hardwares, which had traditionally been provided by the urban artisans. Artisans, collectively called bourgeoisie, employed rural exodus workers to increase their output and meet the country's needs.

The growth of their business coupled with the lack of experience of the new workers pushed arationalisation and standardisation of the duties the in workshops, thus leading to a division of labour, that is, a primitive form of Fordism. The process of creating a good was divided into simple tasks, each one of them being gradually mechanised in order to boost productivity and thus increase income.

The accumulation of capital allowed investments in the conception and application of new technologies, enabling the industrialisation process to continue to evolve. The industrialisation process formed a class of industrial workers who had more money to spend than their agricultural cousins. They spent this on items such as tobacco and sugar, creating new mass markets that stimulated more investment as merchants sought to exploit them.

The mechanisation of production spread to the countries surrounding England in western and northern Europe and to British settler colonies, helping to make those areas the wealthiest, and shaping what is now known as the Western world.

Some economic historians argue that the possession of so-called ‘exploitation colonies’ eased the accumulation of capital to the countries that possessed them, speeding up their development. The consequence was that the subject country integrated a bigger economic system in a subaltern position, emulating the countryside, which demands manufactured goods and offers raw materials, while the colonial power stressed its urban posture, providing goods and importing food. A classical example of this mechanism is said to be the triangular trade, which involved England, southern United States and western Africa. Critics argue that this polarity still affects the world, and has deeply retarded industrialisation of what is now known as the Third World.

Some have stressed the importance of natural or financial resources that Britain received from its many overseas colonies or that profits from the British slave trade between Africa and the Caribbean helped fuel industrial investment.

Early industrialisation in other countries

After the Convention of Kanagawa issued by Commodore Matthew C. Perry forced Japan to open the ports of Shimoda and Hakodate to American trade, the Japanese government realised that drastic reforms were necessary to stave off Western influence. The Tokugawa shogunate abolished the feudal system. The government instituted military reforms to modernise the Japanese army and also constructed the base for industrialisation. In the 1870s, the Meiji government vigorously promoted technological and industrial development that eventually changed Japan to a powerful modern country.

In a similar way, Russia suffered during the Allied intervention in the Russian Civil War. The Soviet Union's centrally controlled economydecided to invest a big part of its resources to enhance its industrial production and infrastructures to assure its survival, thus becoming a world superpower.

During the Cold war, the other European socialist countries, organised under the Comecon framework, followed the same developing scheme, albeit with a less emphasis on heavy industry.

Southern European countries saw a moderate industrialisation during the 1950s-1970s, caused by a healthy integration of the European economy, though their level of development, as well as those of eastern countries, doesn't match the western standards.

The Third World

A similar state-led developing programme was pursued in virtually all the Third World countries during the Cold War, including the socialistones, but especially in Sub-Saharan Africa after the decolonisation period.^{[citation needed]} The primary scope of those projects was to achieveself-sufficiency through the local production of previously imported goods, the mechanisation of agriculture and the spread of education andhealth care. However, all those experiences failed bitterly due to a lack of realism: most countries didn't have a pre-industrial bourgeoisie able to carry on a capitalistic development or even a stable and peaceful state. Those aborted experiences left huge debts toward western countries and fuelled public corruption.

Petrol producing countries

Oil-rich countries saw similar failures in their economic choices. An EIA report stated that OPEC member nations were projected to earn a net amount of $1.251 trillion in 2008 from their oil exports.^[11] Because oil is both important and expensive, regions that had big reserves of oilhad huge liquidity incomes. However, this was rarely followed by economic development. Experience shows that local elites were unable to re-invest the petrodollars obtained through oil export, and currency is wasted in luxury goods.

This is particularly evident in the Persian Gulf states, where the per capita income is comparable to those of western nations, but where no industrialisation has started. Apart from two little countries (Bahrain and the United Arab Emirates), Arab states have not diversified their economies, and no replacement for the upcoming end of oil reserves is envisaged.

Industrialisation in Asia

Apart from Japan, where industrialisation began in the late 19th century, a different pattern of industrialisation followed in East Asia. One of the fastest rates of industrialisation occurred in the late 20th century across four countries known as the Asian tigers thanks to the existence of stable governments and well structured societies, strategic locations, heavy foreign investments, a low cost skilled and motivatedworkforce, a competitive exchange rate, and low custom duties.

In the case of South Korea, the largest of the four Asian tigers, a very fast paced industrialisation took place as it quickly moved away from the manufacturing of value added goods in the 1950s and 60s into the more advanced steel, shipbuilding and automobile industry in the 1970s and 80s, focusing on the high-tech and service industry in the 1990s and 2000s. As a result, South Korea became a major economic power and today is one of the wealthiest countries in Asia.

This starting model was afterwards successfully copied in other larger Eastern and Southern Asian countries, including communist ones. The success of this phenomenon led to a huge wave of offshoring – i.e., Western factories or Tertiary Sector corporations choosing to move their activities to countries where the workforce was less expensive and less collectively organised.

China and India, while roughly following this development pattern, made adaptations in line with their own histories and cultures, their major size and importance in the world, and the geo-political ambitions of their governments (etc.).

Currently, China's government is actively investing in expanding its own infrastructures and securing the required energy and raw materials supply channels, is supporting its exports by financing the United States balance payment deficit through the purchase of US treasury bonds, and is strengthening its military in order to endorse a major geopolitical role.

Meanwhile, India's government is investing in economic sectors such as bioengineering, nuclear technology, pharmaceutics, informatics, and technologically-oriented higher education, exceeding its needs, with the goal of creating several specialisation poles able to conquer foreign markets.

Both China and India, particularly the Chinese, have also started to make significant investments in other developing countries, making them significant players in today's world economy.

Newly industrialised countries

In recent decades, a few countries in Latin America, Asia, and Africa, such as Turkey, South Africa, Malaysia, Philippines and Mexico have experienced substantial industrial growth, fuelled by exportations going to countries that have bigger economies: the United States, Peru, China, India and the EU. They are sometimes called newly industrialised countries.

Despite this trend being artificially influenced by the oil price increases since 2003, the phenomenon is not entirely new nor totally speculative (for instance see: Maquiladora).