For some, outsourcing is a dirty word. But does it have to be?
According to Forbes, approximately 300,000 jobs are outsourced by the United States yearly. “Offshore” outsourcing, in particular, has become a widely used method in relocating office jobs to countries where labor costs are significantly lower. For example, Carrier, an Indianapolis-based HVAC company, made headlines for laying off 600 workers, sending those jobs to Mexico instead.
However, new research from the Fox School shows that choosing to outsource in a foreign country goes beyond a pros and cons list or a review of your bottom line—it is a strategic business decision.
J. Jay Choi, professor of finance, and Masaaki “Mike” Kotabe, professor of international business and marketing, embarked on a collaborative project in order to understand what motivates firms to seek options such as offshore outsourcing, in a way previous research has not.
Their paper, “Flexibility as Firm Value Drivers: Evidence from Offshore Outsourcing,” which was accepted for publication in the Global Strategy Journal, blends the researchers’ backgrounds strategy and finance to analyze outsourcing as an approach rather than a choice.
Choi and Kotabe found that firms chose to outsource in a foreign country in order to have flexibility in the face of uncertainty. An uncertain market can mean an upsurge in prices, a decline in demand, unforeseen competition, or an economic recession. Companies have to be flexible in order to adapt to these changes—which offshore outsourcing can offer.
“Our work fills an important gap demonstrating that flexibility adds value in more uncertain conditions, more so internationally than domestically,” said Kotabe. “Outsourcing provides firms the ability to adjust and evaluate their options in order to gain quality resources with limited costs.”
When firms are able to move their operations offshore, they essentially gain more freedom. Lower costs, more suppliers, and the ability to expand in more financially driven areas become widely available.
This level of flexibility is not as easily achievable when it comes to domestic operations.
However, Choi and Kotabe explain this approach may come with set-backs. “Offshoring allows firms to perform better financially, however, this relationship may be somewhat weakened by potential loss of domestic innovation and talent while dealing with foreign suppliers.”
Choi and Kotabe merged their respective disciplines in order to gain a unique perspective of outsourcing. “The key is to conduct business research as realistically as possible, so that we can provide relevant research findings to the business community,” said Choi.
The taboos that surround outsourcing may still exist, but with this new research, businesses and consumers alike can better understand when outsourcing will provide the best results.