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The 2008 financial crisis underscored the fragility of the economy. This event was not just domestic,
but also global. Because of both the wild swings in the price of oil and the financial credit crisis,
companies saw their bottom lines erode dramatically. It is especially during times of declining profits
that companies look to shed costs and find more efficient ways of conducting business.
Outsourcing is not new. Outsourcing dates back to biblical times when the production of materials
was outsourced to other tribes. Outsourcing as a business strategy, however, was first mentioned in
1979. Prior to that date, many companies “farmed out” a number of their needs. In the 1960s, many
companies outsourced their data processing. Small companies utilized accounting firms to perform
many of the functions that would normally be handled in-house. Publishing companies rarely
performed their own composition, printing, and distribution. Yet, in the 1970s and 1980s, vertical
integration became the trend. More and more companies believed that there were efficiencies in
controlling all of the functions involved in producing and supporting their products. The recession in
1990, however, prompted businesses to closely evaluate what services should be performed in-house.
Companies reviewed their organizations to determine their core competencies. Those functions that
did not fit the model were considered for outsourcing. Thus, many companies eliminated departments
such as legal services, information technology (IT), accounting, internal audit, product design, and
even some manufacturing. If companies did not deem it strategic, many outsourced it.
Offshore outsourcing increased dramatically in the late 1990s as a result of the Y2K problem.
Companies faced the daunting task of remediating millions of lines of COBOL code, a task far too
large for companies‟ existing infrastructures, but one for which a booming workforce in India had
capacity. India always possessed a wealth of technical talent. Because of the lack of demand within
India, most of that talent tried to emigrate to the United States for employment. Yet, there were many
who were not fortunate enough to overcome the U.S. immigration quotas. As a result, companies such
as Tata Consulting Services, Wipro, and Infosys developed Y2K factories in India where thousands of
skilled programmers modified the code to meet the requirements of the new millennium.
Then, with the growth of inexpensive broadband technology and the Internet, it no longer mattered
where a company‟s support services were located. Almost any support services could be performed
offshore. Law firms outsourced document examination and patent applications. Hospitals outsourced
radiological interpretations during nighttime hours. Call centers and technical support services were
popular functions to be outsourced. Bangalore became the center of outsourcing services in India. In
the United States, major American companies reinvented themselves as outsourcing companies. IBM
and Hewlett-Packard became significant powers in providing outsourced services. For example, in the
late 1990s, Sears outsourced all of its point-of-sale installation, maintenance, and call center support to
IBM, which located 1,500 of its employees at various Sears facilities. (See Exhibit 18.1.)
Motivation to Outsource
What motivates a company to outsource some of the internal functions that do not fit its core
competencies?
• Cost reduction and cost control. Most companies begin here. When business is booming,
prices are stable, and credit is plentiful, companies become complacent. However, as soon as
business turns down or competition increases, companies look for areas to trim costs and to