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What are the Effects of Outsourcing?

By Leonardo Von Navorski
Updated May 17, 2024
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Outsourcing is the act of contracting internal business functions to external third parties outside of a company. Although the term "outsourcing" can technically refer to any external contracting, it usually refers to the contracting of services to lower-cost providers, particularly those located in less-developed countries. The effects of outsourcing are far reaching, and the act has negative consequences as well as benefits. For the company that outsources jobs, the act allows it to reduce costs, which might lead to increased profits and allow it to avoid going out of business. The unemployment rate in that company's region or country will increase, possibly harming its economy, but the opposite effects are seen in the country where the third-party workers are hired.

Outsourcing is an effective cost-saving tool for companies located in developed countries because it allows the company to contract workers in lower-wage, less-developed countries. Those countries might also have lax regulations, which can reduce fees and increase worker output. Such lax regulations might include non-existent or limited labor laws, such as having no overtime pay mandate and a longer work week.

The effects of outsourcing on a company’s bottom line are simple: it reduces costs. The lower cost of labor usually allows the company to achieve a greater profit because it is spending less on labor than it would in its own country, or in another developed country. The effects of outsourcing also reach further into either country’s economy.

In the less-developed country, the effects of outsourcing include economic growth and the creation of new industries in areas that otherwise have a lack of jobs. The effects of outsourcing on the company’s country of origin, however, are generally negative. The company is outsourcing its work, so it is not hiring local employees, which can 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 “shipping jobs overseas,” although the third-party workers might not be overseas. In other cases, the company might choose to expand its operations to a less-developed country rather than expand in its home country.

Common services that are candidates for outsourcing include factory work, customer service and engineering, although other services are not exempt. In the case of factory work, the decision to outsource might be influenced by lax air quality regulations and environmental regulations in the less-developed country. This is in addition to the overall lower labor cost.

Proponents of outsourcing argue that the practice allows companies to remain viable and compete in a global economy. They might also argue that by outsourcing work, they are able to keep their costs low. This might help keep prices for the product or service in question low, although many people argue that those savings tend to go directly to the company’s bottom line.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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