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No Easy Answers on Offshoring

Ann All

Is offshoring good or bad for America? It may be a moot point. In this highly charged debate, many experts conclude that broad business trends will make it extremely difficult for U.S. companies to reverse the flow of jobs going offshore, even if they want to.

 

In an interview with Forbes, Robert Kennedy, director of the Global Initiative at the University of Michigan's Ross School of Business, outlines several of the broad business trends leading to an increase in offshoring, including the growing number of developing countries with low-cost labor forces entering the global economy, an increasing number of foreign students educated in America who choose to return to their home countries and the widespread digitization of business processes.

 

While Kennedy says offshoring will be "disruptive" in the short term, he believes the United States will benefit in the long term. I've written about folks with similar views, including Canadian economists Runjuan Liu and Daniel Trefler, who published research earlier this year that found that while some U.S. workers would lose jobs to offshoring, such losses would be offset by the growing sales of U.S.-produced services in other countries.

 

Kennedy also says that it's difficult to determine how many U.S. jobs are lost to offshoring, a point I wrote about in August, citing a study from University of Hawaii IT management professor Raymond Panko in which Panko determined that few mass layoffs could be attributed to offshoring. Yet as Kennedy points out, that doesn't mean significant losses aren't occurring. He says:

 

If you shut an assembly plant in Michigan and move 500 jobs to Mexico, it's pretty obvious what has happened. On the other hand, GE is hiring people in India and laying off people two years later in a different group in the United States -- often in twos or threes. It's incredibly hard to observe and identify.


 

Concern over offshoring is heating up in the United States as job losses mount, and President Barack Obama made remarks that many construed as negative toward offshoring during his campaign. Yet Kennedy says there is little the government can do to stanch companies' offshoring of general and administrative functions. While tariffs can be placed on goods produced in other countries, it's not possible to restrict back-office functions in this way, Kennedy says.

 

The Hackett Group's Michel Janssen and Erik Dorr offered a similar take when I spoke to them earlier this month. According to their recent report, "Companies Accelerate Globalization of G&A Processes in the Face of Economic Crisis," Global 1000 companies will send more than 350,000 jobs in IT, corporate finance, human resources and procurement to offshore labor markets in 2009 and 2010, bringing the total number of back-office jobs being done offshore to more than 800,000. By 2010, they predict, about one in four jobs in IT will be located offshore. They say typical Global 1,000 companies now realize more than $16 million in annual savings by offshoring back-office operations, more than half of which is money saved on IT. The number will grow to nearly $30 million by 2010. This represents about a third of total potential cost savings, which could reach up to 17 percent of total G&A costs, they say.

 

While trends such as political maneuvering, currency devaluations and labor supplies will affect the degree to which companies adopt offshoring in the near term, Janssen says the United States is in the frst decade of a "mega-trend" that will last another 10 to 20 years. There won't be a reversal until "relative parity in salaries" is attained. (Of course, even as salaries and attrition issues increase for offshore giants like India, lower-cost countries are developing the skills and infrastructurerequired to attract American companies and other outsourcing clients.)

 

It's no longer about simple labor arbitrage, say Janssen and Dorr. Entering global markets will become a matter of necessity for many U.S. companies because of a stark economic reality. While growth is slowing in countries like India and China, it's still increasing in the double digits, while here in the United States it is essentially flat. American companies that don't expand into new markets will simply take away business from other U.S. companies. Says Janssen:

 

If you look at top line growth, we showed 17 percent growth for global revenues. The challenge in the U.S., with our shrinking GDP, if you go out and make more revenue, you're actually stealing it from another (U.S.) company. The pie is getting smaller. If somebody gets bigger, somebody has to get smaller, by definition. In the global theater, the pie is getting bigger due to population growth and improvements in standard of living. Companies need to go where the money can be had. The U.S. could be like Japan for 10 years. You need to go out and be competitive in the global market and figure out what the world is going to buy, what you can deliver to the world.

 

Another interesting point made by Janssen and Dorr: Perhaps the biggest competitor to globalization is automation. That is, companies with processes that are relatively easy and cost-effective to automate can gain the efficiences required to remain competiive that way and avoid the hassle of going offshore. (Although they may not find it as easy as their counterparts with an offshore presence to enter new markets.) As with offshoring, jobs will be lost as companies automate formerly manual processes.

 

Other situations in which globalizing processes may not be appropriate: companies without the required scale, companies that don't need to compete on a global basis and companies with processes that require lots of human interaction and a sense of customer intimacy. On the latter point, I wrote in July about research in which several academics found that outsourcing customer service knocked down a company's score on the American Consumer Satisfaction Index (ACSI), a measure created by the National Quality Research Center at the University of Michigan. Globalization didn't apear to be the bad guy here, however. Scores fell whether outsourcing occurred onshore or offshore.

 

Janssen also notes that it's no longer just low-skill jobs moving offshore, a point also brought out in a study done earlier this year by CareerBuilder.com and the University of Pennsylvania's Wharton School. In that study, 28 percent of companies said they are sending an increasing number of high-wage, high-skills jobs such as computer programmer and software developer overseas. Sixty-nine percent of respondents said these kinds of jobs are at equal or greater risk of being offshored than low-skill jobs.

 

Echoing larger points made by Kennedy and by the Hackett Group's Janssen and Dorr, 28 percent of the respondents said offshoring some jobs had helped them create new and better jobs in the United States. The respondents' reasons for offshoring: cost savings, mentioned by 64 percent; gaining access to needed skills, 27 percent; and plans for market expansion, 19 percent. Companies expanding their market presence were more inclined to send sales and support positions offshore, according to the study. About those cost savings, companies achieved them. Respondents reported that offshoring yielded annual savings of $20,000 per head for most companies, with savings rising to $50,000 for 15 percent of employers.


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