Travis Larsen, Lara Osmond, Billy Palmer,
Kyle Smith, April Young, John Youngberg

Background:
Offshoring and Outsourcing
These terms have had various meanings and are used interchangeably in some of the literature, to clarify:
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Outsourcing: subcontracting business outside of the company
Offshoring: moving business from one country to another
Offshore outsourcing: transferring business outside of the country, to another firm
Most of the research pertaining to offshore outsourcing simply call it outsourcing, we will do the same

Background:
Reasons for offshoring
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Businesses outsource for the purpose of cutting costs and raising profits. An early example of outsourcing in America in the
1970’s, IBM developed the IT industry in
India.
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Economically, if some people can use some of their skills more cheaply than others, then those people have the comparative advantage. The idea is that countries should freely trade the items that cost the least for them to produce.

Background:
How it came to be:
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Production offshoring got its big push when the
NAFTA made it easier for manufacturers to shift production facilities from the US to Mexico.
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After its accession to the WTO, China emerged as a prominent place for offshore outsourcing:
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Cheap prices through very low wage rates, cheap loans, land, and huge economies of scale based on cities with populations of over a million workers.
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Currently, India's engineering talent has made India the offshoring destination of American high-tech firms, lead by HP, IBM, Intel, AMD, Microsoft, Oracle, and Cisco.

A Brief History of Outsourcing
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Outsourcing has been practiced for over a hundred years…
In the early years of US History,
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America's covered wagon covers and clipper ships' sails
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Scotland
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India
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India’s textile manufacturing
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England

A Brief History of Outsourcing
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More recently, in the U.S. in the 1970’s, it was common for computer companies to export their payrolls to outside service providers for processing.
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In 1979, British voters elected Margaret Thatcher as their prime minister, and in 1980 U.S. voters elected
Ronald Reagan as their president.
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They worked (as did their successors) to create and sustain agreements and organizations to promote free trade.
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The General Agreement on Tariffs and Trade (GATT)
The North American Free Trade Agreement (NAFTA)
The formation of the European Union
The World Trade Organization (WTO), which superseded the
GATT in 1995

A Brief History of Outsourcing
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Continuing into the 1980’s, accounting services, payroll, billing, and word processing all became outsourced work.
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Until this point, the reasons for outsourcing had more to do with small efficiencies than reshaping the economy.
It wasn't until the late 1980’s that outsourcing began to emerge as a potentially powerful force in transforming global
economies.

A Brief History of Outsourcing
(1987-1997)
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Major outsourcing in the manufacturing industry
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Associated loss of blue-collar jobs in many industrial sectors
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Work outsourcing primarily to East Asian countries of
Taiwan, China, South Korea, and Malaysia
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Reasons:
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Low costs of manufacturing
Availability of skilled labor
Promotion of business friendly environment
Existence of production and supply networks in those countries

A Brief History of Outsourcing
(Late 1990’s)
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Outsourcing of White Collar Jobs
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Software sector was first to go
Other non-manufacturing sectors – telecommunications, retail trade, finance, banking and insurance
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What caused this major burst of outsourcing in the late 1990s?
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Creation and quick distribution of the internet
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Transnational networks set up by immigrants in the U.S.
Liberalization of emerging market economies

A Brief History of Outsourcing
(Late 1990’s)
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Where to?
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India
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Malaysia
Philippines
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South Africa
Why?

A Brief History of Outsourcing
(cont.)
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Push factors vs. Pull factors
Pull factors for Second Wave countries:
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Widespread acceptance of English
Business and communication education
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Common accounting and legal system to the U.S.
(at least in some of the countries)
General institutional compatibility and adaptability
Time zone and geographic differences – created
24/7 capability and overnight turnaround times
Large and continuous supply of technically savvy graduates

"In India, they were pumping these guys out left and right. . . . Look at the deal here: We've got very highly paid SAP programmers that we could hire in the U.S. - and they're hard to find. Or we could go to India and find very talented SAP programmers immediately at 35% to 40% lower cost."
"...offshore outsourcing will create more than 337,000 jobs by 2010..."
"Demand for offshore IT services isn't slowing, and that trend is showing up in Indian companies' hiring. Between July and September, Tata
Consultancy Services increased its staff by nearly 12% to more than
53,000, while Infosys Technologies' staff grew 15% to more than
46,000."
"Outsourced IT services brought in $12 billion for India 2004, leading the world in IT exports."
Network World
InformationWeek
InformationWeek
Santa Clara University's
Leavey School of Business
July 2004
November 2005
October 2005
October 2005
"Only 19% of US businesses have an offshore outsourcing strategy, a study by Ventoro found. However, the percentage skyrockets to 95% if only Fortune 1000 companies are considered."
ZDNet Research
"Business Process Outsourcing will overshadow and incorporate IT outsourcing and mainstream BPO expenditure is likely to grow worldwide by 10 per cent a year from $140 billion in 2005 to over $220 billion by
2010."
LogicaCMG
October 2005
August 2005

Current Outsourcing:
# of Jobs Affected
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Jobs Lost to Date*: 300,000-995,000
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300,000-500,000 ( Goldman Sachs )
400,000-500,000 ( Business Week )
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995,000 ( economy.com
)
Projected Job Loss: 3.3 million-6 million
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3.3 million over 15 years ( Forrester Research )
6 million over 10 years ( Goldman Sachs )
Jobs at Risk: 14.1 million
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14.1 million ( UC Berkeley )
* The total size of the U.S. Labor Force is 140 million jobs

International Aspects:
Problems
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Jobs are leaving the United States and going to other countries
Less people in the United States know trades that are outsourced

International Aspects:
Benefits
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Domestic companies can employ foreign workers for less
Prices lower for products sold in the
U.S. and made in other parts of the world
Countries in the rest of the world can become more developed

International Aspects:
Options
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Keep outsourcing at the current level
Decrease outsourcing in the future
Increase outsourcing in the future

International Aspects:
Keep outsourcing as is
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Foreign workers benefit
Loss of work for domestic workers
Domestic firms benefit from lower wages
Foreign firms lose workers and have less choice in labor
No new firms can outsource

International Aspects:
Decrease outsourcing
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More jobs for American workers
Higher wages for lower skilled workers
Workers in foreign markets work for foreign companies
Less work for foreign employees
Lower wages for foreign employees
Domestic companies have to pay higher wages by using domestic workers

International Aspects:
Increase outsourcing
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Firms wanting to start outsourcing benefit
What else can we outsource?
More foreign workers can find better jobs
More trades will be lost for American workers
More workers will no longer work for foreign firms

Special Problems:
Negative Consequences
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Qualified professionals are losing their jobs to offshore workers who will work for less
Difficulty of monitoring child labor
Difficulty of managing remote locations with those who understand the culture, and are in synch with corporate objectives

Special Problems:
Negative Consequences
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Loss of incentive for college students to pursue IT careers as family members and friends lose jobs
Loss of trust between employees and the employer as more jobs move offshore
Due to new roles, competencies, and skills required when outsourcing, inefficiencies and disorganization result

Special Problems:
Positive Consequences
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Proven beneficial as far as cost, quality, and value of work delivered
Improved service delivery and access to a greater number of highly qualified talents
In-house organizations lack the assurance of quality standards that those with offshore operations have

Special Problems:
Myths and Realities
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Myth: A job outsourced is as good as a job lost
Reality: Outsourcing is a budget balancing act.
Outsourcing does not call for job losses, but increased efficiency. This helps the firm to focus its resources on their most valuable aspects of business, namely producing and selling its products. The end result of this drive toward efficiency is evident to Americans in lower prices and higher standard of living. Foreign outsourcing goes hand in hand with higher wages, lower prices, higher profits, and enhanced competitiveness.
Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Special Problems:
Myths and Realities
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Myth: Outsourcing is a one-way street
Reality: We are not only outsourcing jobs, but have jobs being outsourced to us. There are over 6.4 million jobs in the US that have foreign employers.
They are actually growing at a faster rate than we are outsourcing. Those foreign employers that are outsourcing to the US often pay higher than the jobs that are being outsourced from the US. For instance, the 4,300 employees that work for BMW in South
Carolina, and the 14,000 employees that work for
Honda in Ohio. The fact is, most of the jobs that are being outsourced are actually below the US average wage. As a result, comparatively lower wage jobs are being outsourced and higher wage jobs are coming in, increasing the standard of living in America.
Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Special Problems:
Myths and Realities
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Myth: Only greedy corporations benefit from outsourcing
Reality: Everyone benefits from outsourcing as it is a means to lowering costs in response to competition.
As costs decline, every consumer benefits by paying less for the same product, or even for a better product.
The vast benefits of outsourcing are usually overlooked as the benefits are widespread among the economy.
The few who lose their jobs to outsourcing are much more vocal than the millions of consumers who save hundreds of dollars. This results in the American consumers saving billions of dollars each year.
Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Looking to the Future:
Potential Negatives
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American unemployment rate will rise
Americans will spend less because they will feel less rich
American resources such as concrete, drywall, and oil will be shipped over seas and America will experience a shortage of goods.

Looking to the Future:
Potential Positives
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Quality of jobs increase as lower wage jobs are replaced with high-wage, highskill jobs
As competition increases, savings from decreased costs will be passed on to consumers
Domestic companies will be able to compete with foreign companies easier, causing a decrease in tariffs and increase in world trade

Looking to the Future:
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Only time will tell whether the negatives will out-weigh the positives, or vice versa