Is offshore outsourcing a good thing? CNN’s Lou Dobbs and Senator Kerry are stoking that debate, peppering their talk with emotional arguments like the ethics of offshoring and the loss of jobs. Dobbs even coined the term “Benedict Arnold CEOs” for corporate leaders who have embraced offshore outsourcing.
From my perspective (I’ve spent 25 years in the outsourcing world), the debate has not been very thoughtful. It’s strong on rhetoric, tapping emotions instead of dispassionately examining the pros and cons. I want to take the time to make an unemotional business case for offshore outsourcing.
First, some clarifying definitions. Outsourcing occurs when one company hands over the responsibility for a process or a part of the process to the outsourcing supplier. As I explained in my book, Turning Lead Into Gold, The Demystification of Outsourcing EDS created outsourcing in the 1960s. Most people have experienced outsourcing, even if they don’t know it. Check your paycheck. If it’s produced by suppliers like Paychex or ADP, then your company has outsourced its payroll function to an outsourcing supplier.
However, until the late 1990s, most of the outsourcing in the United States occurred between American buyers and suppliers. Today the debate centers on offshore outsourcing. Offshore outsourcing happens in two ways. First, American companies are sending work directly to foreign outsourcing suppliers. Second, American outsourcing suppliers are opening up offices abroad to take advantage of the difference in the price of labor. They determine the best place to send the work depending on the cost and skill levels involved. Of course, when other countries send their work to American outsourcing suppliers, that’s offshore outsourcing, too.
In addition, some American companies are offshoring by opening their own captive operations in foreign countries. In this instance, they are moving their operations to a less costly location. American companies have been doing this for years — moving out of high-cost areas like New York City or San Francisco to other parts of the country that have lower costs. Going overseas is an extension of that trend. But this is not offshore outsourcing because the company still owns the operation. When a company outsources its work offshore, it’s turning over responsibility for the process to another company outside US boundaries.
Here are seven myths about offshore outsourcing:
1. Outsourcing is a new phenomenon.
The original theory derives from Adam Smith’s competitive advantage. He published his landmark book, The Wealth of Nations, in 1776. Offshore outsourcing is the natural evolution of the industrial and information revolutions that preceded it.
American companies have been offshoring for decades. When you get undressed tonight, read the labels on your clothes. I’d wager very few items were made in America. American apparel manufacturing has been using cheaper foreign labor for over a decade.
2. Offshore outsourcing causes job losses.
Not so, say the statistics.
It is true American jobs are going abroad. Gartner predicted at its ITxpo in Barcelona, Spain last March that up to 25 percent of traditional IT jobs in developed countries would be situated in emerging markets by 2010.
But is that a net job loss? The Information Technology Association of America (ITAA), an industry trade group, wanted to definitively answer the job loss question. It sponsored a study completed by Global Insight, which was published in March 2004. “The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the US Economy and the IT Industry” has some eye-opening statistics.
The study predicts the US economy will create 516,000 new IT jobs over the next five years. That number would only be 490,000 jobs without global sourcing. Of the 516,000 new IT jobs, Global Insight reports 272,000 will go offshore. That leaves 244,000 new jobs that will remain in the US.
And, offshore outsourcing also creates jobs in other sectors besides IT. The report says the incremental economic activity that follows offshore IT outsourcing created over 90,000 net new jobs in 2003 and probably will create 317,000 net new jobs by 2008.
The report also pointed out that the dotcom debacle caused more IT job losses than offshoring. Global Insight estimates the number of displaced IT software and service jobs due to offshore IT outsourcing as of 2003 was 104,000. This number includes jobs US companies eliminated by replacing American workers with foreign workers as well as jobs that were never created as other US companies expanded their IT activities by going offshore directly. The study says “it is important to note” that the industry has lost 372,000 jobs since 2000. It also says that 10% of all IT software and service jobs have disappeared since 2000. But only 2.8% of the total IT jobs were lost because of offshore IT outsourcing.
The study adds the impact of global sourcing on employment varies by industry. Major industry groups expected to gain a “significant” number of incremental jobs over the next five years include education and health services, transportation and utilities, construction, wholesale trade, financial services, professional and business services, and manufacturing.
The same is true in other economies. Canadian David Ticoll, author of The Naked Corporation: How the Age of Transparency Will Revolutionize Business, points out about 20,000 Canadians provide offshore IT services to the United States and other countries. American businesses prefer to outsource to nearshore countries like Canada, he explains. “If Canadian firms captured only 3% of the projected global outsourcing market, we will create more than 200,000 jobs by 2010. This could more than offset the 75,000 Canadian IT jobs we expect to move offshore,” he writes.
3. Offshore outsourcing is bad for the economy.
Nay. Nay. Companies look at offshore outsourcing because of the labor arbitrage — the difference in wages between US and non-US workers. The study found cost savings totaled $6.7 billion in 2003. “This represents an assumed 40% savings versus what would have been spent if domestic resources had been used,” it states.
The costs savings lower inflation, increase productivity, and lower interest rates, according to the Global Insight report. This happy constellation of events “boosts” business and consumer spending. To be exact, the study said “the benefits of global sourcing” added $33.6 billion to the US gross domestic product (GDP) last year. By 2008, it calculates real GDP will be $124.6 billion higher than it would be without offshore IT outsourcing.
At the same time, the study predicts demand for US exports is increasing due to the lower prices of American goods and services and higher incomes in the offshore outsourcing destinations. Global Insight calculated real exports were $2.3 billion higher in 2003 and are expected to be $9 billion higher by 2008.
4. Offshore outsourcing depresses US wages.
Au contraire. According to Global Insights, workers “are expected to enjoy a bump up in real wages. Offshore IT software and services outsourcing actually increases the average real wages of US workers.” The report says real wages were 0.13 percent higher in 2003 with an expected increase of 0.44 percent by 2008.
5. Companies lose control of their processes when they outsource them to providers halfway around the globe.
Outsourcing, by definition, requires the buyer to relinquish control of a process to the supplier, who is an expert in the process and able to perform it better, faster, and cheaper. Strong corporate governance is required in all outsourcing transactions, including offshore ones. Careful monitoring of any outsourcing relationship ensures the buyer is getting what it is paying for.
6. Companies cannot ensure data security and privacy when they outsource offshore.
Data security is a problem whenever employees have access to sensitive information. American suppliers, however, are particularly sensitive to the issue. At a Convergys call center in India, guards search employees before they enter the building. There are no memory cards in any computer. It keeps all its data on computers in the US. The security there far exceeds anything I’ve seen here in the States.
7. American companies don’t have to outsource offshore.
Oh yes they do. Because their competitors are outsourcing offshore. Companies that don’t look at lowering their costs become uncompetitive in the global marketplace.
Witness the story of eFunds, which is fielding calls at a call center in India for the Utah Department of Workforce Services. When the word got out, the supplier was caught in a political firestorm. EFunds agreed to bring the work back to the States, but the move would cost Utah $63,000 more, according to John Nixon, the state’s director of finance. If the state of Utah moved the call center in-house, Nixon predicted it would cost the department over $1 million to run it 24×7. Overall, Nixon told the Deseret News the outsourcing contract is saving the state $420,000 over the five year contract.
Strip away the emotions and look at the numbers. In my opinion, offshore outsourcing is a TINA — There Is No Alternative.
Lessons from the Outsourcing Journal:
- Outsourcing occurs when one company hands over the responsibility for a process or a part of the process to the outsourcing supplier. Offshore outsourcing occurs when the supplier resides outside your borders.
- Offshore outsourcing does not cause a net job loss. In both the US and Canada, more IT jobs were created than lost by sending IT work offshore. The dot-com bomb caused greater IT losses than offshore outsourcing.
- American companies must consider offshore outsourcing to remain competitive.
- Offshoring is not bad for the economy. The costs savings lower inflation, increase productivity, and lower interest rates. This happy constellation of events “boosts” business and consumer spending.