Illustration of company outsourcing work abroad

Examining overlooked costs of outsourcing decisions

In a move to reduce costs, a Milwaukee clinical diagnostics laboratory outsourced work to two assistants in the Philippines, which eliminated two full-time positions at home. Initially, the contracted workers handled basic administrative tasks by computer and, over time, took on more complex duties, making the outsourcing decision appear worthwhile.

But then, one of the contracted workers incorrectly answered a question concerning one of the lab’s providers, a mistake that would’ve been highly unlikely from an on-site employee. Complicating matters, the person asking the question happened to be a regulator. Consequently, the lab stopped outsourcing.

Avik Chakrabarti, an associate professor of economics, researches the costs of such unforeseen outcomes triggered by outsourcing decisions. He’s done so for nearly two decades, involving students in the work of gathering data and identifying patterns related to outsourcing.

Avik Chakrabarti
Avik Chakrabarti

“Proactive analysis of ‘big data’ is crucial in outsourcing decisions,” Chakrabarti says. Doing so meaningfully, he adds, “requires identifying patterns from stories beyond numbers that people can picture, rather than running old-style statistical or econometric programs.”

Chakrabarti says it’s common for a company to focus on direct costs during its outsourcing decision process, only to later discover that indirect costs – such as fallout from the mistake of the lab’s contracted assistant – make a big difference.

“That local lab’s experiences are strikingly similar to those of multinational corporations,” Chakrabarti says. “They go for cost savings, which is perfectly rational. Oftentimes, however, the net savings falls far short of expectations.”

Chakrabarti’s students have gone directly to local companies and researched what drives outsourcing decisions, extracting information from big data related to production and costs. Maren Orlowski is one of his students doing this work with funding from a Support for Undergraduate Research Fellowship.

“We are getting mixed messages in terms of outsourcing being good or outsourcing being bad,” says Orlowski, who’s majoring in economics as well as journalism, advertising and media studies. “There is so much more that goes into it. It’s important to really examine how outsourcing has affected these firms and put that into context.”

“Companies consider costs,” Chakrabarti says, “but later realize, whether it’s cultural or work ethic, that workers in other countries operate differently than employees in the United States. This catches employers by surprise, sometimes a little late.”