Does outsourcing really add value to companies?
November 13, 2009
In all the din about the benefits of outsourcing, there is very little empirical evidence on how exactly does this model pay. One line of argument is that its not outsourcing per se, but the innovation that a foreign service brings that makes for profitability and intelligent use of resources. This point is very well made in a September 7, 2009 post, Procurement that pays: Foreign outsourcing, innovation, and profit dynamics, on Vox.
In another December 2006 Japanese study, Does Offshoring Pay? Firm-Level Evidence from Japan, authors Alexander Hijzen, Tomohiko Inui and Yasuyuki Todo draw upon statistical data from a wide range of manufacturing firms in Japan to conclude that offshoring does have a positive impact on efficiency, regardless of the size of the organization. This study however does not examine the debate from a cost perspective, which is the subject of inquiry for another Japanese study, Foreign outsourcing, exporting, and FDI: A productivity comparison at the firm level) that appeared in the Journal of International Economics in May 2007. Researchers of this study concluded that outsourcers are on average are less capital intensive than other multinationals. Another interesting finding is that “multi-sourcing” has a more positive effect on cost-saving than single sourcing.
Earlier, a 1997 study, Innovation and wage effects of international outsourcing carried in European Economic Review in January 2001, marshaled up enough statistical evidence in support of outsourcing, concluding in the end that outsourcing increases profits, creating greater incentives for innovation. A reduction in the resource requirement, improved technology, product expansion were other benefits associated to international outsourcing, especially to low wage countries.
Finally, there is an Irish study, Productivity Effects of International Outsourcing: Evidence from Plant Level Data of local export units that finds evidence of increased productivity in plants, especially export-oriented units. This can perhaps be attributed to the fact, that export-oriented units have an in-built logistical and procurement infrastructure to enable firms to draw maximum benefit from their foreign associates.