story of outsource

Pareto Law takes it’s name from Vilfredo Pareto’s 80:20 principle. This economic law stated that 80% of Italy’s wealth was owned by a mere 20%. Putting this theory into business practice, Pareto Law translate that 80% of a company’s business will be generated by 20% of its activities. Considering the Pareto law it makes business sense for businesses to focus on its core activities and outsource the rest.

Outsourcing occurs when a business purchases services or products from a foreign supplier or manufacturer, or when a business pays another company to provide services that a business might otherwise have employed its own staff to perform. Businesses outsource for the purpose of cutting costs; raising profits and productivity.

Outsourcing is not a new phenomenon. Many thousands of years ago, our ancestors realized that it would be impossible for them to fulfill all their needs by themselves and they would have to depend on someone else to serve them. However, just before the Industrial Revolution, the trend of companies was to retain all activities for themselves. They nearly never relied on outsourcing to look after their sales, storage and transportation, legal affairs, and taxes. The company performed all of these by itself.

The great Industrial Revolution between 1750 and 1900 that took place in Europe saw a manifold increase in the production of goods; the market for them widened and profits were like never before. Many companies began to outsource such activities like accounting, insurance, engineering, legal needs, etc to specialized firms. These firms were within the country and not offshore. At this point of time, outsourcing (if we could call that so) was exploitative and ugly. For instance, the Indian farmers were forced to provide raw materials like cotton and indigo for the British companies when they would rather produce food grains which was the need of the hour.

Middle of the 20th century saw many political and economic changes combined with the development of faster means of transportation. Distances began to matter less. Manufacture of low costing toys and electronic goods, apparels, etc were outsourced to less developed countries. The political set up had changed considerably. Many countries in Asia had become free. Outsourcing was a welcome development as it benefited the developing economies by increasing employment and income levels of the workers. The education and skill levels too improved. The governments in these developing countries took care to develop adequate infrastructure necessary for manufacturing companies to maximize profits.

The IT revolution and the improvement in computer technology had a great part to play in the next stage in the outsourcing history. In the 1990s, many companies began to outsource activities that were essential for them, but these did not include their core activities. Outsourced activities included data processing, human resources and accounting. All these enhanced profits for their clients. They clung on to ownership and management of core activities.

Outsourcing was a response to globalization. The origin of outsourcing in America dates back to the 1970’s when IBM developed the IT industry in India . Later, the Internet and telecommunications boom encouraged outsourcing as a means of promoting capitalism