Outsourcing

(2nd ed 2005) Outsourcing to India. ISBN 354023943X. As of 2005, several areas of the world are thought by some to be in a bubble state, although the subject is highly controversial; see:. 2004. See also: real estate economics. Mark Kobayashi-Hillary. A basic summary of the progress of housing indicators for US cities is provided by Business Week [6]. Outsourcing departments like Accounts, Payroll and Procurement is now common practice, as seen in August 2005 at the University of Portsmouth. The valuation component measures how expensive houses are relative to what most people can afford, and the debt component measures how indebted households become in buying them for home or profit (and also how much exposure the banks accumulate by lending for them).

It is argued a malicious implementation of the Higher Education Role Analysis (HERA) in the UK may force Higher Education administrative and support staff to prematurely retire or seek for new employment in other organisations, thus freeing of staff many departments which could then be effectively outsourced. Indicators describe two interwoven aspects of housing bubble: a valuation component and a debt (or leverage) component. presidential candidate John Kerry blasted firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of US taxes during his unsuccessful 2004 campaign, calling such firms "Benedict Arnold corporations," in reference to the infamous traitor Benedict Arnold. By comparing current levels to previous levels that have proven unsustainable in the past (i.e. led to or at least accompanied crashes), one can make an educated guess as to whether a given real estate market is experiencing a bubble or not. Democratic U.S. In attempting to identify bubbles before they burst, economists have developed a number of financial ratios and economic indicators that can be used to evaluate whether homes in a given area are fairly valued or not. That database contains personal and work-related information, enabling employers to verify a staff member's credentials and allowing police to track the background of workers. .

NASSCOM, which is a forum of IT and ITeS companies, has attempted to address these fraud concerns in India by creating the National Skills Registry. Therefore this article focuses on housing bubbles and mentions other sectors only when their situation differs from housing. Intel would not put up with such fraud. Other sectors such as office, hotel and retail generally move along with the residential market, being affected by many of same variables (incomes, interest rates, etc.) and also sharing the "wealth effect" of booms. The report concluded that fraudulent practises such as "faking bills to claim your allowances like conveyance [and] drivers’ salaries" were some common malpractices in India. Due to low inflation in most countries, future corrections may result in a fall in both real and nominal house values. The firings followed from Intel's internal Business Practice Excellence programme of expenses claims. In select markets though, housing prices have fallen in real and nominal dollars, such as Los Angeles during the late 80s and early 90s.

In 2005, Intel discovered and fired 250 Indian employees after they faked their expense reports. Historically due to inflation, prices do not fall in nominal terms, rather they stay "flat" for a period of 3-5 years. Outright fraud is also a concern. Unlike a stock market crash following a bubble, a real-estate "crash" is usually a relatively slower process, because sellers just decide not to sell. (See the full report.). The crash of the Japanese asset price bubble from 1990 on has been very damaging to the Japanese economy and the lives of many Japanese who have lived through it [4], as is also true of the recent crash of the real estate bubble in China's largest city, Shanghai [5]. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank. US Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the US housing market) … it's hard not to see that there are a lot of local bubbles" [3].

In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call center workers in Pune, India, acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. The Economist magazine said that "the worldwide rise in house prices is the biggest bubble in history" [2], and real estate bubbles are believed to to exist in many parts of the world, especially in many areas of the United States, Great Britain, Australia, New Zealand, Ireland, Spain, and China. There are also security issues concerning companies giving outside access to sensitive customer information. Just like any type of economic bubble, it is difficult for many to identify except in hindsight, after the crash. With these traditionally "safe" jobs perceived to be endangered, this raises questions regarding whether origin countries can maintain any comparative advantage given the losses in both low and high-value jobs. It is characterized by rapid speculative increases in the valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by decreases that can result in many owners holding negative equity (a mortgage debt higher than the value of the property). Proportions of workers trained for Science, Technology, Engineering, and Mathematics (STEM) fields fields in developing nations are viewed to outstrip traditional technology leaders such as the U.S. A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets.

There is also little incentive given that the jobs in their new field could also be outsourced as well. The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke, New York: Basic Books. Retraining to their current level in another field may not be an option due to years of study and cost of education involved. Elizabeth Warren and Amelia Warren Tyagi (2003). However, some of these workers are already highly educated and already possess a bachelor's and master's degree. Benjamin Wallace-Wells, "There goes the neighborhood", Washington Monthly, 2004 April. One solution often offered is retraining of domestic workers to new jobs. Personal Finance for Dummies, 4th ed., Foster City, CA: IDG Books.

Policy solutions to outsourcing are also criticized. Eric Tyson (2003). Dealing with lackluster outsourced service is a negative surprise after the money is already spent. The Only Investment Guide You'll Ever Need (updated ed.), Harcourt Brace and Company. Customers only experience outsourced service and support after they have spent their money since sales is generally done in-house by the original company. Andrew Tobias (2005). However, service and support are often not considered by customers as part of their original purchases. The Coming Crash in the Housing Market, New York: McGraw-Hill, Inc.

Defenders of outsourcing say if this were true, then companies would experience market forces compelling them to return service and support handling back from the outsourced company. Talbott (2003). Criticism of outsourcing from the public and media sometimes tend to concentrate on lackluster customer service and technical support being provided by either local workers who are not actually employees of the company, or by overseas workers attempting to communicate with Americans in broken or incomprehensible English. John R. Thus, outsourcing is criticized as it represents a new threat to labor, contributing to rampant worker insecurity, and reflective of the general process of globalization where the United States government fails to mediate business-labor relations in a way conducive to prevailing values that places the American middle class worker as a central priority. Princeton University Press. Outsourcing appears to work contrary to the claim that “free trade” will create the “jobs of tomorrow” in America when high-tech or high paying white collar jobs are transferred to or created in foreign countries. Irrational Exuberance, 2d ed.

This is especially true for high-tech workers who were promised the “jobs of tomorrow”- a phrase Bill Clinton iterated in 1994 to justify his conservative position on NAFTA. Shiller (2005). Outsourcing appears to threaten the livelihood of domestic workers and the American Dream. Robert J. The poll of over 1,000 Americans was conducted in August 2004 (See Zogby International survey results online at zogby.com). A Mathematician Plays the Stock Market, New York: Basic Books. A Zogby International poll reports that 71% of American voters believe that “outsourcing jobs overseas” hurts the economy and another 62% believe that the US government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. John Allen Paulos (2003).

Criticism of outsourcing, from the perspective of US citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. Norton and Company, Inc. This debate did not center on problems of declining quality of customer services but on the threat to US jobs and work. W. The 2004 US presidential election race focused on outsourcing to some degree. A Random Walk Down Wall Street, 8th ed., New York: W. It has been therefore argued that quality levels of customer service and technical support of outsourced tasks are lower than where they have remained 'in-house'. Malkiel (2004).

Because "outsourced" workers are not actually paid agents of the company, it has been argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company. Burton R. In December 2005, nearly 50 people were indicted in connection with a scheme that bilked at least $200,000 from Katrina relief fund at Red Cross claim center in Bakersfield, Calif., which handled calls from storm victims. Norton and Company, Inc. (See the full story.). W. For example, 40 million credit card numbers were stolen in June 2005 at CardSystems Solutions in Tucson, Arizona. The Random Walk Guide to Investing: Ten Rules for Financial Success, New York: W.

Advocates of outsourcing also claim that outsourcing-related fraud is insignificant, averring that such malpractices can occur in any country. Malkiel (2003). ^[3]. Burton R. Nationally, 70,000 computer programmers lost their jobs between 1999 and 2003, but more than 115,000 computer software engineers found higher-paying jobs during that same period. All Booms Bust, History in the Making, All Booms Bust: Making Myself Clear.. ^[3] Drezner also points out that large software companies such as Microsoft and Oracle have increased outsourcing and used the savings for investment and larger domestic payrolls. Robert Kiyosaki (2005).

Professor Drezner reports that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money—That the Poor and Middle Class Do Not!, New York: Warner Business Books. That in turn makes us all richer.” ^[2]. Robert Kiyosaki (2000). ‘Creative destruction’ is a discovery process where we find ways to produce goods and services more cheaply. The New York Times, December 25th, 2005, Take It From Japan: Bubbles Hurt. The automobile cost the jobs of people who took care of horses or made saddles, carriages, and horseshoes.” ^[1] Walter Williams, another economist, said “we could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past--jobs such as elevator operator, TV repairman and coal deliveryman. The Economist, May 28th, 2002, "Going through the roof.".

Economist Thomas Sowell from the University of Chicago said “anything that increases economic efficiency--whether by outsourcing or a hundred other things--is likely to cost somebody's job. The Economist, May 29th, 2003, "House of cards.". Because outsourcing allows for lower costs, even if quality reduces slightly or not at all, productivity increases, which benefits the economy on aggregate. The Economist, May 3d, 2005, "Still want to buy?". the firm is trying to maximize the quality of its product given cost (its productivity). The Economist, April 20th, 2005, "Will the walls come falling down?". A firm's motivation for replacing workers with machines is identical to the motivation for outsourcing, i.e. The Economist, June 16th, 2005, "In come the waves.".

Some economists suggest that government training programs be provided. The Economist, June 16th, 2005, "After the fall.". However, economists do concede that labor is not always perfectly mobile and that some workers may have difficulty getting new jobs. The Economist, December 8th, 2005, "Hear that hissing sound?.". Some argue that greater profits to the labor owners lead to higher consumption, which leads to further job creation, allowing those who lost jobs to gain jobs in other sectors of the economy. See also this blog. Although workers’ jobs were lost from this replacement of workers with machines, the Ford Motor Company made more money by lowering costs (or increasing quality, thereby increasing revenue). Barron's, "The Bubble's New Home", June 20, 2005.

Economists argue that machines on the car assembly line must have a higher quality to cost ratio than workers because, if they didn’t, there would be no incentive for the firm to replace workers with machines. Chinese property bubble [10]. Today these workers are replaced by machines because they are cheaper in the long run, produce better quality products, or a combination of both (the firm is trying to increase its quality to cost ratio, quality being defined by the consumer and inferred from revenue). California property bubble. American Motor Company Ford relied heavily on workers in the past to assemble car parts. Spanish property bubble. Some economists have argued that outsourcing is a form of technological innovation analogous to machines on a car assembly line. Japanese asset price bubble.

That many large businesses outsource and continue to outsource suggests that in many cases outsourcing is successful in that it increases product quality, lowers costs substantially, or both. Irish property bubble. Proponents of outsourcing believe that arguing that outsourcing leads to lower product quality is pointless because if it were true, consumer demand will force firms to shift back to producing the good or service in-firm rather than out-firm. British property bubble. If the company does it correctly, it benefits from higher profits. US property bubble. The decision to outsource is like the decision to expand a business overseas, to incorporate computer technology, or to hire new workers. In this context, supply-and-demand numbers can be misleading: sales demand exceeds supply, but rent demand does not.

Critics of outsourcing often talk about outsourcing failures without mentioning instances of outsourcing success. A low occupancy rate means that the market is in a state of oversupply brought about by speculative construction and purchase. The decision to outsource is like any other business investment decision in that there is risk. The occupancy rate (opposite: vacancy rate) is the number of occupied units divided by the total number of units in a given region (in commercial real estate, it is usually expressed terms of area such as square meters for different grades of buildings). In fact, many American companies like Dell have moved customer service divisions back to America as a result of poor quality ^[2]. The price-rent ratio is the average cost of ownership divided by the received rent income (if buying to let) or the estimated rent that would be paid if renting (if buying to reside):. But the outsourcing firm has freedom to move a firm department or division back home if its profits are suffering as a result of poor quality. This formula is:.

One criticism of outsourcing is that product quality suffers. To compute the P/E ratio for the case of a rented house, divide the price of the house by its potential earnings or net income, which is the market rent of the house minus expenses, which include maintenance and property taxes. ^[1]. The price-to-earnings ratio or P/E ratio is the common metric used to assess the relative valuation of equities. A recent poll of economists by the Wall Street Journal found that only 16 % of them saw outsourcing as having a significant impact on the overall job picture. Therefore a high ownership ratio combined with an increased rate of sub-prime lending may signal higher debt levels associated with bubbles. "Offshoring”, on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control. If a rise in ownership is not supported by a rise in incomes, it can mean either that buyers are taking advantage of low interest rates (which must eventually rise again as the economy heats up) or that home loans are awarded more liberally, to borrowers with poor credit.

In short, “outsourcing” means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. Also, governments often enact measures such as tax cuts or subsidized financing to encourage and facilitate home ownership. “Offshoring”, in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. It tends to rise steadily with incomes. When this third party is located in another country the term “offshore outsourcing” makes more sense. The ownership ratio is the proportion of households who own their homes as opposed to renting. To be consistent, “outsourcing”, in corporate context, represents an organizational practice that involves the transfer of an organizational function to a third party. A ratio of 1 means 100% leverage; higher than 1 means negative equity.

Note that “outsourcing”, “offshore outsourcing” and “offshoring” are used interchangeably in public discourse despite important technical differences. This ratio increases when homeowners refinance and tap into their home equity through a second mortgage or home equity loan. In some cases, the agents are not allowed to even give out their real name. The housing debt to equity ratio (not to be confused with the corporate debt to equity ratio), also called loan to value, is the ratio of the mortgage debt to the value of the underlying property; it measures financial leverage. The agents were often not able to tell the customer they did not actually directly work for the original manufacturer. A variant of this indicator measures total home ownership costs, including mortgage payments, utilities and property taxes, as a percentage of a typical household's monthly pre-tax income; for example see RBC Economics' reports for the Canadian markets (June 2, 2005 report). These agents generally worked in call centers where the information needed to assist the calling customer was indexed in a computer system. When the ratio gets too high, households become increasingly dependent on rising property values to service their debt.

In some cases these companies hired technical writers to simplify the usage instructions of their products, index the key points of information and contracted with temporary employment agencies to find, train and hire generally low-skilled workers to answer their telephone technical support and customer service calls. The housing debt to income ratio or debt-service ratio is the ratio of mortgage payments to disposable income. The term "outsourcing" became more well known largely because of a growth in the number of high-tech companies in the early 1990s that were often not large enough to be able to easily maintain large customer service departments of their own. In either case, the usefulness of this ratio in identifying a bubble is debatable; while downpayments normally increase with house valuations, bank lending becomes increasingly lax during a bubble and mortgages are offered to borrowers who would not normally qualify for them (see Housing debt measures, below). This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business. (The NAR's methodology was criticized by some analysts as it does not account for inflation [9]). A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. [8].

Many companies, most notably Dell and AT&T Wireless, have gained significant negative publicity for their decisions to use non-US labor for customer service and technical support; one of the most prominent complaints being the expectation that the replacement staff will have more trouble communicating with customers. For example, as of 2004 this ratio was equal to one year of income in the UK (Nottingham Trent University paper).
Another variant of this ratio measures the ratio of median family income to the income necessary to qualify for a typical mortgage or a typical home; this is what the National Association of Realtors calls the "housing affordability index" in its publications. Due to this demand call centers have sprung up in Canada, China, Eastern Europe, India, Israel, Ireland, Pakistan, Philippines and even the Caribbean. It is especially important for first-time buyers without existing home equity; if the downpayment becomes too high then those buyers may find themselves "priced out" of the market. The logical extension of these decisions was of outsourcing labor overseas to countries with lower labor costs, this trend is often referred to as offshoring of customer service. The deposit to income ratio is the minimum required downpayment for a typical mortgage (definition of "typical" varies), expressed in months or years of income. The overhead costs of customer service are typically less where outsourcing has been used, leading to many companies, from utilities to manufacturers, closing their in-house customer relations departments and outsourcing their customer service to third party call centers. According to Goldman's figures, a one-percentage-point rise in mortgage rates would reduce the fair value of home prices by 8%.

Outsourcing business is characterized by expertise not inherent to the core of the client organization. "However, this estimate is based on an average mortgage rate of about 6%, and we expect rates to rise," the firm's economics team wrote in a recent report. Many companies also outsource customer support and call center functions, manufacturing and engineering. [7].
According to a back-of-the-envelope calculation by Goldman Sachs economists, a comparison of median home prices to median household income suggests that US housing in 2005 is overvalued by 10%. Business segments typically outsourced include Information Technology, Human Resources, Facilities and Real Estate Management and Accounting. This ratio, applied to individuals, is a basic component of mortgage lending decisions. Many companies look to employ expert organizations in the areas targeted for outsourcing. It is sometimes compiled separately for first time buyers and termed attainability.

In theory, this business segment should not be mission-critical, but practice often dictates otherwise. It is generally the ratio of median house prices to median familial disposable incomes, expressed as a percentage or as years of income. Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. The price to income ratio is the basic affordability measure for housing in a given area. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking.

Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Outsourcing and/or out-tasking involve transferring a significant amount of management control to the supplier. Outsourcing is defined as the management and/or day-to-day execution of an entire business function by a third party service provider. .

EDS was the first company to establish the outsourcing business. Outsourcing became a popular buzzword in business and management in the 1990s. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country. A related term, offshoring, means transferring work to another country, typically overseas.

Outsourcing is a business decision that is often made to lower costs or focus on core competences. Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. ^  "Outsourcing is the Kool" (kOOL PEOPLE). 3.

^  Should we “Save Jobs”? by Walter Williams. 2. ^  “Outsourcing” and “Saving Jobs” by Thomas Sowell. 1.

Universities in the European Union granted 40 % more science and engineering doctorates than the United States, with that figure expected to reach nearly 100 % by about 2010 according to Freeman's paper. were in science and engineering compared with a world average of 27 % and 52 % in China. He found that in the year 2000, 17 % of university bachelor degrees in the U.S. ^  This view is borne out by a recent study by Richard Freeman at the National Bureau of Economic Research in Washington.