Reasons for outsourcing

Companies outsource to avoid certain types of costs. They outsource the non core activities. Among the reasons companies elect to outsource include the avoidance of regulations, high taxes, high energy costs, and costs associated with defined benefits in labor-union contracts and taxes for government-mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short-run costs, executive management sees the opportunity for short-run profits, while the income growth of the consumer base is strained.[3] This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers.[10] Lower regulatory costs are an addition to companies saving money when outsourcing. On comparative costs, a U.S. employer typically incurs higher defined benefit costs associated with taxes to account for social security, Medicare, safety protection (OSHA regulations) and FICA taxes etc. than in other countries.[11] On comparative CEO pay, executive pay in the United States in 2007 was more than 400 times more than average workersa gap 20 times bigger than it was in 1965.[12] In 2011, twenty-six of the largest US corporations paid more to CEO's than they paid in federal taxes.[13] However, it appears companies do not outsource to reduce executive or managerial costs. Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business.[14] Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction.[15][16] Import marketers may make short-run profits from cheaper overseas labor and currency mainly in wealth-consuming sectors at the long-run expense of an economy's wealth-producing sectors, thus straining the home country's tax base, income growth, and increasing the debt burden. When companies offshore products and services, those jobs may leave the home country for foreign countries, at the expense of the wealth-producing sectors.[3] Outsourcing may increase the risk of leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.[17][18]

Implications
Management processes

Greater physical distance between higher management and the production-floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems, new Time management methods such as Time Tracking Software, and new cost- and scheduleassessment tools such as Cost Estimation Software.

Quality of service (QoS)

Quality of service is best measured through customer satisfaction questionnaires which are designed to capture an unbiased view.[19]
Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where the first language and culture are different.[20] Foreign call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual cues that are missing in a telephone call may lead to misunderstandings and difficulties.[21]
Security

Before outsourcing, an organization is responsible for the actions of their entire staff, sometimes a substantial liability. When these same people are transferred to an outsourcer, they may not even change desks. But their legal status changes. They are no longer directly employed by (and responsible to) the organization. This creates legal, security and compliance issues that are often addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and sometimes involves a specialist third-party adviser. Fraud is a specific security issue as well as criminal activity, whether it is by employees or the supplier staff. However, it can be disputed that fraud is more likely when outsourcers are involved, for example credit-card theft when there is the opportunity for fraud by credit-card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call-center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.[22]
Qualifications of outsourcers

In the engineering discipline, there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also the disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).[23][24] Companies looking to outsource their engineering activities should evaluate the capabilities of the providers. There are many benchmarking reports by independent research and consulting firms which analyze the vendors' capabilities.[citation needed]

Diversification The early trend in outsourcing was seen in financial constructs where a function's associated capital and personnel were sold to a vendor and then rented back over a series of years. Early benefits were a boost in expertise and efficiency as outsource vendors had more focus and capability in their specialization. As time progressed, the year 0 benefit was off the books, customer needs evolved and contracts generally aged poorly. Rigid contracts hampered the ability of customers to respond to emerging business drivers, and simultaneously tied the hands of the vendor's team who was focused on increased efficiencies for static problems. The result tended to be additional "project" contracts for incremental changes in a monopoly environment. Many deals became contentious, and many customers have become very uncomfortable surrendering so much power to a single vendor. As the contract aged, it became increasingly difficult to even negotiate with vendors with confidence, because the customer began to lack any real knowledge of the cost structure of the function, or the competitive situation of the vendor.