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The gamble of outsourcing - as demonstrated at an outsourcing summit in London in 2009

Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally.[1][2]

It often involves the contracting of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center support). The term "outsourcing" came from "outside resourcing" and dates back to at least 1981.[3][4] Outsourcing sometimes involves transferring employees and assets from one firm to another.

Outsourcing is also the practice of handing over control of public services to private enterprises.[5]

Outsourcing includes both foreign and domestic contracting,[6] and sometimes includes offshoring (relocating a business function to a distant country)[7] or nearshoring (transferring a business process to a nearby country).

Offshoring and outsourcing are not mutually exclusive: there can be one without the other.

Contents

TerminologyEdit

  • Offshoring is moving the work to a distant country. If the distance workplace is owned by the company, then the offshore operation is a captive.[8]
  • Insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration.

OverviewEdit

MotivationsEdit

Financial savings from lower international labor rates can provide a major motivation for outsourcing or offshoring. There can be tremendous savings from lower international labor rates when offshoring.

Another motivation is speed to market, and to make this work, a new process was developed: "outsource the outsourcing process."[9] Details of managing DuPont's CIO Cinda Hallman's $4 billion 10-year ourtsourcing contract with Computer Sciences Corporation and Anderson Consulting were outsourced, thus avoiding "inventing a process if we'd done it in-house." A subsequently developed term to describe this is midsourcing.[10][11][12]

Outsourcing can offer greater budget flexibility and control by allowing organizations to pay for the services and business functions they need, when they need them. It also reduces the need to hire and train specialized staff, makes available specialized expertise, and can reduce capital, operating expenses,[13] and risk.

"Do what you do best and outsource the rest" has become an internationally recognized business tagline first "coined and developed"[14] in the 1990s by the "legendary management consultant" Peter Drucker.[15] The slogan was primarily used to advocate outsourcing as a viable business strategy. It has been said that Mr. Drucker began explaining the concept of "Outsourcing" as early as 1989 in his Wall Street Journal article entitled "Sell the Mailroom."[16]

ExamplesEdit

For example, in 2003 Procter & Gamble outsourced their facilities' management support, but it did not involve offshoring.[17]

An example of an Intermediary is when a business provides a contract service to another organization while contracting out that same service.

OverviewEdit

Two organizations may enter into a contractual agreement involving an exchange of services, expertise, and payments. Outsourcing is said to help firms to perform well in their core competencies, fuel innovation, and mitigate a shortage of skill or expertise in the areas where they want to outsource.[18]

HistoryEdit

Early 21st centuryEdit

In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Several related terms have emerged to refer to various aspects of the complex relationship between economic organizations or networks, such as nearshoring, crowdsourcing, multisourcing,[19][20] strategic alliances/strategic partnerships, strategic outsourcing.,[21] and vested outsourcing.

From Drucker's perspective, a company should only seek to subcontract in those areas in which it demonstrated no special ability.[22] The business strategy outlined by his slogan recommended that companies should take advantage of a specialist provider's knowledge and economies of scale to improve performance and achieve the service needed.[23]

In 2009 by way of recognition, Peter Drucker posthumously received a significant honor, when he was inducted into the Outsourcing Hall of Fame for his outstanding work in the field.[24]

Outsourcing modelsEdit

A serial report published in the 2010s looking at outsourcing models in clinical development described seven distinct models: Preferred Provider, Fee-for-Service, Functional Service Provider (FSP), Hybrid Full Service/FSP, In-Sourced, Compound/Program-based, and Sole-Source.[25]

Reasons for outsourcingEdit

Companies primarily outsource to reduce certain costs, which may include peripheral or "non-core" business expenses,[26] high taxes, high energy costs, excessive government regulation or mandates, and production or labor costs. The incentive to outsource may be greater for U.S. companies due to unusually high corporate taxes and mandated benefits like social security, Medicare, and safety protection (OSHA regulations).[27] At the same time, it appears U.S. companies do not outsource to reduce executive or managerial costs. For instance, executive pay in the United States in 2007 was more than 400 times more than average workers—a gap 20 times bigger than it was in 1965.[28] Other reasons include:

  • Reducing and controlling operating costs.
  • Improving company focus.
  • Gaining access to world-class capabilities.
  • Freeing internal resources for other purposes.
  • Streamlining or increasing efficiency for time-consuming functions.
  • Maximizing use of external resources.

White-collar outsourcingEdit

Outsourcing of white-collar work has grown rapidly since the early 21st century, despite a focus on manufacturing outsourcing. The digital workforce of countries like India and China are only paid a fraction of what would be minimum wage in the US. On average, software engineers are getting paid between 250,000 and 1,500,000 rupees (US$4,000 to US$23,000) in India as opposed to $40,000–$100,000 in countries such as the US and Canada.[29] Outsourcing has also expanded to include many different countries; Costa Rica has become a big source for outsourcing work as it offers the advantage of a highly educated labor force, a large bilingual population, stable democratic government, shares similar time zones with the United States, and it takes only a few hours to travel between Costa Rica and the US. Companies such as Intel, Procter & Gamble, HP, Gensler, Amazon and Bank of America have big operations in Costa Rica.[citation needed] In the recent years there has been an exponential growth in white collar work with service providers emerging in a wide range of activities, from banking and legal services to companies like Resources US,[30] a pioneer in outsourcing services for architecture firms in United States. Unlike outsourced manufacturing, outsourced white collar work, offers workers the flexibility to choose their working hours, and which companies to work for. With many individuals telecommuting from home, the companies that require this type of work do not need to allocate additional funds for setting up of office space, management salary, and employee benefits as these individuals are contracted workers.[31]

Ending a government oursourcing arrangement has its difficulties too.[32]

ImplicationsEdit

For businessEdit

Management processesEdit

Globalization and complex supply chains, along with greater physical distance between higher management and the production-floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as voice over IP, instant messaging, and Issue tracking systems, new time management methods such as time tracking software, and new cost- and schedule-assessment tools such as cost estimation software.[citation needed]

Communications and customer serviceEdit

In the area of call center outsourcing, organizations that are not experienced in working with outsourced call centers may suffer from lower end-user-experience as a result of outsourcing. This is exacerbated when outsourcing is combined with offshoring in regions where the first language and culture are different.[33]

For example, foreign call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual cues that are missing in a telephone call may lead to misunderstandings and difficulties.[34]

GovernanceEdit

In 1979, Nobel laureate Oliver E. Williamson wrote that the governance structure is the "framework within which the integrity of a transaction is decided." Adding further that "because contracts are varied and complex, governance structures vary with the nature of the transaction."[35] University of Tennessee researchers have been studying complex outsourcing relationships since 2003. Emerging thinking regarding strategic outsourcing is focusing on creating a contract structure in which the parties have a vested interest in managing what are often highly complex business arrangements in a more collaborative, aligned, flexible, and credible way.[36] (Also see relational contract, governance, Vested outsourcing.)

SecurityEdit

Outsourced staff may not even change desks, but their legal status changes. Since they're no longer directly employed by (and responsible to) the organization, legal, security and compliance issues are often addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and sometimes involves a specialist third-party adviser.

Fraud is a specific security issue as well as criminal activity, whether it is by employees or the supplier staff. However, it can be disputed that fraud is more likely when outsourcing is involved.

In April 2005, a high-profile case involved the theft of $350,000 from four Citibank customers when call-center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.[37]

Information TechnologyEdit

Richard Baldwin's 2006 The Great Unbundling work was followed in 2012 by Globalization's Second Acceleration (the Second Unbundling) and in 2016 by The Great Convergence: Information Technology and the New Globalization.[38] It is here, rather than in manufacturing, that the bits economy can advance in ways that the economy of atoms and things can't: an early 1990s Newsweek had a half page cartoon showing someone who had just ordered a pizza online, and was seeking help to download it.

ReversalsEdit

A number of outsourcings and offshortings that were deemed failures led to reversals signaled by use of terms such as Insourcing and reshoring. The New York Times reported that IBM "plans to hire 25,000 more workers in the United States over the next four years," overlapping India-based Infosys's "10,000 workers in the United States over the next two years."[39] A clue to a tipping point having been reached was a short essay titled "Maybe You Shouldn’t Outsource Everything After All" [40] and the longer "That Job Sent to India May Now Go to Indiana."

Among problems encountered were supply-and-demand induced raises in salaries and lost benefits of similar-time-zone. Other issues were differences in language and culture.[39] Another reason for a decrease in outsourcing is that many jobs that were subcontracted abroad have been replaced by technological advances.[41]

According to a Deloitte Consulting survey carried out in 2005, a quarter of the companies which had outsourced tasks reversed their strategy. Many big companies like Lenovo considered turning around outsourcing strategies of outsourcing.[41]

These reversals, however, didn't undo the damage. New factories often:

  • were in different locations
  • needed different skill sets
  • used more automation[42]

Public opinion in the US and other Western powers opposing outsourcing was particularly strengthened by the drastic increase in unemployment as a result of the 2007-2008 financial crisis. From 2000 to 2010, the US experienced a net loss of 687,000 jobs due to outsourcing, primarily in the computers and electronics sector. Public disenchantment with outsourcing has not only stirred political responses, as seen in the 2012 US presidential campaigns, but it has also made companies more reluctant to outsource or offshore jobs.[41]

A counterswing depicted by a 2016 Deloitte survey suggested that companies are no longer reluctant to outsource.[43] Deloitte's survey identified three trends:

  • Companies are broadening their approach to outsourcing as they begin to view it as more than a simple cost-cutting play
  • Organizations are "redefining the ways they enter into outsourcing relationships and manage the ensuing risks."
  • Organizations are changing the way they are managing their relationships with outsourcing providers to "maximize the value of those relationships."

InsourcingEdit

Outsourcing has gone through many iterations and reinventions. Some outsourcing contracts have been partially or fully reversed, citing an inability to execute strategy, lost transparency & control, onerous contractual models, a lack of competition, recurring costs, hidden costs, and so on. Companies shifting to insourcing often cite the desire to increase control, compliance and to gain competitive differentiation through vertical integration or the development of shared services, commonly called a center of excellence.[44]

Further, the label outsourcing has been found to be used for too many different kinds of exchanges often in confusing ways. For example, global software development, which often involves people working in different countries, cannot simply be called outsourcing. The outsourcing-based market model fails to explain why these development projects are jointly developed, and not simply bought and sold in the marketplace. Recently, a study has identified an additional system of governance, termed algocracy, which appears to govern global software projects alongside bureaucratic and market-based mechanisms. The study[45] distinguishes code-based governance system from bureaucracy and the market, and underscores the prominent features of each organizational form in terms of its ruling mechanism: bureaucracy (legal-rational), the market (price), and algocracy (programming or algorithm). So, global software development projects, though not insourced, are not outsourced either. They are in-between, in a process that is sometimes termed "remote in-sourcing."[46] Projects are developed together where a common software platform allows different teams around the world to work on the same project together.

Standpoint of laborEdit

From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and is reflective of the general process of globalization and economic polarization.[47]

On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[48]

Standpoint of governmentEdit

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.

Policy-making strategyEdit

A main feature of outsourcing influencing policy-making is the unpredictability it generates regarding the future of any particular sector or skill-group. The uncertainty of future conditions influences governance approaches to different aspects of long-term policies.

In particular, distinction is needed between

  • cyclical unemployment - for which pump it up solutions have worked in the past, and
  • structural unemployment - when "businesses and industries that employed them no longer exist, and their skills no longer have the value they once did."[42]
Competitiveness strategyEdit

A governance that attempts adapting to the changing environment will facilitate growth and a stable transition to new economic structures[49] until the economic structures become detrimental to the social, political and cultural structures.

Automation increases output and allows for reduced cost per item. When these changes are not well synronized, unemployment or underemployment is a likely result. When transportation costs remain unchanged, the negative effect may be permanent;[42] jobs in protected sectors may no longer exist.

Whether "open markets" and "trade liberalization" cause problems in developing countries depends on a balance among technological spillovers, capital inflows, and unemployment from opening up domestic markets.

As prices adjust to the global market, if they no longer reflect domestic productivity, lower-productivity firms in the previously protected sectors close. Even if temporary, only those which enjoy a competitive edge also be able to export. The loss is to previously protected sectors that were not (yet) competitive on a global scale.[50]

In Mexico, wage convergence was faster in cities where outsourcing first took hold through maquiladoras, along the Mexico–United States border. Studies suggest that for every 10% increase in US wages, northern cities in Mexico which are most influenced by outsourcing would experience wage rises of 2.5%, about 0.69% higher than in inner cities.[51]

Corruption and reduced tax revenues after the signing of NAFTA have limited the economic resources available to the Mexican government, thus explaining the difference in investment policies between Mexico and China.[50] Conversely, one of the successes of Asian countries in the twentieth century has been their promotion of higher rates of saving and investment. Studies suggest that the increase in capital input fueled the ‘Asian miracle’ rather than improvements in productivity and industrial efficiency. Though the previous conclusion suggests production conditions in the region remained static, the situation in East Asia experienced rapid transformations. Not only were national educational rates raised drastically, but there was also an increase in patenting and research and development expenditures. Rising levels of education, urbanization and even of patenting illustrate the active role of the government in advancing education as well as encouraging research and development.[52]

Industrial policyEdit

Outsourcing results from an internationalization of labor markets as more tasks become tradable. According to leading economist Greg Mankiw, the labour market functions under the same forces as the market of goods, with the underlying implication that the greater the number of tasks available to being moved, the better for efficiency under the gains from trade. With technological progress, more tasks can be offshored at different stages of the overall corporate process.[53]

The tradeoffs are not always balanced, and a 2004 viewer of the situation said "the total number of jobs realized in the United States from insourcing is far less than those lost through outsourcing."[54]

Environmental policyEdit

Import competition has caused a de facto ‘race-to-the-bottom’ where countries lower environmental regulations to secure a competitive edge for their industries relative to other countries.

As Mexico competes with China over Canadian and American markets, its national Commission for Environmental Cooperation has not been active in enacting or enforcing regulations to prevent environmental damage from increasingly industrialized Export Processing Zones. Similarly, since the signing of NAFTA, heavy industries have increasingly moved to the US which has a comparative advantage due to its abundant presence of capital and well-developed technology. A further example of environmental de-regulation with the objective of protecting trade incentives have been the numerous exemptions to carbon taxes in European countries during the 1990s.

Although outsourcing can influence environmental de-regulatory trends, the added cost of preventing pollution does not majorly determine trade flows or industrialization.[55]

Globalization and socio-economic implicationsEdit

Global inequality and developmentEdit

IndustrializationEdit

Outsourcing has contributed to further levelling of global inequalities as it has led to general trends of industrialization in the Global South and deindustrialization in the Global North.

The rise in industrial efficiency which characterized development in developed countries has occurred as a result of labor-saving technological improvements. Although these improvements do not directly reduce employment levels but rather increase output per unit of work, they can indirectly diminish the amount of labor required for fixed levels of output.[56]

Growth and incomeEdit

It has been suggested that "workers require more education and different skills, working with software rather than drill presses"[42] rather than rely on limited growth labor requirements for non-tradable services.

MigrationEdit

The level of migration has remained relatively low, particularly compared to the mass migratory trends which characterized the Industrial Revolution roughly between 1850 and 1914.,[49] probably because labor markets are not free now. Countries now have discrimination labor laws, only allow people with citizenship cards live and work free in their territories, even getting a citizenship card is difficult for some one not born in their territory. Free labor markets, discrimination based with a person skills would help reduce outsourcing problems, letting people freely follow their jobs in other countries.[57]

By countryEdit

United StatesEdit

"Outsourcing" has become a continuing political issue in the United States, having been conflated with offshoring, during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations".

Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll conducted in August 2004 found that 71% of American voters believed that "outsourcing jobs overseas" hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource.[58] One prediction (form 2010) claims that, by 2014, more than 1.3 million positions will disappear because of "the accelerated movement of work to India ..." and some other countries willing to accept outsourced jobs.[59] President Obama promoted an act titled 'Bring Jobs Home Act' that would help reshore jobs by giving incentives such as a tax cut or a 20 percent tax credit for moving operations back to the USA.[60] The same bill was reintroduced in the 113th United States Congress as the Bring Jobs Home Act (S. 2569; 113th Congress).[61][62]

Labor advocates accuse union busting as one possible cause of outsourcing. They argue that as unions are disadvantaged by union busting legislation, workers lose bargaining power and it becomes easier for corporations to fire them and ship their job overseas.[63]

Another rationale is the high corporate income tax rate in the U.S. relative to other OECD nations,[64][65][needs update] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today,[when?] yet the tax rate was actually higher in 1950.[66]

It is also suggested that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and "gaming the system".[67] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.

European UnionEdit

Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001). Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e., the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.

Seeking to implement the cost-cutting solutions, many Western European firms have been transferring tech projects eastward. For example, Deutsche Bank has some of its software developed in Ukraine, Siemens possess R&D center in Romania. Europe Outsourcing has produced outstanding results and henceforward they are increasing them in numbers.[citation needed]

Despite unfavorable economic conditions from 2007 to 2009, the outsourcing services market continued to flourish in Central and Eastern European. In 2008 when the inflow of investment in Western Europe was down by 48%, it fell by only 9% in Central and Eastern Europe. In Poland alone, during 2009, the year following the global economic downturn, approximately 10,000 jobs were created in business process outsourcing (BPO).[citation needed]

Co-sourcingEdit

Co-sourcing is a business practice where a service is performed by staff from inside an organization and also by an external service provider.[68][69] It can be a service performed in concert with a client's existing internal audit department. The scope of work may focus on one or more aspects of the internal audit function. Co-sourcing can serve to minimize sourcing risks, increase transparency, clarity and lend toward better control over the processes outsourced.[70]

Examples of co-sourcing services are supplementing the in-house internal audit staff with specialized skills such as information risk management or integrity services, providing routine assistance to in-house auditing for operations and control evaluations in peak period activity and conducting special projects such as fraud investigation or plant investment appraisals. Another example of co-sourcing is outsourcing part of software development or software maintenance activities to an external organization, while keeping part of the development in-house. Other internal business activities such as HR and administrative tasks can also be co-sourced by employee leasing companies.

Identity management co-sourcingEdit

It is an approach to enterprise identity management in which the identity service interacts directly or through some technical footprint with an organization's Information Technology (IT) identity back-end infrastructure: directories, databases, and other identity repositories. The organization and the external service provider typically have a shared responsibility for building, hosting and operating the identity service. The balance of this responsibility can vary depending on the service levels required, and span from an all on-premises deployment, where the identity service is built, hosted and operated within the organization's IT infrastructure and managed on-premises by the external service provider. This contrasts with an "all in-the-cloud" service scenario, where the identity service is built, hosted and operated by the service provider in an externally hosted, cloud computing infrastructure.

Forms of outsourcingEdit

Print and mail outsourcingEdit

Print and mail outsourcing is the outsourcing of document printing and distribution.

The Print Services & Distribution Association was formed in 1946, and its members provide services that today might involve the word outsource. Similarly, members of the Direct Mail Marketing Association were the "outsourcers" for advertising agencies and others doing mailings. DMMA celebrated their 100th anniversary in 2017.

The term "outsourcing" became very common in the print and mail business during the 1990s, and later expanded to be very broad and inclusive of most any process by the year 2000. Today, there are web based print to mail solutions for small to mid-size companies which allow the user to send one to thousands of documents into the mail stream, directly from a desktop or web interface.

See alsoEdit

Notes and referencesEdit

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  4. ^ "outsource". Oxford English Dictionary (3rd ed.). Oxford University Press. September 2005. (Subscription or UK public library membership required.)
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  21. ^ see Holcomb & Hitt, 2007
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  30. ^ Resources US pioneer in outsourcing services to US architecture firms Archived 2016-06-11 at the Wayback Machine
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  32. ^ {{cite web |website=[[The Washington Post |url=https://www.washingtonpost.com/wp-srv/politics/documents/crsreportoninsourcing.pdf |title=Insourcing Functions Performed by Federal Contractors: An Overview of the Legal Issues |author1=Kate M. Manuel |author2=Jack Maskell |date=May 5, 2011}}
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  37. ^ Ribeiro, J (2005) Indian call center workers charged with Citibank fraud Archived 2015-09-24 at the Wayback Machine. www.infoworld.com
  38. ^ Richard Baldwin. The Great Convergence: Information Technology and the New Globalization.
  39. ^ a b Steve Lohr (July 30, 2017). "Hot Spot for Tech Outsourcing: The United States". NYTimes.com.
  40. ^ Carl Richards (May 7, 2018). "Maybe You Shouldn't Outsource Everything After All". The New York Times.
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