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How Outsourcing Works

Outsourcing Locally vs. Overseas
Many companies use outsourcing to help lower their costs like this company based in Israel, which provides telemarketing services for America Online.
Many companies use outsourcing to help lower their costs like this company based in Israel, which provides telemarketing services for America Online.
David Silverman/Getty Images

We said earlier that one of the main advantages to outsourcing is that it allows companies to access the world class talent -- that is, a company could hire the best widget engineer, not just settle for the available one.

But when does it make sense to hire someone overseas, as opposed to one across the street or even a nearby city? It's a balance of several things.

In general, companies typically cite factors such as quality commitment, price, reputation, business culture compatibility and location when selecting a vendor for outsourcing. Additional factors like understanding goals, constant management of the business relationship, well-written contracts and strong communication are also important for the ongoing success of an outsourcing relationship.

The choice to go offshore or hire locally can hinge on these factors as well as language compatibility, the labor pool's skill and size, security and privacy, the local education systems ability to support the labor pool and the legal culture and stability of a country.

People who live and work near one another or at least within the same state or national boundaries will have more in common in terms of language, business culture and background. This can make communications and management easier. Also, it's simply easier to conduct on-site meetings and inspections when one doesn't have to travel overseas to do so. If the particular expertise a company is seeking can be found nearby at a good price, it seems logical most companies would select that option.

As always in business, however, price can be a major concern. Outsourcing overseas can be less expensive for a company and is just one of the advantages to going offshore for outsourcing needs. This is true for several reasons.

Wages in many countries are lower than in the United States. Labor is one of the prime costs in manufacturing or the service industry, so that alone can mean a substantial savings to a company. In the case of manufacturing, raw materials may also be less costly in certain countries. Also, foreign countries may offer a more business-friendly regulatory environment, lower corporate taxes and tax shelters and financial incentives for American business to invest in their countries.

Often when a company opens a factory overseas it ends up selling the products made there in that country. This allows the company to access a foreign market more economically.

Overseas outsourcing shows no signs of slowing down. reported in January 2008 that research firms predict more overseas outsourcing companies will open this year, giving companies in both the United States and Europe more selection. The research firm Gartner predicted offshore spending to increase by 60 percent for European companies and 40 percent for U.S. companies.

India is a leader among countries that receive outsourcing work from overseas. But other countries, including Russia, China, Ireland and South Africa are also elbowing their way up the list, the article stated.

In the next few sections, we'll look at some of the fields that are beginning to rely on outsourcing more and more.