Firms in stages 3 through 5 often outsource their production and services to countries where they find a competitive advantage in lower labor costs. Fewer and fewer firms can grow or even survive unless they engage in some form of outsourcing. Global outsourcing now occurs for all types of jobs and across most industries. For instance, IBM has hired over 100,000 employees in countries such as Brazil, China, and India, where labor costs are low. These employees work in so-called global service delivery centers, which provide a wide array of services for IBM’s clients, including software programming, help-desk call centers, financial accounting, and benefits management. Many of those global service employees report both to the local supervisors and to IBM managers thousands of miles away. Another example in a totally different industry is Blue Cross Blue Shield, which has signed alliances with seven overseas hospitals in places such as Turkey, Costa Rica, Singapore, and India and hopes to add more soon. These overseas hospitals will be included in coverage for the insurer’s 1.5 million members. As health care costs continue to rise in the United States, “medical travel is going to be part of the solution,” says a top Blue Cross executive.

Although some believe that exporting jobs to less-developed countries keeps salaries and benefits at home low, most international business experts believe that it is not realistic to turn the clock back when companies are free to locate wherever they want.15 Further, consumers benefit from lower prices achieved by outsourcing, and countries that are the recipients of outsourcing use increased earnings to purchase goods and services from the United States. Political leaders are unlikely to push for restrictive legislation to curtail outsourcing in the foreseeable future.

The growth of outsourcing can be attributed to a large extent to the Internet. However, the Internet poses some serious challenges to outsourcing because of problems with online security. Rank-and-file employees are increasingly asked to play a role in fighting Internet-based threats. For instance, in India, which depends heavily on the Internet for much of the outsourcing it receives, there is widespread fear that well-publicized security threats could wreak havoc on the economy. Hence, Indian companies are trying to select workers who can be trusted and are training employees to be on the lookout for any suspicious activity.

As a case in point, two Indian employees who worked for Mphasis BFL LTD, a Citibank subcontractor, logged on to Citi’s online system and transferred at least $426,000 from U.S. customers to their own accounts. Because computer systems at Citibank subcontractors in India let local employees see sensitive information about U.S. customers (for example, Social Security number, credit history, and savings account number), the system was open to abuse. This kind of security risk is compounded by hasty selection and training, because attrition in the industry is about 60 percent.16 But most Indian companies, including Mphasis, are channeling more resources into improving employee screening, reducing attrition, and training employees to spot and report potential security problems. Citibank has no plans to curtail outsourcing to India. “If the industry can keep improving security, it has little to fear in the long-term.”17

Two additional concerns regarding outsourcing have come to light in the past. One is poor safety. This was recently exemplified, for instance, when drug companies subcontracted with Chinese manufacturers to produce the blood thinner heparin. The contaminated product caused several deaths around the world. Phillips, General Electric, Medtronic, Siemens, and others are setting up the manufacturing of sensitive medical equipment (such as MRIs, CT scanners, and ultrasound and x-ray gear) in China, but many see danger in this trend given recent scandals with unsafe toys, food, and drugs in mainland China.18 Another concern with global outsourcing is the large number of complaints from clients when they are forced to deal with the firm’s customer representatives who are located in foreign countries. Employees in so-called “call centers” often lack sufficient information, may be poorly trained, may have language barriers, and may not be empowered to make decisions to resolve a customer complaint on the spot. These problems mean that firms need to take less-tangible factors into account and not be blinded by the labor-cost savings in subcontracting. It takes years to build a good reputation, and problems of this sort can quickly tarnish a company’s image and future profitability. Human resources can help to reduce these problems with outsourcing by having a role in determining how workers are selected, the type of training they receive, the criteria used to reward employees (for instance, quantity versus quality), how new employees are socialized through the orientation program, efficient monitoring systems, and the like.

Although the world has always had some degree of economic interdependence, the economic meltdown at the end of the prior decade demonstrates how, for better or for worse, the barriers that separate countries have largely disappeared when it comes to trade, production, services, and finances. For example, most European countries enacted similar economic packages following the initial $700 billion “stimulus” in the United States. China was also forced to announce a similar economic package of $586 billion, a much larger percentage of its gross national product than the United States.19 As of 2014 most European countries, particularly Spain, Portugal, Italy, Greece and Ireland, are still suffering from the economic malaise that started in the United States back in 2008.

At the firm level, whatever happens to a multinational company in one country will affect many other countries simultaneously. For instance, 70 percent of the components of Boeing’s 787 Dreamliner passenger airplane are sourced from foreign suppliers in 40 different countries.20 So when Boeing faced a recent downturn in the United States, employees in 40 other nations also suffered.

Political rhetoric aside, governments face more limits than ever in enacting and implementing domestic labor legislation (such as social security and minimum wage laws), because firms will simply move their operations elsewhere (see Managers’ Notebook “Will Mexico Overtake China? ”). Companies now enjoy a great deal of discretion in deciding where they want to set up shop. For individual employees, being a strong contributor is the best job insurance they have, because the protective role of government and labor unions is likely to continue to wane in the future.

Traditionally, only larger and older firms sent production and service off shore, but small and medium-size enterprises (SMEs) are quickly entering this race. These SMEs face some unique human resource challenges. First, many of them are family owned or led by the founder. More often than not, these individuals may have had little international exposure. Second, it may be difficult for these SMEs to delegate control to expatriates or representatives in foreign locations. They may not even know how to start. Third, SMEs that look abroad to gain new customers or partners may be daunted by the complexities involved in navigating complex foreign laws, taxes, and regulations. Fourth, and perhaps most difficult to overcome, most small businesses have had limited experience with people from other cultures. Cultural blunders can get in the way of successful expansion abroad. Consider the following example.

Tom Bonkenburg, director of European operations for St. Onge Company Inc., a small supply-chain consulting firm in York, Pennsylvania, headed to Moscow to develop a partnership with a large firm there. He met the company’s Russian branch director. “I gave my best smile, handshake and friendly joke . . . only to be met with a dreary and unhappy look,” says Mr. Bonkenburg. Later, however, Mr. Bonkenburg received an e-mail from the Russian branch director, thanking him for a great meeting. Mr. Bonkenburg later learned that Russian culture fosters smiling in private settings and seriousness in business settings. “He was working as hard to impress me as I was to impress him,” Mr. Bonkenburg says.21

SMEs entering global markets need to put in place recruitment and selection programs to hire employees with the desired international background, appoint the right person to represent the firm overseas, offer sufficient inducements to managers to engage in international activities, and develop the necessary cross-cultural skills to deal with a diverse cultural landscape. According to Kari Herstad, CEO of Culture Coach International Inc., a Newton, Massachusetts, firm that consults with clients on cross-cultural issues: “the important thing to remember is that you don’t know what you don’t know . . . even subtle cultural insensitivities can have a profound impact.”22

Advances in technology and communication and fewer bureaucratic hurdles for short-term, cross-border mobility mean that companies don’t need to rely as much on traditional long-term assignments overseas (known as expatriate assignments, discussed next). After at least 100,000 years of human history, it is truly amazing how much things have changed in international connectivity in less than one generation. For instance, a phone call overseas that is almost free today would have cost as much as $100 per minute 25 years ago. That same phone call would have also required the help of an operator on both sides, a process that could have taken eight hours or more for a single call. Fax machines were not widely available until the late 1980s. The ability to send documents overseas in the form of computer attachments was not a viable option in most countries until 15 years ago. Virtual conferences with high-quality connections were not possible until the late 1990s. Traveling to much of Western Europe used to require multiple visas and customs border crossings, and Eastern Europeans were inaccessible behind the so-called Iron Curtain until 1989. English has become the lingua franca, or the language of choice, to bridge people whose native language may be French, German, Spanish, or Mandarin. This use of one language (in this case, English) greatly facilitates international communications across over 200 countries. Most leading MBA programs (both in the United States and abroad) are now in English so that language will not be a serious communication roadblock for middle- and upper-level managers interacting across national borders. These changes are truly revolutionary, even though most readers of this book now take them for granted. They have opened a new way of working across the globe, with employees able to choose as the situation demands (for instance, telephone communication, Internet connections, or short-term stays). An employee can be located in a regional office or headquarters yet remain in touch with international operations through short visits or virtually by the touch of a finger. Unlike the traditional expatriate who leaves the home country to take a long-term assignment in another country, these global managers may be expected to interact with people from many different cultures and be able to switch from one culture to another almost instantaneously.

As we will see next, expatriates confront cultural issues, yet they have more time to adapt to local environments. Global managers don’t have the opportunity to learn about foreign cultures in a piecemeal fashion. They are supposed to act as integrators and coordinators across national and functional boundaries and to do this under time pressures. According to a recent study, “global managers need to work with people from many cultures simultaneously. They need to form complex cultural understandings, not having the luxury of dealing with each country’s issues on a separate and therefore sequential basis. In terms of cross-cultural skills, global managers are expected to tread smoothly and expertly within and between cultures and countries on a daily basis. They need to learn about many foreign cultures’ perspectives and approaches to conducting business, be flexible and open-minded toward a multitude of cultures, and have a broad cultural perspective and appreciation for cultural diversity.”23

From an HR perspective, the scenario described here increases the need to attract, retain, and motivate individuals who are capable of being flexible enough to operate in many cultural environments, sometimes within the space of an 8-hour day or even simultaneously through the use of computer technology. Greater employee diversity at home should help with this process because it sensitizes managers to work with people from very different backgrounds (see Chapter 4). The firm may also need to consider explicitly the person’s ability to relate to a diverse audience when it comes to recruitment, selection, appraisals, compensation, and the like. Contrary to some earlier predictions, global managers are not replacing expatriates but are complementing their work. In fact, the number of expatriates has risen sharply in recent years, in tandem with increased globalization. Although expatriates are expensive, many international companies realize that a strong local presence by company loyalists is needed to help manage operations on a continuous basis, to recruit individuals with deep knowledge of the area, to anticipate and deal with political risks, and to protect the company’s interest (for instance, ensuring compliance with the firm’s quality standards by the subsidiary and its suppliers).We now turn our attention to expatriates.