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 skills.

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 development.

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 just $.33.

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.