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Offshoring: and the winner is ... contrary to the recent spate of negative media coverage and political attacks against offshoring, a growing body of credible sources are speaking out about the upside for the U.S.--for both jobs and the economy.

Testifying before the U.S. Congress last January, Hewlett-Packard CEO Carly Fiorina said, "There is no job that is America's God-given right anymore." Her frankness drew heavy criticism, but it was clear by that time that lines were drawn in the sand on globalization and offshoring.

For more that a decade, emotions, economics, media, politicians and public policies have created a flurry of controversy over U.S. jobs moving abroad. What is the real story behind the headlines? Who really benefits? Does one country benefit at the expense of another? Does one industry, company or individual benefit at the expense others? How serious a threat is globalization, global sourcing or offshoring--whatever "name" it is given--to U.S. jobs and the economy?

Globalization's reputation as the "enemy" is now the real threat to the U.S. economy, argues McKinsey Global Institute's April 2004 publication Exploding the Myths About Offshoring. Diana Farrell, director of McKinsey Global Institute, the economics think tank of the consulting firm McKinsey & Co., explains offshoring as part of a bigger process of global industry restructuring--or companies becoming global entities, so their customer base is no longer primarily "national with a little bit of export on the side."

As the percentage of these multinational operations increases, an increasingly diversified management group now serves customers around the world, along with a diversified investor group. The result, Farrell says, is that concentrating on the domicile of a company--how we think about a company--is not helpful anymore. "We need to break that mold of being primarily one country just because you happen to have your headquarters there."


Indeed, Farrell argues, understanding that we are part of a global economy, from which there are real benefits to be derived, will help to move our models of fear to models of: how do we channel this to productive use and stave off the risks that are there? "This is clearly a global creation story--a win-win opportunity for good things to happen economically," she says.

Offshoring means "doing things off-site" to Dane Anderson, program director for outsourcing for Meta Group Inc. "There doesn't need to be a shore involved, or a beach or a body of water. The question to ask is, 'Can I offshore this?' You can do many tasks in the next county, the next city, next state or halfway across the globe."

He points to industries that have experienced offshoring such as printing and manufacturing: "It's an evolutionary acceptance of companies trying to figure out what their core competency is, and what they can be most efficient and effective in," says Anderson. He notes that Ford Motor Co., at one time, made steel, only to determine that that function wasn't core to its business. So it became outsourced, and, in some cases, offshored. Similarly, at one time, The New York Times owned forests.


The current global economic evolution, Anderson says, is a continuation of the "better, faster, cheaper" mantra that started with the outset of the information technology (IT) services industry. "Organizations continue looking for more, but they also want more value-added. So, today's offshoring represents maintaining and continuously improving upon that effectiveness and efficiency for profitability." Organizations, he says, are going to a global delivery model. "We are seeing that in manufacturing, and it's sequeing into IT, where standardization, the commonality of delivery models, will be global; it'll be the same in India as it is in Dallas, as in China, with the differentiation the labor arbitrage."

Undeniably, IT has been the key driver of the late-20th, early-21st century offshoring phenomenon. In looking at just the past 10-15 years and the emergence of the Internet and networking capabilities, Anderson affirms, IT has definitely been an influencer, because it enables greater efficiency and effectiveness in a shorter timeframe, a competitive-advantage strategy. "The past 40 years of IT has brought forth all kinds of great change, and we [in the U.S.] need to stay in front of that change as much as possible, or we'll have technological stagnation," he argues.

It's a globalization of processes, as opposed to globalization of products, says Daniel Drezner, assistant professor of political science at the University of Chicago and author of The Sanctions Paradox. This, he says, means, "the U.S. can be more productive in the things that it cares about."

However, Drezner notes two potential downsides: first, that workers at the bottom rung of the ladder face declining opportunities, and this produces social anxiety. "There is a perception that anyone's job can essentially be outsourced in the next decade," he says. And while he doesn't believe that to be the case, he concedes it's a tough perception to change. Job losses, he explains, are primarily in categories that had previously required a fair amount of skill, and have become more rote. "A job category that could be automated could well be considered for outsourcing."

Jobs: Destruction vs. Creation

The McKinsey Global Institute estimates that offshore outsourcing activities will increase by 30 to 40 percent a year for the next five years. Supporting the growth, Forrester Research estimates that 3.3 million white-collar jobs will move overseas by 2015, which would amount to a yearly average from 2000 to 2015 of approximately 220,000 jobs out of a workforce of 138.3 million. And, Deloitte Research predicts 2 million financial-sector jobs will be outsourced by 2009.


Additionally, McKinsey's August 2003 data estimates that every dollar of costs the U.S. moves offshore brings the U.S. a net benefit of $1.12 to $1.14 (in addition to the benefit to the country receiving the investment).

Undoubtedly, there is much to gain from offshoring--consumers benefit from lower prices, enhanced productivity, higher-value jobs, etc. But along with the gains, there will be pains--especially for certain individuals and industries. And while many see jobs lost, economists see a different picture. It's a case of job destruction/creation, and many say, "Look at the numbers."

A Bureau of Labor Statistics study released in early June looked at reasons for mass layoffs (where a firm lets go 50 or more workers). The survey indicated that less than 2 percent of all jobs destroyed were due to offshore outsourcing.

There is much empathy for individuals who lose their jobs. A common media response, Drezner says, is to write anecdotal stories. "There is nothing more heartbreaking than a story of someone who had to train their Indian replacement and was then let go," he says. "Any loss of a job--for whatever reason--is a traumatic event, and it's whether you take that anecdote and generalize the possibility of that happening, which is what the media does." Actual numbers, he says, tell a different story.

Many argue that short-term disruption from job losses must be weighed against the broader benefits--to U.S. consumers, businesses and the consequences of resisting change, and that job churn itself is always going on in the labor market.

"The magnitude of churning is astonishing," says Matthew Slaughter, associate professor of Business Administration at Dartmouth College Tuck School of Business. He notes that gross job creation and destruction rates in the U.S. economy are about 25 percent per year.

On New Year's Day 2004, there were about 130 million payroll jobs. Using Bureau of Labor statistics, he says, if you track those till New Year's Eve 2005, about 30 million of those jobs will have been destroyed, while yet another 30 million jobs will be created. (This data for the Jobs Open and Labor Turnover Survey (JOLTS) covers all private nonfarm, as well as federal, state and local government jobs, including part-time and seasonal work.)

Relative to that benchmark, and Forrester's estimated 3 million jobs set to be offshored over the next 10 years, Slaughter calculates: annualizing that 3 million means about 300,000 jobs per year, totaling about 1 percent of the total gross destruction that is going on in the U.S. economy this year.

Additionally, Slaughter says the U.S. Commerce Department tracks U.S. multinational companies' operations--both in the U.S. and abroad, in foreign affiliates--to which he applies the concept of "substitution versus complimentary," meaning: does expanding abroad mean reducing U.S. involvement? The data shows U.S. multinationals are a big force behind creating jobs--not destroying jobs, he says.

Slaughter tracked the 10-year period from 1991-2001 (the most recent data available), which includes the 1990s and 2000 period of meaningful integration into the world economies of China, India and the former Communist countries in Eastern Europe, at a time when U.S. multinationals were hiring heavily in these locations. He found employment abroad in the multinational affiliates of U.S. head-quartered companies increased by over 2.8 million workers.

So, what was happening inside the U.S.? Contrary to what many expect, Slaughter says, "If they thought substitution is really what matters, you don't see a decline of over 2.8 million jobs in the parent-based U.S. companies." To the contrary, he notes, "Over that 10-year period, the U.S. parent employment in these multinationals was rising by over 5.5 million workers." Thus, for every one person working in the affiliates abroad, the U.S. parent employment went up by almost two workers. "What matters on balance," he says, is that "the employment changes that we see is quite different from what is presumed in [U.S.] policy discussions."

Global outsourcing was defined by Gregory Mankiw, chief economist to President George W. Bush, as "just a new way of doing international trade." And, the Democratic Senator from New York, Hillary Rodham Clinton, writing in an op-ed article in The Wall Street Journal--"'Bestshoring' Beats Outsourcing"--favors, among other things, a national agenda that promotes research through tax credits and further direct investments in science, as well as tax incentives for jobs and help for workers to adapt.

No doubt, such a bread-and-butter economic issue will be part of the upcoming U.S. presidential elections.

"It's tied in to the overall state of the economy, and it's a great campaign issue--it makes it seem like politicians care about the little guy who loses his job," says Drezner. At the state level, he thinks, we'll see "legislators with purposes, [who] on the one hand, want to be seen as 'doing something,' so there's a temptation to pass legislation addressing the outsourcing issue." At the same time, he finds it "amusing" how many state legislators are realizing that if they pass such legislation, it'll cost them significant amounts of money, since many are offshoring state services.

Bottom line, Drezner believes "the better the aggregate economy does, the "less pressure we'll see on the out-sourcing stuff." The worse it does, the more it becomes the "scapegoat."

Optimistic on Offshoring's Future

Long-term, Drezner is optimistic for two reasons: "If we were having this conversation a little more than 10 years ago, it wouldn't be about outsourcing--but rather about downsizing." Second, in terms of public attitudes, he believes we're going to see a generational shift in terms of receptivity to imports, and less public pressure to enact protectionist measures. Generally, "those who attack outsourcing focus on jobs, and it's great when they can get to frame the debate that way." In fact, he argues that what's key is that outsourcing benefits people because it lowers prices.

McKinsey's Farrell believes the U.S. needs to remain on the leading edge of innovation, saying it's crucial to "put policies [in place] and address the issues that will allow us to continue innovating as we have always done--and to make sure that we don't lose our meaningful portion of otherwise vibrant contributors, because we don't spend the time and energy to educate them in the first place or to retrain them if their jobs become less able to be done in our economy."

She warns of going down the path that some European economies have--"protecting the workers so much that we make it impossible to create the vibrancy in the labor markets, and the flexibilities in the labor markets." For the U.S., Farrell says, it can be a case of "having our cake and eating it too." The way to protect people, she insists, is not by not allowing them to lose their jobs--because it's in the interest of the economy in terms of migrating to higher value-added to let some jobs go and create better ones. "You don't want to protect the jobs, you want to protect the people," argues Farrell.

The way to protect them, she says, is to educate and retrain them, and make sure they are not exposed to periods where they are not covered for healthcare or where their pension funds are not accruing value. Indeed, Federal Reserve Chairman Alan Greenspan is said to have commented on outsourcing: "In the long term, we have to worry about education."

RELATED ARTICLE: IT Jobs: No 'Gloom-and-Doom' Here

He represents a group that has arguably taken the hardest hit in recent job losses, yet Harris Miller takes issue with the general media's "gloom-and-doom" scenario of offshoring. Miller is president of the Information Technology Association of America (ITAA), a trade group that represents major information technology companies--primarily global companies, with the majority based in the U.S.

Results from a recent survey conducted for ITAA by Global Insight (in part by Nobel prize-winning economist Dr. Lawrence Kline) present quite a rosy scenario compared to what Miller dubs "common myths." One of these myths is that global sourcing (ITAA's term for offshoring) of IT jobs will reduce the overall number of U.S. jobs.

"The companies see themselves as global companies, with global supply chains and global customers, many earning 40-60 percent of their revenue selling their products and services outside the U.S.," says Miller. "As such, companies view sourcing of labor critical, and believe that they should be able to source labor where their business is, and the business of the customers they serve."

He says his members oppose restrictions by legislation or regulation on where a particular individual works and locates--unless there is a major national-security reason, or other special limitations that make it a natural necessity to work in the U.S.


"It's for the marketplace to decide, not policymakers," asserts Miller, who says his Washington, D.C.-based organization is vigorously fighting the federal government and 38 states to stop legislation from being enacted. "We believe such legislation is very harmful to the global competitiveness of the U.S. IT industry," he adds.

Eliminate the hype and dramatic headlines, Miller says, and the numbers shows increased jobs and wages. The percentage of IT jobs that has moved offshore is relatively small--only about 2 percent; it is projected to increase to 6 percent by 2008.

Competition from global sourcing has increased employment overall in the U.S. by some 90,000 workers in 2003; it is expected to increase by over 300,000 by 2008, with higher-paying jobs. By 2008, global competition is expected to add half a percentage to the average pay of American workers. Also, foreign investment in the U.S. doubled from 2002 to 2003.

About 400,000 IT jobs disappeared between the end of the dot-com bubble and the beginning of the recovery, with only about a quarter of those (100,000, or 33,000 a year) lost due to global competition. The rest were due to the recession, telecom-and Internet-bubble overhiring, Y2K and other factors. With all the hype and inaccuracies about the numbers, Miller says, it appears that only about 100,000 IT jobs have actually moved offshore over a three-year period.

Moving routine-type jobs offshore frees up investment capital, and while some low-end jobs disappear, the job pyramid is rearranged--with more higher-paying, more sophisticated jobs. "We've had seven straight months of new job creation in the U.S., with many of those in the IT-services sector, and over 300,000 new jobs created in June alone. So, it's taken a little time for the job engine to kick in, but it's certainly kicked in now. The U.S. economy is a great engine of growth," he says.

Acknowledging that "we can't dismiss the pain of the people who lose their jobs," Miller says, "the way to deal with that is not by throwing up artificial barriers to global competition." He's suggesting help to enable U.S. workers who lose jobs to get retrained, so they can find jobs faster.

--Ellen M. Heffes

RELATED ARTICLE: India Today: The Offshoring Effect

If India's GDP growth rate of 8.1 percent in 2003 is any indication of things to come, the country certainly is "shining"--the slogan used in the recent election by the ousted BJP party. India's GDP has grown rapidly compared to the previous four years: 4.6 percent in 2002; 5.1 percent in 2001; 3.9 percent in 2000; and 7.1 percent in 1999.

The agriculture and manufacturing-sectors contributed 23 percent and 26 percent, respectively, and the service-sector contributed approximately 50 percent of the GDP. A major contributor within services has been information technology (IT), which has shown an average growth of 46 percent a year since 1993.

India has emerged as the global leader in the export of IT consulting and business processing services, while providing Indian workers with comfortable, if not princely, salaries. The outsourcing boom has brought with it the emergence of a new middle class, earning salaries that, by American or British standards are low, and are, therefore, competitive.

The economy stands to gain tremendously from this inflow of cash, resulting in a kind of "Westernization," evidenced from a decline in what are know as "arranged marriages" to multinational fast-food chains such as Pizza Hut.

A jaunt through Bangalore, the outsourcing capital of India, shows that along with the less-than-five-year-old shining steel and glass office buildings sprawled across the city, are designer shops and shopping malls, as well as a new generation of Indian coffee-shop chains, such as Mocha and the 500-outlet Barista chain.

Private consumption is rising, evidenced by increases in automobile sales and mobile phone ownership. The inflow of dollars has provided India with the funds for international trade, resulting in benefits for both individuals as well as the nation. But this expanding, affluent middle class and richer nation have led to a growing gap between the "haves" and "have-nots," as 72.2 percent of India's population of more than 1 billion live in rural areas and have not directly benefited from the inflow of wealth.

The current government has promised to care for the masses, while also realizing the gold mine of widely available and in-demand exportable skills. Renewed support for liberalization of government policies, which has helped the IT industry growth--such as permitting foreign ownership of companies--is expected. However, tariffs still restrict importation of goods from the U.S., a policy that is not likely to change in the short term.

By Clarence T. Schmitz

Contributed by Clarence T. Schmitz, ( Chairman and CEO of Outsource Partners International Inc.
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Title Annotation:outsourcing
Author:Heffes, Ellen M.
Publication:Financial Executive
Geographic Code:1USA
Date:Sep 1, 2004
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