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Offshore Outsourcing

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  1. Offshore Outsourcing Travis Larsen, Lara Osmond, Billy Palmer, Kyle Smith, April Young, John Youngberg

  2. Background:Offshoring and Outsourcing These terms have had various meanings and are used interchangeably in some of the literature, to clarify: • 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

  3. Background:Reasons for offshoring • 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. • 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.

  4. Background:How it came to be: • Production offshoring got its big push when the NAFTA made it easier for manufacturers to shift production facilities from the US to Mexico. • After its accession to the WTO, China emerged as a prominent place for offshore outsourcing: • 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. • 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.

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

  6. A Brief History of Outsourcing • 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. • In 1979, British voters elected Margaret Thatcher as their prime minister, and in 1980 U.S. voters elected Ronald Reagan as their president. • They worked (as did their successors) to create and sustain agreements and organizations to promote free trade. • 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

  7. A Brief History of Outsourcing • Continuing into the 1980’s, accounting services, payroll, billing, and word processing all became outsourced work. • 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.

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

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

  10. A Brief History of OutsourcingThe Second Wave(Late 1990’s) • Where to? • India • Malaysia • Philippines • South Africa Why?

  11. A Brief History of OutsourcingThe Second Wave(cont.) • Push factors vs. Pull factors • Pull factors for Second Wave countries: • Widespread acceptance of English • Business and communication education • 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

  12. Current Outsourcing

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

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

  15. International Aspects:Benefits • 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

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

  17. International Aspects:Keep outsourcing as is • 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

  18. International Aspects:Decrease outsourcing • 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

  19. International Aspects:Increase outsourcing • 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

  20. Special Problems: Negative Consequences • 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

  21. Special Problems:Negative Consequences • 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

  22. Special Problems:Positive Consequences • 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

  23. Special Problems:Myths and Realities • 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:

  24. Special Problems:Myths and Realities • 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:

  25. Special Problems:Myths and Realities • 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:

  26. Looking to the Future:Potential Negatives • 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.

  27. Looking to the Future:Potential Positives • Quality of jobs increase as lower wage jobs are replaced with high-wage, high-skill 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

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