Macro economic issues
of offshore outsourcing

- seminar paper -

Chair of Information Systems Management I

University of Mannheim

June 2004

by Manuel Knaus
Filderstadt

Index

FIGURES III
GLOSSARY OF ACRONYMS IV
SUMMARY V

1. CONCEPTUAL INTRODUCTION 1
1.1 Outsourcing 1
1.2 Outsourcing in offshore markets 1
1.3 IT outsourcing 2

2. REASONS FOR OFFSHORE OUTSOURCING 2
2.1 Advantages of offshore outsourcing 2
2.2 Facts of some developing countries 3
India 4
Vietnam 4
Russia 4
China 5
Middle and East European countries 5
2.3 Excellence or inferiority of the offshoring services 5

3. PROBLEMS WITH OFFSHORE OUTSOURCING 6
3.1 Risks and problems of outsourcing 6
3.2 Problems in developing countries 7
3.3 Barriers between western and developing countries 7

4. CONSEQUENCES FOR WESTERN COUNTRIES 8
4.1 Current and future IT outsourcing trends 8
4.2 Consequences for the western IT branch 10
4.3 Consequences for the national economy of Germany 10
4.4 Development of unemployment in western countries 11
4.5 Crossover of the offshoring trend towards other economic areas 13

5. POSSIBLE SOLUTIONS 13
5.1 Creation of new jobs 13
5.2 Adjusting screw of macroeconomic parameters 14
5.3 Future of offshore outsourcing 15

6. CONCLUSION 15

BIBLIOGRAPHY VI

Figures

Fig. 1 Offshore Outsourcing Project Types
Fig. 2 Cost reduction is considered the main benefit from offshoring
Fig. 3 IT outsourcing markets in Germany and Europe
Fig. 4 The international hunting line
Fig. 5 Seasonally adjusted gainful employment and unemployment in Germany

Summary

Topic of this paper are the macro economic issues of offshore outsourcing.

First inland and offshore outsourcing are described, especially focused on IT outsourcing.

Then reasons for IT offshore outsourcing are illustrated. Popular offshore markets are introduced and the advantages are shown.

In the next chapter, problems and risks of offshore outsourcing are explained. Both the more general view and IT specific problems and risks are described. Here general problems as well as problems of IT outsourcing are mentioned.

Then consequences of the offshoring trend are illustrated. Apart from consequences for IT branch, especially consequences for national economies of western countries, e.g. Germany, are viewed in detail. There can be short term and long term consequences. Future offshore outsourcing trends help to understand the effects. The development of unemployment caused by offshoring is one main focus.
Furthermore offshoring trends in other white collar work besides IT are shortly described.

At the end this the paper develops an idea about possible solutions for western countries. Potential reactions of the government and suggestions on how to create new jobs are presented in detail.

The paper finally ends with a small conclusion.

1. Conceptual introduction
1.1 Outsourcing

Outsourcing is an invented word of “outside”, “resource” and “using” and means the long term branching out of previously self done services to an external vendor (Allweyer, T., Besthorn, T. and Schaaf, J., 2004). This vendor will do the work for the company. “Classical” outsourcing takes place in the same country. In this case, the vendor often takes over employees of the outsourced section.

In former times outsourcing has taken place only in areas like canteen, supply and security, in the last 15 years outsourcing became popular in all major sections of a company like production, R&D, financial services, telecommunication and IT.

Outsourcing is done to realize saving potentials, to transfer fix costs into variable ones, to get a higher service level and to free resources and focus on core competencies and strategic goals (Pohl, A. and Onken, B. R., 2003). More details will follow.

Apart from to complete outsourcing, there are other ways of outsourcing.
“Outtasking” or “selective outsourcing” is the assigning of single and middle term oriented tasks to an external vendor.
“Multisourcing” or “multi-vendor-outsourcing” is a complete outsourcing not to a single vendor, but different tasks to different vendors (Söbbing, T., 2002).
Outtasking and multisourcing are not the main focus of this paper, therefore they will not be discussed in detail.

1.2 Outsourcing in offshore markets

When outsourcing doesn’t take place with a vendor within the home country of the company, but with a vendor from a different country, outsourcing is called “offshore outsourcing”, “offshoring” or “international outsourcing”.
Popular offshore markets are in developing countries (DCs) like India, China, Vietnam and in Middle and East European Countries (MEECs). In these countries more and more vendors appear on the scene.

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