Outsourcing: A Win-Win Game?
The dramatic loss of jobs in the United States, an estimated
1.3 million that would be moved offshore by the end of the
decade, half to India has sparked anger in the US.
A two-day conference instructing companies on moving technology
work and other jobs overseas drew picketers, in one of the
first demonstrations protesting the practice to hit the San
Francisco Bay Area.
Faced with an electoral backlash, some U.S. states have legislated
to ban government agencies from moving tech services overseas
and unions are fighting what they see as an alarming trend.
The outsourcing of jobs to China and India is not new, but
lately it has earned a chilling new adjective: professional.
Advances in communications technology have enabled white-collar
jobs to be shipped from the United States and Europe as never
before, and the outcry from workers who once considered themselves
invulnerable is creating a potent political force.
But the NASSCOM study by New York-based business research
consultancy Evalueserve said a combination of skilled immigration
and "offshoring" of jobs was vital to head off a
looming labour shortfall of 5.6 million by 2010 that would
undermine the U.S. economy.
In China, foreign-invested enterprises employ about 3.5 million
workers. That number has grown 3 to 3.5 times over the past
decade. Add in the subsidiaries funded out of Hong Kong, Macao
and Taiwan, there are another 3.25 million workers. Employment
in the information technology business in India is 650,000
right now and is supposed to go up another three to four times
in the next five years. This suggests America is short of
jobs as never before and the major candidates for offshore
outsourcing are ramping up employment as never before.
Nearly 2.8 million jobs have been lost since George Bush
took office in January 2001. In response, he has offered some
fairly conventional economic medicine: tax cuts, deficit spending
and low interest rates to jump-start a business recovery,
which will ultimately create jobs.
Look at what's gone on in China over the last 10 years. There
are 300 million people in those eastern coastal provinces
who have seen an extraordinary pickup in their standard of
living. Now it is people in the developed world who are being
left behind. That is very difficult to resolve.
Out in the San Francisco Bay Area, what look like high-paid,
sophisticated IT jobs going offshore, but really they're not
that sophisticated. What is happening, for example, with Accenture,
is that the role the consultant plays is changing. Low-skill
jobs like coding are moving offshore and what's left in their
place is the need for far more advanced project-management
Last year China received $53 billion of foreign direct investment,
making it the largest recipient in the world. India got $2
billion. Services don't need FDI. Services just need people
and Internet-based connectivity. The service sector outsourcing
model is a totally different, radical opportunity for economic
China for all practical purposes has an infinite supply of
labor: 400 million in its urban population and another 900
million in the rural area. The average wage of a Chinese worker
is still 2.5 percent to 3 percent of the counterpart in the
high-waged developed world. Those are disparities that will
be around for a long time.
Multinationals such as American Express Co (AXP), General
Motors Corp (GM) and Cisco Systems Inc (CSCO) now base various
functions in India, including payrolls administration, mortgage
processing, equities analysis and customer call centres.
This is creating a jobs and investment boom in the world's
second most populous nation.
Vollenweider said for every 100 jobs moved to outsourcing
centres such as India or South Africa, 15 were created in
the United States to manage them and for every $100 spent
on offshore work, about $140 was reinvested in the U.S. economy.
This estimated reinvestment included the effect of outsourcing
on expanding and creating new markets for U.S. firms, such
as deals for infrastructure projects in outsourcing centres.
The 18-page McKinsey Global Institute report entitled, “Offshoring:
Is It a Win-Win Game?” says the economic benefits of
“offshoring” are substantial to the US. “As
is commonly realized, the prime motivation of offshoring is
that it reduces labor costs.”
The report cites an example of a software developer who costs
$60 an hour in the U.S. costs only $6 an hour in India.
The MGI report postulates that the United States receives
up to $1.47 in value for every dollar spent on offshore outsourcing.
The country where the labor is performed, in contrast, receives
Who wins in offshoring and who loses?
It's a global-wealth-creation story over all. The Indias
of the world are certainly benefiting. We see that in terms
of job growth, which is dramatic; through the rise in consumption,
which is showing up as demand for US goods, which is not as
rapid as it might be.
And it's ultimately a global wealth story for the outsourcers.
They are getting huge savings they can redeploy in positive
ways. Earnings for the activities being done in India by U.S.
companies are repatriated. If they have faith in the job creation
opportunities of this economy - and that's at some point an
open question - they have the ability to redeploy that labor
to more productive and higher output use. The framing of this
debate as a zero-sum game is false. This is a win-win game.