INDEPTH: ECONOMY
Outsourcing: Contracting out becomes big business
CBC News Online | March 7, 2006
Outsourcing – often known as contracting out – has become a daily reality in the business plans of most companies. Simply put, outsourcing involves the transfer of work that used to be done in-house to an outside third-party. To call it a growth industry would be something of an understatement: Growth estimates of 30 per cent per year are not uncommon. One estimate puts the current value of outsourced goods and services around the world at a whopping $6 trillion US a year.
Mention “outsourcing” and many people will think of work that’s been shifted to low-labour-cost countries such as India or China. But outsourcing doesn’t necessarily imply a move overseas, which is called “offshoring.” Outsourced work is sometimes done by another company in the same country – sometimes in the same block.
Outsourcing is also one of those buzzwords that attracts a crowd … and everyone seems to have an opinion on the subject. The comments generally fall into two main camps. One side calls outsourcing little more than a thinly-veiled attempt to contract out good-paying jobs to cheaper – usually non-union – workplaces that may be in the developing world. The other side calls it a necessary business strategy that cuts costs and ensures competitiveness and better quality in an increasingly globalized marketplace.
As with so many things, one’s opinion about outsourcing depends on whether you benefit from it or think you’re a victim of it.
Kinds of work commonly outsourced
Name a service, function, activity or thing that can be carried out, analyzed, manufactured or processed by an outside company and you have a candidate for outsourcing. In reality, though, certain fields have tended to lend themselves more to the practice than others.
One of the first functions that many companies chose to outsource was data processing.
Information technology services, after all, involve the processing of digital data that can easily be sent back and forth.
Many of Canada’s financial institutions have outsourced all or part of their IT departments. In 2002, CIBC inked a $2-billion contract with HP to provide it with “comprehensive IT services” over the next seven years. In 2001, Laurentian Bank outsourced its IT services to CGI Group and Scotiabank outsourced its computer operations to IBM Canada. Even the Bank of Canada got into the act – outsourcing the data and support services for its Canada Savings Bond program to EDS Canada, transferring 500 workers to EDS.
IT outsourcing isn’t just about data processing, either. It can also include
infrastructure, e-commerce, network management and security.
And then there’s software research and development. Macadamian, an Ottawa-based software firm, estimates that by 2009, 90 per cent of companies will outsource their software R&D.; Only a quarter outsourced it in 2004.
Human resources is another frequent outsourcing target. Payroll processing, employee assistance programs, recruitment and staffing services – all can easily be carried out by third parties that specialize in doing nothing but HR-related work.
In 2001, CIBC signed a seven-year deal with EDS Canada to handle its human-resources operations. Two hundred CIBC employees instantly became EDS employees.
Some companies have become successful by providing nothing but outsourcing services in a particular field. Canadian-based Patheon, for instance, manufactures drugs for dozens of pharmaceutical companies in more than a dozen facilities around the world.
Call centres are another familiar example of outsourcing. Many multinational companies that attract large numbers of customer enquiries have contracted out the entire division to third-party call centres – some in Canada, some overseas. A caller may think they’re talking to a company rep in their home town. The reality may well be that the person at the other end of the line works for a third-party call centre company in Moncton, N.B., India or the Philippines.
But it would be a mistake to think that it’s just big companies that outsource. A survey by the Canadian Federation of Independent Business found that 64 per cent of the companies that responded had acted as a subcontractor for another business. But even more – 67 per cent – had themselves outsourced work to subcontractors. Most of the companies that were outsourcing had fewer than 100 employees.
It would also be a mistake to think that Canadian companies don’t attract big outsource contracts of their own in highly specialized fields. Air Canada Technical Services, for instance, does fleet maintenance work for more than a hundred clients, including Delta Air Lines, United Airlines, and Canada’s Department of National Defence.
The Defence Department has been into outsourcing in a big way for years – handing out billions of dollars in contracts for pilot training to companies including
Bombardier and Allied Wings
The Canadian-based auto parts giant, Magna International, farms some of its manufacturing work to firms in China. Magna is, of course, also a major beneficiary of outsourcing parts contracts from the major automakers.
Outsourcing pros and cons
Companies that outsource talk of the savings and efficiencies to be had by moving non-core, in house operations to outside providers. When it embarked on its outsourcing initiative, the Bank of Canada said it would “ensure more flexible and cost-effective service” in its CSB programs. Similarly, CIBC said its strategy was to “focus on its core businesses while using the expertise of leading providers to support our administrative needs.”
Companies that do nothing but provide payroll or IT services or debt collection, the thinking goes, will do a better job at a lower cost and allow the company to concentrate on what it really wants to be known for.
But when outsourcing involves the contracting out of higher-paying, often unionized jobs to lower-paying, non-union workplaces, the labour movement sees an ulterior motive.
“The race to the bottom,” they call it – companies underbidding one another to get a crack at a lucrative outsourcing contract.
When companies shift jobs to places where labour costs and standards are lower, such as India or China or Mexico, the shift can also attract the attention of politicians. While many like to consider themselves freetraders at heart, they don’t like to see local jobs vanishing to foreign jurisdictions. There are a number of anti-outsourcing legislative efforts currently under way in the U.S. to “protect American jobs.”
Outsourcing’s critics say the business case for many cases of contracting out just isn’t there. The widget or answer may be obtained at a lower cost, they admit, but it comes from a worker who may not have the same commitment to the company as an in-house employee. And there may be quality issues. Dell Computer had to move some of its business customer service calls from Bangalore, India back to the U.S. in 2003 following complaints (Dell says it remains committed to its other call centres in India.).
For many businesses, the question now is not whether to outsource – that’s a no-brainer – but how far to go. Currently, we see more manufacturing and high-tech companies handing off the routine manufacture of many of their products to a third party, while they hang on to the key R&D; functions. In the future, with India and China churning out millions of highly educated professionals, some predict that every part of some companies' product cycle will be sent overseas, as multinationals choose to mine the advantages of going elsewhere.
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