Does Outsourcing Really Save Money?

Outsourcing is the practice of relocating certain parts or all of business off the shores of the country in which the business is located. Many companies employ this practice as a cost-saving device, and it undoubtedly can save money. This issue however is greatly complicated by all of the factors involved, and it’s valuable to look at how locating most business to foreign shores may save and cost money at the same time.

First, not all outsourcing goes to countries that have lower costs. Some countries relocate plants, stores, and facilities in countries that have higher costs but may have tax advantages. Typically, the practice involves using countries where costs to employ people and to rent or own facilities to house employees is significantly lower, and there may also exist tax advantages for employing large numbers of people within that country.

In highly industrialized countries, costs of wages and of facilities can be high, and companies may pay a fraction of this price elsewhere, while still employing workers who are just as skilled. For companies looking to cut expenses, outsourcing can be a viable means of accomplishing this, while still allowing a company to pay for more expensive employees in the country in which it was established. Many businesses have a combination of local employees and outsourced employees, while others relocate most business to foreign shores.

There have been some negative reactions to companies that outsource all aspects of their business. For instance, many businesses chose to relocate customer help lines to foreign countries and then some found this practice was not working well. People being helped by these lines weren’t getting the kind of service they required to remain customers, and some companies have chosen to stop outsourcing help line and customer service work to better serve customers. The bottom line is that if customer dissatisfaction mitigates cheaper employee costs, then outsourcing doesn’t save money.

Another way to evaluate outsourcing is by the way it affects the local economies in the main countries in which a business operates and depends on sales of products or services. Eliminating jobs from a country impacts its economy and the buying power of consumers. While outsourcing might result in being able to offer products at lower prices, number of customers and consumer spending decreases when jobs are not available. This is a common criticism of the practice.

In the US, for instance, many manufacturing jobs have been outsourced. Not all people who lose their jobs are able to find other jobs that earn the same amount of money, and high unemployment especially in towns that were formerly centered on manufacturing, affect the other businesses in those towns. When companies begin to outsource so much that unemployment rises and the general economy falters, these companies may be unable to make money. In other words, they may create a situation where no consumers exist to buy their products, no matter how inexpensive they are. It’s ultimately argued that decline in consumer buying power can cost companies money, far more than they’d save by outsourcing.

An additional factor that deserves consideration is the effect of stimulating the economies of developing countries. While from a humanitarian point of view this can be thought highly desirable, there are some ultimate consequences. Consistent work in these countries helps to raise standard of living, and this will eventually raise costs of employing workers in such countries and renting or acquiring property. Elevating standard of living could foreign and domestic employees cost about the same amount.

Ultimately, this practice saves money and is likely to be continued. Countries can make outsourcing less attractive by giving tax breaks to companies that will keep employment within a country’s borders. However, even with incentives not to outsource, benefits to this common business practice are likely to continue to exist. What companies that outsource must weigh is not just the short-term savings but the potential long term costs and possibly benefits for both itself and the society at large.