Thursday, September 30, 2004

Is outsourcing good or bad?

As my mother sat on the phone for what seemed like an eternity for the seemingly simple process of trouble shooting an uncooperative computer a revelation became clear…whomever she was speaking to had not the foggiest idea of how to fix her ailing PC. Hours passed by as she attempted to explain that her computer was not booting up correctly and that she had no Internet access. In the final coup de gras of this exercise in futility the technical support expert on the other end of the telephone informed my mother that they could not address the problem without an Internet connection. Mustering up every ounce of self control she possessed my mom responded incredulously, “Exactly! My PC will not connect to the Internet! That’s the problem.” My dear sweet mother, who is normally exceedingly patient, was beside herself with exasperation at having dealt with tech support personnel that spoke broken English, were not technically proficient, and could not grasp simple concepts. Such is the world of outsourcing.

During the 1990’s the American landscape witnessed an unprecedented explosion of the information technology industry. Along with the ever expanding world of IT came another, more ominous proliferation of what’s come to be known as “outsourcing”. This is the practice of American companies moving jobs offshore to countries such as India, China, and The Philippines in an effort to lower costs and spur domestic job growth. Companies such as IBM, Hewlett Packard, Dell, Cisco, have shipped hundreds of thousands of jobs overseas and, according to an article in the March 30, 2004 issue of Forbes Magazine, over the last three years over 400,000 service and 1 million manufacturing jobs have been outsourced to other countries. Forrester Research estimates that over 3.3 million jobs will moved offshore. According to Stephan Roach, the chief economist at Morgan Stanley, “The U.S. service sector is 6.2 million jobs shy of the hiring that typically accompanies an economic recovery at this stage, in part because of the move overseas.”[1] Researchers at Cal Berkley also estimate the potentially 14 million jobs are vulnerable to outsourcing.

In the beginning, the vast majority of outsourced jobs were fairly mundane tech support and customer service positions. This has changed dramatically. Information technology companies continue to ship vital programming and software development jobs overseas. Silicon Valley, the one-time Mecca of the world-wide IT industry, has been the hardest hit. 200,000 Silicon Valley workers have lost their jobs since 2001. In fact, Bangalor, India now employs more computer engineers than Silicon Valley, a gap of about 20,000 and growing fast. An increasing number of credit card companies are also moving their call centers offshore. The U.S. Department of Labor speculates that in 2005, 587,592 jobs will be outsourced and that number could climb to 1.5 million in 2010 and 3.2 million by 2015.

The debate about the merits of outsourcing rages on. A new report from the bipartisan Government Accounting Office (GAO) states that outsourcing constituted barely four percent of American corporate foreign investment. GAO estimates vary from 100,000 to 500,000 IT jobs could be lost to offshore companies in the next few years. The Bureau of Labor Statistics states that only 2.5 percent, or about 4,600 positions, of layoffs in the first quarter were directly attributable to outsourcing. At this point the GAO says that a myriad of factors effect the economic impact of outsourcing and that accurately determining said impact is extremely difficult.

Another facet of this controversy is outsourcing of state and federal government services. Currently, 31 states outsource various projects and the federal government has increased its reliance on foreign labor for vital defense, technology, and accounting needs. Some states are toying with the idea of legislation that would prevent any outsourcing of state contracts and services and Washington, D.C. could be moving in the same direction. Colorado senatorial candidate Ken Salazar has proposed offering tax incentives to companies who produce goods and services with domestic labor. Salazar has also suggested taxing corporate profits from their foreign subsidiaries. Some in Washington agree. A failed ballot proposal in Colorado gained national attention for limiting work on state contracts to U.S. citizens or legal resident immigrants.

There are hidden costs to outsourcing jobs to offshore companies. In Bangalor the cost of living and real estate has sky rocketed to record levels as thousands are earning more than ever before. Consequently the increasing cost of living in these areas could backfire as worker lifestyles improve and companies demand more money to keep up with the upward spiral in essentials of daily living. When faced with the specter of escalating employee demands some companies will simply fold up their tent flaps and move elsewhere leaving employees stranded and areas strapped.

In this stagnant economy we can ill afford the loss of one job to overseas providers. Not only have the levels of confidence in customer service declined the reputations of HP, Dell, IBM, AT & T, etc. have taken a beating in the court of public opinion. While the economic impact of outsourcing is still largely indecipherable opinion has a way of becoming reality.
[1] Forbes Magazine, March 30, 2004, “The outsourcing debate: A tail of two cities” by Kerry A. Dolan and Robyn Meredith.