In the business operation, outsourcing refers to the act of contracting out some business processes to a third party. The factors that drive business to decide on outsourcing their business processes are diverse. They include factors such as technological development, skilled laborers, costs such as labor cost and raw materials amongst other factors. Outsourcing can either be done within the same country or outside often referred to as offshoring and nearshoring respectively. Some of the major drivers that force businesses to outsource some of the business process include costs, strict government regulations, taxes and incentives (Carmel & Nicholson, 2007). In this paper, we shall explore the concept of outsourcing some or all business processes to low labor costs countries focusing on the advantages and disadvantages and using a case example.
There has been an increased rate of business processes being outsourced from one country to another. In this paper, we shall make use of the case of the United State corporations outsourcing their business processes to Costa Rica. Costa Rica has become an ideal destination for the United States’ corporations that have some or all business processes that can be outsourced without affecting the operations. This increase can be attributed to a number of factors as follow: The United States charges a corporate tax rate at 40% of the taxable income. Costa Rica on the other side charges a flat rate of 30% to the taxable income. The United States has a strong and organized workers union that has negotiated for high salaries, medical covers, retirement benefits and good working conditions. These factors in combination with the high tax rates drive force the corporations to make changes in their operations in an effort to reduce the cost of production. In this case, the trade-off is that the company will have to pay the income for the permits, export duties and taxes to the host nation. However, owing to the fact that labor costs in Costa Rica are relatively lower as compared to the United States, the organizations will still save in their cost of production (George, 2012).
An example of a company that has embraced outsourcing in order to lower their costs of production and increase efficiency in the delivery of the services is Proctor & Gamble. The company markets branded household products that are sold in over 180 countries globally. The company has ground presence in more than 80 countries. The task of managing such a huge business operation is enormous, labor intensive and called for innovation. The company thus opened service centers in Costa Rica, Manila and Newcastle. These service centers have improved the company’s efficiency and effectiveness in the provision of business operation support. The lower labor cost in Costa Rica as compared to the United States saves on the company operational costs (Ernst & Sánchez-Ancochea, 2008).
In the selection of the ideal countries where an organization can outsource its business processes, time differences, language barriers, and cost are the main factors that are considered. Thus, for business organizations that are in the United States, South American countries would be ideal. India and China have lower labor cost and skilled laborers in the manufacturing and IT sectors. Thus, they would also be an ideal destination for companies form the developed nations.
Most companies are increasingly employing the outsourcing process as a method of lowering the costs and increasing the efficiency. The trade-off includes the export duties from the host country and the import duties into the destination countries. However, owing to the low labor costs, the sacrifice is worth it and in the end, both the host and the origin countries will benefit from the union. Costa Rica has become an ideal destination for American corporations owing to the proximity to the U.S. and common cultural and languages. Other destinations include India and China that are Ideal for manufacturing services.
References
Carmel, E., & Nicholson, B. (January 01, 2007). Small Firms and Offshore Software Outsourcing.
Ernst, C., & Sánchez-Ancochea, D. (2008). Offshoring & Employment in the Developing World: The Case of Costa Rica. Geneva: International Labour Organization.
George, B. (2012). Best Practices in Outsourcing: The Procter & Gamble Experience. The university of St. Thomas
