The Big Outsourcing Scare: Facts and Myths

The hullabaloo over outsourcing and the loss of US jobs ignores the fact that offshoring is lowering costs for US companies and actually creating more jobs. Thanks to a more efficient economy, US shareholders are benefiting and their returns on investment are increasing. Forrester Research predicts that 3.3 million jobs will be lost in the US over a 15 year period, while 22 million new jobs are expected to be added in the US between now and 2010. Another report by IDC says that outsourcing would affect less than 0.2 per cent of employed Americans. What's more, although 70,000  US computer programmers lost their jobs between 1999 and 2003, more than 115,000 computer software engineers found higher-paying jobs during that same period. D.V. Venkatagiri argues that the US economy has gained more than it has lost through outsourcing.

"Outsourcing: 100 US Bills Target India". The recent headline on the front page of a newspaper emphasised once again that reason and logic have taken a backseat when it comes to the outsourcing issue. Emotional outbursts seem to be the preferred reaction if it has anything to do with the words 'India' and 'outsourcing'. The business reality of today is that offshoring or outsourcing is likely to increase over the next decade. But far from “stealing of  US jobs”, as the emotional argument goes, it is a business practice that results in reduction of costs. Its effect on the US economy and loss of US jobs has been wildly exaggerated. The rumpus over outsourcing has become so ominous and irritating that facts have taken a backseat while myths, arising out of fear, have been leveraged by smart US politicians to grab worldwide attention.

The backlash is understandable when an American reads a report that says over 3.3 million jobs and over USD 136 billion wages will be transferred out of the US by 2015 (Forrester Research). But while diverse political parties are cashing in on the fear factor, the positive impact of outsourcing is being largely ignored. Secondly, the rhetoric violates all norms of global trade practices. One of the latest studies indicates that the outsourcing  trend may actually be creating more jobs. According to the Global Insight study, from 1998 through 2003 offshore IT software and services spending increased from $2.5 billion to $10 billion; the figure could reach $31 billion by 2008. It also estimates that as of 2003 nearly 104,000 IT software and services jobs were displaced. The same study says that 372,000 IT jobs have been lost in the US since 2000, accounting for about 10 percent of the total number of such jobs in the U.S. The main reasons for the loss: the dot-com bust, the recession, and the growth in productivity. Interestingly, Global Insight says that rather than reducing the number of jobs in the US, offshoring is lowering costs for everyone and actually creating jobs, thanks to a more efficient economy. It says that about 194,000 new jobs—both IT and non-IT—were created in 2003 thanks to offshore IT outsourcing, and by 2008 the number will reach over 589,000.

Facts vs Myths: As for the jobs that can be sent offshore, even if the most  dire-sounding forecasts come  true, the impact on the US economy will be negligible. The Forrester prediction of 3.3 million lost jobs, for example, is spread across 15 years. That would mean 220,000 jobs displaced  per year by outsourcing -- a number that sounds impressive until one considers  that total employment in the United States is roughly 130 million, and that about 22 million  new jobs are expected to be added between now and 2010. Annually, outsourcing would  affect less than 0.2 percent of employed Americans, according to a report by International  Data Corporation (IDC).

What about the service sector? Again, the facts contradict the popular belief that US jobs are being lost to foreign countries without anything to replace them. In the case of many low-level technology jobs, the phenomenon has been somewhat exaggerated. For example, a Datamonitor study found that global call-center operations are being outsourced at a slower rate than previously thought -- only five per cent are expected to be located offshore by 2007. And done properly, the offshoring of call centers creates new jobs at home. Delta Airlines outsourced 1,000 call-center jobs to India in 2003, but the $25 million in savings  allowed the firm to add 1,200 reservation and sales positions in the United  States.

McKinsey Global Institute has estimated that for every dollar spent on  outsourcing to India, the United States reaps between $1.12 and $1.14  in benefits. Thanks to outsourcing, US. firms save money and become more profitable, benefiting shareholders and increasing returns on  investment. Foreign facilities boost demand for US products, such as computers and telecommunications equipment, necessary for completing outsourced assignments. And US labour can be reallocated to more competitive, better-paying jobs. For example, although 70,000 computer programmers lost their jobs between 1999 and 2003, more than 115,000 computer software engineers found higher-paying jobs during that same period.

What goes around comes around: According to the Global Insight Study commissioned by the ITAA, total savings from the use of offshore resources are estimated to grow from USD 6.7 bn to USD 20.9 billion in 2008. Outsourcing thus enhances the competitiveness of the US. service sector (which accounts for 30 percent of the total value of U.S. exports). Contrary to the belief that the United States is importing massive amounts of services from low-wage countries, in 2004 it ran a $80 billion surplus in services. Increased productivity also plays a key role in the new IT job scene: IT support requires fewer people than it once did. Windows 2000, Windows XP, and Mac OS X are far from perfect, but there's no question that they are more stable than Windows 95 or 98, or Mac OS 8 or 9. As a result, companies need fewer people to support them.

Also, most of the computers and software that the Indian outsourcing service providers use are American. The young employees in all these outsourcing firms patronize American brands like anything – soft drinks, shoes, clothing etc. It will be unfair if an economy wants to markets it products globally and doesn’t want jobs to go. Anecdotes of workers affected by outsourcing are politically powerful, and demands for government protection always increase during economic slowdowns. The short-term political appeal of protectionism is undeniable. Scapegoating foreigners for domestic business cycles is smart politics, and protecting domestic markets gives leaders the appearance of taking direct, decisive action on the economy. Again, that may sound shrewd politics but makes poor economic sense.

The effects of outsourcing are so tremendous and amazing. Jadooworks, an Indian animation firm is making a film on the childhood of Lord Krishna and to write the script it has outsourced the project to an US animation writer, Jeffrey Scott! So as Thomas Friedman says, ‘what goes around really comes around’.
Andy Grove, the Intel legend, has this to say, “Outsourcing is the first  and relatively minor indication of a much longer , much more significant trend that's best described as a very large portion of the world joining the electronic community that has only existed in the US for all practical purposes. Very rapidly it can connect India, China, Taiwan, Korea on the web of an interconnected intellectual power. The consequences of that are immense much more immense than the loss of some amount of jobs that outsourcing represents”.  

The current trend of outsourcing business processes overseas is comparative advantage at work. The main driver of productivity gains over the past decade has been the spread of information technology across the economy. The commodification of simple business services allows those benefits to spread further, making growth even greater. The data affirms this benefit. Catherine Mann of the Institute for International Economics conservatively estimates that the globalisation of IT production has boosted US GDP by $230 billion over the past seven years; the globalisation of IT services should lead to a similar increase. As the price of IT services declines, sectors that have yet to exploit them to their fullest -- such as construction and health care -- will begin to do so, thus lowering their cost of production and improving the quality of their output.

What the US needs to do to safeguard its jobs: Before reacting or responding to any outcry against outsourcing it is also worth remembering that many predictions come from management consultants  who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourced contracts. What the US can possibly do is, extend the social safety net to include displaced workers by outsourcing also. This can help to contain the ire of the affected workers and can help them till they find an alternate job.

Another important thing that all need to do is, keep quiet. This is a very difficult but wise option for this scenario.  Technological advances and business cycles have never been predicted perfectly; but sweeping changes driven by technology  and open trade have always benefited men more than anything else. Let’s leave it so and not bother too much. The benefits of free trade -- to both consumers and producers -- are significant. Cushioning this process for displaced workers makes sense. Resorting to protectionism to halt the process, however, is a recipe for decline. When the developing countries and other third world nations are beginning to appreciate this it will be an irony if the United States, the leading exponent of free trade and liberalism, reverses this trend. The fact remains, that despite the fears and the political rhetoric, as long as cost-cutting remains a key practice of business entities, outsourcing will prevail.

[The author is the Regional Secretary of Indo-American Chamber of Commerce, South India Council, Chennai. The views expressed in this article are those of the author and do not reflect that of the Chamber. He can be contacted at dvvenkatagiri@yahoo.co.in
17 June 2005]