The definition of outsourcing means the delegation of tasks or jobs from internal production to an external entity (such as a subcontractor). More recently, the term has taken on negative political connotations and it has come to mean the elimination of native staff to staff overseas, where salaries are markedly lower.

In general, the term means, in popular parlance, the outflow of high-paying, good jobs to low-paying areas of the world. The idea is that good jobs are being exported overseas by greedy corporations that are motivated by nothing more than profit. In reality the original definition is more accurate: subcontracting jobs to reduce costs.


A more technical definition would be that the process of outsourcing is done to decrease unit costs. Another, technical definition would be the purchase of off-shore, arms-lengths services. Arms-length means buyer and seller are in different firms in different geographical regions or countries. Outsourcing is not foreign direct investment, nor is it the purchase of cheaper manufactured parts from off-shore. Outsourcing only involves services in different firms and in different countries.


The advantages of outsourcing are numerous. First, there is the obvious advantage that there will be a reduction in costs associated with a product. A reduced cost will mean lower prices. When work is outsourced it allows for work on more core aspects of a company, in other words it frees up the non-outsourced employees to work on the matters of the business that are most important. Further outsourcing allows/provides flexibility in staffing which can be a cost cutting measure. Another advantage is that along with outsourcing is “insourcing”.



This means that while there will be an outflow of direct jobs there will also be an inflow of indirect jobs. Jagdish Bhagwati, the British economist, found for example the case of Info Management Consultants based in Reston Virginia that for every Indian engineer hired by the firm there were 6 domestic engineers hired.


Because the US is such a large exporter of arms-length services this could be a great prospect if there is even a one-for-one correlation to outsourcing. Bhagwati further points out that there is a total of 30 million jobs lost and created every year in the United States, and that 300,000 are lost annually to outsourcing. This is neither advantage or disadvantage but a way of putting it into perspective.



Another big advantage, yet not readily identified in the media, is innovation and the product cycle theory which points out that as technologies become mature they move to the less developed nations where they are cheaper to produce. There is the example of electronic production moving from Japan to Korea, and now to southeast Asia. The same is true for more heavy manufacturing like car manufacturing.


The Japanese are now outsourcing the production of cars here in the US as well as Mexico, southeast Asia etc. The idea is that these types of jobs are moving overseas while better, cleaner jobs based on services are replacing them. There is a distinct advantage to not having to work in the monotony of a factory, not to mention the risks associated with manual labor.


Another example of the advantages of outsourcing has been in the decrease of information technology, particularly software and services, may actually increase productivity in the US. Katherine Mann identified a 10-30% decrease in prices of information technology from 1995-2003 and that increased US GDP by approximately .3% per year.



There are also disadvantages to outsourcing. The main proponent of protection against outsourcing is Paul Samuelson who thinks that the growth of technology in the developing world as creates outsourcing which Samuelson says may reduce the welfare of industrialized nations. The idea is that, in the Ricardian perspective, that countries like China can create a comparative advantage, especially in technology, that will mean that there will be no advantage of trade for countries like the US because China will be able to provide the product below any conceivable autarky price that the US can manage.



A disadvantage of outsourcing is the possibility that information sent overseas can be held hostage for more money. This recently happened with US medical information held by a Pakistani worker who wanted more money, or she would release this sensitive and private information. The point here is that there is very little ability to oversee the work or to ensure that it is not falling into the wrong hands.



A final disadvantage is that once you have outsourced the work it may be contractually hard to retrieve that work back. Studies have shown that as many as 30-35% of all service contracts are not renewed. This seems to indicate that much of outsourcing is not satisfying the needs of the outsourcer, or that other problems have been encountered with the outsourcee.