Offshore Outsourcing: The Dark Side of Globalization

Borderbuster Monthly E-Newsletter
(No.23): October 6, 2003,

by Paul Dillon

“The high wage begins down in the shop. If it is not created there it cannot get into pay envelopes. There will never be a system invented which will do away with the necessity for work.” –Henry Ford

For many years, advocates for doing business on a global scale, or “border busting,” have touted all the benefits to expanding business activities beyond our national boundaries by capturing additional markets and accessing cheap labor and raw materials. The arguments of these international business expansionists, however, have been largely confined to traditional manufacturing and trade industries. What these fervent “border busters” never contemplated was that their arguments about the advantages of expanding businesses into international markets to take advantage of “cheap labor” would come back to haunt them.

The offshore outsourcing of traditional U.S. jobs to take advantage of cheaper labor, in third world countries in particular, is a relatively recent phenomenon that is getting considerable press coverage these days. Let’s briefly examine this “offshore outsourcing” trend, the rationale behind this activity, and its repercussions for both U.S. businesses and government leaders.

The Stats

“White-collar jobs in engineering, programming and accounting are leaving the U.S. for cheaper locales at a pace of nearly 4,000 per week,” according to Forrester Research. A McKinsey & Co. report featured on in September indicates that the U.S., Europe and Japan combined are losing 600,000 jobs per year to countries with low wage rates.

In his testimony before the U.S. Congress on June 18, 2003, Bruce P. Mehlman, Assistant Secretary for Technology Policy for the U.S. Department of Commerce said, “The Gartner group estimates that by 2004, more than 80 percent of U.S. executive boardrooms will have discussed offshore outsourcing, and more than 40 percent of U.S. enterprises will have completed some type of pilot.” A widely quoted 2002 Forrester report estimates that over the next 15 years, 3.3 million U.S. service industry jobs — including 1 million IT service jobs and $136 billion in wages — will “move offshore.”

Does anybody detect a trend here?

The Rationale

There are many reasons for a company to send its jobs offshore. Here are a few:

Cost. Cheap labor is the prime motivation for companies to outsource jobs to low-wage companies. For example, while call center workers in the United States can make in the high $30,000 range or more a year, according to a recent article on Knowledge @ Wharton, a call center operator in India might earn $4,000 or up to $7,000 for a management post. Including other expenses, total cost savings of 30% to 40% can be realized by moving certain back-office tasks overseas.

Restructuring the corporation. Companies may take advantage of offshore outsourcing not only as a way to reduce costs by relocating core business functions, but also to realize the advantages of technological advances and highly educated workers to fundamentally restructure the corporation.

Market access. Corporations may want to outsource key business functions overseas to take advantage of the rapidly developing markets in such places as China and India, with 2.4 billion people between them.

Infrastructure and business climate. According to Assistant Secretary Mehlman in his recent testimony, “Foreign governments are making their own investments in university and job research facilities, transportation, energy and telecommunications to more effectively compete [with the U.S.].” And, “a great number of top-ten innovative companies explain moves to Asia by pointing to their less burdensome taxation, regulation and litigation environments.”

Proximity to manufacturing facilities on foreign soil. Companies may seek to relocate more of their knowledge workers to better service the manufacturing facilities which they relocated overseas, during the previous spirit of globalization in the 1980’s.

The Implications

Clearly there are going to be both short and long term policy implications for both business and government leaders as a result of this offshore outsourcing phenomenon. Among them are:

Concerns over security. With fears of terrorism rampant throughout the world, corporate leaders who outsource to third world countries sensitive functions critical to their company, face the very real threat of having their core business functions disrupted by either outright terrorist activity, or other security concerns. This is particularly true regarding the increasing international nature of the defense business and the shifting of work abroad.

Viability of providers and service quality. As noted in a Knowledge @ Wharton article, business leaders who send critical business functions to foreign soil need to be very concerned about the long-term viability of their service providers and the quality of service experienced by customers and clients over a sustained period of time. Infrastructure, while improving in many countries, may not always be reliable. And foreign accents over the phone can be a “turn off” to many U.S. customers. It will take only one major high-visibility “crash” of an offshore outsourcing activity to significantly slow this trend.

Labor union and white-collar backlash. There is growing vociferous opposition from both labor union and white-collar workers over eliminating decent-paying jobs in the U.S., while workers overseas are exploited. Many “high-end” facilities for foreign born workers are cramped and not even air conditioned, leading to a modern day version of the late 19th century or early 20th century “sweat shop.” There is a substantial price that companies will pay in both worker productivity and morale in their domestic U.S. workforce, as angry and anxious workers see jobs that they are currently doing going to foreign workers at a fraction of the cost.

Clearly, the “border busters” have won. Business, government and labor are all experiencing what it truly means to participate in a “global economy” — in the good, the bad, and the ugly. There are both opportunities and dangers here. If we, as a nation — as U.S. workers at all levels — are going to truly participate in this global economy, we must define what our national interests are on this world-wide working stage.

How do we seek to maximize our resources — material, labor and capital — while protecting our nation’s defenses and our companies in this lightning fast, changing world? How do we build the best and brightest for our work force, while equipping people and building systems capable of coping with rapid change in a global marketplace? Is it more advantageous for us, as a nation, to buy Fords made in Canada, or Hondas made in Ohio? Should public aide recipients be made to call an off-shore “hot-line,” staffed by cheap labor at a call center in India, to get information on their benefits, thus saving money that could go to provide them with more services? Or, should these call center jobs be staffed with re-trained public aide recipients at a more costly U.S. based call center, thus reducing the total amount of funds available to provide benefits?

How we answer these complex questions will determine if we, as a nation, with all of our economic might, continue to “bust borders,” or simply go “bust” in the global marketplace.