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Outsouring

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Category: Business

Autor: anton 19 April 2011

Words: 2211 | Pages: 9

Foreign outsourcing costs US workers more than just jobs. The impact of outsourcing stretches beyond the employee and has local, regional and global considerations. While many of us work our daily jobs and do our normal day to day tasks we rarely consider how the company down the street or across town affects us directly.

Before exploring the affects, it is best to explain the benefits which cause business to explore and choose this option. The primary consideration is of course, costs. Outsourcing in general allows business to defer functions to a company who specializes in specific services and have scale to handle the volumes at lower costs. An example of this is that of call centers. For a business to have a call center, they must have the hardware and technology. These expenses are on-going to keep up with the competition and typically require IT support staff necessary to maintain the hardware and software. Secondary considerations are the need to have the resources necessary to support the call volume regardless of whether anyone calls. A standard for the Insurance industry is one customer service representative per one thousand members (potential callers). Those reps require salaries, training, supervision, and miscellaneous benefits like vacation time, 401k, and medical and dental insurance. These costs quickly escalate and can exceed $60,000 for a fully loaded employee cost per employee. The cost for the supervision and management can exceed these costs by 25-30%.

The alternative is to find a company who manage and staff call centers. They typically provide a single price and cover all the costs of the center and are accountable to maintaining service levels, hiring and retaining staff, and training. This allows the outsourcing company to maintain set costs and focus on more core functions of their business like sales and business development. Now consider the ability to outsource these services to a company who resides in another country with lower labor costs.

Farrell, D., & Laboissiиre, M., & Rosenfeld, J (2006) provide great statistics which provide a great overview of the costs. They provided the following graph which shows the current hourly labor costs by country for engineering:

As you can see, the cost of labor is significantly lower in India, the Philippines, China and Malaysia. So businesses are quick to consider the costs and the potential to reduced their spend which in turn drops straight to the bottom line as increased profits by taking an expense and turning it into an asset.

Direct Impact

With the framework of the considerations, let’s explore the direct impacts. The affects to workers who are impacted directly by outsourcing are unemployment, loss of health care benefits and pension. At one time or another in your life you too where unemployed. Think about a time for a moment. How did you feel during that time? Were you depressed? Stressed? Lost? All of these are normal reactions but only cover the human side. Consider the average time it took to find a job for the “was 3.6 months” according to a study cited in CNNMoney.com (2005).

How long can you afford to pay your bills, your prescriptions, or food? Forget having four months of income saved just in case, most US workers live paycheck to paycheck. So how do these folks survive? If they are fortunate they get a job quickly or have some money saved. If not, they may ask for help from friends and family. If not, public assistance for food and rent which is provided by out taxes if they qualify and money is available.

Regional Impact

Now let’s look at this from a little wider perspective. Over the years as a business executive, I have faced several decision points on the aspect of outsourcing, both domestically and foreign. Each of these decision pointed faced many questions on what outsourcing will do for the local economy, especially since my company is one of the top employers in the region. Repeatedly, the decision to forgo increased profit potential to maintain employment for many workers has been the way to go, however, the increasing costs of the local workers causes the discussion every few months. I continue to hold true to the thought of keeping the local economy strong by employing local workers. This decision helps my organization when working with political clients and favors my organization over competitors who do outsource but we are becoming an exception and not the rule. Consider this example of the impact outsourcing has to a region:

You are an employer who has 100 employees and decide to outsource the majority of your worker force to India. You layoff 50 of your workers. Most of them find work within a few months, let’s use the average referenced earlier of “3.6 months.” But during this time, several need to be hospitalized for a chronic or acute illness. Since these individuals are unemployed, they are also uninsured. Consequently, the hospital and doctors absorb the costs of the services or they are on Medicaid and the taxpayers pick up these charges. Due to the decreased revenue of the hospitals and doctors, they in turn pass those expenses on to those insured, who in turn passes these costs on to the employer. The net result is a self-repeating process, which will only get worse over time unless we decrease the uninsured and unemployed workers without insurance coverage.

The example assumes the services are contextual meaning they are "impersonal services that need not be delivered face to face" (Blinder, 2006), and while the example above is a regional look, consider how that influences our economy. An article titled “Outsourcing Hurts American Workers" by A. Gussert offers some alarming statistics. Gussert (2005) states, "U.S. trade deficit shot up to a record $60.3 billion during November 2004, according to the U.S. Census Bureau". Gussert also offers another perspective, by asking why US companies and business people shouldn't consider outsourcing. Many benefits exist for companies and the laws currently allow such actions, why blame the business leaders for taking every advantage to make their business successful.

While I can understand the rational from Gussert, it is still a narrow focus. We need to look even further into this and consider the impact this will have over time. According to Farrell, Laboissiиre, and Rosenfeld (2006), "The U.S. economy has already weathered a much larger loss of manufacturing jobs than the decline in service jobs we expect to be caused by offshoring, without experiencing a corresponding decline in overall employment. Over the past 30 years, the share of manufacturing jobs in total U.S. employment has declined by 11 percentage points, to 21 percent, from 32 percent. By comparison, we estimate that only 11 percent of all U.S. service jobs could, even in theory, be performed remotely, and it is unlikely that all of them will move offshore during the next 30 years."

Using this logic offered by to Farrell, Laboissiиre, and Rosenfeld (2006) and historical reference one could conclude the global market has shifted as a result of these changes but replacing the lost jobs with new ones. Okay assume new jobs are in fact created, are those new jobs, equal or higher paying than those lost? To examine this I reference an article by D. Griswold (2004), who offers deeper understanding. He states, "Think of all the former typists, telephone operators, and bank tellers whose work has been replaced by computers and other machines." Wow, this takes the outsourcing discussion into a new direction. Should we not automate, gain efficiencies, or better our businesses simply to preserve employment of staff? Griswold further added, "only about two percent of job layoffs can be blamed on foreign outsourcing". Does this mean we should not care because the issue is bigger and more complex?

I think the answer to that question in obvious. We should care, so that we can plan and not be on the receiving end of this action. We need to further review this topic and get a broader understanding of the impacts and connections this topic has on us and the world. Anything short will leave you as a possible next victim.

National Impact

So far we have looked at direct and regional impacts which paint a less than favorable position. Now let’s consider the impact to the overall economy. This breaks down into a few main areas of consideration; trade rates, national unemployment rates, and work force availability.

According to research conducted the trade rates show very positive results for the US economy. According to Daniel Griswold, he sites research conducted by The McKinsey Institute which shows “every $1 spent on foreign outsourcing creates $1.12 to $1.14 of additional economic activity in the U.S. economy.” As part of this study they also projected what this would look like in 2008. The study showed that “the US economy will be $124 billion larger in 2008 because of outsourcing compared to an economy where the practice was restricted.” This is very interesting when considering the opposition to foreign outsourcing indicate that US jobs are being lost when in fact, this study shows it actually benefit US economics overall. Why this make sense is it allows US companies to continue to run business operations on a 24 hour schedule at reduced costs. Consider a US company who has normal 8 am to 5 pm operations in the United States. If they outsourced, they could run additional schedules, after US hours in other counties for a significantly reduced cost and run two to three times the production in the same 24 hour period. For manufacturing and other like businesses this is a huge benefit. That doesn’t even consider the savings the company would achieve from the elimination of shift differential pay to get US workers to work evening or overnight shifts.

Unemployment Rates are a major topic to oppose outsourcing. The average weekly unemployment rate of individuals applying for aid is “350,000” according to Griswold. Griswold also notes the 2002 study by Forrester Research Inc. which concluded the increase in lost jobs in 2015 would increase unemployment an additional “257,000 each year.” So, if the major impact of outsourcing is job losses, how can a “257,000” additional jobs for a year be a major concern. Sounds like we need to re-assess our priorities on this issue and find ways to reduce the major reasons for unemployment which totals 4.2 million workers annually.

The final aspect of the national scene is the issue of the availability of viable workers needed to perform specialized services. Foreign countries are seeing this shortfall and stepping up to meet the challenge. According to Farrell, D., & Laboissiиre, M., & Rosenfeld, J (2006), they note the increasing need to recruit and retain qualified workers. The focus on this is on services which would be done remotely and is benefited from the increases in technology to support remote services. The graph below by Farrell, D., & Laboissiиre, M., & Rosenfeld, J (2006), shows the potential jobs which could be outsourced, if appropriate technologies are employed, is an “estimated 11%” and the potential job categories which could benefit for outsourcing. As you can see, the major category is packaged software, followed closely by IT services. Where as, retail services has a very low percentage of potential job outsourcing. The main reasons for the difference is that the retain business has a direct customer contact and IT and package software services can be handled without face to face contact.

What can we conclude?

It is clear that outsourcing is a heated topic in political arenas and business. Supporters and opponents alike, have some very valid concerns which need to be addressed. But the data is very clear in that foreign outsourcing is not a major threat to US jobs. It produces significant trade in the form of insourcing. And has specific and clear benefit to US companies. So what is really at issue and need to be discussed is the perception of outsourcing. We need to help the country understand this very complex issue and break it down into simple terms. As an overall society it is clear to me at this time, outsourcing has significant benefit to the US. We a citizens and employers need to determine if outsourcing meets our specific needs or not but we can not continue to state outsourcing is bad. It is clearly not.

References

Farrell, D. (2004). Governing globalization [Electronic version]. McKinsey Quarterly. (3), 3-4. Retrieved November 2, 2006, from EBSCO Publishing

Gussert, A. (2005). Outsourcing Hurts American Workers [Electronic Version]. State

Legislatures. 31(6). Retrieved November 2, 2006, from EBSCO Publishing.

Blinder, A. (2006). Offshoring: The Next Industrial Revolution? [Electronic Version]. Foreign Affairs. New York. 85(1). Retrieved November 2, 2006, from EBSCO Publishing.

Farrell, D., & Laboissiиre, M., & Rosenfeld, J (2006) Sizing the Emerging Global Labor Market: Rational Behavior from Both Companies and Countries Can Help It Work More Efficiently. Academy of Management Perspectives, 20(4), 23-34. Retrieved December 10, 2006, from EBSCO Publishing.

Griswold, D. (2004). Foreign Outsourcing Invigorates US Economy [Electronic Version]. Cato Institute. Retrieved December 10, 2006, from EBSCO Publishing.

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