A client firm could easily find itself spending more through outsourcing than would be the case with local procurement. Hidden costs associated with outsourcing include legal expenses incurred while drafting a contract as well as time pent in implementing the contract. Such hidden costs are spontaneous and difficult to plan for. The effect of employees constantly living in fear of losing their jobs to outsourcing is reduced motivation. Employees would not have high morale if they know that their employer will terminate their services at will in favor of outsourcing.
Reduced motivation means low productivity and hence low return on investments for a firm. Lower tax returns translates to lower government revenues and hence a weak economy (Meanzella, 2005, p. 56). Problems associated with outsourcing contracts including reduced competitive advantage, non-conducive contract periods, contract renewal hiccups and differences arising out of contract content are some hindrances to smooth business operations. Considerable time and financial resources are spent in trying to straighten issues. This translates to reduced business and government income.
Although offshore direct wages may be as much as 80% less as compared to domestically, labor savings only amount to 10-15 percent. a report by Deloitte discovered that increased travel expenses, communications expenses, equipment overheads, basic expenses, problems with maintaining staff numbers, privacy requirements, and problems with managerial control inflate overall costs for overseas processes. Unexpected relocation of personnel overseas also eats into the business earnings. A first year productivity downtrend of 20% has been experienced by many firms (Berdzik, 2005, 234).
In essence, businesses deny government agencies of revenue since companies that procure outsourcing don’t remit taxes to their governments. This responsibility is passed on to the service provider who pays taxes to their respective governments. US companies thus consume services that have had their taxes paid to overseas entities. Outsourcing could lead to increased rigidity in responding to dynamics in the business environment. Capitalizing on emerging and upcoming opportunities is thus not achieved. Sharing cost savings benefits is a demerit of outsourcing.
The two factors lead to reduced revenues for the firm and in extension low revenue for the government (Britt, 1997, p. 29). Smooth job procedures can be drastically changed when outsourcing is adopted. Improper coordination resulting from varying cultures and language barriers leads to loss of valuable business time. This translates to loss of income and hence low contributions to the economic development of the country. A firm that procures outsourcing services is likely to be in financial loss incase the service provider doesn’t render services owing to bankruptcy, lack of manpower or limited finances.
The risk of losing a firm’s investments is very great. Such a loss may negatively impact on the economy through job cuts and low tax returns hence reduced revenues (Berdzik, 2005, p. 241). Policy recommendations The US government ought to focus on the collection of statistical data on the impacts offshoring has on employment, capital investment and technology. This will enable the formulation of objective policies based on solid facts rather than speculative arguments as is the case currently. A level playing ground needs to be established for American firms interested in outsourcing with a view of the negative effects of the same.
Detailed analysis of potential economic impacts of planned offshoring ventures should be undertaken. Restrictions on offshoring may be imposed by the government when vital economic or security technologies are involved in the contract. Restrictions can also be enforced when the government targets the realization of certain social goals (Saunders, 2004, p. 45). Concerted efforts at research on cost-efficient alternatives to offshoring ought to be made to save American workers from impending joblessness.
The government is a key consumer of technical services and commodities. Government expenditure accelerates demand and creates jobs. Offshoring government contracts overseas reduces the benefits of such expenditure for the US economy. Multiplier consequences benefit nations where outsourced work is done. World-wide outsourcing of government procurements could lead to reduced taxpayer financial burdens. Government assistance in research and development in individual companies could be beneficial in the long term (Curie, 2000, p. 58).
Favorable tax breaks ought to be developed for local firms in order to stem the steady flow of Americans’ jobs overseas. More taxes should be imposed on firms that do outsourcing in order to develop a level playing ground for all players. Conclusion The aforementioned demerits of outsourcing and offshoring should better inform companies to make balanced and wise choices if they want to adopt the same. The government should also base their policy decisions on the facts outlined in the paper. Proponents and opponents of outsourcing have consensus that the phenomenon can not be eliminated.
The issue is therefore to seek for innovative ways of effectively incorporating outsourcing and offshoring into United States business practices. A keen examination of the facts will convince business enterprises that outsourcing and offshoring are not really as attractive as they are portrayed to be. References Berdzik, R. W. (2005). Restructuring information technology: Is offshoring a concern? Employment trends by industry and occupation suggest that offshoring in the information technology sector occurs, but not to a great extent. Monthly Labor Review.
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