TCS Daily

Outsourcing: Separating Fact from Hysteria

By John McKay - December 23, 2004 12:00 AM

During the recent Presidential election campaign in the United States, the debate over outsourcing and its impact on the US economy reached a high level of what can only be described as irrationality, and even hysteria. Democratic candidate John Kerry accused the Bush administration of planning "to export more of our jobs overseas", while Senate Minority Leader Tom Daschle argued that "if this is the administration's position, I think they owe an apology to every worker in America". Meanwhile, CNN's Lou Dobbs continued his "Exporting America" series, naming and shaming "unpatriotic" US companies shifting jobs offshore. Such debate is not confined to the US, and similar charges of reckless corporate behavior have been made in Britain, the EU countries, Australia and elsewhere. In Japan, Korea and Taiwan a lively debate is raging about the supposed "hollowing out" of these economies as jobs are exported to China in particular.

Outsourcing is not a new phenomenon, of course. Strictly speaking, the term refers to the subcontracting of any business function to an outside supplier, but in the current debate outsourcing to other companies within the home country is rarely mentioned. It is the offshore component that is controversial. Similarly, overseas investment in new factories or other facilities is included in the public debate, even when such developments are not strictly outsourcing. What the debate is really about, then, is a nationalistic backlash against the growing internationalization of production and service delivery. This form of globalization has been with us for decades, and especially since the 1980s. Revolutions in container transportation allowed the production of component parts and finished items in a range of offshore locations where labor costs were much lower than in the industrialized world, while improved communications systems made feasible the more complicated logistics involved. What is new about the current situation is that whereas in the past it was production jobs that were at risk in the home country, now many service sector jobs are also being moved overseas. Continued improvements in internet and related technologies have allowed a wide range of routine accounting, call center and other financial and administrative activities to move to lower cost locations.

Estimates of the number of jobs involved vary wildly. The head of strategy at IBM, Bruce Harreld, has estimated that the world's companies now spend $19 trillion per year on sales and other administrative costs, and of this only $1.4 trillion is outsourced. The McKinsey Global Institute suggests that offshore outsourcing may increase by 30-40 per cent a year for the next five years, while Forrester Research predicts that 3.3 million white-collar jobs may be relocated overseas by 2015. The potential cost savings involved are certainly very large. McKinsey has suggested the multinational companies can lower their costs by 50-70 per cent through the reorganization of their production and administrative activities. In the white-collar area, IT services are likely to be the most affected. Already some 16 per cent of such work is done remotely, and perhaps half of such jobs may move overseas in the near future.

Should policy makers and the public worry about such trends? Clearly, some workers will be adversely affected by offshore outsourcing, and there is a strong case more measures to support and retrain these workers, and prepare them for new jobs. But overall, there are clear benefits from outsourcing for the economy and the wider society. For the developing countries, such as India and China, new jobs and higher incomes have an impact well above any continuation of development aid. White-collar jobs in particular are leading to the emergence of a well-educated and relatively affluent new middle class of enormous benefit to their countries and to the wider world. They give a hopeful signal that can counter the despair that may eventually lead to more recruits for terrorist organizations. But they also generate new demands for the products of the industrial countries. McKinsey estimates that for every dollar spent on outsourcing to India, the US gains around $1.12-$1.14 in return, as demand for US products is generated. The Information Technology Association of America has estimated that outsourcing to countries such as India and China created a net 90,000 new jobs in IT in the US in 2003, and this is expected to rise to 317,000 new US jobs by 2008. Workers displaced by outsourcing can, with appropriate training, be moved to more lucrative and productive jobs. For example, between 1999 and 2003 some 70,000 computer programmers lost their jobs, but 115,000 higher paid jobs were created in other parts of the IT industry. It should also be remembered that outsourcing is not a one-way street. According to the US Bureau of Labor Statistics, the number of jobs outsourced from the US increased from 6.5 million in 1983 to 10 million, but in the same period the number of jobs outsourced from other countries to the United States increased from 2.5 million to 6.5 million. More generally, industrial societies have gained enormously from having cheaper goods and services available to them, and lowering the administrative costs of hard-pressed sectors such as healthcare can be of great benefit in the future. Outsourcing, just like any other aspect of globalization, brings great increases in efficiency through specialization and concentration by various countries on those goods and services in which they have a particular comparative advantage.

In the final analysis, it must be remembered that perhaps 90 per cent of all jobs are tied for various reasons to particular localities and are very unlikely to be outsourced. But in a few sectors, outsourcing can provide significant savings and large benefits for the entire community. While some short-term assistance may be needed to assist workers displaced by these processes, protectionism is not the answer, nor is a continuation of the current hysteria about outsourcing.

John McKay is a Partner with Analysis International in Melbourne, Australia and is Director of the Australian APEC Study Centre.


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