International Outsourcing and Business Perspectives on Waste

Kirk St.Amant (Texas Tech University)

From a business perspective, the concept of waste is often tied to the idea of success. That is, more successful companies can maximize all of their resources, and thus waste little. As waste decreases, profits generally increase, and this perception creates a cycle that focuses on waste reduction. Historically, geographic barriers limited the waste reduction activities organizations could pursue. The advent of international outsourcing, particularly the outsourcing of knowledge-based work, has however created new perspectives on corporate waste reduction. Today's workers need to understand how such perspectives of waste affect employment so they can re-define themselves and their job activities in relation to international outsourcing.

Return on Investment, Profits, and Waste

In business, profits are essential to success, and maximizing profits often means minimizing waste. This perspective comes from the concept of return on investment (ROI) which dictates the money an organization earns from its activities needs to be greater than the money that organization spends on those same activities. So, the results of the equation

Money Earned – Money Spent = x

must always be a positive number for an organization to remain salient. Accordingly, the larger that positive number resulting from this relationship, the greater the financial success, or the profits, of the company will be. As a result, organizations must alter one or both of the variables in this ROI equation if they wish to maximize profits.

Increasing Expenditures

Within this ROI relationship, increasing profits via increasing money earned can be problematic. To begin, increasing earnings often means expanding an organization's customer base beyond its current parameters. Such expansion, however, generally requires an increase in spending related to marketing in order to attract a greater pool of perspective customers. Or, as the old business axiom goes, "you need to spend money to make money."

This increased expenditure, however, does not bring with it any guarantee of increased profits. That is, just because an organization begins to spend more money in order to attract to a larger consumer base, there is no guarantee that desired base will be drawn to or purchase the related product. Additionally, should such an increased (and unproven) expenditure fail to increase profits – or lead to a loss in profits – then the solvency and thus the existence of the organization might be threatened.

This situation, often called the innovator's dilemma, notes that innovations that can lead to increased earnings are fine so long as a company is small and can tolerate innovation-related loss in terms of payroll and operating costs. Yet, once an organization grows to a certain size, the losses resulting from innovative risks used to grow earnings carry too much threat to undertake, for they could cost more than the company can afford. Thus, the risks of increasing profits via increasing sales/money earned carries with it a high degree of risk as well as a high degree of reward.

Decreasing Costs

The money spent part of the ROI equation presents a different situation. In this case, maximizing profits does not involve spending any additional money. Rather, it focuses on cutting production and service costs. The question becomes how does an organization know which factors to cut safely so that profits can grow? The answer to this question ultimately comes down to waste. That is, organizations look for any form of activity that does not contribute directly to profits, classify it as "waste" (money spent on something non-productive), and remove it from the organization's budget.

According to this relationship, the less money wasted (i.e., spent) on a task, the greater the profits. Curtailing such waste traditionally focused on the relationship

time = money

If organizations reduce the time employees "waste" on non-job-related activities, they could reduce production time and costs. Likewise, by making employees produce more in the same period of time and for the same wage, then the costs of producing an individual product drop. As long as companies make sure the market price of goods remains the same while the cost of producing the good drop, then profits increase. So, by reducing the time employees waste on non-production activities, organizations increase profits. For this reason, many of the strategies designed to cut waste and increase production (and profits) focus on maximizing work time.

Strategies for Cutting Wasted Time

Two central strategies for reducing wasted time and maximizing profits are mechanization and downsizing. In mechanization, organizations replace humans with robots/ machinery that can work at all times. This idea was by no means new; rather, it dated from the industrial revolution when business owners began to replace workers with machines that could perform the same function as quickly (if not more quickly) than humans. Machines do not waste time to eat, sleep, or socialize. They do not take sick days, ask for time off to attend a child's sporting event, or expect vacations. Rather, machines can work 24 hours a day, 7 days a week, and need only to stop for maintenance activities.

Mechanization, however, presents other limitations related to curtailing waste. First, machinery had a fixed minimum cost, so there was a limitation to how little an organization could pay to replace humans with machines. Second, the maintenance of machines can be a time-intensive and a costly process that "wastes" production time and incurs expenditures. Finally, certain tasks cannot easily be replaced via mechanization, for they require a human "touch" or "feel" to be performed safely or effectively. A classic example of such a task is flying a plane. While computers can perform much of the actual flying from point to point, the landing of a plane requires a sense of "feel" that is often best reserved for human pilots.

An alternative to mechanization is downsizing, a process in which an organization cut the overall number of employees on its payroll. The idea is that reducing the overall number of workers forces remaining employees to maximize work time in order to accommodate an increased workload. Again, overall payroll costs decrease while the time needed to perform a process, in theory, remains the same, for workers feel they have less time to waste on non-production tasks (e.g., personal conversation, lunch breaks). Additionally, the fear of job loss related to downsizing could be used to motivate individuals to work harder in order to improve the chances of keeping one's job.

Like mechanization, downsizing also has limitations. First, and perhaps foremost, there is a limit to how much work an employee can perform. If an organization cut too many employees and redistributed too much work, then remaining employees could become overwhelmed and fail to perform activities in a timely manner. Likewise, employees who felt pressed might be less likely to take the time needed to perform a task carefully or correctly. As a result, if cuts in employee rolls were too extensive, the quality of production and products could suffer. In today's hyper competitive marketplace however, such a loss of quality could be enough to prompt consumers to do business with a competitor. Additionally, overworked or over-stressed employees often suffer higher degrees of illness and require more sick days (and thus create lost/wasted time), which cause even more work to be distributed to even fewer employees.

International Outsourcing and New Perspectives on Reducing Waste

Traditionally, organizational attempts to cut waste were limited by geography. That is, work had to be performed in one location, so salaries, product costs, and employee pools/availability were limited to what was the norm and what was present in a particular location. Thus, geography created a minimum threshold for how organizations addressed employees and pay when cutting waste to maximize profits. International outsourcing, however, provides a means for moving beyond this threshold.

In international outsourcing situations, companies in one nation transfer the responsibility for completing a task to workers in another country (Bendor-Samuel, 2004). Originally, this transfer of responsibility focused on manufacturing and the production of physical products such as clothing or footwear. The global spread of online media, however, has given rise to a new kind of international outsourcing that involves the export of knowledge-based work. While such practices have been relatively limited to date, they are poised to expand rapidly in the future.

The push to adopt international outsourcing has to do with perceived benefits related to waste. Perhaps the most publicized of these benefits is savings related to the cost of skilled labor. Much of today's knowledge work is being outsourced to skilled employees in developing nations – employees who can perform most technical tasks for far less than what counterparts in industrialized nations would charge. For example, gaming developers in Russia earn roughly $100 US a week, while middle managers in mainland China earn roughly $9,000 a year (Weir, 2004; Nussbaum, 2004). As a result, corporate perspectives of waste have chanced from a focus on time to a focus on money.

Many companies now view waste in terms of unnecessary wages paid to workers in industrialized nations. That is, if workers in developing nations can perform the same job for a fraction of the wage, hen why spend more money on having a task performed "at home?" Doing so would offer no production benefit, but would result in the organization spending (i.e., wasting) more money that needed to perform a task. So, why not use the minimum number of workers (minimize wasted time) in a developing nation (minimize wasted expenditures) to maximize profits?

Such wage-based savings, however, are not the sole waste cutting advantage related to offshoring. Rather, because international outsourcing employees tend to be better educated, they often provide a better quality of service (Reuters, July 18, 2004; Farrell, 2004; Hagel, 2004). Such increased quality can maintain or grow a customer base and contribute to profits. Additionally, Secure employment is often rare in many developing nations, and outsourcing jobs tend to be among the better paying ones. Therefore, outsourcing workers in developing nations tend to stay with employers for longer periods of time (Reuters, July 18, 2004; Farrell & Zainulbhai, 2004). This factor keeps training costs low (cuts waste) while contributing to quality (reduced chances of novice mistakes).

Moreover, because managers are paid less in developing nations, organizations can easily justify the use of more in-country managers to oversee outsourcing activities (Nussbaum, 2004; Hagel, 2004). This increase means managers have more time to answer employee questions and to provide employee training – factors that further contribute to improved quality of work (Hagel, 2004; Lewis, 2003; Hagel, 2004). Again, reducing waste in the form of cutting unnecessary wages only contributes to the profits organizations can gain from international outsourcing.

The perceived benefits of international outsourcing have resulted in such practices spreading to a number of countries and to a variety of service- and computer-based industries. French companies, for example, have begun working with French-speaking developing nations such as Senegal and Morocco on a variety of service based outsourcing projects, and these relationships have met with good results (Reuters, July 18, 2004). Similarly, German firms have begun exploring outsourcing relationships with Easter European nations, while the Netherlands has begun using international call centers located in South Africa where Dutch-based Afrikaans is spoken (Farrell, 2004; "Sink or Schwinn," 2004; Baily & Farrell, 2004; Rosenthal, 2004b). Additionally, markets in Spain, combined with the growth in the U.S. Spanish speaking population has meant more work is now outsourced to Mexico and to Latin America (Rosenthal, 2004a). Finally, even India, the one time center for international outsourcing, is itself outsourcing some work to China and to Sri Lanka, where it can be done for less money (Reuters, September 2, 2004).

The majority of BPO practices, however, are reliant on software. Aspects related to software use can thus greatly affect if and how organizations realize the advantages related to the offshoring of knowledge work. For this reason, decision makers in the public and the private sectors need to understand the differences between proprietary and open source software – as well as the limitations and advantages of each – in order to make informed choices related to international outsourcing. Only through such informed decision making can organizations benefit from the advantages related to offshoring.

Addressing International Outsourcing

Surviving outsourcing, thus, becomes a matter of changing corporate perspectives of waste. Employees therefore need to re-conceive their jobs in terms of the quality they add vs. the costs they incur. To achieve this objective, employees must think of themselves in terms of more than the tasks they perform for their jobs, for it is this task-based focus that fuels outsourcing. (That is, task A can be done just as easily in India as in the US, but for a fraction of the cost.)

Employees must instead focus on the insights and advantages they as individuals bring to an organization. In some cases, that advantage could be the networks of which employees are a part – networks that could be used to conduct marketing via non-traditional, and thus less costly, channels. In other cases, such advantage could be the fact that an employee is a member of the same culture as the desired consumers of a product. As members of that same culture, employees can provide culture-specific insights on user expectations and tastes, as well as on different situations in which consumers would realistically use a product.

This connection with a common culture can also be used to argue that more workers should move into management roles that would allow them to supervise outsourcing employees located in other nations. Such an arrangement would allow companies to cut costs for regular production workers, who would be overseas employees, but would provide a level of product oversight and review by a manager from the same culture as the intended consumers of a product. In adopting these perspectives, the ROI relationship between waste and profits is re-cast from focusing on cutting costs to increasing earnings while doing so in ways that do not add additional expenditures. Thus, time no longer serves as a factor that defines waste; rather, failing to maximize the non-job-task potential of existing employees becomes the new definition for waste. Such a shift can benefit all parties affected by international outsourcing. Accordingly, organizations can seek to minimize waste by maximizing the potential of domestic and overseas employees – that is not wasting the non-job-related talents or benefits of workers.

Conclusion

By focusing on adding quality, employees reveal how they contribute to profits and thus curtail waste in other ways. Until the relationship between waste and wages is broken, however, the threat of international outsourcing will persist. Fortunately, experiences with international outsourcing have remained relatively limited to date – especially in relation to knowledge work. Thus, individuals need to take a more active role in educating employers, colleagues, and society now, while there is still time to influence ideas, opinions, and practices. Only though taking such an active role will ROI-based profit perspectives shift from minimizing costs to maximizing employee potential.

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