The allure of outsourcing too powerful for U.S. companies to resist – Part 1

One of the predominant economic issues of our day has to do with the "offshoring" or "outsourcing" of American jobs overseas, particularly to developing economies like India and China where costs of labor are significantly less, thereby undermining efforts to reduce the stubbornly high U.S. jobless rate (currently at 9.6 percent)



Outsourcing is actually a natural outcome of globalization, the rise of multinational corporations and increased foreign direct investment — a complex process that began two or three decades ago and will only intensify in the coming years.



Robert Preziosi, a professor at Nova Southeastern University’s Huizenga School of Business and Entrepreneurship in Fort Lauderdale, Fla., said that while it is difficult to ascertain how many U.S. jobs have been lost due to outsourcing, clearly at least "hundred of thousands" of such jobs have moved overseas.



Stephen Bronars, a labor economist at Welch Consulting in Washington D.C, estimates that during the downturn of 2001-2003, anywhere from 500,000 to 1 million U.S. jobs were sacrificed to outsourcing.



According to recent data from the U.S. Commerce Department, employment at foreign subsidiaries and affiliates of U.S. multinational companies climbed by 729,000 jobs to 11.9 million from 2006 to 2008. Meanwhile, over that same span, domestic employment by these companies declined by 500,000 jobs to 21.1 million.



In a recent column in the Wall Street Journal, Craig Barrett and James P. Moore Jr. explained that companies outsource for two principal reasons.

"The first centers on the nature of the global," they wrote.



"In today’s world, outsourcing can save companies money, reduce the time it takes to deliver products and services to customers, and provide access to skilled employees unavailable in the U.S. Outsourcing also allows companies to capitalize on incentives offered by foreign governments to attract investment."



The second reason U.S. companies outsource is that "our own government pursues policies that drive investment and job-creation offshore: excessive taxes, needless regulations, lengthy permit processes, a decreasing supply of U.S. citizens with technical and engineering degrees, and a general governmental misunderstanding of how to support private-sector jobs."



For example, Barrett and Moore cited that taxing new U.S. corporate investment at 35 percent – when the world average is just over 18 percent – pushes U.S. companies to invest offshore to increase return to shareholders.



[Barrett is the former CEO and chairman of Intel (NASDAQ: INTC); Moore is a former U.S. assistant secretary of commerce for trade development.]



The massive spread of the Internet and soaring telecommunications capacity has in particular enabled U.S. companies to easily transfer computer-based work to places like India, China and, increasingly, the Philippines, which offer a large pool of highly-educated (and, of course, cheap) workers.



"We have probably seen the most pronounced growth of outsourcing in the services sector, which cuts across a wide swath of businesses," Bronars said. "It is estimated that since about 1992, the number of services-related jobs outsourced overseas has tripled."



Preziosi noted that if one calls the customer service department of a bank or mortgage company or a credit card firm, one is now likely to reach someone in Mumbai or Manila, rather than Memphis or Minneapolis.



Bronars indicates that medium-skill positions in the services sector are the most likely to be heavily outsourced.



"Jobs in computer support, database administration, engineering services, computer programming, statistical analysis, and almost anything computer-related can be easily and cheaply replaced by foreign labor," he said.



"Also, tasks like record-keeping, bill-processing and such business-support jobs (which one can find in virtually every different sector) can be outsourced."



Manufacturing has also lost a huge number of jobs to outsourcing, everything from the making of heavy equipment and airplane parts to shoes and basketballs.



Although manufacturers and technology companies are most intimately associated with outsourcing, a broad array of American firms have taken advantage of moving certain operations overseas.



According to a recent article in the Los Angeles Times, such diverse companies as CKE Restaurants, JPMorgan Chase (NYSE: JPM), hotelier Hilton Worldwide, and accounting firm PwC have recently transferred some duties to foreign countries.



[Source] Software Outsourcing Blog Section: http://www.unisoftchina.com