Outsourcing:-Will it become a norm in doing businesses between generations?
With a growing labour market abroad and a challenging economic situation at home, large and small firms are making the push to outsource professional services to highly skilled personnel in less expensive labour markets abroad. At a global customer summit held in 2003, over 80 US firms indicated that outsourcing has saved them between 25 to 40% annually. In the services-sector, Forrester Research estimates that 2 percent of all American jobs will move offshore. The current situation of reduction in costs versus loss of jobs, at least in the short-run, bears some similarity to the dilemma faced by the automotive industry in the early eighties when some of the parts began to be manufactured in lower cost countries such as Mexico. At the time, some observers perceived that too many U.S. jobs were being sent offshore, and that the impact to the U.S. economy would certainly be negative. However, a detailed analysis of that situation highlighted the danger of adopting a restrictive policy. This analysis revealed that increasing global competition required the United States automobile companies to outsource manufacturing to a certain degree, or to risk losing the world market to other countries that could produce cars cheaper and better.
Of the approximately $1.45-$1.47 of value derived from every dollar spent offshore, U.S. firms receive $1.12-$1.14, while foreign firms receive only 33 cents of the value. Further, if income taxes paid by H1-B visa holders, and software and service imports by India are considered, outsourcing provides an aggregate benefit to the U.S. economy of $16.8 billion. Another factor to be considered is that the average age of the U.S. working population is declining, and the US Census figures indicate that the U.S. will require an additional 15.6 million workers to maintain the current working population in 2015.
From a labour perspective, most professional service workers are not unionized, though several observers have cited this possibility as being a likely trend, especially in the software industry. Groups such as the IBM union and the Seattle union represent the rights of a subset of software workers and advocate leaving American jobs in America. If an increasing number of professional workers enroll in unions, the new labour unions may impact the larger political landscape and alter the existing balance between management and labour.
In order to mitigate the types of pressures described above, one needs to think of new hybrid work paradigms that yield the best cost performance ratios by having part of the work be performed in the US and another part abroad. The potential distribution of work across geographic and temporal boundaries requires careful delineation of the economic ramifications of alternative distribution models in order to elicit the optimal benefits from the outsourced model. While some lessons can be learned from the experiences of globalization in manufacturing industries, the inherent distributed nature of the new paradigm presents new challenges. The costs for collaboration, as well as for replicated hardware and software, can be significant. Further, one must consider the investment in effective hiring processes, and in travel between onshore and offshore locations – both of these factors impose financial overheads whose benefits can be hard to quantify.
Another major change is the widening of the competitive landscape. The lowering of costs in the software industry is making it possible for smaller firms to compete much more readily with larger firms, because the smaller firms can now access a bigger labour pool much more easily. With many professional services, the start-up costs are lower, and do not involve the significant capital investments that characterized the typical manufacturing scenario. These facts allow smaller companies to enter new markets and to maintain a small core of designers onshore that is complemented by a larger pool of offshore professional service workers. Using this hybrid model, they are able to compete more vigorously in the global market.
A survey of over 50 software executives participating in off-shoring concluded that “off-shoring will live or die based on the ability of everyone involved to communicate with each other.” Richer collaboration technologies need to become available in order to enable simultaneous use of video, audio and other messaging capabilities to link geographically and temporally separated personnel. The outsourcing of professional services requires firms to transfer knowledge via formal and informal channels within their organizations, as well as to establish and preserve knowledge repositories both for offshore teams to come up to speed on new tasks and for onshore teams to learn what is being done offshore. Such efforts require deep understanding of evolving technology and business needs. A Forbes report identifies the key factors that contribute to a particular country’s success in a particular market: infrastructure, culture, language, education, and many others.
Technology can be used to mitigate many of potential deficiencies among these factors, and to bridge cultural gaps between employees from different nations. Based on these factors, both the Forbes report, as well as a Merrill Lynch report, concludes that India is the most preferred destination for outsourcing. The key is to educate the concerned individuals both on the opportunities as well as on the process, and to use technology to develop an understanding of what is best done in the US and what is best done offshore. This process may lead to the conclusion that a revised onshore process is a prerequisite to a successful offshore process. For example, Campbell suggests that requirements definition is essential for quality outsourcing projects because the communication process is especially tough one. In outsourcing of professional services, the set of relevant stakeholders involves include parties from both developed and developing nations.
Now, companies in developing nations themselves are beginning to outsource to other markets to spread their labour costs.
The table below summarizes the key stakeholders:
- Outsourcing Nations Host Nations
- Professional service workers losing jobs
- Firms hiring foreign labour
- Legislators responsible for economy
- Government procurement
- Customers of professional services
- Professional service workers being hired
- Firms providing outsourcing service
- Policy makers responsible for economy
- Citizens not being hired for professional services
The relationships between these stakeholders is complex.
Professional service workers who are losing their jobs to outsourcing and legislators who are faced with the impacts on labour and economy have to deal with the short-term impact. On one side, we have the workers and the need to retain professional service jobs remain within the United States; on the other, we have significant cost savings accruing to the firms who are hiring the foreign labour. This issue is complex because long-term solutions such as better education, better infrastructure, and better intellectual property protection, as suggested by Mehlman, are irrelevant in the short-term in terms of their ability to resolve the issues faced by these stakeholders.
Business executives are increasingly convinced that outsourcing of professional services can provide their companies with the major cost benefits by allowing goods and services to be produced at the most economic prices without the traditional barriers of national boundaries and corporate boundaries. On the other side, trade unions and unemployed individuals blame many of the economic woes to outsourcing. There are other stakeholders in this issue, too.
The issue of outsourcing of professional services across geographic and temporal boundaries requires detailed analysis of complex short and long-term issues, both on the national and international level. Firms will continue to move forward with plans to outsource, with the benefits accruing primarily to their shareholders. Workers will be retrained and will acquire new jobs that are more suitable for their background and location, both in developed and developing countries. One now has the opportunity to move towards the “24-hour global knowledge factory” where outsourcing means active engagement on knowledge intensive tasks for 24 hours a day, with opportunities for all involved. This future can be realized with careful consideration of all stakeholders mentioned herein, and with thorough analysis of the strategic, technical, economic and organizational issues discussed in this paper. If firms, governments, and individual workers are able to frame an approach in the areas mentioned above, outsourcing can be a “win-win” situation for all, and the globalized world of 24-hour knowledge factories can become a reality.
Four years ago, one of the authors of this paper advised Polaroid Corporation to perform more of its development tasks at its center in Gurgaon. There was resentment against this idea. Since then, Polaroid has gone through a painful process and more than three quarters of its employees have either resigned or been laid-off. All parts of the company have been downsized. The only exception is its development center in Asia; the latter is now considered vital to the future of the company. Would it not be better for organizations, especially government agencies, to comprehend this potential without going though the intermediate stage of pain and suffering?
The growth of the IT sector in general and the BPO segment in particular is not confined to India. Firms involved with software services outsourcing and BPO are rapidly gaining ground in the Philippines and Malaysia (call centres and other back-office BPO), China (embedded software, financial firm back-office BPO, some application development), Russia and Israel (high-end customized software and expert systems), and Ireland (packaged software and product development). While it is difficult to estimate the exact number of jobs created in these countries in these sectors, let alone those transplanted and created by US firms, tentative evidence collected
suggests that business process outsourcing and software outsourcing have together generated, at the very least, over a million jobs in the 1990s and hundreds of thousands more since the turn of the century.
One possible scenario is that services job outsourcing proves more costly to the economy than the earlier round of manufacturing outsourcing. As centers of skilled high-tech professionals build up in other parts of the world, the US and California may no longer dominate the next wave of innovations, and we would observe slower growth of high-wage jobs within the US and California. In this extreme situation, economic adjustment, in the absence of continuing innovation originating in the US, first might take the form of prolonged unemployment.
Then, workers losing their jobs to outsourcing would finally be absorbed in lesser-paying services jobs. Alternatively, there could be a downward adjustment of salaries and wages, making the outsourced occupations internationally competitive again. Under this worst-case scenario, the impact on the demand for office space would initially be reflected in lower rents and prices, and higher vacancy rates. In the long run, with increasing employment in other jobs and occupations, rents and prices would settle on a lower growth path trajectory with vacancy rates returning to their long run equilibrium. As an alternative to this troubling scenario, a backlash against globalization could occur, both worldwide and within the US, slowing down the process of business services outsourcing. Opponents of globalization are already discussing protectionist measures and regulatory roadblocks in the form of restricting the kind of jobs that can be outsourced. If successful, this kind of protectionism, although inefficient from the point of view of the economy, may result in the retention of some of the outsourcing jobs. In the short run, this would moderate the negative impact on the real estate sector.
Rents in some of the higher priced markets could continue to remain depressed, even with expanding employment nationwide. Finally, the most positive scenario is that the US and California economies continue to fashion their outsourcing activities in light of the new production paradigm, keeping the “cream” of the new development at home, while the more routine activities are outsourced. Under this scenario, innovation would lead to a continuing stream of new service and manufacturing activities, and hence new jobs and occupations, while competition and the need for lower-cost supply would force more mature services operations overseas. Depending on their education and skills, individual workers might still find it difficult to find replacement employment at similar wages, but overall, the jobs lost to outsourcing would be replaced by higher-wage jobs in the new subsectors brought about by innovation. Increasing wages, incomes and company profits would then impact the real estate sector positively through a recovery and eventual increases in prices, rents and occupancy rates.
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