Greg de la Cruz works in the tech industry and is the author of two published titles on Amazon.
Companies that move some of their jobs to a country with cheaper labor benefit not only themselves but also the destination economy. This strategy seems like a win-win for both parties—which are, respectively, the company that increases its bottom line and the country whose economy is flushed with foreign currency. But does the glam of outsourcing fade a little once you thoroughly understand its downsides?
There’s an ugly side to outsourcing, and as international brands with headquarters in the USA, Canada, Australia, the United Kingdom, and many other Western countries turn to outsourcing to gain a competitive advantage—the disadvantages of moving jobs overseas have become harder to ignore.
While there are surprising benefits (redundancy, business continuity, etc.) when you choose to outsource, there are also unintended consequences. And there are long-term effects that you may not have accounted for or even cared about when you made your decision to outsource.
Let’s examine some of these pitfalls of outsourcing below.
1. Lowering Barriers to Entry
Big companies, which are led by executives of varying motivations, often don’t pay much attention to the unintended effects of outsourcing. As many of them continue to offload work to other countries, they are effectively lowering the barrier to entry for potential competitors. And instead of gaining a competitive advantage over others, what ends up happening in the long term is increased competition.
Adam Hayes, in his article for Investopedia titled The Unintended Consequences of Outsourcing, warns us that outsourcing lowers barriers to entry and increases competition. “While increased competition is encouraged by free markets,” Hayes says, “it can hurt businesses that can’t keep up. Outsourcing allows new entrants to industries where labor would have been too expensive otherwise.”
If you’re an executive with the decision-making power to authorize a department or section of your business to be outsourced, you might need to exercise caution. Because while you’ll reap benefits in the near term in the form of increased profit margins, your actions may eventually result in your company losing market share over outside competitors, which were enabled due to the low barrier of entry. (To better visualize this, think the U.S. Military effectively arming terrorists by overextending war in parts of the world like Afghanistan and other similar situations.)
2. Lacking Control
Losing control of your business operations—especially if these functions become more critical than you had expected—is one of the main reasons why you might be resistant to outsourcing any of your business functions. But thanks to better connectivity around the world and the globalization of the supply chain, which has made more equipment and infrastructure available across all continents—you can now get better control.
At least that’s what you think when you’re able to call, email, and chat in real time with most of your business counterparts at your whim.
Obviously, there’s still a lot that you can’t control. Why else would some foreign companies opt to hire a head-of-office or GM of their subsidiary that’s of the same ethnicity as the people in headquarters? An American company, for example, will likely be more comfortable if the executive-in-charge at their outsourced location in, say, the Philippines, was also American. (But I’m speaking in generalities—this doesn’t happen all the time. Over time, my observation has been that as long as there’s someone competent enough in the country, the GM doesn’t have to be American, Australian, etc.)
In his Forbes article The Pros and Cons of Outsourcing, Deep Patel, who is a bestselling author of A Paperboy’s Fable: The 11 Principles of Success, tells us that the lack of control is one of outsourcing’s potential drawbacks. “Although you can provide direction in regard to what you need to accomplish,” Patel says, “you give up some control when you outsource.”
He adds: “There are many reasons for this, including the fact that you are often hiring a contractor instead of an employee. And since the person is not working onsite, it can be difficult to maintain the level of control you desire.”
3. Diminishing Customer Satisfaction
It’s wrong to assume that customer satisfaction will logically decline once you outsource customer service, helpdesk, and support to developing countries. It may sound counterintuitive, but outsourcing customer service globally makes sense for the following reasons, according to an article by Unity Communications:
- Resource conservation
- Expanding coverage
- Eliminating staffing issues
- Maintaining concentration on the task at hand
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Nevertheless, if you’re a company with the reputation of outsourcing customer service to places like India—for which many can attest the accent of the agent can be thick—you might be tarnishing your brand without you realizing it.
“Consumers can also be turned off by outsourcing,” says Adam Hayes in The Unintended Consequences of Outsourcing, “When customers hear a foreign accent answer their call to an American company, they may lose trust in the company and could even blame that company for eliminating American jobs. The situation becomes even more sensitive when customers have to share medical or financial information with strangers overseas.”
The unintended consequences of outsourcing customer service could be an eroding brand perception and a diminished trust with customers. But maybe if everyone is doing it, people wouldn’t care anymore, right?
4. Risking Security Breaches
The Wipro cybersecurity incident of 2019 is a cautionary tale for anyone who decides to outsource and yet doesn’t put enough value in improving security measures. In an article by Identity Management Institute (IMI), the writer highlights the Wipro case as an example of the negative impact of data breaches from an outsourced location.
Wipro provides IT services to big-name Fortune 500 companies, as well as government organizations and healthcare facilities. “Up until March of 2019,” IMI describes, “the state of Nebraska had a contract with Wipro and was planning on using them to provide upgrades to the state’s Medicaid enrollment system. State leaders cancelled the contract and sent out a cease-and-desist letter after receiving word that hackers had gained access to Wipro computer systems.”
The hackers were able to breach Wipro’s systems by using phishing tactics and gift-card fraud. They installed remote access tools and got into the networks of some of Wipro’s clients.
Cybersecurity breaches in outsourced locations don’t have to result in directly harming the client-company for there to be any apparent impact. It’s enough for the outsourcing partner to be associated with data breaches for the client company to see its reputation suffer. The client wouldn’t want to be affiliated with a foreign call center or services hub that has gained notoriety in being hacked.
It's an unfortunate truth that’s analogous to the saying “Tell me who your friends are, and I’ll tell you who you are”—your outsourcing partner’s reputation will rub off on you. This is why risking security breaches is one disadvantage of outsourcing, because you can never be so sure unless you take the pains to thoroughly audit your counterpart’s systems.
5. Losing Intellectual Capital, or "Brain Drain"
Angie Mohr wrote a thought-provoking article on Investopedia titled 4 Ways Outsourcing Damages Industry. In it, she lists the "Loss of Intellectual Capital" as one of the ways outsourcing harms industry as a whole. “In the beginning,” she says, “the outsourcing movement was meant to transfer low-skill jobs out and retain highly-skilled jobs as an important asset for the advancement of the country’s economy.”
“However,” she continues, “as emerging economies work hard to build their own intellectual capital, American companies are increasingly contracting accountants, engineers, and IT specialists at a rate far lower than it would cost them in the U.S. This brain drain has long-term repercussions for American industry. Once a skill has been largely moved offshore, it is difficult to regain. For example, if most publishers outsource book design and layout work to Chinese firms, over time there will be fewer designers in the U.S… It also means that there are fewer students of the craft, due to lack of opportunities.”
It may sound noble and appear equitable for you to provide these opportunities to job seekers abroad who never would have had the sheer quantity or quality of opportunities in their home country, but it’s problematic knowing that you’re hurting potential job seekers and even students in your own locality.
Brain drain happens to those developing countries, too, when their professionals seek employment in developed countries due to low local wages—but it also happens to developed countries when you gradually find ways to outsource higher-level jobs.
6. Relying on Foreign Relations
The existence of friendly foreign relations isn’t given much credit when it comes to making outsourcing available as an option—because it’s only when foreign relations suddenly becomes not so friendly that you take it into account. When you hear news of ambassadors, delegates, even the president or prime minister ‘improving ties’ with its counterparts from other countries—and talks of ‘strengthening partnerships’—you know that one is about to exploit the other. This exploitation can come in the form of labor, and this is when outsourcing is the direct result of foreign relations.
This dependence on foreign relations means that if both countries, or possibly allies of either country become disagreeable—then suddenly your outsourced operations fears for its own existence. Know that the government from the other country can shut your operations there anytime, and there’s nothing you could do about it.
Angie Mohr, in 4 Ways Outsourcing Damages Industry, provides examples of just how reliant outsourcing is on foreign relations:
- If the U.S. had a trade war with China, the Chinese government could levy tariffs against foreign companies operating within its borders or on goods crossing them.
- In 1996, when the Helms-Burton Act was in effect, it restricted U.S. companies from doing business in and with Cuba. This forced many companies to overhaul their operations outside of the country.
- If you’re an investor in the international markets, you can suffer losses on your portfolio if relations between two countries sour or if a foreign country falls into economic duress.
If there’s a sudden boycott or embargo by your home country on the country you’ve outsourced to, obviously, you’d be left scrambling. If most of your customer service operations are there, then your reputation would instantly suffer, and you’d also lose money.
7. Denying Local Growth
Lastly—and one pitfall that most companies turn a blind eye to—is denying local growth.
If you’re the chief executive of some company that constantly hits or exceeds its revenue targets, you’re likely to see your company keep on growing. You’ll eventually find that local growth isn’t enough—you’ll realize that you have to grow your business outside the confines of your home country (as a consequence of globalization). As great as it looks on paper that your company keeps growing year after year, the reality of it might not demonstrate—it’s likely that you’ve outsourced some jobs overseas already, given the remote work capability of our times.
Kevin O’Leary, popularly known as Mr. Wonderful on the hit show Shark Tank, and himself a longtime investor, has this saying: “Capital has no political bias. It has no nationality. It goes to the path of least resistance always.” And what this means is that unless you’re careful and deliberate about making sure you’re growing your local community as your own business grows, your capital will find a way to grow the outside communities if it means that it’s a more financially conducive path.
Outsourcing has always had a way to deny or offset local growth—and you have to be ready to accept this reality.
Outsourcing Is Here to Stay but Not to Replace All Jobs
The good news is that outsourcing isn’t likely to replace everyone’s job—even if local labor becomes exceedingly expensive. What holds true until today is that outsourcing applies to mostly "non-core" functions. Also, some companies are more comfortable implementing a "buddy system" where for one function, there are two or three groups of people—each group from different countries—who can do the same job, because this model allows for both flexibility and contingency.
There are always ugly, unintended consequences to even the best of intentions. What’s important is for you to be aware of these results and accept the reputation you get out of it. Thanks to globalization, many companies are now multi-cultured and previous biases are slowly fading away.
Maybe outsourcing will always do some measure of harm, but I suppose the costs are worth it?
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2022 Greg de la Cruz