Globalization and Outsourcing

Globalization and outsourcing go hand-in-hand when it comes to promoting one another and their benefits. Globalization has, in many ways, leveled the playing field for talented workers from around the world, creating job opportunities where few might have existed before.

Conversely, globalization and outsourcing can be pretty controversial topics. This holds true particularly in the US, where there’s a lot of resentment toward companies that outsource work to far-off places to save money.

At the same time, companies that outsource IT and development work are in somewhat of a bind. It can be hard to find developers and engineers with the specialized skills they need. And when they do, smaller firms are competing with the likes of Facebook and Amazon for top talent.

There’s a lot to think about: economic and ethical implications, the current political climate, and the rules and regulations that come into play when you start shipping work abroad.

Below, we’ll look at where things are today.

How has global outsourcing progressed in recent years? Which factors might impact your decision to outsource and who you work with? Here’s what you need to know.

Impact of Globalization on Outsourcing

For US companies, the impact of outsourcing can be transformational on multiple levels.

It allows US firms to tap the global talent pool, save money, and, ultimately, become more competitive.

A global technology economy fuels innovation and enables organizations (from any country) to deliver the experience customers expect by making it easy to partner with the best specialists and teams for any given project.

According to research from Deloitte, 58% of organizations that outsourced software development were able to improve the quality of their products and services.

On an international scale, globalization and outsourcing have created career opportunities in countries that historically struggled with poverty and political unrest. It lowers the barriers of entry, allowing developers in Mexico, India, Ukraine, and other countries to work with companies around the world and earn a living wage.

So, in many ways, these two forces have done a lot of good. They’ve opened doors to a better life among populations that have struggled to access stable work and decent wages.

On the flip side, globalization has also created more competition. Organizations now compete with companies all over the world for the same consumers and talent.

For the talent themselves, job seekers now compete with developers all over the world. So, in some cases, you have skilled developers in the US or Western Europe competing for work with talent in countries like India, Poland, or Mexico who can perform the same work at a lower rate.

While US-based talent offers advantages in the form of proximity and English proficiency, the rise of remote work has prompted many firms to look beyond US borders to reduce costs.

How Outsourcing Benefits the US Economy

In the US, globalization and outsourcing have made it possible for organizations to take advantage of a concept known as “comparative advantage.”

The idea is, companies can offer products and services at a lower rate than competitors by working with vendors in countries with lower labor costs.

Outsourcing keeps businesses profitable by reducing software development and IT costs. Plus, it allows them to deliver more services that benefit consumers, which, in turn, leads to increased revenue for the US economy.

The global outsourcing market also enables organizations to leverage the expertise of global talent, reduces the amount of pressure on the production cycle, and helps them respond to increased pressure to compete—without undermining their ability to focus on core business activities and strategic goals.

Ethical Considerations and Impact on the US

While ethics alone should be reason enough to make sure workers are treated fairly, in today’s digital era, you don’t want to be called out for unethical practices—be it working with unethical vendors who put customer data at risk or those actively exploiting workers.

Consumers will find out and will take to social media to call you out and spread the word about your bad business practices. In other words, you’re taking on a huge risk of reputational damage in an effort to save a few bucks.

Here’s a quick look at some of the main considerations:

Exploitation of Workers

Worker exploitation is a key reason there’s still a bit of a stigma surrounding outsourcing.

Make sure you partner with a firm that pays employees fairly (at market rate or higher in their home country) and that working conditions are safe and adequate for performing work.

There are definitely outsourcing companies that offer access to talent at a much lower rate, but you’ll want to avoid them.

Not only are you venturing into unethical territory, but there’s also the risk of high turnover and poor service. In other words, you’ll likely end up with a substandard product and the need for significant rework.

Information Security

Companies need to consider the safety of electronic records, consumer data, IP protections when outsourcing. For example, in China, IP theft is rampant. As of last year, the FBI was investigating over 1,000 cases involving theft of US technology—particularly tech deemed “high-priority” such as IoT, cloud computing, biotech, clean energy, and aerospace.

Different countries have different rules and requirements. Countries like China and India follow different rules. You’ll need to address any regulatory gaps in your contract and consider preventing your partner from accessing sensitive information or trade secrets during your collaboration.

Naturally, this can limit what types of projects you send to those countries. However, it’s an important thing to think about as you put together your outsourcing strategy.

Make sure you’re working with an outsourcing partner that meets US requirements (either by partnering with a firm headquartered in the US or a country with similar laws/regulatory requirements).

If you’re working with a country in Eastern Europe, vendors are subject to the European Union’s standards for IP protections and data privacy, which aligns closely with US regulations. The same goes for Mexico, which follows US IP protections as part of its trade agreement with the US.

Service Quality

There’s also the risk outsourcing vendors might not meet quality expectations; it ends up being a disservice to your end-consumers. Anyone considering outsourcing software development (or any other business process) should make due diligence a top priority. Be sure to check vendors’ track records and competencies before signing any contracts.

Nationalism

Many Americans still see outsourcing as a threat to the US job market and their ability to earn a living wage. Generally, this conversation centers around manufacturing jobs and other types of manual work that have largely disappeared from the US.

In the context of software development, those concerns are still valid. However, there’s a difference between outsourcing manufacturing jobs versus software development work. For one, outsourcing manufacturing jobs tend to hurt low-skilled workers the most.

Software developers and engineers are skilled workers, and in many cases, are in short supply. Especially if we’re talking about developers with specialized data science, AI, or blockchain skills that are both rare in the US and high in demand.

Global technology and outsourcing have made it possible to partner with developers in Eastern Europe, Asia, and Latin America also make it possible for American workers to find work in other states or countries. In many ways, they benefit, too.

Now, nationalism is definitely a factor you’ll want to consider as there’s a lot of variation in terms of how people view this issue.

A lot of it comes down to public perception—and who your target consumer is. Organizations likely to face backlash may want to combat this issue through transparency and education. Think being upfront about which locations you’re outsourcing to and what prompted that decision.

For example, if you’re outsourcing development tasks that take your in-house team away from the work that creates the most value to consumers, chances are, those customers may see your decision in a different (and more positive) light.

There’s also the skills gap issue. Often, organizations can’t find someone local—or even within the US—with the skills they need to remain competitive.

So, then, it becomes more of an education issue or an access issue; it’s a larger systemic problem with a ton of moving pieces.

Organizations with resources could combat negative public perception by establishing scholarship foundations, partnering with universities, vocational schools, or sponsoring programs for school-age children aimed at closing these gaps.

Covid-19

According to Harvard Business Review, COVID-19 could have a lasting impact on globalization. Unsurprisingly, companies that rely on international suppliers to deliver products and raw materials stand to take the biggest hit.

However, the article also points out that the pandemic could fracture the global economy, particularly in politically sensitive industries. It’s possible some companies will pull back on global outsourcing and “re-shore” some jobs, even if it costs more.

At the same time, COVID is, in part, responsible for the growing demand for outsourcing services—factors include remote work, new customer needs and changing expectations, the need for virtual events and collaboration spaces, as well as emerging security threats and privacy concerns.

It’s a lot.

Due to the current state of uncertainty, lost revenue, and shifting customer priorities, companies may not have the same budget they were working with pre-pandemic.

As such, outsourcing presents a cost-effective alternative to paying US salaries and adding new employees to the payroll.

Instead, companies might opt to keep in-house teams small and outsource secondary projects, repeatable tasks, and ongoing maintenance to offshore or nearshore firms that can provide on-demand, scalable teams at a lower price point.

Outsourcing Rules and Regulations

As it stands, there are no national laws in the US that regulate outsourcing, though contracts and transactions are up to state interpretation.

While there’s no umbrella legislation that covers outsourcing, businesses are required to comply with data privacy laws (CCPA, GDPR) and any industry-specific regulatory requirements (especially for those in financial services and healthcare). Non-compliance with those regulations comes with the possibility of hefty fines, public backlash, and a whole host of potential lawsuits.

In some cases, relief programs (like the CARES act) or business loans and grants (i.e., SBA loans) may come with stipulations about whether you can use outsourcing services at all, as well as how those services can be used. According to CARES Act terms and conditions, mid-sized businesses are not allowed to outsource or offshore jobs for two years after they repay their loan.

The idea there is, government programs exist, in part, to help business owners create US jobs. Following that logic, using US aid/loans to bankroll your outsourcing contracts runs counter to the idea that you’re doing work that benefits the local community or the US economy.

Final Thoughts

There are two sides to how you might view both globalization and outsourcing. From our view, there’s a lot of promise, both for US companies and their external partners.

The key things to think about are:

  • Working with a reputable company that treats workers fairly
  • Finding an outsourcing partner that follows US IP and data privacy regulations
  • Ensuring that you’re not violating any outsourcing restrictions
  • Making sure outsourcing decisions and partnerships align with your customers’ and employees’ best interests

Tiempo Development provides clients with access to experienced development teams with a tight-focus on outcomes. Contact us today to learn more about our approach to outsourcing.