Offshore Outsourcing: The Controversy Over Moving Jobs Overseas

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Offshore Outsourcing: The Controversy Over Moving Jobs Overseas

Every day thousands of workers find and lose jobs as businesses grow or close. Each new job found represents income for food, shelter, and education. Each job lost may represent giving up some or all of these basic necessities. When a global company decides to move its business operations overseas – a process called “off-shoring” – one country’s or worker’s loss of jobs may translate into another country’s or worker’s gain. The growing phenomenon known as off-shoring presents both benefits and challenges for the developed and developing world.

What is Off-shoring?

Imagine that the computer you are using has suddenly crashed. You call the customer service hotline because you need help fixing it. The person who answers your phone call is very polite and professional and helps you correct the problem right away. You’re happy because the computer is working again. But what do you know about the person who just helped to fix it for you? When you dialed the service hotline, the phone number looked like it called somewhere in your home country. But was the person who just helped you somewhere close by, or half-way around the world?

Thanks to the rapid technological advances that make global communication easier and easier, either scenario is possible. Companies today face many options about where to hire the workers that they need to serve their customers. When a company in one country hires workers in another country to perform select business functions – like providing customer service to fix a broken computer – this is an example of off-shoring. Off-shoring is now an increasingly common business practice that affects both developed and developing countries.

Off-shoring vs. Outsourcing

To do business, companies need employees to perform labor, or work done by human beings. A company may hire its own employees directly, or it may use contracts to secure the laborers (workers) it needs from elsewhere.

The global labor market is comprised of all the buyers (companies) and sellers (workers) of labor around the world. Companies who want to hire laborers in exchange for payment represent labor demand. Workers who want to offer their skills in exchange for payment represent labor supply.

When a company contracts the labor it needs from another company located in the same country, this is called outsourcing. When a company chooses to contract the workers it needs from a location overseas, this is called off-shoring (possibly because, in many cases, the workers are literally located across a sea, away from the first country’s shores.)

In both cases, jobs may be lost if companies layoff workers in favor of the new contract arrangement. With outsourcing, these losses are offset by the gains of workers finding the new jobs elsewhere in the same country. With off-shoring, these jobs are lost to workers overseas.

Typically, the companies that engage in off-shoring are located in developed, high-wage countries, while the contracted workers are located in the less developed, low-wage countries.

Types of off-shoring

When we refer to off-shoring, we are talking about moving two kinds of jobs – manufacturing or services – to a new location overseas.

A company in the manufacturing sector produces goods, or products, as its main source of income. To engage in production off-shoring, this company would need to set up manufacturing equipment in a new foreign destination, or hire a foreign company to replicate its existing equipment and processes. An example of production off-shoring is a company based in Europe manufacturing its products (for example, clothes, toys, or electronics goods) in China and eventually selling these goods in markets all over the world.

A company in the services sector earns income from the services, or the performance of business activities (like repairing a computer), that its employees offer to customers. To engage in services off-shoring, this company would simply hire workers in another country to perform this work, or contract a foreign company to manage these foreign workers.

It should also be noted that companies in the manufacturing sector may employ workers in service occupations (such as computer programmers and accountants). Thus, services off-shoring can cut across both the services and manufacturing sectors.

Why is it occurring?

There are five main reasons why off-shoring is becoming an increasing popular way for companies to do business.

• Cost savings. There can be large differences between the wages paid to workers in developed and in developing countries. Many companies seek to take advantage of this wage gap, the difference between the higher wage and the lower wage, to reduce their cost of producing products or delivering services. For example, hiring a software developer in the US will cost a company about US $60 an hour. It could cost the company only US $6 an hour to hire a worker in India to perform the same task.

• A large global labor supply. Labor supply refers collectively to workers who are available for and capable of work. Many countries in the developing world offer a labor supply of highly educated and highly-skilled workers. These workers can be easily trained to perform the tasks that foreign companies require.

• 24-hours-a-day-7-days-a-week business operations. By taking advantage of differences in time zone across the globe, companies are able to operate around the clock. For example, when a team of telemarketers finishes its shift at a company in the US, a team located overseas could be ready to start their work day. (When it is 8:00pm in New York City, it is 8:00am in Singapore.) This enables continuous operation.

• Access to overseas markets. Companies that want to sell their goods or services in foreign markets may choose to produce these goods and services in the foreign country. By doing so, they can reach customers more quickly and efficiently than if they needed to export, or transfer out, the goods and services from their home market.

• Technological possibility. Many services sector jobs (such computer programmers, radiology technicians, and computer support specialists, telemarketers, and even tax preparers) do not require a physical presence in the hiring company. The work can be performed remotely and delivered via technology (for example, via the Internet or telephone).

Where is it occurring?

According to the McKinsey Global Group, US businesses account for about 70 percent of the total off-shore labor demand. (Europe and Japan account for the remaining 30 percent.) Data from the US Department of Commerce shows that US imports, or purchases of services (meaning the hiring of overseas service workers) grew from $21.2 billion in 1997 to $37.5 billion in 2002. This increase of about 80 percent is due primarily to the increased popularity of off-shoring computer and data processing services.

The location of the labor supply hired by global businesses depends on the particular service that is involved. The demand for call center and telemarketing services is predominantly supplied by English-speaking countries like Australia, South Africa, the Philippines, Canada, India, Ireland and Israel. A common language helps to ensure high quality of service.

Other service activities which do not require customer interaction or English language skills (such as computer programming, graphic design, and data entry) are often performed in non-English speaking countries like Mexico, China, Russia and several Eastern European countries.

What are the benefits and challenges?

There is a great deal of debate and anxiety about off-shoring in developed countries. Opponents argue that off-shoring represents a threat to high-paid, high-skilled jobs in the developed world. The loss of jobs may make a country less able to compete in the global economy. Workers in the developed world who have lost their jobs because of off-shoring will need to be re-educated and re-trained to take advantage of new employment opportunities. If this does not happen, they may experience a lower standard of living, or quality of life.

Both global companies and developing countries are the beneficiaries of off-shoring. Global companies benefit by reducing their cost of doing business because they are able to pay less for the labor that they need. They may pass on some of this savings to consumers through lower prices. Developing countries benefit by the increase in employment of their populations. More income for their citizens may result in higher levels of economic growth for the nation.

Future trends

Not much data exists to determine the number of service occupations that are likely to be off-shored from developed countries, but a number of studies have created estimates. One study by the McKinsey Global Institute finds that there are approximately 160 million jobs worldwide that could potentially be off-shored. They estimate that a total of 4.1 million, or 2.5 percent of the “at-risk” services workforce were likely to be affected. In the US it is estimated that between 2001 and 2004, around two million jobs were relocated overseas. Most experts predict that off-shoring will continue to increase as companies seek to reduce costs and remain competitive. Information technology will continue to drive the process.

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