Southwest Review of International Business Research, Vol. 16, No1, March 2005

AN ANALYSIS OF THE IMPACT OF OFFSHORE OUTSOURCING OF JOBS ON THE U.S. ECONOMY: ECONOMIC PROJECTION Gbolahan Osho University of Houston-Downtown Nasrin Nazemzadeh Tomball College Nora Loera University of Houston-Downtown ABSTRACT Offshore outsourcing is a fast-growing aspect of the world economy and a hotly debate issue. This paper evaluates the impact of offshore outsourcing of jobs on the U.S. economy, why companies move overseas in the first place, what incentives/benefits they receive, how researchers anticipate this phenomenon will affect the U.S. workforce and the anticipated number of jobs projected to move offshore. While this paper evaluates offshore outsourcing in general, the focus is primarily on white-collar jobs moving overseas and its impact. While it is clear that the issue of offshore outsourcing may increase again as soon as the upcoming election is out of the picture, it is not an issue that is soon to end. The competitive edge that some developing countries, such as India, have developed is in part due to the high quality services at lower costs. INTRODUCTION The issue of outsourcing U.S. jobs to other countries also known as offshore outsourcing has been a debatable topic since the early 1990 s, when it became more prevalent. Offshore outsourcing mainly refers to outsourcing to firms in foreign countries, often to take advantage of labor arbitrage and the low cost overall. In the past years, the process of outsourcing has increase and many jobs have been sent to developing countries. Typically, educated workers in developing countries, such as India or China, work for a much lower wage than do similarly educated workers in developed countries, such as the United States. The key point of outsourcing is that savings from the lower wage rate must exceed the increased costs of management and risk associated with offshore outsourcing for it to be economically viable and profitable for the company. Outsourcing is a much debated issue in the United States, especially in the national media. When the U.S economy began to pull out of recession in 2001 and unemployment did not decrease as expected, outsourcing was blamed as a contributing factor to this jobless recovery. Information Technology was a particularly soft sector, and many American programmers lost their jobs to lower-paid foreign counterparts such as India. Many economists however assume that the higher-than-expected unemployment numbers were not the result of offshore outsourcing, and that offshore outsourcing has actually had a positive impact on the American economy. Undoubtedly the debate will continue since there are many others that believe outsourcing to be evil to the US economy. Some of the advantages of outsourcing are that many firms found outsourcing to be an effective way to reduce cost and maximized profits, since jobs in foreign countries are cost effective and American jobs cost more (Clott, 2004). Some economists assumed that this money being saved would eventually come back into our economy and thus create more jobs at home. Outsourcing can also maintain the US position as a global competitor. With outsourcing, the companies can control their capital cost since it cuts the cost and converts the fixed costs into variable cost, which can avoid large expenditures in the company. It also allows companies to reduce risk and to contribute to the development of new markets (Diamond, 2000). 157

There are variables that usually determine what, if anything, a firm will outsource. Outsourcing occurs within many industries, with the Information Technology sector being one of the more common. With the current movement of white-collar jobs moving overseas, it is causing a bit of apprehension among domestic workers. Some are asked to train their new foreign replacements while others are given the option to move overseas or be without their job. The objective of this paper is to evaluate the impact of offshore outsourcing of jobs on the U.S. economy. Specifically, to determine why companies move overseas in the first place, what incentives and potential benefits they receive, how researchers anticipate this phenomenon will affect the U.S. workforce and the anticipated number of jobs projected to move offshore. While this paper evaluates offshore outsourcing in general, the focus is primarily on white-collar jobs moving overseas and its impact. LITERATURE REVIEW There are various ideas and strategies regarding the offshore outsourcing of U.S. jobs. Kishore, et al (2003), with more of an IT (Information Technology) focus, defines outsourcing as the contracting out of various information systems functions such as managing of data centers, operations, hardware support, software maintenance, network, and even application development, to outside service providers. IT outsourcing has been one of the more well known industries whose lower level programming jobs have been outsourced to other countries where the job can be done for a fraction of the cost in the U.S. Many U.S. companies outsource these types of jobs to countries such as India, China and Russia. Peled (2000) states that outsourcing is a management strategy that farms out non-core organizational activities to vendors who specialize in these activities in order to execute them more efficiently, reliably and economically. The weak labor market, slow job creation and the lengthened economic recovery have generated a vast amount of concern about the outsourcing of production and jobs to other countries (Gnuschke, 2004). Outsourcing occurs when an organization transfers some of its tasks to an outside supplier. Specifically, offshore outsourcing is when these tasks are sent to another country (Gnuschke, 2004). Outsourcing may take the form of constructing facilities and the hiring of labor (offshore) to produce services or products for sale and consumption offshore. However, this also includes the utilization of offshore facilities and labor with the intention to import these goods and services back into the U.S. for consumption (Gnuschke 2004). Gnuschke (2004) states that in both scenarios, the purpose is the same: take advantage of lower production costs, increase profits, and remain competitive in an increasingly global economy. With the increase in global competition, it is necessary for companies to become more creative on cutting costs and increase profits. Offshore outsourcing is the answer for many U.S. companies. Some examples of American companies are: GE Capital (India, China, Ireland); American Express (India, Philippines), Bank of America (India, Philippines), and Citigroup (India, Philippines, Malaysia, Taiwan, Singapore). Gnuschke (2004) states that outsourcing is likely to increase, especially in the manufacturing sectors and also the service sectors, such as healthcare. But, how much is actually being outsourced? That is another debatable issue. Since the U.S. Commerce and Labor Departments have no system to track the number of jobs moving overseas, and no plans are in place to implement one, many educated guesses are provided (Hira 2004). A current trend that is occurring is the outsourcing of white-collar jobs, where previously it was mostly high-wage blue-collar workers. These white-collar jobs that are moving overseas at an accelerating pace causes concern because it has the potential to have a profound impact on the economy, workforce, technological innovations and politics (Hira 2004). Hira (2004) says that states with high concentrations of information technology workers, such as Oregon and Connecticut, have experienced the most negative effects and warn that they should consider risks from offshore outsourcing. A new legislation, called the Keep American Jobs at Home Act has been recently proposed by Senator Ron Wyden (D-Oregon). This purpose of this Act is to eliminate tax deductions for companies that outsource American jobs. This also includes those for executive compensation and for the cost of training overseas workers related to outsourcing. Companies would no longer be able to defer taxes on profits gained from shipping jobs overseas (Bend.com 2004). Another major provision would provide companies that do not send jobs overseas with immunity from shareholder lawsuits over the decision. 158

The service sector accounts for more than 80 percent of total US employment and approximately 500,000 of these jobs have been outsourced in the past three years (Bend.com 2004). The Wyden bill is expected to be referred to the Senate Finance Committee. The outcome of the Wyden bill will hold an interesting future for offshoring outsourcing. Southwest Review of International Business Research, Vol. 16, No1, March 2005 DATA ANALYSIS The trend of the white-collar, professional jobs moving overseas was not such a threat in the past because it was mostly the manufacturing sector that was affected. Now, the treasured white-collar jobs are at risk. The Table 1 illustrates the occupations that the U.S. Bureau of Labor Statistics considers at-risk to offshore outsourcing: Table 1: U.S. Employment in Occupations at Risk to Outsourcing Sectors Employment 2001 Average Annual Salary 2001 Occupations at risk of outsourcing 127,980,410 $34,020 Office Support 8,637,900 $29,791 Computer Operators 177,990 $30,780 Data Entry Keyers 405,000 $22,740 Business/Financial Support 2,153,480 $52,559 Computer and Math Professionals 2,825,870 $60,350 Paralegals/Legal Assts. 183,550 $39,220 Diagnostics Support Services 168,240 $38,860 Medical Transcriptionists 94,090 $27,020 Total in Outsourcing Risk Occupations 14,063,130 $39,631 Percent of all Occupations 11.0% Source: U.S. Bureau of Labor Statistics While this analysis will not focus on all industries, the table above illustrates the vast range of employment sectors that are at risk in the U.S. from office support (includes office and administrative support categories) to paralegals and medical transcriptionists. These statistics show a total 11 percent of all occupations at risk. Most of these occupations are at risk of being outsourced primarily to India and East Asia. Some of the contributing factors include globalization, faster communications, lower costs, and the Internet (Gnuschke 2004). Service-sector jobs that are at the highest risk all share common attributes: No face-to-face customer servicing requirements High information content Work progress is telecommutable and Internet-enabled Large wage differential gap with similar occupation in destination country Low set-up barriers Low social networking requirements (Gnuschke 2004). According to a study by the Global insight and North American Industry Classification System, outsourcing abroad will well to created new US jobs. See Table 2 below to see the study: (Jobs that will be created by outsourcing). Table 2: Projected U.S. Jobs that will be created by Outsourcing Occupations 2003 2008 Natural Resources & Mining 1,046 1,182 Construction 19,815 75,757 Manufacturing 3,078 25,010 Retail Trade 12,552 30,931 Transportation and Utilities 18,895 63,513 Education and Health Serv. 18,015 47,260 159

Financial Services 5,604 32,066 Government -3,393 4,203 Global Insight and North American Industry Classification Systems 160

According to Outsourcing followers, outsourcing and off shoring are not the threat to the US economy that they have been made out to be. An example given by a Wall Street article written by Daniel Drezner mentions that Delta Airline outsourced 1,000 call center jobs to India in 2003, which allow the company to saved up to $25 million which in turn allowed the firm to add 1,200 reservation and sales positions in the United States. There is an important variation in outsourcing depending on the size of the outsourcing contract, where the company s headquarters are located and the size of the company. A recent study shows that companies with larger outsourcing contracts - $10 million or more annually are outsourcing user support, data networking and disaster recovery more than firms with smaller contracts. Larger companies those with $10 million or more in annual sales use outsourcing as an opportunity to focus on their core business more than smaller firms (Goldsmith 2004). The Figure 1 demonstrates the variety of jobs being outsourced as of 2000 (Hira 2004): Figure 1: Variety of Jobs Being Outsourced 4% 3% 2% 1% 11% 26% 53% Office Computer Business Sales Architecture Legal Art Design Source: John C. McCarthy 3.3 million U.S. services jobs to go offshore. Tech Strategy Research Brief, Forrester Research, Inc. November 11, 2002. The estimates of potential jobs that would be outsourced vary. Forrester Research had estimated almost 600,000 U.S. service jobs will be outsourced by 2005 and possibly up to 3.3 million by 2015. Put into perspective, the 15-year spread calculated to 220,000 displaced jobs per year. The total employment in the U.S. is approximately 130 million and 22 million more jobs are expected to be added between now and 2010. These numbers conclude that outsourcing would affect less than 0.2 percent of employed Americans (Gnuschke, 2004). An even more recent report by Forrester Research shows their estimate of offshore outsourcing has increased by 40% from their previous report of 3.3 million jobs by 2015 that is 830,000 by next year (Offshore Outsourcing Staff, 2004). Forrester Research does explain that the only reason that could slow offshore outsourcing are global geopolitical concerns, such as the current situation in the Middle East getting worse or renewed tension between India and Pakistan. Other researchers may consider these estimates drastic. The problem lies in the fact that these estimates are no more than educated guesses since this trend of offshore outsourcing has just begun. The truth is that the U.S. Commerce and Labor Departments have no system to track the number of jobs moving overseas, and no plans are in place to implement one (Hira. 2004). Figure 2 illustrates the total number of U.S. jobs moving offshore, as predicted by Forrester Research. 161

Millions of Jobs Southwest Review of International Business Research, Vol. 16, No1, March 2005 3.5 3 Figure 2: Total Number of U.S. JobsMoving Offshore, 2000-2015 3.3 2.5 2 1.5 1.6 1 0.5 0 0.1 0.6 2000 2005 2010 2015 Source: Forrester Research, November 2002 Outsourcing, at least in the short term, does result in the loss of jobs in the U.S., but Gnuschke (2004) states that the U.S. must do a better job in providing more opportunity in the U.S. for those that have lost them. Of course, this includes the re-training of displaced employees to equally high-tech and highskilled positions and not to low-skilled jobs. Gnuschke (2004) poses this issue to the Bush or Kerry administration that will lead the U.S. for the next four years. While the lower prices do benefit the consumer eventually, is this an appropriate long-term option? The addition of nearly 1 million new U.S. jobs since the beginning of the year is likely to strengthen the argument that the total loss of U.S. jobs to foreign countries is not a threat to the economy. Since the economy has been improving, the outsourcing debate has settled a bit. The Bush administration s view is that sending U.S. service jobs overseas is a plus for the economy in the long run since foreign workers can do the same jobs cheaper, therefore, reducing costs for U.S. consumers and companies (Schroeder and Rebello, 2004). This new issue of outsourcing is different than the debate in the 1980 s because, this time the workers are the ones losing and not the companies. In the 1980 s, many companies turned to the government for foreign competition relief. In this case it s the workers that are being displaced while the companies reap the benefits. As mentioned, the numbers are estimated guesses, but one fact that is very clear is that the number of companies announcing the formation or expansion of overseas operations is increasing rapidly. That creates the need for domestic companies to freeze hiring or downsize their workforce (Hira, 2004). The dispute continues regarding the scale and scope of its effect on the U.S. economy and workforce. Some opponents perceive offshore outsourcing as a threat to America s future. In an article titled Lethal Outsourcing, Paul Craig Roberts says, The U.S. gave away its agricultural knowledge, its education, its technology, its manufacturing jobs and is now giving away its IT jobs. However, proponents suggest that the offshore outsourcing issue should not cause concern because the number of jobs moving overseas is miniscule compared to the total workforce. Offshoring has contributed, however, to the high unemployment rates in high-technology occupations. In 2003 and 2004, America has experienced the worst job market for electrical and computer engineers in 30 years. The dot-com bust only partially explains this decrease in available jobs (Hira, 2004). Data shows there are a number of reasons why companies move overseas. Some factors include tax incentives by foreign governments, access to foreign markets, around-the-clock production capabilities, and the most important factors, lower wage rates for highly educated workers. Understandably, overseas workers cost less because their cost of living is much cheaper and can afford to be paid less (Hira, 2004). Hagel adds that in addition to the lower labor costs, companies are able to hire more middle managers that can then devote more time building the skills 162

of their employees and improve processes. In addition, the best offshore companies tend to invest heavily to recruit their staff because they can afford to be more selective (Hagel, 2004). The aforementioned proposed Wyden bill, which is designed to punish companies that outsource American jobs, should have a remarkable effect on those companies. Will the company benefits of outsourcing still outweigh the lost benefits in the U.S.? Hira (2004) says those states with rather high concentrations of high-tech workers have been the ones affected by the lack of jobs. They face a higher risk because the leading wave of white-collar job loss has been in the high-tech sector. Since state agencies have never had to find jobs in this industry, they lack the experience in placing these workers elsewhere. Another impact is the loss of tax revenues for the U.S. government. These white-collar jobs have been providing constant revenue for the government until now. In addition, those who do remain in the high-tech industry will feel the downward pressure on wages, therefore, generating less tax revenue. CONCLUSION AND SUMMARY While it is clear that the issue of offshore outsourcing may increase again as soon as the upcoming election is out of the picture, it is not an issue that is soon to end. The competitive edge that some developing countries, such as India, have developed is in part due to the high quality services at lower costs. In addition, the little relevance a company s physical location has (due to the Internet) and how fast and inexpensive information travels plays a factor as well. Firms, at least for now, will continue to increase their productivity and manage low costs by doing what they do well and outsourcing the rest. This, however, may partially be in the hands of the politicians due to the proposed Wyden bill. Should this bill come into effect, it will make a significant difference to those firms that currently choose to offshore outsource. What will happen then? Will consumers cause uproar due to the high prices because companies have decided to stay in the U.S. and pay U.S. worker wages? The varying statistics make it difficult to confirm how, in fact, offshore outsourcing is affecting or will affect the U.S. economy. The facts are, however, that there are firms that choose to move their operations overseas for various reasons. What this will do in the long run to our economy and to our employment rate cannot be determined yet. It is safe to say that offshore outsourcing, especially of whitecollar jobs, has no clear answers being that the issue is quite new and the estimated guesses proposed now may not be realized for years to come. REFERENCES Bend.com. 16 June 2004. Wyden bill targets outsourcing U.S. jobs offshore. http://www.bend.com/news/ar_view%5e3far_id%5e3d16201.htm Clott, Christopher B. Perspectives on Global Outsourcing and the Changing Nature of Work Business, and Society Review. Blackwell Publishing 2004. Diamond, J. Outsourcing and the implications for human resource development Journal of Management Development, Vol. 19, Issue 8. 2000. Gnuschke, John E. (Spring 2004). Outsourcing production and jobs: Costs and benefits. Business Perspectives; Vol. 16 Issue 2, p12, 6p Goldsmith, Neal M. (2002). Outsourcing Trends. The Conference Board. Hagel III, John. Offshoring goes on the defensive. McKinsey Quarterly; 2004 Issue 2, pg 82, 10p. 163

Hira, Ron (2004). White-collar jobs move overseas: Implications for states. Spectrum: Journal of State Government; Vol. 77 Issue 1, p12, 4p. Kishore, Rajiv; Rao, H.R.; Nam, K.; Rajagopalan, S.; Chaudhury, A. (2003). A relationship perspective on IT Outsourcing. Communications of the ACM; Vol. 46 Issue 12, p 86, 7p. Offshore Outsourcing World Staff (2004). Forrester ups outsourcing forecast. http://www.enterblog.com/200405230222.html Peled, Alon (2000). The politics of outsourcing: bureaucrats, vendors, and public information technology (IT) projects. Information Infrastructure & Policy; Vol. 6 Issue 4, p 209, 17 p. Schroeder, Michael and Rebello, Joseph (2004). U.S. Survey finds few jobs moving to offshore homes. Wall Street Journal. 11 June 2004. 164