The Moral Dilemma of Recession and Outsourcing

Source: Articlesbase
By Steve Walker

A recession is defined as a decline in a country’s Gross Domestic product (GDP) or negative growth for two or more successive quarters of a year.

Recession is caused by any one or combination of the following factors:

1. Currency Crisis:- This happens when the value of a currency changes quickly, undermining its ability to serve as a medium of exchange.


2. Inflation;- It is the result of a rise in the general level of prices of goods and services in an economy over a period of time.


3. National Debt:- Recession follows when a sovereign government is unable to pay off national debt.


4. Speculation & economic bubbles:- Speculation causes prices to deviate from their intrinsic value. Recession follows when such hyped prices crash.


5. War:- When two or more nations are at war over a considerable period of time, it can prove to be a drain on the economy and can result in recessionary trends.


6. Under consumption:- When there is under consumption it leads to a situation where stagnation will set in as production will be stopped, resulting in recession.


7. Over production:- If there is over production on a large scale, it would lead to the reduction in value of the produced goods, thereby leading to lower prices and unsold stock.

The current recession seems to be the fallout of bursting of Economic (read Housing) bubble and overproduction (read over availability of mortgage credit).

The real estate prices had been growing to astronomical figures due to hyped demand. This hype in demand had been caused by over-availability of easy credit. When there was snap in one of them, the entire bubble burst. Add to that, the continued rise in oil & steel prices and the stage was set for recession in US. The involvement of big players the world over resulted in this enormous recession in the entire world.

The recession in US has been confirmed by a negative growth of GDP. In fact the GDP in US has shrunk 0.5%, the most since 2001 (when the last recession took place).

What has been the fallout of this recession in US?

Bankruptcies

Squeeze in credit availability from banks

Foreclosures

Reduced sales

Stock Market crash

Rise in Unemployment

So, how does recession impact outsourcing?

As it has with all other forms of businesses, recession also has a huge impact on outsourcing.

And the impact on outsourcing can be as varied as the two poles!

Sine in recessionary times, there is severe credit & fund crunch, businesses will like to optimize whatever available resources they have. And they would look at outsourcing option as one which could lead to sustained profitability because of the lower costs involved and 24/7 availability of the outsourcer.

But at the other spectrum of the debate is rising unemployment. In Nov’08, unemployment in US was at 4.9% with economists predicting a further rise to about 6% to 7%. In fact, in October, 2008, the service sector of US shed about 240,000 jobs. And that’s a huge number we are looking at!

And this has stirred the conscience of many a businesses. The thinking is: when my own countrymen are losing jobs, why do I ship jobs to other countries? I could very well help few of my countrymen offering jobs at reduced costs.

While this line of thinking is certainly appreciable, it is pertinent to note that outsourcing is not a tool to reduce job opportunity in a country. Outsourcing should be used as a strategic tool for a business to grow and not look at it as a mere tool for cost control.

Here is a small illustration of what it means:

Suppose a businessman A has an in-house accountant to record his daily transactions and prepare the monthly Income & Expense Statement for helping the businessman to take strategic decision about his business. On an average, the hourly rate for an accountant (with less than 1 year of experience) is $14.14. The monthly fixed cost assuming a 40 hours week would be $2,262. And this is only for accounting. The businessman has to again shell out $300 upwards for preparing his business’s tax return from a CPA.

On the contrary, if businessman A decides to outsource his entire accounting function to APT Services, he would be charged $1,280 per month for all services including the tax return preparation. Add to this, the benefit of getting highly professional reports on the current state of the business which would be far better than reports generated by an accountant with less than a year’s experience.

So, cost wise, it makes sense to outsource accounting to APT. But doesn’t that mean making one person jobless?

Not necessarily. The person’s time can be split into: time to interact with APT for reports etc. and time for the core area of the business. This would have two pronged effect on the person and the business:

a) The person would be able to generate additional direct revenue for the business and also learn a lot from associating with professionals at APT.

b) The business gets additional revenue while cutting down the overhead.

Thus by associating with APT, you can do business without hurting your conscience!