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  • Offshore outsourcing: why companies do it?

    I have a perspective on this I'd like to share. There are many reasons for offshore outsourcing, the popular one was/is the cost of wages. However outsourcing today happens for reasons radically different than how it started in south east Asia in the 1980s pioneered by Japanese and German industrial investment. The cost of wage matters only in low-automation labor-intensive sectors. Today the most of offshore outsourcing I see happening is not because of wages. Factors such: environmental impact, environmental/health regulation, tax breaks, tax incentives, employee wage subsidy by the state (i.e. host country actually pays a slice of the wages), free real estate, few scrutiny when it comes to business practices/lack of accountability, insurance from the host state (i.e. if the business go down you don't fail and lose money, some state agency buys it for you and thus you're in 100% win situation), and trade-oriented outsourcing (i.e. to gate favorable trade terms from the host county, acquire some prized licence such as bank, import etc).

    I can delve more into the details and intricacies of this, but this is, in general why and how offshore outsourcing happens in the 21st century. The days of "low wages" are long gone and in any case, wages account for less than 10% of the cost (at best) and even in labor intensive sectors (e.g. garment) it's never more than 30%, and unless you're Bangladesh, Vietnam and such there is barely a significant difference with the advanced world.

  • #2
    Re: Offshore outsourcing: why companies do it?

    I have a different but related perspective. If you're familiar with foreign exchange and ways to profit from it, then you would understand why outsourcing is such a hit here in Asia and why it usually doesn't work in countries with the same level of currency. North America and Europe think they're paying less but the amount being paid to developing countries has a bigger value when converted to the local currency. So if you look at it from afar, it's a win-win situation.

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    • #3
      Re: Offshore outsourcing: why companies do it?

      I agree. I think these days are not the main factor anymore even if it may have started out that way. A lot of the countries that cater to outsourcing stay in that state because their terms are conducive for it. There is a lot you'd have to put up with with local government that you wouldn't necessarily have to with companies set up in another country and not only that but sometimes the cost for it is lower too even when you don't consider the cost of paying people. Even Hollywood does it way more now for the same reasons because it's sometimes a lot more expensive to film locally than elsewhere with a similar look.

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      • #4
        Re: Offshore outsourcing: why companies do it?

        My take on foreign outsourcing is the cheaper wages and the quality of the labor force. You don't outsource simply because of low wages because you get Africans or Bangladeshi to fill up your call center but don't expect good performance. In other words, outsourcing from another country is more of the capability of the outsourced workers and wages is only secondary. By the way, I have heard that India is now the number 1 in call center outsourcing because they have much improved English speakers with the proper accent. But the Philippines is not left behind because we are also good in terms of English. Much more, our call center agents are mostly college graduates.

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        • #5
          Re: Offshore outsourcing: why companies do it?

          This is really something that is met with a lot of hostility towards the companies who do it, but I have to say that it is often times for good reason. The most common reason that people think of is cheaper labor, or cheaper production. When you have a more global economy, too, this is just more likely to happen. The real issues come when we have a lack of jobs in the home country, and the people there see it as the company screwing them over, when in reality they are just cutting costs, trying to make a profit. It is harsh to think about, but it is not these companies' moral duty to make sure that everyone has a job. It is a tough issue, but open and honest discussion is certainly welcome and warranted, and for that I say thank you for sharing.

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          • #6
            Re: Offshore outsourcing: why companies do it?

            I see, I'm glad there are reasons beyond paying cheaper wages for outsourcing offshore nowadays, and makes sense. The concerned expenses now moved towards taxation, labor legislations, imposed paid benefits by law etc. I always said to my peers that when We let government bite far more than it can be allowed to chew in regards of regional economy regulations, businesses will lose incentives to invest more within the borders and will go offshore elsewhere for better profit, or even just to avoid going bankrupt due to ridiculous government impositions.

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            • #7
              Re: Offshore outsourcing: why companies do it?

              Originally posted by xTinx View Post
              I have a different but related perspective. If you're familiar with foreign exchange and ways to profit from it, then you would understand why outsourcing is such a hit here in Asia and why it usually doesn't work in countries with the same level of currency. North America and Europe think they're paying less but the amount being paid to developing countries has a bigger value when converted to the local currency. So if you look at it from afar, it's a win-win situation.
              Well we may ask for George Soros' insight on Forex, he also happened to have made a fortune out of manipulating South East Asia currencies and ultimately (as some claim) causing the 1997 Asian financial crash. But I can cite some outsourcing examples I am familiar with: GE were dumping all of their dirty steel casting in China not for the love of the latter or to make any kind of profit (it's a pretty cheap & dumb process) but just because it was dirty. You could pretty much walk with a foundry factory in any OECD country and you'd basically get a "no thank you take your money we don't want that dirty stuff here". China was the only place that had the size to do it and the only one country that invested and heavily subsidized in getting a giant steel industry that no other small country could compete with its prices (not =/= wages). Another example I know is the aeronautics industry, I know of a manual polishing process for a new composite material that is being delegated to "crap country" because this process has many health hazard that we have yet to fully grasp; very small particles that infiltrate any protection and no single operator is permitted (or even able) to work on this for more than 2 years before serious health issues kick in. The reason here is obvious, not cost but you just cannot do this kind of stuff in any respectable country and even if you succeed in obfuscating the health hazard you will eventually pay one day or the other in a very infamous lawsuit.

              Originally posted by Norm View Post
              I agree. I think these days are not the main factor anymore even if it may have started out that way. A lot of the countries that cater to outsourcing stay in that state because their terms are conducive for it. There is a lot you'd have to put up with with local government that you wouldn't necessarily have to with companies set up in another country and not only that but sometimes the cost for it is lower too even when you don't consider the cost of paying people. Even Hollywood does it way more now for the same reasons because it's sometimes a lot more expensive to film locally than elsewhere with a similar look.
              Exactly, Hollywood example is great, there are some things they outsource that are not just more expensive but not permitted by law period. I think there was a case where a host country (don't remember which) rented its true soldiers with uniforms and tanks to appear in a Hollywood production, and guess what they did it for free, entirely. The local dictator is a Cinema aficionado and apparently thinks his army are toy soldiers.

              Originally posted by neural View Post
              I see, I'm glad there are reasons beyond paying cheaper wages for outsourcing offshore nowadays, and makes sense. The concerned expenses now moved towards taxation, labor legislations, imposed paid benefits by law etc. I always said to my peers that when We let government bite far more than it can be allowed to chew in regards of regional economy regulations, businesses will lose incentives to invest more within the borders and will go offshore elsewhere for better profit, or even just to avoid going bankrupt due to ridiculous government impositions.
              I think it is something of a food chain, the functions that require professionalism, skill-based knowledge-based talent, good regulatory and governance environments have stayed in the advanced countries, whereas low-automation labor-intensive or immature and inefficient processes have moved, or should I say did not move in the first place they were directly created in offshore countries.

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              • #8
                Re: Offshore outsourcing: why companies do it?

                It's a small percentage of the budget because they offer their products at a high price just to get as much profit margin as possible.

                The price itself is broken down into several things other than the cost of employment, they have to pay all sorts of things out of the investment for the manufacturing like delivery cost, personnel expenses. You know big businesses like to rent jets and crap like that just to make themselves feel more successful.

                One round trip on a private jet is the yearly salary of 2 employees working full time on minimum wage in the US, assuming that jet cost a little over 25K round trip.

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                • #9
                  Re: Offshore outsourcing: why companies do it?

                  Originally posted by hades_leae View Post

                  You know big businesses like to rent jets and crap like that just to make themselves feel more successful.

                  One round trip on a private jet is the yearly salary of 2 employees working full time on minimum wage in the US, assuming that jet cost a little over 25K round trip.
                  This may be off topic but let me reply to that jet issue. I work in a bank and our HR has a continuing program to uplift the company's reputation. It is called corporate image when an executive uses a luxury car. And I agree to that because can you imagine a company president riding in a dilapidated car? Even our managers are exhorted to buy their own cars for it is not a good image for people to see managers taking the bus (over here, public transportation is normally for regular workers only and if you are an executive, you should at least take the cab).

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                  • #10
                    Re: Offshore outsourcing: why companies do it?

                    Originally posted by Corzhens View Post
                    My take on foreign outsourcing is the cheaper wages and the quality of the labor force. You don't outsource simply because of low wages because you get Africans or Bangladeshi to fill up your call center but don't expect good performance. In other words, outsourcing from another country is more of the capability of the outsourced workers and wages is only secondary. By the way, I have heard that India is now the number 1 in call center outsourcing because they have much improved English speakers with the proper accent. But the Philippines is not left behind because we are also good in terms of English. Much more, our call center agents are mostly college graduates.
                    I don't think call center have much future, they are sadly just pure exploitation IMO. Typically they help with immature processes, i.e. companies that hadn't planned more self-service for their clients, e.g. calling to change an address/subscription type, but the client can do it by himself if the company had invested in building a professional website for this type of stuff.

                    Call centers are already receding compared to their golden era in the mid to late 2000s, and many are kept alive only thanks to local government subsidies. Some big operators understand this and have the adequate political connections to open a call center in a country and actually have "free employees", because the host country will be paying their wages through some form of subsidy usually dressed as: employee training, tax breaks, sovereign fund cash investment etc. Or even better a corrupt host country offering a nice building in the middle of the city for free that you can operate for a few years and then sell at hefty price in the buoyant real-estate market and there you have your profit.

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                    • #11
                      Re: Offshore outsourcing: why companies do it?

                      It may seem to be a blessing in the beginning, but outsourcing is a curse for the third world countries. The brain drain has been apparent now and it is now that we realize that we have sold our souls to some money mongers who call themselves the future of IT. They want to cut on their cost of inventory and that is why they outsource. Its a imperialistic business approach. If they want to really be friend to the third world, why do they not pay all their employees at the same scale all over the world!!!!!

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                      • #12
                        Re: Offshore outsourcing: why companies do it?

                        Some companies actually do save a lot of money by outsourcing to third world countries. Wages there are lower and people work longer hours than they do elsewhere in the developed world. Some call it some form of slavery.

                        The companies still sell the finished products as the same prices they would if they [the products] were locally produced. It's what they are after huge profits. And that's why outsourcing will be around for a really long time.

                        Comment


                        • #13
                          Re: Offshore outsourcing: why companies do it?

                          Originally posted by CarlosTL View Post
                          Well we may ask for George Soros' insight on Forex, he also happened to have made a fortune out of manipulating South East Asia currencies and ultimately (as some claim) causing the 1997 Asian financial crash. But I can cite some outsourcing examples I am familiar with: GE were dumping all of their dirty steel casting in China not for the love of the latter or to make any kind of profit (it's a pretty cheap & dumb process) but just because it was dirty. You could pretty much walk with a foundry factory in any OECD country and you'd basically get a "no thank you take your money we don't want that dirty stuff here". China was the only place that had the size to do it and the only one country that invested and heavily subsidized in getting a giant steel industry that no other small country could compete with its prices (not =/= wages). Another example I know is the aeronautics industry, I know of a manual polishing process for a new composite material that is being delegated to "crap country" because this process has many health hazard that we have yet to fully grasp; very small particles that infiltrate any protection and no single operator is permitted (or even able) to work on this for more than 2 years before serious health issues kick in.
                          That's not outsourcing, by the way. Outsourcing is basically taking advantage of cheap labor in another country. The GE issue you were talking about had nothing to do with outsourcing whatsoever. That was simply the case of an industrialized country letting a developing country take care of its trash. Dumping trash in another country is not the same as outsourcing, regardless of how China transformed trash into a profitable venture.

                          Comment


                          • #14
                            Re: Offshore outsourcing: why companies do it?

                            Originally posted by xTinx View Post
                            That's not outsourcing, by the way. Outsourcing is basically taking advantage of cheap labor in another country. The GE issue you were talking about had nothing to do with outsourcing whatsoever. That was simply the case of an industrialized country letting a developing country take care of its trash. Dumping trash in another country is not the same as outsourcing, regardless of how China transformed trash into a profitable venture.
                            It is outsourcing 100%. No, the point of outsourcing is not only cheap wages in a another company, that is not to mention that wages are not that important in many sectors, I started this topic to point this out.

                            You can read a bit about the history of outsourcing and its relation to supply chain management, it all started in the 1980s when companies started specializing, focusing on their core skill and abandoning the vertical pyramidal way of doing things. This type of stuff used to be done not only in the country of origin but by the brand itself, which by today's standards seems totally crazy but was back then totally normal. It is no wonder that almost all steel-related factories have closed in the advanced world over the last two decades or so. Work moved abroad for various reasons, wages being really an anecdotal part of the story in this particular trade.

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                            • #15
                              Re: Offshore outsourcing: why companies do it?

                              Many companies are involved in offshore outsourcing because of the numerous benefits that may be derived from this arrangement. Some countries whose economies may probably be in a bad state will literally bend over backwards to have these investors in their countries, hence they offer these investors huge tax breaks and incentives to establish businesses there. In addition, the businesses are able to enjoy the opportunity of paying lower wages than they would in their country, thus enhancing profitability. In most instances all that is mostly gained by the country that is offering the incentives is the increased low wage employment.

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