The Negative Effects of Outsourcing Labor
In our rapidly globalizing world, the practice of outsourcing labor to third parties has become a common practice among businesses across the world. While offshore outsourcing does seem like a quick and efficient way for firms to maximize profits, in the long run it actually causes more harm to the very firms it was designed to improve. Many studies of this practice primarily focus on how it affects low-skilled labor, such as manufacturing, and ignore its effects on other levels of labor. Examining medium to even high skilled jobs like call centers and even the medical field show that outsourcing does have negative effects on those industries and that in the long run it can cause problems that will end up costing businesses more money in the future.
Before diving into outsourcing it is important to have some background knowledge on what causes business to decide to outsource labor. The main goal of any business is to make money by selling goods or services. The money made from selling goods and services is called revenue, but it is not the final amount of money that the business makes. Businesses also have to keep in mind the costs of producing the goods and services that they will sell, such as building rent and employee wages. By subtracting the total costs (TC) a business faces from the total revenue (TR) it earns we end up with the business’s profit (P). The simple equation of: P = TR - TC is a simpler way of visualizing that. Businesses will always look to maximize profits by maximizing TR or minimizing the TC, and because TR is very dependent on the willingness of consumers to buy their goods or services, it can be hard to consistently maximize TR. However, since businesses often have more control over their costs, minimizing costs is a more efficient way to maximize profits. In N. Greogry Mankiw’s textbook, “Principles of Microeconomics,” it is stated that the fourth principle of economics is that, “rational people make decisions by comparing costs and benefits, they respond to incentives” (Mankiw, 7). The prospect of cutting costs is incentive enough for many people to turn to outsourcing as a means to maximize profits.
Having knowledge of what leads people to implement outsourcing we can now look at some of the risks that are involved with it. One problem that plagues medium to high skilled labor industries is the loss of knowledge. In Tomás F. Espino-Rodriguez’s article on the effects of outsourcing the IT services of hotel chains in Scotland and Taiwan, he states that outsourcing may lead to a, “ stage of decline that could leave them without the skills and capabilities necessary to compete and/or offer a high-quality service” (Espino-Rodríguez et al. 100). When a company decides to outsource services to another offshore party, they begin to lose the knowledge of how to do that particular service because another company is doing that job for them. This leads to the stage of decline that was mentioned by Espino-Rodriguez, as they will never be able to improve the quality of that service by themselves which could lead to losses in the future if another business with better service enters the market. This stage of decline can be easily avoided if the business decides to insource instead. Jeff Osbornes article on whether research labs should outsource or insource describes insourcing as, “work that could have been contracted out is instead done in-house” (Osborne 44), and while it this method does cost the business a sizeable amount of money in the short run, the benefits that it would bring to the business in the long run make up for the money lost. By implementing training programs, a business would not have to contract outside labor and at the same time improve the livelihood of it’s employees and increase the business’s abilities. This would have the opposite effect of outsourcing, as the business would be able to entire a stage of growth through it’s training programs.
One of the costlier problems that can arise as a result of outsourcing are legal disputes and the fees that accompany them. An article written by Richard Feyrer that addresses the costs and benefits of outsourcing labor in the cardiovascular engineering industry acknowledges this potential risk when it states that, “The hospital can also be confronted with disadvantages if the partner becomes insolvent or legal disputes arise” (Feyrer et al. 293). Legal battles can take years in court and coupled with the hefty legal fees can add up to billions of dollars wasted. Another externality that can have negative effects on a business is the potential of human error in the third party. While human error is a possibility in any business, the probability of it occurring when outsourcing is implemented is increased as more people get involved as miscommunication is more likely to happen. An article on the website The Economist published by the Schumpeter Blog also addresses this issue. In the article Schumpeter talks about how Boeing’s decision to outsource manufacturing parts for the 787 Dreamliner lead billions of dollars and time being wasted, reporting that, “Some of the parts did not fit together. Some of the dozens of sub-contractors failed to deliver their components on time, despite having sub-contracted their work to sub-sub-contractors; it will be billions over budget and three years behind schedule”(Schumpeter, 2011). Boeing’s failure in the production of the 787 Dreamliner should be proof to anyone that this method of manufacturing can come with devastating costs.
The costs that come with outsourcing labor as we will see not only affects the businesses that implement it, but also the temporary workers that are employed. Often times the workers that are the source of the outsourced labor are not given the proper wages. This phenomena is explained in Matthew Pierlott’s article discussing the morality of outsourcing labor where he states that, “if the supplier (of labor) is independent of the corporation (that is buying the labor); it becomes problematic for the corporation to police these independent suppliers and ensure the just treatment of the laborers” (Pierlott 592), and because most companies do contract labor from multiple suppliers this mistreatment of laborers affects millions of workers around the world and contributes to the continuation of the cycle of poverty. An example of this event happening can be seen in David G. Van Arsdale’s article on how outsourcing can lead to poverty. Arsdale’s article offers a great case study of this event as he reminisces about his time as a Waste Management (WM) company worker in New York and how WM’s decision to outsource labor hurt him and the workers that eventually replaced him. Within the article he talks about one of the temporary workers, Pete, who was not being compensated correctly because, “the temporary staffing industry gets away with (illegally) paying temps only for their work performed for clients regardless of how long they wait on-call” (Arsdale 91). Pete relies solely on temporary jobs given to him by a labor supplier and because he is not paid correctly he lives in poverty as a 50 year old man and is unable to retire. Even though Pete is employed he mentions how he feels like he has no control over his life because of the position that the staffing company has put him in.
After looking at all the causes and effects of outsourcing labor it is clear that many of the risks that accompany this method hurt both the businesses that outsource and the workers that provide that labor. While it does seem like a cost effective solution to maximize profits, in the long run it can cause more harm to the businesses through legal disputes, miscommunication, and by stunting their intellectual growth. It can even hurt the workers it provides jobs to, as in many cases like Pete’s there is no regulation on how they are paid. Other methods, such as insourcing labor, while costing more at the onset, will benefit the company and it’s employees far more in the long run.
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