The cost of labor in developing nations is much lower than in their industrialized counterparts. For example, a working level engineer in Bangladesh is paid the equivalent of $19,000 USD per year, or about a fifth of the cost of a working level US engineer. These cost savings are enticing many corporations to outsource business functions to developing nations. And despite a significant amount of negative press, outsourcing benefits everyone in the long run.
As the world continues to become a global economy, we all benefit from the efficiency created by increased competition. In other words, on a global level we all benefit when work is outsourced to those who can do it for the lowest cost. This is not to say that the cost savings of outsourcing don’t have an ugly side. In some cases the cost savings associated with outsourcing are due to inhumane working conditions and human rights violations. In the long run extorting wealth by mistreating workers is not sustainable. However, wealth is created as the global economy becomes more and more efficient through competition. How does competition create wealth? Through specialization.
Specialization refers to the efficiency and cost advantages gained by focusing on producing one product or providing one service. One famous entrepreneur who created wealth through specialization was Henry Ford. The workers on his assembly lines specialized in performing one step in the process of building a car. This allowed each worker to become extremely skilled at his or her particular function, which increased the quality and speed at which Mr. Ford’s cars were produced. The same principle, specialization, is at the heart of outsourcing. In fact, outsourcing is the application of specialization to the global economy.
To illustrate, assume a company used to produce widgets. They also used to create ad campaigns to sell their widgets, bill their customers for buying widgets, and support customers who had trouble using their widget. From an economy-wide perspective, that was the old way, in which one person built the whole car. With the application of outsourcing, the ad campaign to sell widgets is designed and implemented by a company specializing in consumer marketing. Likewise, the functions of billing customers and supporting end users are outsourced to companies that do nothing but billing and end user support. The advantage for the global economy is that the outsourced functions are not only likely to cost less, but they will be done better! This includes the now-specialized widget manufacturer.
Outsourcing is not a new concept. The industrialized nations of the world have outsourcing to thank for their prosperity. Furthermore, specialization is at the center of modern civilization. Consider the development of cities in medieval Europe. How was it that they were able to flourish and grow? The production of food, the manufacture of fabric, metalworking, and many other functions were outsourced to people specialized in those areas. The efficiencies of this specialization created wealth; when one individual focused his or her efforts, he or she produced more than the sum of two non-specialized workers. This incremental production represents the wealth created by specialization. Outsourcing applies the same principle to the global economy, allowing companies to create wealth on a global scale through increased specialization.
The real advantage to outsourcing is the additional wealth created by specialization.