Outsourcing involves contracting internal business functions to third parties, often in less developed countries with lower labor costs and lax regulations. While it can reduce costs and increase profits for companies, it can also lead to job loss and negative effects on the economy in the home country. Proponents argue that it allows companies to compete globally and keep prices low.
Outsourcing is the act of outsourcing internal business functions to external third parties outside a business. While the term “outsourcing” can technically refer to any external contract, it usually refers to contracting services to low cost suppliers, especially those located in less developed countries. The effects of outsourcing are far-reaching and the act has negative consequences and benefits. For the company that outsources jobs, the law allows it to reduce costs, which could lead to increased profits and allow it to avoid going out of business. The unemployment rate in that company’s region or country will rise, possibly hurting its economy, but the opposite effects are observed in the country where the third-party workers are hired.
Outsourcing is an effective cost-cutting tool for companies located in developed countries because it allows the company to contract workers in low-income and less developed countries. Those countries may also have lax regulations, which can reduce taxes and increase worker output. Such lax regulations could include non-existent or limited labor laws, such as not having a mandate for overtime pay and a longer workweek.
The effect of outsourcing on a company’s bottom line is simple: it reduces costs. The lower labor cost usually allows the company to make a higher profit because it is spending less on labor than it would in its home country or in another developed country. The effects of outsourcing further reach the economy of both countries.
In the least developed country, the effects of outsourcing include economic growth and the creation of new industries in areas that would otherwise have a lack of jobs. The effects of outsourcing on the company’s home country, however, are generally negative. The company is outsourcing its work, so it is not hiring local employees, which may contribute to the country’s unemployment rate.
In some cases, these negative effects can be seen directly when a company closes a factory or operations center and moves the unit to the less developed country, sometimes sending many local workers straight to the unemployment line. This act is sometimes referred to as ‘maritime work abroad’, although the third party workers may not be overseas. In other cases, the company may choose to expand its operations to a less developed country rather than expand to its home country.
Common services candidates for outsourcing include factory jobs, customer service and engineering, although other services are not exempt. In the case of factory jobs, the decision to outsource may be influenced by lax air quality regulations and environmental regulations in less developed countries. This adds up to the lower overall labor cost.
Proponents of outsourcing argue that the practice allows companies to remain viable and compete in a global economy. They could also argue that by outsourcing the work, they are able to keep costs down. This could help keep the prices of the product or service in question low, although many people argue that those savings tend to go directly to the company’s bottom line.
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