When economics demand it, why give outsourcing a bad name?

November 13, 2008

I’ve read with interest, President elect Barrack Obama’s comments on outsourcing. There is nothing new in those comments. The fear psychosis has been with us for decades. During industrialization, the dominant fear was that machines would replace humans. Post telecommunication-internet boom, the fear is that tech workers from developing economies like India and China will make white-collared American workers redundant.
The fears are exaggerated and become controversial only when the economy begins to slow down. Ironically, that’s also the time to tighten the belts and think of newer ways to cut costs in order to boast up the shrinking bottom lines.
In a slowing economy, corporations more than ever before are compelled to cut their operating expenses by delegating a portion of their non-core functions to economies where labor or infrastructure costs are lower. It’s very similar a trend to what happened to the manufacturing industry a few decades ago.
But two things cannot be missed here:

  • One, off-shoring generally moves only non-core functions to a low-cost economy; and, more important, even when it does not
  • It’s often a business imperative with a strategic intent of lowering costs for the outsourcing partner

In fact, outsourcing as a business practice has been around for decades. Markets have and will continue to destroy and create tens of millions of new jobs with the advent of new technologies and better business practices. In this process, new jobs would get created and some of the old ones may get petered out. Trade indeed plays very little role in this natural churn.

Pre-industrialization, the fear was that machines will throw out human beings from factories. Today, America produces nearly the same tonnage of steel as it did in 1965, albeit with one-quarter of the steel workers required.

Thanks to modern-day farming techniques and equipment, only 40% American farmers are able to produce the same quantity of food, if not more for the rest of America, as 80% farmers did in 1900.

Are we left richer or poorer as a consequence of any of these changes?

Politicians naturally would not talk about this natural churning in the U.S. work force. They would also not talk about the “negative” impact of “insourcing” on workers of another country, when someone like Whirlpool decides to set-up not one or two but four plants in Ohio to manufacture top-of-the-line energy-efficient appliances there. And why would they crib, when a BMW decided to expand production at South Carolina, while it cuts jobs in Germany?

However what stands to logic in one country must also stand to logic in another country.
We cannot wholeheartedly accept the logic in a business practice when it benefits us and reject it outright when it doesn’t.

The fact of the matter is that major economic changes never lead to permanent unemployment. Some jobs do get eliminated. But in their place, new ones come up. No one slides down the value chain, as a consequence of these changes. Instead, they climb up.

History testifies to it. In 1979, less than 1% of female workers in America earned over $75,000 and only 3% made between $50,000 and $75,000. However since 1979, over one-third (36%) have fallen in these top two earnings brackets.

The corresponding change for men has been even more spectacular: only 10% of 1979 male workers earned over $75,000, but today, nearly 34% of the new jobs fall in this top earning category.
What these figures imply is simple. That adoption of newer technology and a switch to better work practices does not rob anyone of a job, especially, if he/she is willing to reskill and move up the value chain.

Women workers transited from traditionally low-paying jobs to high-paying managerial and professional roles through this route; while the men whom they supposedly dislodged, had got thrown further up the ladder. Is that such a bad thing?

Let’s face it: the growth of the internet and the possibility of remote control of business operations have made Business Process Outsourcing (BPO) a reality that we cannot easily run away from.
Alan Blinde, former vice-chairman of the Federal, Reserve Board and a member on President Clinton’s Council of Economic Advisors was perhaps right in fearing that forty million U.S. jobs are at risk of being offshored in the next ten to twenty years to countries like India, Russia, China and the Philippines.
But my question is simple —- don’t we face a Hobson’s choice here?

Are we to cut costs by moving services offshore or lose market share to competitors from other countries?
The writing on the wall is clear. Given the focus on maximization of ROI and reduction in costs, the question is no longer whether to outsource or not, but rather, when, what and how to outsource.


4 Responses to “When economics demand it, why give outsourcing a bad name?”

  1. Outsourcing on November 14th, 2008 12:09 pm

    i really don’t know.. why do they? outsourcing have been a great help as far as i know..

  2. Judy on November 23rd, 2008 2:21 pm

    On the surface, outsourcing is ok, but it is has many problems that seem virtually unsolvable. The two main problems I see are substandard quality of product and exploitation of foreign workers.

    Who hasn’t had trouble over the last few years with outsourced customer service. These companies teach people to try to disguise their accent and give them American sounding names to use at work, but the service they provide is almost useless.

    Now we have to worry about sub-standard Chinese quality from lead paint to melamine poison in our food.

    Perhaps the most disturbing aspect of outsourcing is the exploitation of foreign workers in order to produce cheap goods, specifically child labor. There are many industries where child labor is a huge problem, and it is very hard to police because of the use of subcontractors and lack of governmental control worldwide.

    On the flip side, Barack Obama and other Democrats refuse to see the real reason for much of the outsourcing they hate, the need for American corporations to go abroad for their labor due to high corporate tax rates and unreasonable union contracts.

  3. test on December 8th, 2008 7:46 pm

    Check out this posting (http://www.ireport.com/docs/DOC-159881) which gives several reasons why outsourcing is bad for the US economy. I think ultimately outsourcing helps companies to stay competitive and focus on their core competency and outsource rest to the outsource providers.

  4. afox on January 19th, 2009 6:58 pm

    I can’ believe that outsourcing and sending American jobs overseas will create American jobs. You evidently don’t use real numbers to arrive at your conclusion.

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