Offshore Outsourcing, Wise or Foolish?

Companies have been outsourcing work for many years. This trend has been carried to an extreme in the case of offshore outsourcing - sending work and jobs to other countries where labour is cheaper.

Outsourcing made sense. Specialized companies provided their services to many client companies at lower prices than the client companies could do the work in-house. Both companies, the service provider and the client, profited from the arrangement. Unfortunately, like the building of conglomerates before it, outsourcing got carried to extremes. Companies began outsourcing work to the lowest bidder and lost sight of the effect it had on the company except for finances. Outsourcing this work to "foreign" or "offshore" companies, solely to take advantage of lower labor rates in those countries, became known as offshore outsourcing.

The offshore outsourcing of professional and technical jobs by US companies is done to save money, but it has raised concerns. As the US struggles to recover from recession, the rate of job creation lags far behind the expected pace. There is growing concern that this is due to offshore outsourcing.

Offshore outsourcing is neither the cure-all it has been portrayed by business nor the economy-destroying monster laid-off workers claim. While offshore outsourcing does have financial advantages for businesses, these advantages are often far smaller than first anticipated due to hidden costs. There are also non-financial costs to businesses from offshore outsourcing, including lowered public perception and reduced morale/productivity from remaining staff. Offshore outsourcing can be beneficial for workers of the US companies because their employers will be financially stronger and better able to compete.

Background to Offshore Outsourcing

For decades companies expanded their conglomerates by buying other companies. Initially these companies were related businesses, often suppliers. Soon the conglomerates began buying companies with no relation. Profit motives and the desire to be the biggest became sufficient justification. Ultimately, the conglomerates began to collapse under the weight of the acquired companies. Profits started falling and companies began to retract to their "core" businesses. Next they discovered that they could shed even core functions by hiring them out to companies that could do them more efficiently and, thus, less expensively. Payroll processing was subcontracted. Shipping was farmed out. So was manufacturing. Companies were hired to do collections, customer call centres, and employee benefits. Collectively, this was called outsourcing.

In Favour of Offshore Outsourcing

The arguments for offshore outsourcing centre around free trade and globalization.

1. When a product or service can be produced more cheaply overseas, it makes more sense to import it than to produce it domestically.
2. Much of the revenue earned abroad returns to this country in wages for other employees, investment in R&D, profits for shareholders, and taxes for the government.
3. It doesn't matter where the work is done as long as the US companies earn the profit to return to their shareholders.
4. Companies must do what's best for themselves.
5. Lower priced goods and services are good for all consumers.
6. New, more sophisticated jobs will be created in America to fill the void now that the less important jobs have been sent overseas.
7. It will help improve the economies of poorer countries so they won't need so much financial aid from the US.

Opposing Offshore Outsourcing

The arguments against offshore outsourcing focus on impacts on the American consumer and the danger of a brain drain.

1. Since prices drop only marginally due to offshore outsourcing, while wages decrease substantially, the consumer will be unable to purchase the product or service.
2. America was able to turn on a mighty economic engine that ultimately won World War II. Offshore outsourcing destroys the ability to do that again.
3. The considerable profits to be made from offshore outsourcing are retained by the rich, while the middle class pays higher taxes and loses purchasing power.
4. Foreign workers do not contribute to US Social Security or other taxes. The increased tax revenue from corporate profits does not equal the amount lost on US workers income taxes.
5. Companies could save more costs by offshore outsourcing the CEO job. The average US computer engineer earns six to seven times his Indian counterpart, but the US CEO gets paid 400 times as much as his average worker.
6. The "more sophisticated jobs" that US workers are supposed to move on to now that their jobs have been outsourced do not exist. They are never firmly defined. And it is an affront to the US worker who trained for the "jobs of the future" only to see those computer programming jobs outsourced.
7. The goods and services that have been outsourced overseas are often sent to countries who laws are not as protective of workers and the environment as in the US. We ultimately pay for those oversights in further damage to the planet.

Where It Stands

1. Offshore outsourcing is currently perceived as yet another way for the super rich corporate executives to get richer at the expense of individual workers.
2. Outsourcing work to companies that can do it more efficiently and less expensively does make sense, provided that it is actually less expensive at the bottom line.
3. Hidden costs include the danger that consumers will stop buying from companies engaged in offshore outsourcing.
4. Offshore outsourcing work means unemployed Americans will not be able to purchase products and services and lowly paid workers overseas will not earn enough to purchase them. Companies that save money by offshore outsourcing will go out of business from lack of customers.
5. Offshore outsourcing makes sense only if it truly saves money at the bottom line.

By F. John Reh, About.com Guide

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