The practice of outsourcing and outstaffing started in the late 1960s when American corporations began placing manufacturing facilities in India and China. The idea, however, is much older. It was Adam Smith in 1776 who introduced a concept of competitive advantage and regarded hiring labor forces in less developed countries as a way to achieve one. The globalization of the 21 century just gave us a tool to follow the father of economics’ idea.
- What’s the core difference between outsourcing and outstaffing?
- The impact of IT outstaffing on the economies of developing countries
- Vivid examples – how have the economies of China and India changed due to outsourcing?
- Pros of IT outstaffing for European economic growth
- Cons of IT outstaffing for employment
- Finding a reliable IT outstaffing partner for your business
What’s the core difference between outsourcing and outstaffing?
During the last decade, the IT industry has witnessed a significant transformation in its workforce management. Traditional employment models, such as fixed bid outsourcing, have been gradually replaced by IT managed services, outstaffing, and practices of creating IT ecosystems where every IT vendor is a strategic partner to its customer.
When discussing the impact of outstaffing and outsourcing on employment rates and economic growth, the difference between the two approaches becomes even more viable.
IT outsourcing means a client hires an IT vendor who takes full responsibility for software development and other tech tasks set by the client. IT vendors might have high fees for their services but low employee salaries. There might be inappropriate employment practices, for example, no social guarantees. IT vendors who follow a traditional outsourcing approach can also get involved in dumping practices, which can affect the labor market of a client country.
IT outstaffing means that a client reinforces its team with particular individuals from abroad. Hence, a client knows the salary of its remote employees and can share its corporate values with them. With IT outstaffing, there is no place for dumping practices and injuring prices for the client country.
The impact of IT outstaffing on the economies of developing countries
Outstaffing can have significant positive effects on employment and economic growth of the countries where the outstaffing service providers are based. For example:
1. Job creation
Outstaffing has contributed to job creation in developing countries, especially in regions that have become popular destinations for outstaffing services. As outstaffing companies set up their operations in these countries, they hire local talent to work on various projects for clients in other countries. This influx of foreign investment in the IT sector has led to the establishment of new job opportunities for local professionals. IT outstaffing has, thus, become a driving force in promoting employment in these regions.
2. Skill development and training
The demand for skilled IT professionals in developing countries has increased due to outstaffing. As outstaffing companies strive to meet the skill requirements of their clients, they invest in training and upskilling their workforce to match the specific needs of different projects. This focus on skill development enhances the employability of local professionals and contributes to the growth of a well-trained and proficient IT workforce in these countries.
3. Opportunity for remote work
Outstaffing allows professionals to work remotely for clients in different countries. This flexibility in work arrangements has become increasingly desirable, especially after the COVID-19 pandemic accelerated the adoption of remote work practices worldwide. IT outstaffing provides employment opportunities to individuals who may prefer or need remote work options, enabling them to work for international clients while staying in their home countries.
4. Economic growth
Thanks to outstaffing practices, IT vendors and recruiting companies from developing countries receive the opportunity to increase their state budgets and stimulate economic growth. Their governments can further use this money for social policies, infrastructure improvement, and investment in state development.
Vivid examples – how have the economies of China and India changed due to outsourcing and outstaffing?
Outsourcing to China and India has profoundly impacted their economies, transforming them into major players in the global market. Both countries have become popular outsourcing destinations due to their vast and skilled labor pools, cost-effective services, and favorable business environments. Here’s how outsourcing has changed the economies of China and India.
China became a manufacturing hub
Outsourcing to China has turned the country into a manufacturing powerhouse. China’s vast labor force, infrastructure development, and competitive costs have attracted numerous multinational companies to set up production facilities in the country. As a result, China has become a leading exporter of various products, from electronics to textiles.
- Outsourcing has contributed significantly to China’s economic growth, with foreign investments pouring into the country. The inflow of capital, technology, and expertise has played a crucial role in modernizing China’s industries and expanding its economy.
- The outsourcing industry has generated millions of jobs in China, absorbing its large labor force and reducing unemployment rates. While this has improved the standard of living for many, it has also raised concerns about labor conditions and workers’ rights.
- To accommodate the needs of outsourcing companies and improve logistics, China has invested heavily in its infrastructure, including ports, roads, and communication networks. These improvements have further bolstered the country’s attractiveness as an outsourcing destination.
- Outsourcing has contributed to China’s trade surplus, as the country exports a significant amount of goods and services. This has led to the accumulation of foreign reserves and the strengthening of the Chinese currency, the yuan.
India – the main exporter of IT services
India has emerged as a global leader in information technology and business process outsourcing services. The country’s large (the largest in the world) English-speaking (60% of Indian IT companies’ clients are from the USA and the UK) and skilled workforce has made it an attractive destination for companies seeking cost-effective IT and customer support solutions.
- The IT and BPO sectors have been instrumental in creating millions of jobs in India. Today, more than 4,5 million Indians work in IT, with part of them – in outstaffing and outsourcing service companies. The outsourcing industry has provided opportunities for the country’s educated youth, helping to address unemployment and underemployment.
- Outsourcing has significantly contributed to India’s export revenue, with IT and IT-enabled services becoming the country’s major exports. This has strengthened India’s position in the global services market.
- The growth of the outsourcing industry has helped diversify India’s economy, reducing its reliance on traditional sectors like agriculture and manufacturing.
- Collaboration with international clients has facilitated knowledge transfer and skill development in India. Exposure to global business practices and technologies has boosted the expertise of Indian professionals.
- The success of outsourcing in India has led to the development of specialized outsourcing hubs in cities like Bengaluru, Hyderabad, and Chennai. These cities have become technology and business centers, attracting further investments and talent.
China and India are surely not the only countries that benefited from globalization and international IT outstaffing and outsourcing. In some Eastern European countries like Ukraine and Poland, IT outstaffing become a tool to fill in state budgets and attract investments. Countries do understand the importance of IT outstaffing for their economies and continue providing the most beneficial business environment for the local IT vendors.
Pros of IT outstaffing for European economic growth
It wouldn’t be so popular if there were no additional benefits attached to outstaffing and outsourcing. For client countries, outstaffing offers a cost-effective way to access skilled IT professionals without incurring the expenses of hiring full-time employees with high wages. Companies can expand their teams with qualified specialists from outstaffing partners, avoiding the overhead costs of setting up additional office space, benefits, and other expenses. This cost efficiency can lead to improved financial performance and competitiveness, potentially translating into job stability and growth within the client country’s economy.
What’s more, outstaffing often involves hiring professionals for specific projects or periods, which aligns well with project-based work requirements. This flexible employment model allows companies to adjust their workforce according to project demands, thereby supporting agile and dynamic business operations.
Another advantage of outstaffing and outsourcing is that these practices create a startup-friendly environment, where small to medium-sized enterprises have more chances to succeed. By accessing skilled talent on an as-needed basis, startups and SMEs can compete with larger corporations without bearing the burden of full-time employee costs. This democratization of talent can spur innovation and job creation in industries dominated by established players.
Cons of IT outstaffing for employment
While outstaffing can create employment opportunities in developing countries, it may also present challenges to local job markets in client countries. In some cases, companies may opt to outstaff certain functions rather than hire locally, leading to a reduced demand for local talent in those specific areas. This practice can lead to job displacement in developed countries, where workers may lose their jobs to cheaper foreign labor.
Outsourcing has been associated with widening income inequality within and between countries. While it has lifted millions out of poverty in some regions, it has also concentrated wealth and power in the hands of a few, exacerbating income disparities.
In some cases, outsourcing has led to the exploitation of workers in developing countries. Low labor standards, poor working conditions, and inadequate wages are among the concerns, particularly in industries like manufacturing and agriculture. In this regard, outstaffing protects companies from these drawbacks, as employers can directly control their employees’ working environment.
Global competition can sometimes lead to domestic industries’ decline or even collapse, especially in smaller economies. As international companies flood the market with cheaper products, local businesses may struggle to survive.
Globalization can lead to increased financial interdependence, making countries more vulnerable to economic crises in other parts of the world. Financial instability in one region can quickly spread to other countries, resulting in a global economic downturn. Getting back to the IT industry, this is what happened to Russian and Belarusian IT vendors’ customers around the globe. From March 2022, they had to cancel all their agreements and start searching for contractors elsewhere. The war hasn’t affected the Ukrainian IT vendors that much. Even though most of them have faced some or all challenges of the war, they managed to proceed to work and deliver high-quality services to their international partners.
Finding a reliable IT outstaffing partner for your business
As you can see, IT outstaffing has a mostly positive impact on the economies of client and vendor countries. As a business owner, you can significantly cut your expenses and get access to a broader pool of international tech talent than you have at home. Moreover, you should not worry that you will interrupt your local community’s economic growth or employment.
Businesses usually opt for outstaffing when they cannot find a fitting expert on their national labor market. This means that hiring a skilled developer from Eastern Europe or India for your British company won’t increase unemployment.
At Flytika, we offer IT recruitment, staff augmentation, and dedicated team services. We search, recruit, and hire tech talent for your business. Afterward, we help to onboard, administrate, and manage your new remote employee. We take care of payrolls, taxes, social guarantees, and working spaces for experts we hire for you. To learn more about our spheres of competence and capabilities, contact us and give more details about your project.