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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Add Comment      Leave a comment on this blog post
Feb 17, 2009 6:17 PM Virgil Bierschwale Virgil Bierschwale  says:

Actually Mr. Kennedy is wrong on most points.

To determine how many jobs have been lost to offshoring, download the free report at www.KeepAmericaAtWork.com and using the same calculations repeat that process from 1970 until present and you will have a pretty accurate count of how many jobs have been eliminated in favor of cheaper wages.

As for the other countries offsetting our lost wages via purchasing services from us, please take a look at the page titled "My Analysis" and you will find that this too is not true and to make it worse, for these countries to purchase our services, they need the money that comes from us purchasing from them, so putting Americans out of work again makes the situation much worse.

And our states now are currently having to lay people off just like I have been predicting at www.KeepAmericaAtWork.com

These are all well documented at www.KeepAmericaAtWork.com

Take a look at the "KAAW - Barely Making It" article and it will open your eyes.




Feb 17, 2009 6:59 PM Walter A Nodelman Walter A Nodelman  says:

I disagree with the TITLE of Ann All's column. 

"No Easy Answers on Offshoring" is not accurate.

There is an easy answer which would solve the problem in 3 months, and with no downside risk. 

No hits to the unemployed American taxpayers.  

No stock market crashes.  

No foreign diplomatic issues.

No bailouts from the federal government vaults.   

No bank runs.  

No riots.   

No bureaucracies.  

Simple prosperity, - from working Americans spending their paychecks in the United States of America.



This is a PROPOSAL on how to quickly solve the crime of OFFSHORING.


First, with a 3 day maximum for debate in each house of the Congress, Americans raise a ruckus and get our elected representatives to pass a law which our President signs, or his veto is quickly overridden.  That new law says we abhor and we will no longer follow the WTO treaty, NAFTA treaty, GATT treaty, CAFTA treaty, etc.  It says we abrogate all of those named sovereignty stealing treaties.  We do it, exactly as fast as we abrogated the Missile Test Ban Treaty.

Secondly, On the Capitol Building veranda in Washington DC, our elected representatives lug out a SHREDDER.  Invite the Media and the Press.  With a band drum-roll, they SHRED every page of our signed WTO Treaty, NAFTA Treaty, etc.

Thirdly, we send telegrams to all the signatories of those treaties and tell them that we will no longer be a party to them.  Our change is effective with the arrival of this telegram.  And from each signatory country, the USA is immediately recalling our ambassador for two months of consultations in Washington DC.  (Let them riot in front of empty embassies).

Fourthly, with a 3 day maximum debate in each house of the Congress, our elected officers pass a NEW TAX.  The "American Jobs Recovery and PROTECTIONISM Act".  Also, referred to as the "Digital Per Byte TAX for the American Border".

Every BYTE of data is charged a payment of TAX to the United States Federal Treasury of ONE PENNY.  A super simple calculation.  No complexity of a tax code.  The TAX is owed at the instant that the zeroes and ones of a BYTE crosses ANY United States Geographic Border.  The TAX is collected from the United States 50 states participant to that communication, whether the byte of data is outbound or inbound.  Meaning of the byte is irrelevant.  Physical position of the byte is irrelevant (first, last, etc).  Every byte is counted.  (A byte is 8 positions called bits, and each position contains either a zero or a one).

The digital byte is taxed regardless of whether it represents part of a sound or voice, as in Digital Compression of voices in a Callcenter.  The tax is collected from the telephone company for a simple telephone call from one residence to an overseas location.  ASCI, EBCDIC, whatever -- it all involves bytes, crossing national borders, and it all gets counted.

If it is in Digital Format, and if it crosses our border, it creates a tax liability which must be paid.   Reply

Feb 17, 2009 7:00 PM Walter A Nodelman Walter A Nodelman  says:
The collection of the tax is accomplished in quarter year installments.  January February March is paid to our government by the end of April.

The counter and the audit is associated with every Satellite Dish in the USA, every Glass Fiber Cable which goes to a network that enters an ocean, every Microwave antennae, every Analog antennae, and every Copper Cable which crosses the geographic border of this country.  Place a floppy disk, or a Flash Memory into an envelope and try to mail it to India and the U S Customs Service will want to know the Byte Count on that physical device, because it is Digital and it is crossing our Federal Border.  Default tax for violators is the maximum physical byte count possible on the particular device (floppy disk, tape, flash memory in a Nikon, whatever).

If Microsoft wants to write "Longhorn" in Bangalore...Great.  Let them do it.  Big labor cost savings.  But every COPY of Longhorn which is going to come into the United States to a customer is going to be subject to our BYTE COUNTER, because it is Digital characters and it is crossing our border.  If Longhorn is installed into a new Dell computer in Communist China, and then that new computer is going to get sold in an Office Max or a Staples in the USA, then that is also DIGITAL and crossing our border, and countable by us.  Dell has to declare how many Digital characters are involved, and Dell has to pay the Customs Service.  On the other hand, write Longhorn in Washington State, and build the Dell Computer in Georgia, and there is no digital tax anywhere involved.

Be located in Hyderabad and try to read Monster dot com jobs list, and Monster Corporation gets taxed when Monster sends that Jobs List in Digital Format across the California beach.

Hide from the U S Customs Service and face the punishment normally meted out to companies which do that.

There would be appropriate exceptions which are not taxed.  Military communications.  Internet to private users.  (Still taxed would be INTEL USA talking to INTEL Bangalore via the Internet).  Weather satellites would be exempt.  International Space Station would be exempt.  There are others ...

The wealth generated by the Byte Tax is collected quarterly and goes to reduce the Federal DEBT.  It goes toward the Social Security Fund and Medicare as offsets.  It goes to increase the Budget of the Veteran's Hospitals.  It goes to FEMA for disaster relief.  It goes to Homeland Security to pay for equipment.  Work out the percentages of shares in the Congress.

The tax is on the compressed and encrypted data at the level of a single byte crossing the national border.  If it is digital and it is composed of 8 "zero or one" bits - it gets counted as a BYTE.  Therefor everything is easily measurable and countable.  No huge bureaucracy needed to count Bytes.

No attempt is made to PREVENT the transmission of that byte in either direction.  But, crossing an American border does have a cost, and that cost must be paid to the U S Federal Government Customs Service.

If we started on this effort now, we can have it in place, generating revenue, and inducing the quick return of America's jobs to America's workers inside the United States of America by year end.

For our government to outlaw overtime pay, it took no time at all to accomplish.   Reply

Feb 17, 2009 7:00 PM Walter A Nodelman Walter A Nodelman  says:
Merely a signature and some publicity.  The Byte Tax can happen almost as fast.

Mar 12, 2009 6:35 PM Rich LoBrutto Rich LoBrutto  says: in response to Walter A Nodelman

I completely agree with Walter Nodelman.  The Byte Tax is a great idea!

Offshoring has ruined this so much in this country.  It has to stop.

Go Walt !!!

Jul 22, 2010 3:55 PM R. Lawson R. Lawson  says:

Interesting idea on the byte tax.  Few points:

Who is going to explain to Congress what a "byte" is.  Most will probably think we are taxing excessive chewing.

Second, I think we would be shooting ourselves in the foot with a tariff such as that.  Most companies will choose to simply locate their data centers offshore to avoid such a tax.

I think that Andy Grove had some interesting ideas.  IT supports business.  We are part of the business ecosystem and primarily exist to support other business functions.  With a collapsing industrial base and all the supporting companies, we are losing IT opportunities. 

If we rebuild industry in America, IT will grow naturally.  Of course we need to make sure that our immigration policies and tax policies don't support offshoring, but I believe the real solution to the problem is a new global trade policy.  We need to forcibly remove the old guard who proclaim any job you might sweat in as dead.

The bottom line is that we do need fair trade.  I support tariffs as needed.  But not the tariff of information.  After all, that's what a byte represents.  Information. 

Jul 22, 2010 3:59 PM R. Lawson R. Lawson  says: in response to R. Lawson

And your proposed tax is way too expensive:

"Every BYTE of data is charged a payment of TAX to the United States Federal Treasury of ONE PENNY."

So, for my in-laws in Japan to send a 200KB high resolution photo of my nephews, I'm looking at a $2000 bill.  Nice.

Jul 29, 2010 3:51 PM Rich LoBrutto Rich LoBrutto  says:

As I stated earlier, I completely agree with Walt Nodelman's creative idea to reduce the insane amount of offshoring that has been going on for years.

I disagree with R. Lawson.  He said 'If we rebuild industry in America, IT will grow naturally.'  How are we going to rebuild industry?  See any positive signs of this lately?  Also, if it did happen, yes, one would expect I.T. to grow as well - except - what would stop corporations from continuing to outsource.  They are getting away with it now - why stop?  Would they suddenly acquire a conscience (or brains).

This country is in a downward spiral for many reasons and outsourcing could easily be at the top of the list of those reasons.  It's probably too late, but we should still try to stop it.   Most people have given up, but we're heading for 3rd world country status.  It would be better to fix this before that happens.

Walt's idea on how to stop outsourcing makes sense.  OK - perhaps the cost might be prohibitive for personal transmissions, but that could be worked out.  Look at his premise - not every specific detail.  Maybe a penny a byte would be too much, but a compromise figure or cost could be reached.  His point is to make it difficult and expensive for corporations to outsource.  That is probably the only way this insanity will ever end.  As I said earlier, I wouldn't hold my breath waiting for corporations to develop a conscience, or some sense of patriotism.  It has to hit them in the pocketbook. 

Oh - and to the point about 'what's a byte'.  Again - consider the premise, not the details.  OK - we'll say a penny a character or a penny a number for those not familiar with I.T. terms.    These details are easy to get around.

Aug 18, 2010 11:06 AM Jeff Gonzales Jeff Gonzales  says: in response to Walter A Nodelman

I can see a huge interest in compression algorithms if such a tax ever comes into existence...

As an aside, it's funny how people only complain about "offshoring" when it hurts their own jobs.  Nobody seems to mind all the cheap goods they buy in Wal-Mart having originated by "offshore" slave labor in China now, do they?


Aug 29, 2010 4:14 PM James James  says:

Now that govt's in the U.S. have woken up to the fact that expensive American labor isn't all that bad, we'll see more and more of the work coming back and more and more restrictions on the Indian Mafia. The only sad part is American IT workers tried to warn the U.S. about this impending disaster for over a decade, but no one would listen. Now we have to learn the hard way and rebuild what others have destroyed. Sad part is, it was all avoidable if the ivory towers had just listened to the people to begin with. We HAD a booming economy in 1998. Most gov'ts in a similar situation would have said "Great! Don't mess with it".

But not ours - no, not ours. Ours had to meddle by manipulating the labor market for corporate Amercia and flooding our labor markets with foreign workers which has led to a glut of workers.

Those 'expensive' American workers are the ones who pay all the taxes to keep gov't afloat. We wonder why our gov'ts are going broke but it's all just because they've removed the American taxpayer base. You can't send work offshore or replace 10 million people making $150K each with 10 million people making $40K each and not have a tax revenue problem.

'Expensive' native labor == lots of spending and lots of rax receipts.

The choice is yours gov'ts: continue to allow offshoring and labor gluts and continue to watch the country slide downhill, or stop this nonsense and we'll have a return to a booming economy.

Jan 26, 2011 8:32 PM Walter is a Nut Walter is a Nut  says: in response to Walter A Nodelman

Is this a Joke? Well lets see, Lets say we have a tax on each byte coming into the US, Then the global implication of the idea is - every country will have the same, and Every job that is being created in the US because of its sales outside - like Ebay, FB, Google, Apple will be taxed and charged by the other countries. whereby, they will either not go out and expand their markets or they will open new companies in the respective countries all the while reduing the number of jobs created here.

Great idea- Thank you, but no thanks.

Apr 11, 2011 9:07 AM textile exporter textile exporter  says:

It turns out that the firm had recently laid off 10 employees that had been doing similar data processing work. The chairwoman of the environmental finance oversight committee wanted to see $5 million in additional funding conditioned on the work being done in Minnesota, but the sponsor of the legislation was told that putting a no-outsourcing clause in his bill would make it unconstitutional. hope it will work.

Aug 26, 2011 6:11 PM Jack Thomsen Jack Thomsen  says: in response to Walter is a Nut

Who the hell cares if Ebay, Google and especially Apple expand their markets.  Apple just bought a million robots to replace suicidal Chinese workers... if Apple burned to the ground the world would be a better place!

actually... if GE burned to the ground... it might send a very clear message.. but only if the management were locked inside!!

Sounds like a plan... it's 1788... France - but nobody understands what's coming.

Aug 26, 2011 6:20 PM Jack Thomsen Jack Thomsen  says:

"Kennedy says offshoring will be "disruptive" in the short term" -- but not for Kennedy... these kinds of people make me root for urban mobs.

Where does he live... somebody needs to send a fertilizer bomb so he understands about short term "disruption"

I thought the necklace bomb for the daughter of a former fund manager in Sydney was a hoot.  Technology is going to be a bitch for this bunch.

It's 1788 France... but these clowns won't get it until the portable guillotines rumble past their Manhattan Apartments. 

Where is Robespierre when we need him ???


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