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Outsourcing is the practice of hiring someone outside of your business to complete a specific project or task. The work that would either fall onto the business owner's plate or require an internal hire can be completed by a third party. Outsourcing is completed by a number of different types of people and businesses, from individual freelancers to large businesses specializing in a single function. Outsourcing is different from offshoring, which has been a big political issue in the past.

Outsourcing vs. Offshoring

The terms outsourcing and offshoring are often used interchangeably, but it's helpful to know the difference between the two concepts. Outsourcing means using a third party to make a product or perform a service the company used to make or perform itself. When a startup or small business uses a third-party company to administer its benefits and HR, it's outsourcing. When a consumer uses a service like TaskRabbit to hire someone to perform a service, he or she is outsourcing, too. You can outsource to U.S.-based companies or individuals. Outsourcing doesn't have to involve foreign providers of goods and services.

Some companies do outsource to foreign countries, though. For example, a U.S. car company may manufacture cars in the U.S. which include parts made in Mexico. The manufacture of those parts was outsourced to a Mexican company. But when a company offshores, it moves some of its own operations to another country. So, if the same U.S. car company opened its own factory in Mexico it would be offshoring. If a company opened call centers in other countries it would be offshoring, too. In most U.S. political discussions, people use the term "outsourcing" to refer to either outsourcing to a foreign company or offshoring - or both.

So what are the pros and cons of outsourcing? There are benefits that impact the company that outsources directly and others that could impact the local or foreign economy. Here are the top four pros to outsourcing.

1. Outsourcing Can Increase Company Profits

Companies generally decide to outsource the production of goods and services if they think it can save them money and, by doing so, increase company profits. The most frequently cited example of this has to do with labor costs. Companies might outsource and/or offshore to a country that has lower labor costs. While some might see the local job loss as a negative effect of outsourcing, the increased profits that can result are hard for companies to resist. Companies may also outsource to save themselves the expense of training and hiring all in-house employees or to scale their business.

2. Outsourcing Can Increase Economic Efficiency

Sometimes companies outsource because of the opportunity costs of doing or producing a good or service themselves. For example, a CEO of a tech startup might outsource HR because she feels her time would be better spent meeting with venture capitalists and getting her tech team up to speed than with managing employee benefits.

When highly skilled people can outsource lower-value tasks and spend more time on high-value tasks, businesses tend to benefit. Proponents of outsourcing say that it can also increase overall efficiency in the economy by distributing tasks to people who have the appropriate skill level for those tasks and letting highly skilled workers be more productive.

3. Outsourcing Can Distribute Jobs From Developed to Developing Countries

Some defenders of outsourcing say it's true that outsourcing to foreign countries (and offshoring) results in the loss of some U.S. jobs but that less-developed nations benefit and that those benefits outweigh the costs to rich countries like the United States.

Americans might object to this, they say, but outsourcing can lead to higher wages and more job opportunities in the developing countries to which U.S. firms outsource. Some analysts view this as an advantage, saying that over time it can narrow the gap between rich countries and poor countries.

4. Outsourcing Can Strengthen International Ties

Some experts feel that the more countries trade with each other the less likely they are to go to war with each other and the more easily they can cooperate in pursuit of shared goals. To the extent that outsourcing strengthens relationships between companies in two or more countries, it might also strengthen the relationships between the governments of those countries.

When you've decided to outsource work, no matter how much, it can have a big impact on who you hire, the business itself and potentially the economy. Let's look at the four biggest cons to outsourcing on a wide scale.

1. Potential Job Loss in the U.S.

The drawback to outsourcing that gets the most press is the loss of jobs in the U.S. (or whichever country is doing the outsourcing). The fact that workers in other countries may be getting job opportunities they hadn't had before is little comfort to members of, say, U.S. manufacturing communities hit hard by factory closures.

More and more, consumers want to know where their products came from and who made them. Outsourcing makes this kind of transparency difficult. A U.S. company might outsource part of its business to a company in, say, Bangladesh, which might also outsource to another Bangladesh company for staffing.

So if the staff at a Bangladesh factory is working in unsafe conditions, is that the fault of the staffing company, the Bangladesh manufacturing company, the U.S. clothing company or all three? Outsourcing makes it harder to follow the money and labor to gain insight into a company's supply chain.

3. Labor Standards May Slip

Some critics of outsourcing say that it leads to a general slippage in the labor and environmental standards that apply to the goods and services Americans consume. This is a critique that's often cited by opponents of NAFTA.

If a U.S. company outsources to a country with lower wages, more lax labor laws or lower environmental standards, the resulting good or service may not be up to the standards that the U.S. government has agreed should apply in our country. That's not just a problem for U.S. consumers who want to feel good about where their products come from. It's also a problem for workers in other countries who can't get the wages they need to succeed and communities who feel the impact of pollution overseas.

Plus, it increases the net contribution to climate change if more goods are produced in countries with lower environmental standards. Outsourcing may also crowd out local small businesses and small farms in developing countries.

4. It Can Backfire for the Outsourcing Company

Outsourcing isn't always a money-saving home run for the companies that do it. They might find that the company they've outsourced to misses deadlines, doesn't perform well or otherwise, has a negative effect on business. There may be communication problems or costs might exceed expectations. For smaller companies, in particular, outsourcing can be a gamble.

Outsourcing is a complicated issue that tends to provoke strong reactions. Your feelings about the issue might change based on where you live, where you work and whose opinions you read or listen to, but it's good to have the basic arguments for and against outsourcing in the back of your mind when you hear about it in political debates.

Tips for Business Owners

Outsourcing is just one of many things that can impact your net worth as a business owner. It's important to create a financial plan to prepare your finances for all of your goals. You can do this by enlisting the help of a financial advisor. Finding a qualified financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.

Another tricky part of managing your business is figuring out how to pay and save on taxes. Learn more through our small business tax guide.

Photo credit: ©iStock.com/Prasit Rodphan, ©iStock.com/Manczurov, ©iStock.com/Highwaystarz-Photography

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Outsourcing is the practice of hiring someone outside of your business to complete a specific project or task. The work that would either fall onto the business owner's plate or require an internal hire can be completed by a third party.

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Does outsourcing give foreigners more jobs?

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Does outsourcing give foreigners more jobs?

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Outsourcing can gives developing countries more jobs from developed countries and it can help to narrow the gap between successful and poor countries.

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Job outsourcing occurs when U.S. companies hire foreign workers instead of Americans. In 2019, U.S. overseas affiliates employed 14.6 million workers. Four industries that are often affected are technology, call centers, human resources, and manufacturing.

Key Takeaways

How Job Outsourcing Affects the Economy

Job outsourcing helps U.S. companies be more competitive in the global marketplace. It allows them to sell to foreign markets with overseas branches. They keep labor costs low by hiring in emerging markets with lower standards of living. That lowers prices on the goods they ship back to the United States.

The main negative effect of outsourcing is it increases U.S. unemployment. Outsourced jobs are often more than the number of unemployed Americans. If all those jobs were to return, it would be enough to hire millions who are working part-time but would prefer full-time positions.

That assumes the jobs could, of course, return successfully to the United States. Many foreign employees are hired to help with local marketing, contacts, and language. It also assumes the unemployed here have the skills needed for those positions. Would American workers be willing to accept the low wages paid to foreign employees? If not, American consumers would be forced to pay higher prices.

Note

The pressure to outsource might lead some companies to even move their whole operation, including headquarters, overseas. Others might not be able to compete with higher costs and would be forced out of business.

Technology Outsourcing

American companies send IT jobs to India and China because the skills are similar while the wages are much lower. Companies in Silicon Valley outsource tech jobs by offering H-1B visas to foreign-born workers.

Call Center Outsourcing

In the past 20 years, many call centers have been outsourced to India and the Philippines. That's because the workers there speak English. But that trend is changing. Unlike technology outsourcing, there is a much smaller wage discrepancy between call center workers in the U.S. and emerging markets.

Human Resources Outsourcing

Human resource outsourcing reduces costs by pooling thousands of businesses. This lowers the price of health benefit plans, retirement plans, workers' compensation insurance, and legal expertise. Human resource outsourcing particularly benefits small businesses by offering a wider range of benefits. The Great Recession appears to have kicked off an increase in "domestic outsourcing," where companies outsource functions such as HR to American workers.

NAFTA Job Losses

President Reagan envisioned NAFTA to help North America compete with the European Union. Unfortunately, it also sent around 850,000 jobs to Mexico. California, New York, Michigan, Texas, and Ohio were the most impacted states. At the same time, however, NAFTA did succeed in lowering prices on many products for American consumers and boosted exports to Canada and Mexico. NAFTA's successor, the U.S.-Mexico-Canada Agreement, was renegotiated to change wage and labor rules and took effect in July 2020.

Jobs in Mexico

Mexico is the sixth-largest auto manufacturer in the world, as of September 2021. But did that growth come at the expense of U.S. auto workers? Or is something else the real reason? The truth is Mexico maintains 13 free trade agreements with 50 different countries.

India Attracting U.S. Companies

India attracts American companies because its labor force already speaks English. Plus, its universities rank in the top 20% of the world's best, and its legal system is similar to the U.S.

Jobs in China

China is the world's largest exporter as of January 2020. But a lot of China's so-called "exports" are really for American companies. A lot of U.S. companies ship raw materials over, and the final goods are shipped back.

Note

Perhaps the U.S. should do the same thing. Imagine if all our imported products were partly manufactured in America? Other foreign companies should be required to follow the lead of Japanese automakers, who already do this. Of course, if the United States did that, it would mean higher prices for consumers. U.S. workers need a higher salary to pay for a better standard of living.

Workers in many manufacturing industries have been replaced by robots. To get new jobs, workers need training to operate the robots.

Innovations in technology are what actually allowed U.S. companies to move call centers to India. If technology is the culprit, it is also the answer. It's made the U.S. more competitive as a nation. Education, rather than protectionism, is the best way to both take advantage of technology and create jobs for U.S. workers.

Underpaid Workers

In 2020, there were 37.2 million people living in poverty in the U.S. Meanwhile, the top 10% of workers earned almost 13 times the income that the bottom 90% of workers earned.

Rise in the Freelance Economy

The freelance economy means that companies are laying off full-time-often older-workers and replacing them with part-timers, temp help, ​and freelance workers. It makes it easier to outsource jobs to workers who are not full-time.

The pandemic saw a rapid rise in both remote workers and freelancers, with many businesses expected to sustain or increase their use of freelancers in the future.

The Bottom Line

The phenomenon of job outsourcing in the United States provokes great economic contention. On one hand, this prevalent practice lowers costs for U.S. companies, enables global competitiveness, and allows them to provide reasonably priced goods and services. The benefits also extend to countries on the outsourced end, many of which have grown their economies through U.S. outsourcing. On the other, it has hurt employment, raising the unemployment rate particularly in these hardest-hit sectors:

Outsourcing may not be the biggest threat to unemployment though. Technological growth in automated intelligence could very well replace many human jobs, enormously impacting the U.S. job market in the immanently near future.

Frequently Asked Questions (FAQs)

Are foreign jobs ever outsourced to the U.S.?

How do foreign countries benefit from U.S. jobs being outsourced to them?

What are some U.S. companies that outsource jobs overseas?

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What You Should Know About Outsourcing Jobs

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Job outsourcing occurs when U.S. companies hire foreign workers instead of Americans. In 2019, U.S. overseas affiliates employed 14.6 million workers. Four industries that are often affected are technology, call centers, human resources, and manufacturing. Job outsourcing helps U.S. companies be more competitive in the global marketplace.

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Does outsourcing take away jobs from U.S. citizens?

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Does outsourcing take away jobs from U.S. citizens?

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The outsourcing may have many benefits for both outside countries and U.S.A but it does increase unemployment in America. But the reason we have jobs overseas is because we pay them lower wages because they are foreign. Would Americans be willing to accept lower wages.