Author: Paula Jones FCMA

Outsourcing, or more specifically offshoring, has been increasing in popularity within the business community in the last decade. What started in the manufacturing industries 20-30 years ago is now happening in the business services industries as a result of increased communication, technology and educational standards in offshore “host” countries.

There has been much debate in the media about whether outsourcing is good or bad for the UK economy, much of it has focused on the negative side such as the loss of UK unskilled jobs. However, it is important to note that there are many positive attributes of offshoring that can be a real benefit to our economy…. read more by clicking on the continue reading link below.

Look out for our next fortnightly blog: Outsourcing: a benefit to our economy or a threat – should we worry?

For more information on outsourcing for SMEs, contact: Outspan. www.outspan.co.uk, 0845 838 1965

The reasons companies outsource

The primary reasons why businesses look to outsource some of their activities are, among others:

a) To increase cost competitiveness through significant cost savings and switching costs from fixed to variable
b) To tap into a global pool of resources, particularly where certain skills are not available in the UK
c) To tap into additional or cutting edge technology that would be too expensive for a business, particularly an SME, to be on top off
d) To access operational best practice
e) To take advantage of flexibility in service provision where demand requires an increase or decrease in productivity, often at short notice

All of the points above will benefit the British business with lower costs both in the short term and long run. This in turn will lead to lower prices from the business and/or higher profits for shareholders. Where there are lower prices, the British consumer will benefit through being able to purchase more, which in turn leads to higher demand and job creation. Where there are higher company profits, this often lead to higher dividend payouts which benefit UK investors and in particular pension funds, allowing better pension incomes to be spent on local services (such as meals out, hairdressers, etc)

Real benefits to the economy

Where the work is sent offshore, the workers in those countries (such as Sri Lanka) will benefit from employment, increased wages and higher education. The increased wages will allow the workers to buy more imports from countries such as the UK, increasing the demand for UK made services or products further. So, the cycle continues. A study by the McKinsey Global Institute (2004) reported that every US $1 invested in activity offshore leads to a return of $1.12-$1.14 for the US economy and $0.33 for the host country’s economy (in their report this is India).

The majority of work offshored is the lower end, unskilled work. With companies moving this low end work out of their own business they are able to focus on the more value adding tasks, creating higher skilled jobs which bring with them higher wages for UK staff.

There is an argument, however, that at the lower end of the food chain the unskilled jobs being offshored are gone forever and this particularly affects those people in the UK with minimal qualifications. However, one could also argue that with higher company profits, the UK Government receives increased corporation tax revenues, which allows them to invest more in education, apprenticeships and other measures to help raise the skills of UK citizens.

What they say

In the US, whose economy has been most affected by offshoring (predominantly IT offshoring), there has been ferocious media debate primarily focussing on the loss of American jobs. The US Government has been lobbied by numerous trade unions and professional organisations to stop offshoring. As a result, the US Government passed a bill that forbids certain government departments to offshore work.

However, back in the UK the Institute of Directors (IoD) and the Confederation of British Industry (CBI) advise that offshore outsourcing should be beneficial to both the UK economy and the host country’s economy, and that offshoring is a “natural result of development in the global market”.

Jim Downey FCMA, Managing Director of Outspan (a leading UK outsource provider) says that “although outsourcing within large companies can result in job losses, the majority of our customers within the SME sector use outsourcing as a way to either redeploy their staff into higher skilled roles, outsourcing the low end work, increasing productivity and therefore company profitability, or to gain access to resource they do not currently have. Very few job losses are made by our customers as a result of outsourcing”.

An important point in this debate is that although there can be low skilled job losses, these affect relatively few people whereas the benefits of offshoring are dispersed across the whole population of the UK. The key for the UK Government is to raise the skills levels of UK citizens and promote effective mechanisms for switching displaced workers into new jobs to minimise the negative impact of the inevitable trend of offshoring outsourcing.

Contact Outspan today to discover how we can start reducing your costs now at www.outspan.co.uk, 0845 838 1965