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"Outsourcing" became a popular buzzword in business and management in the 1990s. It was a welcome addition to the business vocabulary as, prior to the introduction of the term, the domestication decision involved a decision to either produce in-house or a decision to produce outside. Introduction of the terms outsourcing and out-tasking gave managers much-needed words for external production.

Overview

Outsourcing and out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.

The concept started with Ross Perot when he founded Electronic Data Systems in 1962. EDS would tell a prospective client, "You are familiar with designing, manufacturing and selling furniture, but we're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly for the service with a minimum commitment of two to ten years."

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Outsourcing business is characterized by expertise not inherent to the core of the client organization.

A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.

The international context

With the rise of Globalisation, many companies are turning to either offshoring or offshore outsourcing. Offshore outsourcing more and more takes the shape of Business Process Outsourcing, where whole business processes (such as support and development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock markets press the company to do more for less. This requires that managers search out the cheapest sources they can find. In countries like India and China, companies like IBM, Microsoft, Hewlett Packard, and Novell choose to get services from sub-contractors in these countries or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects done by offshore developers at minimum cost.

This practice became even more popular after the dot-com crash of the early 21st century. As many businesses struggled with cash-flow problems, many investors were leary in investing money in high-tech companies, which many felt were still vulnerable to the dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For the United States, India seemed like a perfect resource for these needs since most nationals spoke English—a side-effect of several decades of British colonial rule. A company can hire an engineer in India, for example, for US$10,000 a year where an equally qualified engineer in the U.S. could cost $60,000-$90,000 a year.

A Many companies required their employees to train their off-shore replacements, after which they were downsized (laid off). In one unfortunate case, a Bank of America programmer committed suicide when forced to train his Indian replacement.

In practice, this trend has experienced mixed results. Some companies, which were required to hire off-shore talent by investors, reported communication barriers and high foreign personnel turnover rates. They would often ask for one thing, but be delivered a different item. A domestic correspondent may have dealt with a foreign counterpart for weeks, only to find he had left the previous day (with no notice) and was replaced with another individual, who would then need to be briefed on the current development and projects. Several companies also complained of the low quality of the work produced by Indian development teams.

Reaction of their heavy Indian accents.

Other companies report favorable results, however. One company said that the low cost of his Indian development team allows him to hire higher-paid American lead developers.

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See also

• supply chain
• vertical integration
• freelancing on the Internet
• list of management topics

External links

• The New Face of the Silicon Age - Wired Magazine
• Outsourcing Community Forums
• The Outsourcing Times