Outsourcing: strategic considerations and organizational impact

Outsourcing

By the end of 2004, forty percent of Fortune 500 companies were estimated to have outsourced jobs (Reingold, 2004). The primary motivator is to cut labor costs by as much as twenty to seventy percent by taking advange of labor in lower-wage nations. There are huge differences in the wages paid for equivalent skills between the United States and developing countries such as India and the Philippines. For example, the equivalent of a software developer who costs $60 an hour in the U.S. costs only $6 an hour in India (Hoffman). Further, according to Hoffman, outsourced jobs are often seen as undesirable or of low prestige in the United States are viewed as desirable and attractive in the regions where they are being outsourced. This paper discusses the sound business reasons for outsourcing that make it an economic imperative, but concludes that the American worker will not benefit.

Outsourcing is being conducted in countries where English is the main business language such as India, Canada, Ireland and Israel to ensure that quality and performance requirements can be met (Hoffman). However, non-English speaking countries, particularly those in Asia such as China, are getting in on the action. China's inroads are attributable to an influx of Western multinationals who are bringing in back-office work (Einhorn and Kripalani, 2003). By 2007, it's estimated that China will account for $27 billion in services, including call centre and back-office activities, by then reaching parity with India.

McKinsey Global Institute claims that every dollar of offshoring results in fifty-eight cents of savings to the American economy (Reingold, 2004). These savings are said to come from increased productivity, lower prices and greater demand for American products, making U.S. companies more globally competitive. Further, some countries such as India that sells $6.75 billion worth of software services to the United States, asserts that it contributes more than twice as much to the American economy by way of hardware and software purchases (Kripalani and Einhorn, 2003). The outsourcing industry also states that its creating jobs in the United States by hiring its marketing and consulting executives.

Critics of outsourcing claim that savings to the American economy are coming at too high a price. One report shows that thirty-one percent of workers who lost their jobs in early outsourcing waves were never fully reemployed, with eighty percent taking pay cuts (Reingold, 2004). Outsourcing is accused of eliminating the job security of America's educated class affecting everyone from IT experts to accountants, medical transcriptionists to customer-service representatives. In research cited by Reingold, in IT alone, 500,000 positions in the United States were estimated to leave the county in 2004 with as many as twenty-five percent of all IT jobs going overseas by 2008. This translates into one million obsolete careers for American workers.

Offshoring is occuring across a variety of job functions in areas such as IT, manufacturing and the service industry. Functions that easily be digitized or handled by phone or that involve skills that are available or easily developed are all fair game (Hoffman). The range of functions is substantial and increasing over time. Currently, major areas are depicted in Figure1, Offshoring Opportunities Across the Organization. According to some experts such as Baker and Kripalani (2004), while the lower-skill sets are being outsources, there is still a global marke palce for high-quality professionals. As an exampe, the authors point out that the IT industry where of the six types of software professionals, architects, researchers, consultants, project managers, business analysts and basic programmers, only basic programming jobs are being outsourced to offshore operations. Therefore, Baker and Kripalani deduce that America will still remain the supreme source for application development because of tis diverse and talented workforce and that American innovation will create the new products, processes and markets that will result in a net increase in the American economy.

Source: Hoffman, M. Offshoring - Is it a win-win game? Global Issue