Outsourcing

Workers at the New Balance factory in this suburb of Boston create the sound of "made in the USA." The company, striving in a world dominated by Nike, Adidas and Reebok, keeps 25 percent of its manufacturing in America -- the only company to make any athletic shoes here. "Our labor costs are 10 to 12 times higher," says President and Chief Operating Officer Jim Tompkins. "But productivity at New Balance's five U.S. plants is much greater, lowering other costs. We're able to deliver into the market in a matter of days, where our competitors are looking at a matter of weeks and sometimes months."

A new era of globalization began in the 1980s and brought along a significant decline in costs of transportation, communication, production, and considerably improved inter country competitiveness; and broke down trade and cultural barriers among countries. Over the years as world trade has liberalized, outsourcing has become a favorable tool of businesses in the developed world. Businesses are increasingly turning to India, China and Costa Rica to take advantage of their English-speaking, educated and well trained workforce. In the next pages I will try to highlight the Pro and Cons of offshore Outsourcing, outlining the current and future trends in Outsourcing as well as the ethical implications.

The trend of relocating jobs to other countries is not a new development in the United States as manufacturing jobs have declined ever since American companies started to establish factories abroad to take advantage of lower cost structures and wages. The decline in manufacturing jobs, however, was compensated for by greater job opportunities in the service sector. Since most jobs in the service sector were higher paid 'white-collar' jobs, losing the relatively low-paid manufacturing jobs to overseas competitors was considered a bearable set back. With rapid advances in information and communication technology and the availability of highly skilled and motivated workforce in far-flung countries such as India, "safe" jobs in information technology, human resources, real estate management, accounting, customer support are now being shipped overseas as well. Although I am a strong believer in the theory of comparative advantage (everyone gains as long as each country specializes in what it does best) I must say that I do not agree with the current offshore Outsourcing trend. Is it ethical to outsource jobs, and, if so, what are a corporation's responsibilities when doing so?

What is outsourcing?

Outsourcing became part of the business lexicon during the 1980s and refers to the delegation of non-core operations from internal production to an external entity specializing in the management of that operation. Outsourcing is utilizing experts from outside the entity to perform specific tasks that the entity once performed itself.

Pros and Cons of Outsourcing

Economists generally analyze the issues of Outsourcing in terms of two parameters: efficiency and equity. Efficiency refers to how much wealth is created; equity refers to how fairly the wealth is distributed. They argue that all kinds of outsourcing increase efficiency; that's why companies use it to increase profits making business owners, including shareholders, become richer and consumer products are available at lower cost. The positive impacts of outsourcing include also lower inflation, increased productivity and lower interest rates. This gives a boost to business and consumer spending and improves the overall state of economic activity. Moreover, a leaner cost structure makes U.S. producers more competitive in global markets, which should create more jobs. Blocking outsourcing thus imposes hidden costs.

From my research I can say that indeed outsourcing brings real benefits for companies and customers, in the fact that it helps companies cut costs and stay ahead of the competition, citizens in developed counties benefit of high quality products at a cheaper rate and for the workers in developing countries Outsourcing is being seen as a boom. While I am not a strong sustainer of Outsourcing, I believe that it is a growing trend in today's economy and if done in the right way on a long term basis its benefits can overcome the drawbacks.

Cons

Many critics of off-shore outsourcing claim that economic rationale is not enough for firms to head this way, that outsourcing damages the local labor market. They agreed that there are sizeable cost savings, but according to them social costs to their economic and education systems are even greater. Outsourcing causes job displacement as many tasks in the software and telemarketing sector have been moved to India and elsewhere. Who is ready to shoulder the "responsibility" of long-term social costs caused by a shift in the changing pattern of college courses being taken up by American students? Should they stop studying computer programming and other personal selling courses because they will be undertaken by Indian and Chinese students at a fraction of their working rates?

Facts

In the U.S, global outsourcing of IT employees has improved the Gross Domestic Product quite to a substantial extent. The research paper, Global Insight states that "by 2008, real GDP is expected to be $124.2 billion higher than it would be in an environment in which offshore IT software and services outsourcing does not occur. Real exports were $2.3 billion higher in 2003 and are expected to be $9 billion higher by 2008."

However, it can not be denied that outsourcing IT employees from other low-cost countries causes IT employees in USA to lose their jobs. A study by Forrester Research predicts that U.S. companies will transfer 3.3 million service jobs overseas by 2015, compared with just 102,000 jobs shifted in 2000. (Exhibit 1) According to Deloitte Consulting, 2 million jobs will move from the United States and Europe to cheaper locations in the financial services business alone. (Global Insight, 2004) Bureau of Labor Statistics and the International Labor Organization, U.S. manufacturing average hourly compensation is $21.33, in Mexico: $2.38 and in China less than one dollar an hour.(Exhibit 2)t

Frontline World reported last year that over half of Fortune 500 companies have moved jobs offshore, including famous names from many fields: Oracle, Dell, HSBC, Delta Air Lines, Novartis, J.P. Morgan Chase, Hewlett-Packard, American Express, British Airways. More are expected to follow. But the impact of global sourcing on employment differs by industry sector. There are major industry groups that are expected to gain a significant number of incremental jobs over the next few years due to