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"Intetics Co. is a global outsourcing company focused on custom application development, software testing, web system design and offshore staff augmentation services."
Source: Intetic Co.
Who Benefits from Outsourcing?
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The Political, Economic and Cultural Ramifications of Outsourcing
Executive Summary
While simple on the surface, the decision to outsource is a major strategic undertaking for most companies. Since it involves evaluating the probable reduction in costs against the consequences of a loss in control over production or performance of a certain business function, the opportunity to outsource and offshore should never be taken lightly. There are also other considerations — economic effects, political consequences, and even cultural limitations. So who really benefits from outsourcing and offshoring when there are so many issues and constituencies involved?
This White Paper explores the economic and political implications of outsourcing and offshoring, while identifying cultural differences that can make or break a sourcing relationship and examining techniques for managing successful deals.
Outsourcing and Offshoring: Good for Politics?
A simple search of the Web produces endless reports on the pros and cons of both outsourcing and offshoring. However, there is one important issue that most articles, White Papers and even academic studies neglect: how outsourcing and offshoring affects political relations. What happens when one country sources processes and jobs out to another?
In 1750 the economic philosopher baron de Montesquieu wrote in his L'Esprit des Loi, "Peace is the natural effect of trade." Since outsourcing is generally accepted as a modern-day form of trade, the practice should promote closer political ties between countries. And when countries are closer politically, they have a tendency to work together cooperatively with less conflict. These statements are supported in a paper written by Solomon W. Polachek with the State University of New York at
Binghamton and IZA Bonn. He answered the question "How does economic interdependence reduce international conflict?" with the following summary:
"Trade promotes peace because the disruption of trade brought on by conflict makes warfare and other hostilities more costly. Thus, if conflict leads to a diminution of trade, then the cost of conflict (all else constant) is the lost gains from trade. The higher these gains from trade losses, the more important is trade in deterring conflict and the more important is trade in promoting peace. Thus country pairs with the most trade tend to exhibit the most cooperation and the least hostility
"
On the other end of the spectrum, some experts argue that outsourcing cannot be considered a form of trade because the outsourcing country is simply sending domestic jobs and business functions to a foreign country with no reciprocity. In the short term, this argument does have merit, as some jobs are lost. From a long term perspective, however, the argument fails because cost savings and greater efficiencies are eventually realized by the outsourcing countries, and the benefits are passed on to consumers in the form of lower prices and higher quality. It's a win-win scenario discussed in greater detail in the following sections.
The Economics of Outsourcing and Offshoring
As noted, there are those who believe that outsourcing and offshoring lead to significant job losses and higher unemployment rates, and are even the culprits of the current recession. Much of these misconceptions can be traced to the way in which the media has portrayed these practices over the years. In reality, outsourcing is resulting in creation (rather than loss) of higher-paying jobs, speeds up technological advances in both developed and developing nations, and bolstered economic growth worldwide.
Outsourcing and Employment
The most common misconception when it comes to outsourcing and offshoring is that they lead to much higher unemployment rates. There is no denying that we are currently in crisis when it comes to new job creation; the numbers, in fact, are staggering. A recent study by the International Labour
Organization predicted that unemployment worldwide could increase from 179 million in 2007 to 198 million in 2009 under the best case scenario; under the worst case scenario, it could go as high as 230 million2. But how many of these lost jobs are a result of outsourcing and offshoring?
Unfortunately, there are no solid numbers or benchmarks to quantify how many jobs have and continue to be sourced between countries. Because jobs are not counted one by one, like goods headed for a specific destination, no one knows with certainty, so assumptions are made. For example, a much-cited report from Forrester Research projected that 3.3 million jobs would be outsourced from 2000 through 2015, or about 220,000 a year3. A more recent study by the Hackett Group reports that U.S.corporations will move at least 140,000 jobs offshore in 2009 and 2010.
By most estimates, the U.S. IT industry outsourced between 300,000 and 400,000 jobs since the practice became widespread in the early 90's. In comparison, even in times of healthy employment growth, 350,000 people in the United States file for unemployment insurance every week — millions each year.The outsourced IT jobs, even if they continue the currently accelerating trend of growth, are not even a ripple in the oceans of a country with a $14 trillion economy employing 154 million people; one which creates and eliminates millions of jobs each month. As reported by the Labor Department during the past decade, the United States economy created an average of 32.8 million new jobs each year while eliminating 31.0 million, for a net annual gain of 1.8 million. When averaged, jobs sourced out from the U.S. represent less than 0.1 percent of total jobs lost annually - a drop in the bucket in the typical job churn that is considered normal for any dynamic market economy.
It is also worth pointing out that in countries like the US, most jobs do require geographic proximity Therefore, many more jobs are lost to internal restructuring, bankruptcies and ownership changes each year than those lost to outsourcing and offshoring.
Outsourcing and the Recession
Outsourcing and offshoring affect economies in both positive and negative ways. Do these practices exacerbate the current recession felt in the U.S. and across the globe? Probably not and here's why: Outsourcing and offshoring aid in globalization and help improve the standard of living in developing countries. As these countries become wealthier, more products and services are purchased from other countries. This helps to balance trade, boost economies and generate more wealth for all parties involved.
In fact, outsourcing and offshoring will speed up the global economic recovery. One example:
The outsourcing of information technology and software development is a healthy, vibrant sector that keeps growing even in tough economic times. According to John Gantz, Chief Research Officer at IDC,
"Technology is a key factor for economic, social and technological progress, and for the sustainability of economies all over the world." In the 82 countries and regions surveyed by IDC, the IT industry overall is expected to see continued strong growth over the next four years, generating an additional 7.1 million new jobs from a 2007 base of 35.4 million for a total of 42.5 million jobs by 2011. According to the report, the primary source of new IT jobs will be China, followed by the United States. The growth in the global labor force will result in new incremental tax revenues of $592 billion to governments over the next four years.
Managing Cultural Differences and Limitations
Miscommunication is a risk in any new relationship — including those focused on global sourcing. This is precisely why cultural differences are one of the biggest reasons why outsourcing and offshoring deals fail or run into problems. A poll by Accenture revealed that while "the physical obstacles to outsourcing such as telecoms and facilities have largely been resolved; the soft issues, particularly cross-cultural communication, will continue to present the main challenges to realizing global sourcing's full potential for the foreseeable future11." The primary cultural differences cited by respondents were: 1) different approaches to completing tasks, 2) different attitudes toward conflict and 3) different decision-making styles.
The significance of cultural differences and limitations should not be ignored when outsourcing and offshoring. Depending on the location of where you source to, cultural differences can range from minor, if you send work or jobs to countries where languages, religion and cultures are similar to your home country of origin, to a real cultural clash, if you source to countries where there are vast differences in culture and lifestyles.
Here are some of the ways cultural differences and limitations can be better managed:
- Research cultural differences and limitations and educate employees involved and working with and managing third-party service providers
- Identify and resolve cross cultural communication issues early in the relationship
- Adopt cross-cultural communication training programs
- Identify internal team members who have experience with both cultures
- Employ an offshore advisory specialist or consultant
- Educate third-party service providers on your company's specific business culture, expectations and unique requirements
- Organize cultural events to foster learning opportunities
- Visit offshore locations and outsourcing partners in person
So Who Benefits from Outsourcing?
It's easy to see why the target countries benefit from outsourcing: they increase exports and create higher-paying jobs. The benefits of outsourcing and offshoring to the outsourcing country as a whole (rather than the obvious increases in profit margins, speeding up time-to-market, and higher product quality accruing to the outsourcing firms) are not always obvious, nor are they immediate. This helps explain why the issue has been heavily debated.
How does the country-outsourcer benefit from outsourcing and offshoring as a whole?
- Consumers: lower prices, higher quality, better experience
- Businesses (even those that do not outsource themselves): lowered costs, maximum efficiencies, higher profits, higher-paying jobs
- Governments: job creation, higher job quality, improved trade balance, goodwill between nations, incremental tax revenues
Trade and globalization are reshaping our world for the better, which is why many economists view outsourcing and offshoring as good for business and the global economy. An article in The Wall Street
Journal cited a professor at George Mason University as stating, "Anxiety about outsourcing reflects a more general concern about the pace of change. And few recent phenomena have changed the world more abruptly than globalization12." The Foundation for Economic Education supports these statements in a discussion on globalization: "An essential part of the process of change, growth and economic betterment is to allow yesterday's jobs to follow the path of yesterday's technology. Preventing domestic companies from outsourcing will not stop their foreign competitors from doing so. Through outsourcing, foreign competitors will be able to lower their costs, use the savings to lower prices and upgrade technology, and thus gain a big advantage in the market"
Interesting statistics related to the U.S. and outsourcing and offshoring
- From 1996 to the third quarter of 2006, the United States lost on average 7.83 million jobs each quarter, but it gained on average 8.17 million new jobs.
- A study by two Princeton University economists found that productivity gains from outsourcing boosted the wages for the least-skilled workers by 1 percent a year from 1997 to 2004.
- Research by McKinsey & Co. in 2003 showed a return of $1.12 for every dollar of work sent offshore.
Conclusion
From the media to presidential candidates, to Wall Street all the way down to Main Street, tales of outsourcing and offshoring destroying jobs, raising unemployment levels and adding to the financial crisis have flooded the airwaves and been the buzz of conversations around the world. In reality, outsourcing and offshoring create better-paying jobs, fuel economic gains, and balance international trade. And the trend is not expected to wane anytime soon.
About Intetics
Intetics Co. is a leading global outsourcing company focused on creation and operation of remote IT business units and offshore staff augmentation for application development, software testing, system administration and data processing. Since 1995 Intetics has completed over 500 projects for about 200 customers in more than 30 countries. The company is ISO 9001:2008 certified and Microsoft Gold Certified partner. The company's innovation and growth achievements are reflected in winning prestigious Deloitte Technology Fast 50 awards and inclusion into the Top 100 Global Emerging Service
Providers and Top 100 Global Outsourcing Companies. You can find more information at www.intetics.com.
Table of Contents
- Executive Summary
- Outsourcing and Offshoring: Good for Politics?
- The Economics of Outsourcing and Offshoring
- Managing Cultural Differences and Limitations
- So Who Benefits from Outsourcing?
- Conclusion
- About Intetics