Outsourcing can be provided on or off premises, in the same country – domestic
outsourcing – or in a different country – international or global
outsourcing.
Outsourcing has become "a standard aspect of all businesses, which frequently and continually need to make the decision to ‘make or buy' specific inputs and services. While companies regularly decide whether they wish to produce goods and services ‘in house' or buy them from outside vendors, the tendency in recent years has shifted in the direction of ‘buy.'"
(Gereffi, G.
The New Offshoring of Jobs and Global Development, visited 2010-10-16)
Since the 1990s, many major companies in the automobile, aeronautics, IT and distribution sectors, etc. have become network-firms: they have thinned their activity to core tasks, while
outsourcing as many production processes as possible.
Outsourcing as a Way of Restructuring
"Firms can reorganise through mergers and acquisitions, joint ventures and strategic alliances […], but also by sourcing activities to foreign affiliates or
outsourcing them to external suppliers. By concentrating on their core comparative advantages and
outsourcing other activities, firms may increase their competitiveness through cuts in labour and capital investment costs and the exploitation of economies of scale."
(OECD,
Working Party on the Information Economy, 2004, visited 2011-04-21)
An international market orientation is much more likely to be associated with an increase in
outsourcing whereas a focus on the domestic market is associated with decreases in
outsourcing.
(adapted from Bélanger, J., et al,
Future perspectives of multinationals in Canada, Interuniversity Research Centre on Globalization and Work (CRIMT), Montréal, 2006, p. 27, and CRIMT, visited 2009-06-11)
Advantages and Disadvantages
On the one hand, companies can develop labour flexibility (since labour is transferred to the subcontractors), cost control (by creating competition between suppliers), and even technology innovation (since each subcontractor specializes in a particular field).
On the other hand, companies can sometimes overestimate foreseen profits and underestimate some costs linked to coordination (transport, a weakening of the production chain: risks occur at every interface). In addition, transaction costs with subcontractors (communication, negotiation, regulation) can be quite high and
outsourcing does not always provide more flexibility, as every subcontractor has its own agenda and can deprive the firm of its own flexibility in terms of innovation or production. Lastly, decision-making with regard to what tasks to outsource and to whom are not based on objective facts and rules, but rely strongly on irrational criteria, resulting from negotiation and compromise.
Outsourcing Developments
According to Paul Marginson, three main
outsourcing developments amongst the major manufacturers have been identified:
- "Progressive withdrawal from the manufacture of components, in favour of outsourced supplies"
- "A sharp reduction in the number of first-tier suppliers, which are now required to supply complete systems"
- "Growing outsourcing of services, ranging from labour-intensive activities such as cleaning and catering to, increasingly, higher value-added activities such as computing and software systems, maintenance of plant and buildings and more routine aspects of administration."
(Marginson, P.,
European Integration and Industrial Relations: Multi-Level Governance in the Making, New York: Palgrave Macmillan, 2004, pp. 46-47)
Peter Dicken has identified a further important development: the tendency on the part of many firms to move towards closer functional relationships with their suppliers. He maintains that "there is a strong move towards the nomination of preferred suppliers with whom very close relationships are developed. Such suppliers are increasingly being given greater responsibility for the quality of their outputs and, indeed, are playing a more direct role in the design of products. The result, in many cases, is the development of a system of tiered suppliers. In tiered production, the buying company deals primarily with the top-tier suppliers, while lower-tier suppliers are managed by those above them in the pyramid… A tiered production system reduces the need for a single company to manage the entire supply chain."
(Dicken, P.,
Global Shift: Reshaping the Global Economic Map in the 21st Century, 4th ed., New York: Guilford Press, 2003, p. 258)
Impact of Outsourcing on the Labour Market
The combination of intensified international competition and the scope, offered by changes in technology, for restructuring enterprises, including through increased
outsourcing, has led to increased uncertainty over employment security in many countries. Because globalized production will be increasingly coordinated externally rather than within firms (that is if external
outsourcing can create competition among suppliers by reducing costs and raising flexibility beyond what could be accomplished within the realm of internal operations), pressure on labour costs or on labour standards is likely to increase. This has led to the questioning of laws that restrain employers' ability to employ at will and protect workers from the effects of employment instability.
"Ranging across the EU-15, Caprile and Llorens find that existing collective bargaining arrangements have rarely been extended to the third group of outsourced activities, and only with any pattern of consistency to the first-tier suppliers involved in the first and second types of activity. […]
Growing
outsourcing of public service activities through compulsory competitive tendering procedures also poses problems for established sector agreements."
(Marginson, P.,
European Integration and Industrial Relations: Multi-Level Governance in the Making, New York: Palgrave Macmillan, 2004, p. 47)