Offshore OutsourcingOffshore OutsourcingTravis Larsen, Lara Osmond, Billy Palmer, Kyle Smith, April Young, John Youngberg

Travis Larsen, Lara Osmond, Billy Palmer, Kyle Smith, April Young, John Youngberg

Background:Offshoring and Outsourcing

Background:Offshoring and Outsourcing

These terms have had various meanings and are used interchangeably in some of the literature, to clarify:

Outsourcing: subcontracting business outside of the company

Offshoring: moving business from one country to another

Offshore outsourcing: transferring business outside of the country, to another firm

Most of the research pertaining to offshore outsourcing simply call it outsourcing, we will do the same

These terms have had various meanings and are used interchangeably in some of the literature, to clarify:

Outsourcing: subcontracting business outside of the company

Offshoring: moving business from one country to another

Offshore outsourcing: transferring business outside of the country, to another firm

Most of the research pertaining to offshore outsourcing simply call it outsourcing, we will do the same

Background:Reasons for offshoring

Background:Reasons for offshoring

Businesses outsource for the purpose of cutting costs and raising profits. An early example of outsourcing in America in the 1970’s, IBM developed the IT industry in India.

Economically, if some people can use some of their skills more cheaply than others, then those people have the comparative advantage. The idea is that countries should freely trade the items that cost the least for them to produce.

Businesses outsource for the purpose of cutting costs and raising profits. An early example of outsourcing in America in the 1970’s, IBM developed the IT industry in India.

Economically, if some people can use some of their skills more cheaply than others, then those people have the comparative advantage. The idea is that countries should freely trade the items that cost the least for them to produce.

Background:How it came to be:

Background:How it came to be:

Production offshoring got its big push when the NAFTA made it easier for manufacturers to shift production facilities from the US to Mexico.

After its accession to the WTO, China emerged as a prominent place for offshore outsourcing: Cheap prices through very low wage rates, cheap

loans, land, and huge economies of scale based on cities with populations of over a million workers.

Currently, India's engineering talent has made India the offshoring destination of American high-tech firms, lead by HP, IBM, Intel, AMD, Microsoft, Oracle, and Cisco.

Production offshoring got its big push when the NAFTA made it easier for manufacturers to shift production facilities from the US to Mexico.

After its accession to the WTO, China emerged as a prominent place for offshore outsourcing: Cheap prices through very low wage rates, cheap

loans, land, and huge economies of scale based on cities with populations of over a million workers.

Currently, India's engineering talent has made India the offshoring destination of American high-tech firms, lead by HP, IBM, Intel, AMD, Microsoft, Oracle, and Cisco.

A Brief History of Outsourcing

A Brief History of Outsourcing

Outsourcing has been practiced for over a hundred years…

In the early years of US History, America's covered wagon covers and

clipper ships' sails ScotlandIndia

India’s textile manufacturingEngland

Outsourcing has been practiced for over a hundred years…

In the early years of US History, America's covered wagon covers and

clipper ships' sails ScotlandIndia

India’s textile manufacturingEngland

A Brief History of Outsourcing

A Brief History of Outsourcing

More recently, in the U.S. in the 1970’s, it was common for computer companies to export their payrolls to outside service providers for processing.

In 1979, British voters elected Margaret Thatcher as their prime minister, and in 1980 U.S. voters elected Ronald Reagan as their president. They worked (as did their successors) to create and

sustain agreements and organizations to promote free trade.

The General Agreement on Tariffs and Trade (GATT) The North American Free Trade Agreement (NAFTA) The formation of the European Union The World Trade Organization (WTO), which superseded

the GATT in 1995

More recently, in the U.S. in the 1970’s, it was common for computer companies to export their payrolls to outside service providers for processing.

In 1979, British voters elected Margaret Thatcher as their prime minister, and in 1980 U.S. voters elected Ronald Reagan as their president. They worked (as did their successors) to create and

sustain agreements and organizations to promote free trade.

The General Agreement on Tariffs and Trade (GATT) The North American Free Trade Agreement (NAFTA) The formation of the European Union The World Trade Organization (WTO), which superseded

the GATT in 1995

A Brief History of Outsourcing

A Brief History of Outsourcing

Continuing into the 1980’s, accounting services, payroll, billing, and word processing all became outsourced work.

Until this point, the reasons for outsourcing had more to do with small efficiencies than reshaping the economy.

It wasn't until the late 1980’s that outsourcing began to emerge as a potentially powerful force in transforming global economies.

Continuing into the 1980’s, accounting services, payroll, billing, and word processing all became outsourced work.

Until this point, the reasons for outsourcing had more to do with small efficiencies than reshaping the economy.

It wasn't until the late 1980’s that outsourcing began to emerge as a potentially powerful force in transforming global economies.

A Brief History of Outsourcing

The First Wave (1987-1997)

A Brief History of Outsourcing

The First Wave (1987-1997) Major outsourcing in the manufacturing industry

Associated loss of blue-collar jobs in many industrial sectors

Work outsourcing primarily to East Asian countries of Taiwan, China, South Korea, and Malaysia

Reasons: Low costs of manufacturing Availability of skilled labor Promotion of business friendly environment Existence of production and supply networks in those

countries

Major outsourcing in the manufacturing industry Associated loss of blue-collar jobs in many industrial

sectors

Work outsourcing primarily to East Asian countries of Taiwan, China, South Korea, and Malaysia

Reasons: Low costs of manufacturing Availability of skilled labor Promotion of business friendly environment Existence of production and supply networks in those

countries

A Brief History of Outsourcing

The Second Wave (Late 1990’s)

A Brief History of Outsourcing

The Second Wave (Late 1990’s) Outsourcing of White Collar Jobs

Software sector was first to go Other non-manufacturing sectors –

telecommunications, retail trade, finance, banking and insurance

What caused this major burst of outsourcing in the late 1990s? Creation and quick distribution of the

internet Transnational networks set up by immigrants

in the U.S. Liberalization of emerging market economies

Outsourcing of White Collar Jobs Software sector was first to go Other non-manufacturing sectors –

telecommunications, retail trade, finance, banking and insurance

What caused this major burst of outsourcing in the late 1990s? Creation and quick distribution of the

internet Transnational networks set up by immigrants

in the U.S. Liberalization of emerging market economies

A Brief History of Outsourcing

The Second Wave (Late 1990’s)

A Brief History of Outsourcing

The Second Wave (Late 1990’s)

Where to?IndiaMalaysiaPhilippinesSouth Africa

Where to?IndiaMalaysiaPhilippinesSouth Africa

Why?

A Brief History of Outsourcing

The Second Wave (cont.)

A Brief History of Outsourcing

The Second Wave (cont.) Push factors vs. Pull factors Pull factors for Second Wave countries:

Widespread acceptance of English Business and communication education Common accounting and legal system to the

U.S. (at least in some of the countries) General institutional compatibility and

adaptability Time zone and geographic differences –

created 24/7 capability and overnight turnaround times

Large and continuous supply of technically savvy graduates

Push factors vs. Pull factors Pull factors for Second Wave countries:

Widespread acceptance of English Business and communication education Common accounting and legal system to the

U.S. (at least in some of the countries) General institutional compatibility and

adaptability Time zone and geographic differences –

created 24/7 capability and overnight turnaround times

Large and continuous supply of technically savvy graduates

Current OutsourcingCurrent Outsourcing

"In India, they were pumping these guys out left and right. . . . Look at the deal here: We've got very highly paid SAP programmers that we could hire in the U.S. - and they're hard to find. Or we could go to India and find very talented SAP programmers immediately at 35% to 40% lower cost."

Network World July 2004

"...offshore outsourcing will create more than 337,000 jobs by 2010..."

InformationWeek November 2005

"Demand for offshore IT services isn't slowing, and that trend is showing up in Indian companies' hiring. Between July and September, Tata Consultancy Services increased its staff by nearly 12% to more than 53,000, while Infosys Technologies' staff grew 15% to more than 46,000."

InformationWeek October 2005

"Only 19% of US businesses have an offshore outsourcing strategy, a study by Ventoro found. However, the percentage skyrockets to 95% if only Fortune 1000 companies are considered."

ZDNet Research October 2005

"Business Process Outsourcing will overshadow and incorporate IT outsourcing and mainstream BPO expenditure is likely to grow worldwide by 10 per cent a year from $140 billion in 2005 to over $220 billion by 2010."

LogicaCMG August 2005

"Outsourced IT services brought in $12 billion for India 2004, leading the world in IT exports."

Santa Clara University's Leavey School of Business

October 2005

Current Outsourcing:# of Jobs Affected

Current Outsourcing:# of Jobs Affected

Jobs Lost to Date*: 300,000-995,000• 300,000-500,000 (Goldman Sachs) • 400,000-500,000 (Business Week) • 995,000 (economy.com)

Projected Job Loss: 3.3 million-6 million• 3.3 million over 15 years (Forrester Research) • 6 million over 10 years (Goldman Sachs)

Jobs at Risk: 14.1 million • 14.1 million (UC Berkeley)

* The total size of the U.S. Labor Force is 140 million jobs

Jobs Lost to Date*: 300,000-995,000• 300,000-500,000 (Goldman Sachs) • 400,000-500,000 (Business Week) • 995,000 (economy.com)

Projected Job Loss: 3.3 million-6 million• 3.3 million over 15 years (Forrester Research) • 6 million over 10 years (Goldman Sachs)

Jobs at Risk: 14.1 million • 14.1 million (UC Berkeley)

* The total size of the U.S. Labor Force is 140 million jobs

International Aspects:Problems

International Aspects:Problems

Jobs are leaving the United States and going to other countries

Less people in the United States know trades that are outsourced

Jobs are leaving the United States and going to other countries

Less people in the United States know trades that are outsourced

International Aspects:Benefits

International Aspects:Benefits

Domestic companies can employ foreign workers for less

Prices lower for products sold in the U.S. and made in other parts of the world

Countries in the rest of the world can become more developed

Domestic companies can employ foreign workers for less

Prices lower for products sold in the U.S. and made in other parts of the world

Countries in the rest of the world can become more developed

International Aspects:Options

International Aspects:Options

Keep outsourcing at the current level

Decrease outsourcing in the future Increase outsourcing in the future

Keep outsourcing at the current level

Decrease outsourcing in the future Increase outsourcing in the future

International Aspects:Keep outsourcing as isInternational Aspects:Keep outsourcing as is

Foreign workers benefitLoss of work for domestic workersDomestic firms benefit from lower

wagesForeign firms lose workers and

have less choice in laborNo new firms can outsource

Foreign workers benefitLoss of work for domestic workersDomestic firms benefit from lower

wagesForeign firms lose workers and

have less choice in laborNo new firms can outsource

International Aspects:Decrease outsourcingInternational Aspects:Decrease outsourcing

More jobs for American workersHigher wages for lower skilled workersWorkers in foreign markets work for

foreign companiesLess work for foreign employeesLower wages for foreign employeesDomestic companies have to pay

higher wages by using domestic workers

More jobs for American workersHigher wages for lower skilled workersWorkers in foreign markets work for

foreign companiesLess work for foreign employeesLower wages for foreign employeesDomestic companies have to pay

higher wages by using domestic workers

International Aspects:Increase outsourcingInternational Aspects:Increase outsourcing

Firms wanting to start outsourcing benefit

What else can we outsource?More foreign workers can find

better jobsMore trades will be lost for

American workersMore workers will no longer work

for foreign firms

Firms wanting to start outsourcing benefit

What else can we outsource?More foreign workers can find

better jobsMore trades will be lost for

American workersMore workers will no longer work

for foreign firms

Special Problems: Negative Consequences

Special Problems: Negative Consequences

Qualified professionals are losing their jobs to offshore workers who will work for less

Difficulty of monitoring child laborDifficulty of managing remote

locations with those who understand the culture, and are in synch with corporate objectives

Qualified professionals are losing their jobs to offshore workers who will work for less

Difficulty of monitoring child laborDifficulty of managing remote

locations with those who understand the culture, and are in synch with corporate objectives

Special Problems:Negative Consequences

Special Problems:Negative Consequences

Loss of incentive for college students to pursue IT careers as family members and friends lose jobs

Loss of trust between employees and the employer as more jobs move offshore

Due to new roles, competencies, and skills required when outsourcing, inefficiencies and disorganization result

Loss of incentive for college students to pursue IT careers as family members and friends lose jobs

Loss of trust between employees and the employer as more jobs move offshore

Due to new roles, competencies, and skills required when outsourcing, inefficiencies and disorganization result

Special Problems:Positive Consequences

Special Problems:Positive Consequences

Proven beneficial as far as cost, quality, and value of work delivered

Improved service delivery and access to a greater number of highly qualified talents

In-house organizations lack the assurance of quality standards that those with offshore operations have

Proven beneficial as far as cost, quality, and value of work delivered

Improved service delivery and access to a greater number of highly qualified talents

In-house organizations lack the assurance of quality standards that those with offshore operations have

Special Problems:Myths and RealitiesSpecial Problems:

Myths and Realities Myth: A job outsourced is as good as a job

lost Reality: Outsourcing is a budget balancing

act. Outsourcing does not call for job losses, but increased efficiency. This helps the firm to focus its resources on their most valuable aspects of business, namely producing and selling its products. The end result of this drive toward efficiency is evident to Americans in lower prices and higher standard of living. Foreign outsourcing goes hand in hand with higher wages, lower prices, higher profits, and enhanced competitiveness.

Myth: A job outsourced is as good as a job lost

Reality: Outsourcing is a budget balancing act. Outsourcing does not call for job losses, but increased efficiency. This helps the firm to focus its resources on their most valuable aspects of business, namely producing and selling its products. The end result of this drive toward efficiency is evident to Americans in lower prices and higher standard of living. Foreign outsourcing goes hand in hand with higher wages, lower prices, higher profits, and enhanced competitiveness.

Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Special Problems:Myths and RealitiesSpecial Problems:

Myths and Realities Myth: Outsourcing is a one-way street Reality: We are not only outsourcing jobs, but

have jobs being outsourced to us. There are over 6.4 million jobs in the US that have foreign employers. They are actually growing at a faster rate than we are outsourcing. Those foreign employers that are outsourcing to the US often pay higher than the jobs that are being outsourced from the US. For instance, the 4,300 employees that work for BMW in South Carolina, and the 14,000 employees that work for Honda in Ohio. The fact is, most of the jobs that are being outsourced are actually below the US average wage. As a result, comparatively lower wage jobs are being outsourced and higher wage jobs are coming in, increasing the standard of living in America.

Myth: Outsourcing is a one-way street Reality: We are not only outsourcing jobs, but

have jobs being outsourced to us. There are over 6.4 million jobs in the US that have foreign employers. They are actually growing at a faster rate than we are outsourcing. Those foreign employers that are outsourcing to the US often pay higher than the jobs that are being outsourced from the US. For instance, the 4,300 employees that work for BMW in South Carolina, and the 14,000 employees that work for Honda in Ohio. The fact is, most of the jobs that are being outsourced are actually below the US average wage. As a result, comparatively lower wage jobs are being outsourced and higher wage jobs are coming in, increasing the standard of living in America.

Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Special Problems:Myths and RealitiesSpecial Problems:

Myths and Realities Myth: Only greedy corporations benefit from

outsourcing Reality: Everyone benefits from outsourcing as it

is a means to lowering costs in response to competition. As costs decline, every consumer benefits by paying less for the same product, or even for a better product. The vast benefits of outsourcing are usually overlooked as the benefits are widespread among the economy. The few who lose their jobs to outsourcing are much more vocal than the millions of consumers who save hundreds of dollars. This results in the American consumers saving billions of dollars each year.

Myth: Only greedy corporations benefit from outsourcing

Reality: Everyone benefits from outsourcing as it is a means to lowering costs in response to competition. As costs decline, every consumer benefits by paying less for the same product, or even for a better product. The vast benefits of outsourcing are usually overlooked as the benefits are widespread among the economy. The few who lose their jobs to outsourcing are much more vocal than the millions of consumers who save hundreds of dollars. This results in the American consumers saving billions of dollars each year.

Source: http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities

Looking to the Future:Potential Negatives

Looking to the Future:Potential Negatives

American unemployment rate will rise

Americans will spend less because they will feel less rich

American resources such as concrete, drywall, and oil will be shipped over seas and America will experience a shortage of goods.

American unemployment rate will rise

Americans will spend less because they will feel less rich

American resources such as concrete, drywall, and oil will be shipped over seas and America will experience a shortage of goods.

Looking to the Future:Potential Positives

Looking to the Future:Potential Positives

Quality of jobs increase as lower wage jobs are replaced with high-wage, high-skill jobs

As competition increases, savings from decreased costs will be passed on to consumers

Domestic companies will be able to compete with foreign companies easier, causing a decrease in tariffs and increase in world trade

Quality of jobs increase as lower wage jobs are replaced with high-wage, high-skill jobs

As competition increases, savings from decreased costs will be passed on to consumers

Domestic companies will be able to compete with foreign companies easier, causing a decrease in tariffs and increase in world trade

Looking to the Future:Looking to the Future:

Only time will tell whether the negatives will out-weigh the positives, or vice versa

Only time will tell whether the negatives will out-weigh the positives, or vice versa