What is the difference between outsourcing and importing

IT is an acronym for information technology. It can be used for both hardware and software responsibilities within a company. BPO is an acronym for business process outsourcing.

It is a form of outsourcing where a company contracts a third party to provide non-primary business activities for them. BPO can include activities like payroll, human resources, accounting, customer relations, or even some IT-enabled services. BPOs can include phone and email relations with customers, but they can cover more processes than just customer relations.

Language is always evolving, and it could be argued that BPO as a distinction may not exist in the public vernacular ten or twenty years from now. What is considered outsourcing? What is the difference between sourcing and outsourcing? How are call centers different from BPO?

What are examples of outsourcing? What are the types of outsourcing? BPO This is a specific form of outsourcing that focuses on outsourcing services for operational activities. IT Outsourcing This is a form of professional outsourcing and is when solutions for technology-related resources are subcontracted outside of an organization for all or part of an information technology function.

Manufacturer Outsourcing When outsourcing became popular in the US, the overwhelming majority of it was used in manufacturing industries.

Multisourcing While this term can be applied to any business area, it is most commonly used when dealing with IT outsourcing and IT services. Nearshoring Outsourcing is often tied with using a third or second world country for cheaper labor or materials. Offshoring This generalized term refers to any business function that is moved to another country.

Professional Outsourcing This is when key functions in the company that would normally require a skilled professional are outsourced. Project Outsourcing Sometimes companies get overwhelmed with requests or are looking for help with a specific project.

Reshoring Outsourcing is always seen as a way to save money. How does BPO work? Why do companies outsource? What are the advantages of outsourcing? The biggest advantage of outsourcing is cost. It is often cheaper to outsource than to insource. What is the difference between outsourcing and importing? Does BPO mean call center? About the Author: Han Butler. Han's capacity for developing clear, unique, and compelling value propositions disruptively differentiates products and brands in cluttered markets.

His passion for working with people on creating value and opportunity has helped increase ROI Call Center Solutions revenue by Related Posts. November 9th, However, offshoring is when a company sends in-house jobs to be performed in another country. An example of offshoring is for a United States based company to produce their goods in Mexico. Both of offshoring and outsourcing ultimately save companies money but they reduce costs in very different ways.

Outsourcing has become increasingly popular with companies as a way to reduce overhead costs and increase profit margins. Outsourcing occurs when a company entrusts a part of their business process to an outside vendor. Outsourcing possesses a myriad of benefits, some of which are:.

Offshoring is when production operations are performed in another country. Offshoring is often criticized for transferring jobs to another country but it can be extremely beneficial for companies and can ultimately improve the economies in both countries. Offshoring has the potential to significantly benefit businesses.

Some of these benefits are:. Offshoring manufacturing to Mexico is a choice that more and more companies are making.

There are a number of huge advantages companies experience by offshoring production operations to Mexico. One of the main benefits of offshoring in Mexico is the significant cost savings. Mexico has a skilled labor force that can complete higher quality work for a fraction of the cost, which aids United States based companies in drastically reducing overhead costs. Another benefit to companies offshoring in Mexico is the geographic proximity to the United States.

Because of how close the United States and Mexico are, shipping costs are significantly lower than if manufacturing was offshored overseas, such as to China. This reduction in shipping and freight costs provides businesses with even higher cost savings, while still producing high quality products for consumers.

In this economic framework it follows that, for the nation, trade is ultimately not about competition, rather it is a process of mutually beneficial exchange. As noted above and developed more fully below, the overall macroeconomic impact of foreign outsourcing will be a net effect , involving negative and positive impulses that create and destroy jobs. Unfortunately, there are no public data series that allows a ready tallying of the net impact of foreign oursourcing on the economy. Since foreign outsourcing has already occurred on a relatively large scale in the goods-producing sector of the U.

Further, it is assumed that the tools of economic analysis used to isolate and evaluate these past economic effects are appropriate for judging the probable economic effects of current and future outsourcing, wherever in the economy they might occur. Foreign outsourcing destroys jobs in those parts of the economy that once produced the now imported product, but economic analysis tells us that due to off-setting employment effects in other parts of the economy, foreign outsourcing or imports in general is unlikely to cause a net loss of jobs economy-wide.

A steady churning of labor markets is a normal characteristic of a dynamic market economy like the United States. Foreign outsourcing and increased imports can contribute to that "churning," and in doing that can be expected to change the composition of total output and the composition of total employment, but they do not necessarily permanently reduce the level of either.

There are two complementary reasons for the relative steadiness of total employment and output in the face of foreign outsourcing and other disruptive market forces. First, the Federal Reserve, using monetary policy, can set the overall level of spending in the economy to a level consistent with full employment. To give some perspective on the relation between "job loss" and total employment, as well as the potential significance of foreign outsourcing in this dynamic process, consider that in any quarter of , at the peak of the last economic expansion, with total employment at about million, gross job losses tallied between 8.

Nevertheless, the economy at that time was operating at the lowest rate of unemployment in 40 years. Over the whole course of that expansion gross job loss actually rose as the unemployment rate steadily fell.

But with adequate economy-wide spending, it was possible to create job gains that more than offset job losses. In the somewhat more tepid labor market conditions of the current economic expansion, gross job losses per quarter between and have averaged around 7. In either time period gross job losses occurred on a scale well beyond what is currently attributed to foreign outsourcing.

Second, against the economic backdrop of adequate aggregate spending, any increase in the purchase of imports will tend to generate an equal increase in the sale of the country's exports of goods or assets. This outcome follows from the fundamental economic requirement that imports must be paid for and exports are the only means for making that payment.

The export sold does not have to be a currently produced good or service, it can also be the sale of an asset such as a deposits in a bank account, shares of stock, bonds, or real property, but in the end when tallied across transactions in goods and assets, a nation's trade is always in balance in the sense that any imbalance in goods trade must be offset by a compensating imbalance in asset trade.

Both types of export sales will have a positive effect on domestic output and employment, countering across the whole economy the negative effect of increased imports.

In short, the U. Consider, for example, a situation where a service once provided domestically is now imported from a country such as India. Since foreign suppliers do not spend dollars, the U. Either way, to generate the foreign exchange the United States must export something. It can sell U. The positive stimulus of the increased export of goods is direct. When foreigners purchase U. If exports increase less than the amount needed to offset jobs lost, the United States then must, in effect, borrow the money needed to pay for the increased imports through the sale of an asset.

The stimulus from an increased export of assets is indirect. Because the sale of an asset is equivalent to an increase in the flow of saving available to the U. As already highlighted above, the ultimate steadiness of total employment in the face of increased imports does not mean that there are not likely to be important short-run disruptions as displaced workers adjust to the new market conditions; and the manner of that adjustment is likely to be an area of pivotal importance to workers and policymakers.

Given the typical high incidence of intermediate products in export and import flows, we will probably find that outsourcing into and out of the United States both rise as trade increases.

But this is not a necessary condition because while all foreign outsourcing are imports not all imports are foreign outsourcing. We might import an intermediate product and pay for it by exporting a final product. The general impact on employment and output are the same in either case, however.

Multinational companies MNCs account for a very large share of the U. MNCs are even more important in U. Because of their central economic role, if a rising level of international trade and foreign outsourcing were diverting a large number of domestic jobs overseas, it would be evident in the pattern of employment between the MNC's domestic parents and foreign affiliates.

No large scale diversion of employment has occurred, however. For the period that stretches from through , MNC employment declined in both parents and foreign affiliates and the rate of decline was faster in the latter. From to , MNC employment rose in both the parents and the foreign affiliates.

This time employment in the affiliates grew slightly faster, but not so much faster as to indicate any major shift. Be mindful that a foreign affiliate's employment share can increase for reasons unrelated to outsourcing and may not reduce U. Reasons for this would include expanding foreign markets not easily serviced by exports, faster economic growth abroad, or lower productivity in the foreign affiliate.

That the parents in this time period were also increasing their output share suggests that the differences in the rates of employment growth largely reflected slower productivity growth in the affiliates. The natural "two-way" nature of trade suggests that for a complete view of trade's employment effects we also consider the behavior of foreign MNCs in the United States.

Economic reasoning tells us that if it is more efficient to produce some products abroad, it is also likely that it is more efficient to produce other products in the United States. Therefore, we might expect there to be outsourcing into and out of the U. What we observe is that over the period, employment in the U.

The flow of investment spending on plant and equipment between the United States and other economies could also be an indirect indicator of a pattern of diversion of capacity and jobs to foreign locations. If, because of lower labor costs or other factors, foreign locations are increasingly the preferred site for the production of many goods and services, then we might expect that there would also be a pronounced tendency for American companies to expand productive capacity abroad so as to take advantage of these situations.

For reasons similar to those outlined above, foreign investment does not have to lead to a diversion of domestic employment, but if foreign outsourcing by U. The evidence in this regard points to a pattern of balance, not a net diversion to foreign locations. While the image of the American company destroying jobs by closing its domestic operations in favor of some offshore location comes quickly to mind for many people, it is an incomplete image of what has been occurring in the U.

A more accurate image and one wholly consistent with the typical "two-way" nature of international economic exchange is one that also includes large inflows of foreign investment into the United States. These types of investment flows are termed "direct investment" and their level and direction are tallied by the U.

Commerce Department each year. The similar size of these flows suggests that in this time period to the extent that such flows correlate with foreign outsourcing into and out of the United States, this country had been as likely to be the destination of foreign outsourcing as it is the departure point.

But as the expansion continues, inbound direct investment will probably increase relative to outbound direct investment, in part because growth in the United States is expected to outpace that in the rest of the world.

In addition, data for capital expenditures by U. A widely cited study by Forrester Resources projects that 3. Yet, Jacob Kirkegaard of the Institute for International Economics IIE has done a close examination of the employment trends since in those occupations deemed at risk of moving offshore in the Forester study. Some of the findings of the IIE study are as follows:. These findings again suggest that to the extent that foreign outsourcing has affected these "at risk" occupations, it is part of a "two-way" process involving job destruction and job creation and that the jobs created may be better jobs than those destroyed.

Therefore, while some are hurt, it is not clear that the overall impact is a negative one. Another common concern with a rising level of trade and the foreign outsourcing that accompanies it, is the belief that it must put downward pressure on the wages of domestic workers. Outsourcing is commonly seen as a process driven by the search by companies for low-wage environments, that ultimately places American workers in effective competition with a vast pool of lower-wage foreign labor, and exerts downward pressure on worker wages.

This competition, it is argued, will result in the so-called "race to the bottom" between domestic and foreign workers. For many, the reality of the deleterious effect of trade on wages was given credence by the observed slowdown in the growth of real wages and the widening wage inequality between skilled and less-skilled workers that occurred concurrently with the growth of trade over the last 25 years.

Further, there are credible economic reasons that increased trade and foreign outsourcing could have an adverse effect on the distribution of income. The adverse distributional effect could manifest itself as a deterioration of the position of labor relative to capital and a falling average wage, or as a deterioration of the position of one class of labor less skilled relative to another more skilled and increased inequality of wages.

The effect of trade on wages in the U. A likely important reason for the small effect of trade on wages for the U. In fact, among U. This has occurred because many trading partners who were once low-wage economies have, with open trade and steady economic growth, become high-wage economies.

As the once poor have moved up the income ladder, they have also withdrawn from the production of goods that use low-skill and low-wage labor intensively and these products are then imported from the newer emerging economies. China has picked up this task, as other East Asian economies have withdrawn, and, in turn, as these economies did when Japan shifted away from this type of production.

Economies of scale are also a factor that likely helps hold up industrial wages in the face of low-wage foreign competition.

Scale effects are thought to be a significant force in many industries and, when present, would tend to increase worker productivity and decrease unit labor costs. It is also possible that the increase of competition itself spurs companies to higher levels of efficiency that also lowers unit labor costs and helps preserve a higher wage level.

Another reason for the small impact of trade on wages in the United States is that as the once low-wage economies transform to high-wage economies, two events occur: one, they tend to produce less of the goods typically produced by low-wage workers; and two, they tend to increase there demand for the products produced by low-wage workers.

The two effects exert upward pressure on the wages of these workers, including any producing similar products in the United States. This outcome is consistent with the evidence that for the United States the relative price of unskilled, labor-intensive, import competing goods rose in the s and s. Of course, it cannot be ruled out that if trade with relatively low-wage economies does grow in importance, the negative effects on U.

Yet, there is probably an upper bound to this effect, for it is possible that in the future with only relatively moderate differences between home and foreign production costs, complete specialization would occur. That is, the United States would no longer produce much of what is imported from low-wage foreign economies. Since the United States would then no longer have industries that use low-wage labor intensively, there would be no downward pressure on domestic wages caused by such trade.

To the extent that this pattern of trade allows for a fuller realization of economies of scale and lowers product prices, domestic workers' real wages could be increased.

The change in the location of U. Reviewing the period through , the Council of Economic Advisors concludes that for United States the increase in share of total U. The value of imports from both sources has increased considerably. Still, many of the export jobs in non-China Asia are migrating to China, so the distributional effects of this change fell on workers in China and the Pacific Rim economies rather than workers in the United States.

Also we know that industries that export pay wages that are, on average, higher wages than industries that compete with imports. Therefore, as a rising level of trade and outsourcing creates jobs in exporting industries, and destroys jobs in import-competing industries there is a tendency for the average industrial wage to rise.

It is also useful to keep in mind that the U. For the economist, the central economic question to be answered in regard to foreign outsourcing, or increased international trade in general, is not its particular impacts on employment or wages.

Those effects are not to be ignored, but they are symptoms of a larger process. The answer economic analysis attempts to provide is whether that larger process ultimately makes the United States richer or poorer. As economic growth abroad expands the number of competitive sources of production, will substituting foreign for domestic output generate gains from trade and raise overall economic well-being?

Whether such foreign outsourcing is occurring in the service producing sector or the goods producing sector, there will be the same array of possible positive and negative effects on the economy. Because importing must be accompanied by exporting, the possible effects on the economy can be grouped into two general categories: economic effects related to exporting and economic effects related to importing.

The net effect of these several impacts of increased trade or outsourcing can, in theory, be positive or negative. In most circumstances, however, the strong expectation of economists is that gains outweigh losses and that trade's disruptive reshuffling of the economy's productive resources does ultimately result in an increase in overall economic well-being.

The gains from trade are, however, most often a net gain , because some will be hurt by this process. Trade, like other market forces, generates increased wealth through a process of "creative-destruction" which entails what is most often a disruptive re-shuffling of workers and capital. New opportunities for enrichment are created and resources are drawn towards them.

But other activities that are less efficient are destroyed and resources are pulled away from them. Because there are net gains, it is also in principle possible for the losers to be compensated and still leave the winners better off than they were prior to the increased trade.

In practice, however, there may be reason to question how equitable the compensation forthcoming is. It is likely that a general acceptability of increased trade will hinge on this equity issue. In most instances the crux of debates about trade are not about the value of trade to the overall economy, but over who will receive the benefits and who will bear the costs of trade.

While still earning his full wage, the use of his freed time in other endeavors would make him better off. His employer and the ultimate consumers of the final product bear the cost in the form of lower profits and higher product prices than would be the case if the most efficient way of production was used directly. Of course, if his employer learned of the relative efficiency advantage of the foreign worker, she would most likely contract directly with that foreign worker outsource and lay off the domestic employee.

The gains and costs of trade are still the same as in the first circumstance, but now they have been redistributed to the benefit of the domestic employer and her customers and to the detriment of the displaced employee. Economics cannot tell us which distributional outcome is preferred, but it does tell us that outsourcing the task increases overall economic well-being. Equity concerns notwithstanding, the expectation of enrichment though trade has propelled successive rounds of trade liberalization in the post-war era, a process the United States has consistently played a leadership role in sustaining.

Trade has expanded rapidly as has economic well-being of most trading nations, and the increase in well-being is found to increase with a country's degree of openness—the more open to trade, the greater the gain.

As such, a country does not compete with its trading partners, it engages in mutually beneficial exchange with them. Increased foreign outsourcing is a symptom of these expanded opportunities for trade and mutual enrichment.

As the United States has benefitted from increased trade and outsourcing associated with the post-war industrial resurgence of Europe and Japan, so would it likely benefit through increased trade associated with the ongoing economic development of China, India and other emerging economies. The gains from trade are not a static phenomenon, however.

While at any point in time an increase in trade outsourcing increases economic well-being, over time the size of the gain could rise or fall as the relative economic circumstances of trading partners change. Therefore, it can be telling of the economy's international trade performance and its view of how it is faring from increased trade to consider whether there has been any long-term trend in the nation's share of the gains from trade.

More specifically, this is a question about whether, over time, the U. The terms of trade is a ratio of average export price to average import price and as such is a measure of the export cost of acquiring imports. An increase in this ratio—an improving terms of trade—means that any given volume of export sales will now exchange for a larger volume of imports, indicating an increase in the gains from trade. A rising trend would indicate that a country's trade performance has improved relative to other trading countries, reaping an increasing share of the gains from trade, and real income benefits for the economy.

Similarly, a decrease in the ratio of export prices to import prices—deteriorating terms of trade—raises the export cost of acquiring imports and reduces the gains from trade. A falling trend would be indicative of deteriorating trade performance, decreasing share of the gains from trade, and decrements to real income. Over time it is likely that economic growth, at home and abroad, will tend to show either a bias towards the production of goods a country exports or a bias towards production of the goods a country imports.

If export biased, there is a more then a proportionate increase in the worldwide supply of goods that compete with U. In contrast, if growth in the rest of the world is import biased, there is a more than proportionate increase in the worldwide supply of the goods the U.

Increased foreign outsourcing is clearly a manifestation of economic growth in the rest of the world and in recent years this has included the expanded participation of lower income developing economies in the internationally fragmented production processes that now propel a large and growing share of international trade. As was discussed in the " Introduction " section of this report, foreign outsourcing is not a new phenomenon, but one that is occurring with a steadily rising incidence in goods producing industries for the last three decades.

At the peak of the last business cycle in , it is likely that a very large share of total U. Has this increase in foreign outsourcing affected the U.

Has there been any tendency for the U. Relative to its peak in the mids, the terms of trade declined at about 1. But while significant, this fall was moderate in scale. This deterioration most likely reflects the recovery and return to competitive posture of the many high-income economies from the devastation of World War II. These are largely economies that have resource endowments similar to that of the United States and who with economic recovery from the war could be expected to increasingly compete against U.

This growth was certainly export biased and accordingly has pushed down the average price of U. Since the s the U. It is, of course, in this more recent trendless period that the use of foreign outsourcing was steadily climbing and the period when trade with low-income, low-wage economies was also on the rise.

Yet, the trendless path of the U. Growth in the rest of the world and the outsourcing that went with it in this period was, on balance, without a bias towards the goods the United States exports or imports. At this point there does not seem to be a strong reason to expect the spread of outsourcing to the service sector to change this outcome.

The idea of the product cycle provides a useful way of understanding how an economy's gains from trade over time emerges from a continually changing industrial landscape and how foreign outsourcing may influence that outcome. It has been long observed by economists that the production of many tradable products will move from country to country over the life of the product.

In the early life of a product, production occurs on a small scale using relatively high skill workers. The relatively high price of the new product will also offer relatively high returns to the specialized capital stock needed to produce the new product.