Offshore outsourcing is not a new practice in the United States. Offshore outsourcing of information technologies services, however, is relatively new to our nation. It is a hot issue in political debates, with this being an election year. Job loss and job creation in the United States is on the platforms of leading candidates. Economists are projecting that the offshore outsourcing of certain types of jobs will in fact create jobs here at home, ultimately benefiting the labor force and our economy.
While there is not significant statistical data yet to support this theory, if one looks to the history of outsourcing as a whole, it does not seem an impossibility. But why are we outsourcing these jobs? What are the factors that have brought us to this place in the labor market? What caused employers to look to other countries for employees? The purpose of this short study is to consider these questions and provide some thoughts as to where we are now, how we got here, and where we are headed with offshore outsourcing of information technology jobs.
Outsourcing is the process of subcontracting services and operations to other firms that can provide them more cheaply or better . Companies outsource tasks, projects, and sometimes even entire operations. Offshore outsourcing, then, would be outsourcing to firms in other countries. This practice is not new, just as the loss of jobs here in the Untied States to other countries is not new. The automobile industry and the steel production industry were hit by outsourcing long ago , as factories were built in other countries and manufacturers hired workers at lower wages to produce parts and products.
And even before this, workers actually lost “skilled jobs to low-wage foreign competition” as long ago as the Industrial Revolution . In the 1800s British skilled weavers were protected by the government with bans on the use of the textile machinery , but only temporarily as the machines proved to be five times more efficient; Indian cloth makers in the 1830s lost out to British textile workers ; in 1892 Andrew Carnegie’s efforts to automate steel production resulted in the infamous Homestead strike of 1892 .
Outsourcing was not the only way low-wage foreign workers affected the work force in the 1800s. There were also millions of immigrants added to the workforce. When that many new workers were added to the labor force, of course it was not without effect on industrial wagesthey were driven down. Both outsourcing and immigration affected the economy in more ways than just the cost of labor. Products were manufactured at a lower cost and thus sold for a lower price. Lower manufacturing costs benefited the companies, and the lower prices of the goods produced benefited consumers.
Outsourcing TodayOffshore Outsourcing How is it Possible? According to Philip Kotler, “Today’s economic landscape is being shaped by two powerful forces– technology and globalization. ” Offshore outsourcing is made possible by these same two factors. This is not surprising, given the history of technological advances’ effects on the economy. Advances in communications technologies and information technologies are making it possible. Several jobs can be performed at one place while reporting to another, by electronically sending the work wherever it is needed.
And offshore outsourcing is having a tremendous affect on the economies of the countries involved. The transportation revolution in the late 1900s was driven by technology, and it completely changed the way goods were transported from place to place. Trains and steamboats made it possible to move raw materials and finished goods alike across continents and even overseas. This resulted in a profound change in the way businesses functioned. The cost of shipping goods fell dramatically. Nations began importing and exporting goods, which changed the way U. S. mpanies worked.
Also, these new technologies created new markets and new industries, such as department stores and mail-order catalogs, which were dependent upon the rail cars to deliver goods. The addition of refrigerated rail cars facilitated the beginning of a national meat-packing business, which forced the closure of local meat-packing plants. In similar fashion, the Internet and the availability of high-speed data access and communications have changed the way we do business today. Some companies allow employees to work from home, via the virtual office.
A computer with Internet access and a telephone are the only tools necessary. There are stay-at-home jobs, such as medical transcriptionists, insurance claim processors, and even computer programmers. These also require only Internet access and a telephone. Communication with employers is primarily done via telephone calls and e-mail. The same technology that created these opportunities for us is now making it possible for workers in foreign countries to compete for them. One example of improved technology making a marked difference is the fiber-optic cabling of telephones into India.
According to TeleGeography, a research division of PriMetrica, Incorporated, the capacity of the lines had increased sevenfold from 2001 to 2002 . This improvement also allowed for better Internet and e-mail services by increasing the bandwidth possible on the phone lines. Worldwide, there have been improvements in bandwidth, compression, secure methods of connectivity, and falling prices for Internet services. All these are contributing factors to the offshore outsourcing; it has become technologically possible. And firms are beginning to take advantage of it.
Here in the United States, communications companies and fiber-optics specialists hit with a whirlwind, and “the glut of high-speed fiber-optic telecom networks in the U. S. led to a near-total collapse of domestic pricing along those routes in the late 19990s: during 1998, in a period of less than a year, prices fell 50%, and they have fallen 80% more since then, according to Oncept. But now, the impact of overcapacity of telecom is reverberating throughout other industries as companies rush to take advantage of improved technology, plummeting costs and cheap labor. ” We saturated ourselves and now the market is ripe.
The physical location of potential employees is no longer a constraint. We have made it possible to share information over data and communication lines in a matter of seconds, from several thousand miles away, and at a reasonable price. Recently in a speech Bruce P. Mehlman, Assistant Secretary for Technology Policy of the U. S. Department of Commerce, said it like this: ” Advances in communications technologies (e. g. broadband Internet) have empowered once-distant service sector workers to compete in real-time, while foreign workers and service providers continue to improve their quality, processes and expertise.
Globalization has influenced offshore outsourcing, also. To some extent, globalization is driven by technology. Physical borders are no longer boundaries, and neither are seas and oceans. More and more businesses are serving multiple countries with their products and services. The ease with which the products can be moved creates a need for laborers as well as skilled workers and management in each market served. According to Dr. Catherine Mann of the Institute for International Economics, globalization caused the 0. 3% growth in the U. S. oss domestic product between 1995 and 2002.
Manufacturing is not the only industry involved but also service industries, such as information technology call centers and software design and development. Why Do We Outsource As defined in section one, outsourcing is the process of subcontracting services and operations to other firms that can provide them more cheaply or better. Firms that outsource believe the job can be done more efficiently by outsiders than by their employees. Traditionally, outsourcing work was about finding workers at lower wages to cut labor costs.
The lower wages are still a factor today, in offshore outsourcing. “Wipro, Limited pays its Indian engineers a fraction of what their U. S. counterparts make. ” Also, Proctor and Gamble found that offshore labor rates were about twenty percent of those in more advanced economies, such as the United States. Other estimates have rates at thirty percent of salaries in the U. S. However, some experts say offshore outsourcing of information technology jobs today is less about reduced labor costs and more about the quality of work and turnaround time.
Bob Evans, Editor in Chief of Information Week, said, “The truth–as galling and bitter as it might be for many in this country to accept–is that companies are turning today to offshore outsourcers because in return they can get better quality in shorter times at lower cost and the object of that hunt is twofold: new sources of reasonably priced innovation and new sources of reasonably priced quality. ” Workers in places like India, Warsaw, the Philippines, Malaysia, and Indonesia are educated, well trained and extremely motivated.
Their economies are bad and they desire to raise the standard of living for themselves and their countries. In India, it seems to be working. The economy grew 10. 4% in the quarter ended in December as compared to one year ago, helped by agriculture, manufacturing, and the services sectorwhich includes outsourcing contracts from other countries. Companies have also benefited by the time difference from the U. S. to Asian countries. There are fourteen time zones from shore to shore. That puts a new spin on working around the clock.
The U. S. stands to gain from offshore outsourcing, too. In global competition, our nation’s companies can “gain opportunities to win global business, particularly as developing nations improve their own domestic markets for hardware, software and servicesExpanding operations around the globe enables American companies to operate closer to growth markets and new customers, improving economies of scale for entire enterprises with global reach and tapping the best-and-brightest talent around the world. “