Outsourcing and its effects on the economy

Outsourcing and Its Effect on the Economy

In the Age of Information where the forces of globalization are at full play and the competition is fierce, outsourcing appears to represent a viable approach to ensuring that a company's operations are kept streamlined and efficient. Indeed, at first blush, outsourcing various aspects of a company's operations appears to provide companies with a significant competitive advantage by allowing them to concentrate on their core competencies. While these types of benefits have in fact accrued to some companies using outsourcing in the past, critics of the practice maintain that the United States is mortgaging its future and the future of its workers through such practices. To sort out the truth, this paper provides a review of the relevant peer-reviewed, scholarly and popular literature to determine the effect of outsourcing on the U.S. economy, followed by a summary of the research in the conclusion.

Review and Discussion

According to Domberger (1998), "Outsourcing refers to the process whereby activities traditionally carried out internally are contracted out to external providers. Outsourcing is the search for and appointment of contractors for the provision of goods and services" (12). Although one of the primary reasons for outsourcing one or more of a company's internal functions such as payroll or other human resources activities is to reap the efficiencies of scale that are available from third-party providers, the trend in outsourcing in recent years, though, has extended even to a company's core competencies. As Gottfredson, Puryear, and Phillips (2005) point out, "Outsourcing is becoming so sophisticated that even core functions like engineering, R&D, manufacturing, and marketing can -- and often should -- be moved outside. And that, in turn, is changing the way firms think about their organizations, their value chains, and their competitive positions" (132). According to Khanna and Randolph (2005) "The decision [to outsource] is mostly driven by business objectives such as cost reduction, increasing flexibility, gaining access to particular technologies, or simply to concentrate management bandwidth on core activities" (37).

This means while American companies are cutting their operations to the barebones domestically, American jobs are also being eliminated in favor of less expensive labor costs abroad to achieve these competitive advantages. During the first part of the 20th century, American workers and management went through the sometimes-violent crucible of labor relations together, and the resulting labor unions and formal agreements that emerged during this period in U.S. history helped to ensure that pay and benefit packages provided workers with a minimum living wage and decent standard of living. If management got out of line during this period in American employment history, workers had a collective response available to them in the form of strikes and obligatory mediation.

By sharp contrast, this give-and-take type of negotiation between employers and employees is no longer the approach being used because in many cases, American workers are increasing afraid their jobs will simply be outsourced to companies overseas. For instances, according to Tonelson (2000), "It has become clear that foreign competitors do not even have to enter the U.S. market for liberalized trade arrangements to force down wages and reduce bargaining power. Even the possibility of greater import competition can alarm employers enough to cut costs and employees enough to swallow these cuts" (47). Today, strikes are becoming increasingly less commonplace and workers are becoming more docile in their demands to employers -- and for good reason: "American workers have learned that if they sought significant raises, their jobs would get imported or outsourced out of existence. Conventional imports and outsourcing are depressing U.S. living standards" (emphasis added) (48).

Indeed, while many observers might believe that the types of jobs being outsourced to developing nations are merely low-paying positions that the U.S. can easily afford to lose, other analysts emphasize that the trend is affecting professional positions as well. In this regard, Krishnan advises, "There is no shortage of stories that discuss how American companies have been increasingly turning to cheaper workers in places like India, China, and Brazil to perform lower-skilled, labor-intensive jobs, such as staffing those now famous call centers. Paralleling this trend, during the past decade high-technology firms, such as Microsoft and Dell, have been hiring sophisticated software engineers in developing countries" (2190). This point is also made by Challenger (2005), who reports "Countries such as India and China have vast pools of skilled and well-educated workers available to the U.S. And other countries. The first trend is for U.S. firms to source jobs abroad rather than at home. The second trend is companies taking advantage of advanced computer technology to import services from other nations, like having radiologists in Bangalore read X-rays taken in Boston" (16).

In fact, employment statistics bear out these alarming findings. Indeed, more than 10% of employers directly threatened to move some or part of their operations to Mexico, and 15% of companies, when forced to bargain with a union, actually closed part or all of a factory, which is more than three times the rate that occurred during late the 1980s, prior to the enactment of the North American Free Trade Agreement (NAFTA) (Tonelson). As Krishnan (2007) points out, the issue of outsourcing jobs overseas has caused a great deal of controversy among Americans today. According to this author, "Economic free-traders fiercely defend outsourcing as a positive for the U.S. economy, while critics contend that corporate desire for low wages, alone, drives this practice. One notable exchange highlighting the volatile nature of this issue occurred when then-White House economic advisor Gregory Mankiw remarked in February 2004 that outsourcing American jobs to foreign workers abroad was just 'a new way of doing international trade'" (quoted in Krishan at 2189). In reality, while the short-term effects of outsourcing on the U.S. economy have been mixed, the long-term impact of these recent trends may hold some significant promise in terms of job creation and sustainable development in the U.S. And abroad. As the playing field becomes more level and the standard of living in other countries improves as a result of this influx of outsourced jobs from the United States, it is reasonable to expect that the demand for U.S. goods and services will also increase and trade will also increase across the board.

This expectation is congruent with the prediction made by Challenger that, "In the coming years, as the economies of China, India, Mexico, Russia, and the Philippines heat up from their growing interdependence with the U.S., it is likely that they will become our biggest trading partners. The potential upside demand from these countries and from others in a major global expansion is enormous, bigger than the tech expansion of the 1980s and 1990s, enough to fuel the U.S. economy and create jobs for decades to come" (16). Today, though, the U.S. economy continues to struggle through an increasingly recessionary period that many believe has been caused, at least in part, by the relentless outsourcing of American jobs to third world countries. In reality, there are some viable alternatives available to outsourcing that companies can use today that are more acceptable to American workers and consumers, including the following:

Float Workers. These are full-time employees who are cross-trained so that they can be deployed against the specific job based on business need.

Part-Time Workers. This basic arrangement has long been used to provide a cost-efficient way of managing seasonal spikes in workload.

Temporary Workers. This is another cost-effective way to maintain flexibility in operations that are volatile. It is possible to have fairly long-term stable relationships with organizations providing "temporary" labor. Many such employees are as well-trained as the full-time employees of the company.

Payrolling and Employee Leasing. This involves transfer of some or all of the company's employees to another organization such as a PEO (professional employer organization). The prime motive is to simplify the administrative work related to these employees.

Independent Contractors. Self-employed individuals whose services are engaged on a contract basis are hired to perform specialized tasks generally requiring a high level of independence, judgment, skill, and discretion. They can simultaneously be employed at other firms.

Consultants. Large consulting firms not only provide advice and specific expertise, but can also lend "warm bodies" to bolster their client's organization temporarily (Khanna and Randolph 38).