Priority Shipping Overseas: Offshoring Highly Skilled Jobs

by David R. Butcher | November 21st, 2006

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While the overseas flight of skilled jobs to less-costly labor markets is alarming many workers in many professions because of its scope and speed, others are unfazed, arguing that offshoring helps the economy. Explore the two sides of the ongoing offshoring debate.

Lessons Learned from Early Offshoring Efforts

The ‘Truth’ About Offshoring

When offshore outsourcing emerged as a significant business trend several years ago, many viewed it as a shrewd, low-cost alternative to investing in larger domestic IT operations. More recently, however, offshore outsourcing has become a complex social, economic and political issue that seems to raise more questions than it answers.

Offshoring, it could be argued, never was intended to benefit people — it’s always been meant to benefit companies. And profitable companies are supposed to benefit economies, which, in turn, support societies. Ever witnessed a board of directors in the U.S. or in the U.K. write a compensation plan that rewards a CEO based on increased employment? It is based on profitability and ROI. Always. In today’s capitalist world, profitability is the very definition of success.

The offshoring of professional and technical jobs by companies in the U.S., the U.K. and elsewhere is done to save money, and, in many ways, it has worked. But it has also raised concerns. As the U.S. and others continue to struggle to recover from recession, the rate of job creation lags behind the expected pace. There is growing concern that this is due to offshoring.

Here are some arguments on both sides of the debate:

——
Everybody panic!

The trend, though not new, is indeed troubling because of its scope and speed.

It first took place in textiles and other manufacturing jobs, progressing to “low-end” services such as telemarketing and data entry. Other countries were able to manufacture goods more cheaply than in the U.S. because of lower standards-of-living and less-restrictive laws and environmental regulations. In more recent years, companies have been shipping out service jobs, as well.

While the migration of less-skilled jobs to emerging economies has benefited workers in those nations, as well as U.S. consumers who can take advantage of lower product prices, the offshore outsourcing movement continues to climb swiftly up the value chain, upsetting designers and engineers, procurers and human resources (HR). As this new wave of offshore outsourcing hits the middle class, struggling with an extended period of slow economic growth, many citizens and lawmakers are beginning to question the wisdom of offshoring. Not only does offshoring continue unabated in both the manufacturing and retail sectors, it has also engulfed skilled jobs that were once considered “safe” across a much broader portion of the workforce. And the pace at which this is occurring, offshoring critics say, is disturbing.

A recent Hackett Group report found the Fortune 500 could collectively save $58 billion annually, or more than $116 million on average per company, by offshoring many of their back office activities — including procurement.

Three years ago human resources outsourcing (HRO) was a trend, Mark Hodges, chairman and cofounder of Houston-based EquaTerra, recently told Human Resources Executive (Sub. Req.’d). In 2006, it is a $3 billion-a-year industry.

And the global offshoring engineering industry is expected to grow to $150-225 billion by 2020, from $10-15 billion last year, according to a recent study on the design engineering sector by India IT industry trade group National Association of Software and Service Companies (NASSCOM), in association with consultancy Booz Allen Hamilton. As IMT noted last month, R&D and engineering work such as designing and testing cars, consumer products and military equipment is the “next frontier” of outsourcing for India, according to the Booz Allen/NASSCOM report.

Although design outsourcing began with semiconductors, it has now diversified into other industries such as aerospace, automotive, semiconductor, farming equipment and power generation, reports EMSNow. According to an Electronic Design survey of engineers, there has been a significant rise in the amount of design work being outsourced to India (32 percent).

In late July 2006, the offshoring debate became more intense, when a Commerce Department report came to light, proffering a growing pile of evidence that shows U.S. chip design — which, with platform-level design, employs the highest number of electronic engineers — is becoming more vulnerable to offshoring in places such as China and India.

Yet India and China are not the only two offshoring destinations for highly skilled jobs that originated elsewhere…which makes workers in the U.S. and elsewhere even tenser. While India and China continue to lead the offshoring pack, attention is turning to other relative newcomers — Vietnam, Indonesia, the Philippines, Pakistan, Brazil, Mexico, Costa Rica, the Czech Republic, Hungary and Russia. That is a significantly larger pool of destinations for other countries’ jobs to migrate to.

Yet China will be “by far” the most attractive country in 2011, according to a 2006 study entitled The Asian Sourcing Boom: How Long Will it Last?

Any number of skilled positions can be sent overseas as companies continue to pursue cost savings. Because of this trend, U.S. and other countries’ workers may face an increasingly challenging employment outlook. While the global economy will improve as a whole, the local workforce may have to contend with frequent career shifts and strong forces compelling wages to contract in all economic sectors facing competition from foreign labor.

——
No worries. (It’s necessary.)

The impact of offshoring is overstated, another argument goes.

With the strong overall demand for electronics-engineer skills in the U.S., for instance, only 5 percent of engineering respondents to the aforementioned Electronic Design survey are “very concerned” about losing their job to outsourcing.

“The impact of offshoring on employment has been smaller than the impact of things like productivity increases and the changes in technologies,” according to David Attis, Director of Policy Studies at the Council of Competitiveness in Washington, D.C., said in a gantthead.com article in July. “Still, the fear exists that in the future it will have a larger impact. I think what it is doing is that it is forcing both American companies and American workers to think about how they continue to move up that value chain and to be able to do things that can’t be done in places like India and China.”

“Contrary to popular belief,” says the 2006 Duke CIBER/Booz Allen offshoring study, which examined 530 companies from both the U.S. and Europe, “offshoring high-value tasks does not lead to major job losses at home, but to more net new jobs globally.”

In the 2006 survey the average number of US jobs lost per offshore project dropped by 71 percent from 2005 (38 jobs lost per project in 2005 vs. only 11 jobs lost per implementation in 2006).

And in the U.S., for instance, the majority (59 percent) of outsourcing continues to go to other locations within the country.

Moreover, even though companies continue to offshore more highly skilled work, they are increasingly concerned about the loss of managerial control that accompanies outsourcing functions close to their core business, as well as the impact on operating efficiency, according to the 2006 Duke CIBER/Booz Allen offshoring study, the third in an annual series originated by the Offshoring Research Network (ORN). “Loss of managerial control” was cited by 48 percent of companies as a major risk of offshoring, an increase of 30 percent over 2005′s result. In all, companies cited greater concerns about their ability to manage their offshoring activities, while concerns about cultural differences, which ranked very high in the 2004 and 2005 surveys, dropped by 50 percent.

Finally, keep in mind that the U.S. population is getting older. At recent productivity levels, 15.6 million (5 percent) more workers will be needed by 2015 to sustain the current ratio of workers to the total population as well as the country’s living standards. Thus by 2015, the U.S. economy will actually require a greater — not shrinking — number of workers. And offshoring will help satisfy that demand.

While many people — especially those in manufacturing — may have to endure a painful adjustment due to offshoring, counteracting this trend has far more dire consequences, this side of the debate argues. If U.S. and U.K. companies can’t shift jobs abroad, their ability to compete likely will be hampered, dealing a blow to both economies and putting even more jobs at risk. Economics seems to make offshore outsourcing necessary for rapid growth in the 21st century. Besides, more and more people say, the “trend” is impossible to stop at this point.

Resources

Growing Demand for Engineering Services Creates Opportunities for Emerging Economies
Booz Allen Hamilton, Aug. 3, 2006

Is India the next Asian hub for design?
by Karan Ahuja, Vivek Mahajan
EMSNow, Oct. 10, 2006

An Issue Devoted To Understanding Your World
by Mark David
Electronic Design, October 2006

The Asian Sourcing Boom: How Long Will it Last?
by David Jacoby
Boston Logistics Group, Inc., May 17, 2006

Global Outsourcing
by Sunil Sharna
gantthead.com, July 5, 2006

Duke/Booz Allen: Companies offshoring high-end functions to access talent needed to drive growth
Consultant News, Nov. 1, 2006

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Comments:

Bruce

November 21, 2006

Sending our U.S. labor jobs overseas is a major, major mistake.

First, you’re trusting an outside entity with your product and taking a risk of it being copied without any rights of protection to your product.

Second, you are selling out the American people and what this great country stands for — namely, freedom! I agree, labor costs are sometimes too high for the tasks at hand in the U.S., but these can be overcome with robotics/technology. We need to protect our country first, take care of our people first, repair our homes/factories after disasters first — then if we have any resources left, help other countries out.

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Jeff

November 21, 2006

We are just now starting to see the tip of the iceberg when it comes to offshoring jobs. For each American worker that loses his/her job, there is just a larger slice of the tax/relief/programs burden every other American worker must shoulder. Soon it will not matter how cheap a product is, there will be so few who can afford it that even the offshore profitability will be impacted.

As far as Bruce’s comments go, I agree with him, with the following exception: I believe that we should help other countries, those that are our true allies. Any country that spits on the flag should go without the added benefit of our hard-earned dollars.

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Mark

November 21, 2006

Our increasing standard of living has come largely as the result of previous offshoring. Our modest increase in pay coupled with a decrease in the cost of basic goods has resulted in large increases in disposable income. In typical American arrogance, we have come to belive that we are entitled to cheap goods & high paying jobs. Why are we so much better than those overseas that the shirts they are making should only cost us 1 hours labor, but cost them 1 weeks labor?

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Bob Pollard

November 21, 2006

Neither of these gentlemen have addressed the position of comparative advantage. Those most qualified (including costs) will manufacture the product. Americans who are being layed off because they are not economically justifiable should do what I did…get more training (education) and achieve a position of more worth.

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John McDonnell

November 21, 2006

I can’t believe what is happening to the United States of America. I’m 59 and some younger people may not remember Russian leader Nikita Kruschev making a statement (something to the effect that they — Russia — would “take over the U.S. without firing a shot”. Thank God that hasn’t happened yet. However, having seen the events that have taken place since that statement, I’m starting to be very concerned about not only Russia, but the rest of the world!

I’m a businessman who you might think wants to outsource employment for the betterment of the bottom line. To the contrary, I for one, DO NOT WANT TO OUTSOURCE ANY MORE AMERICAN EMPLOYMENT! Can they honestly prove to you that outsourcing is actually good for the U.S. economy, as they argue? Not me, Jack!

I remember all too well my fellow servicemen, who spilled their blood in Vietnam at the hands of brutal communist butchers. The communist government, urged on by Jane Fonda and other activists. Now the Vietnamese government wants your money! I go into department stores and see clothing labels saying, Made in Vietnam. I could PUKE, PUKE, and PUKE again, over seeing anything offered in American stores with, Made in Vietnam. Why, why, are there so few American clothing manufacturing companies left in the U.S.? The answer is that it’s all in the name of profiteering greed by big business.

Younger generations, I implore you to refrain from buying anything that comes from Vietnam! When you pick up that garment that says, Made in Vietnam, please visualize the American blood on that piece of clothing. Just know if you purchase it, your mind will never let you wear it without FEELING the blood on your skin of that young American who fought to give the right to GREEDY American businesses that use his blood, to increase profitability for their stockholders!

Don’t be brainwashed by politicians regardless of which party they represent, crying that people like me, want protectionism and that I should forget the past. FORGIVE, YES. FORGET . . . NO NEVER. If you fail to no longer be concerned about outsourcing, history will show that America was once prosperous and supplied its citizens with quality employment. Believe me, You Will Remember, You Will Remember!

John McDonnell

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Dan

November 21, 2006

It seems naive to suppose that it is this vague thing called the economy that is driving the reality of offshoring. Our Constitution begins with a preamble that states what the Constitution is about …It is about WE THE PEOPLE… Secure for ourselves and our progeny…. Thus it is not for corporations. Corporations effectively disenfranchise American workers when they CHOOSE to get us involved in wars and send employment for poor unfortunate countries like India and China to them. This at the expense of the American families that made buiness decisions and career choices many years ago based on the Promise of the Constitution. Now that the value of the working person in the U.S. has gone up due to labor shortage, someone opened the floodgates for jobs to go overseas and for illegal workers to come in, thus devaluing the American workers’ worth. It is treason and nothing less.

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Michael Ji

November 21, 2006

Offshoring is not a damaging process. It offers more relaxes but not necessarily less revenues to the existing population. Even less revenues on old sections, it triggers the movement to higher levels of practices.

Of course, it will mean more changes — but it also liberates people.

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Raj Kumar

November 21, 2006

Outsourcing, even highly skilled jobs is profitable, both for the companies doing so and the economy for the country choosen for outsourcing. It is good for global economy and must be persued further.

As for comments, fears and arguments against it, I can only say that most new experiments are always resisted, especially by those who have been comfortably enjoying benefits of the existing system and not wanting to change ignoring signals for doing so.

The future belongs to those who recognise the need for change and have the courage to implement it. Their perseverance to go ahead becomes a motivating factor to solve problems that crop up, which is quite normal with any new idea til it is perfected.

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Chris Robson

November 22, 2006

We are also now experiencing the lack of true business ethics being taught in business schools where making money at any cost is the only rule. Most of these people can’t figure out which end of a screwdriver to use.

Unfortunately, when the truly creative people were too busy to handle their money, the most worthless slug the creative mind employed was put into the “bean counter” positions so he wouldn’t hurt himself. Thus since these kind of individuals don’t have positive creative energy, they spend their day using negitive energy creating their own worth. Over time, we gave them too much power, and now you see how we created Corporate America.

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Scott Lange

November 22, 2006

No country has ever been successful in maintaining a perpetual trade monopoly based on proprietary technology, but neither has any previous society deliberately accelerated the pace of putting itself out of business the way we have. I have read the free market philosophy espoused by the late Milton Friedman. Were it only economics, it might be fully valid. When one starts to take in both the geopolitical as well as human consequences, it is pretty clear we cannot afford the kind of free economy we have developed. No matter what our politicians in Washington say, the playing field is never quite level. There is no meaningful protection of American intellectual property in a very large piece of this world, and there seems to be no concern that both blue collar and white collar American consumers face diminished job opportunities and incomes in the coming years.

The time will come, possibly in the very near future, when China will dictate our foreign policy to us because we will not be able to afford the consequences to our economy.

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Tom

November 22, 2006

Two words…….Fair Tax! It would help put an end to this mess.

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Jeff Bain

November 22, 2006

The only people who are unfazed by offshoring are the people who have jobs that are not being offshored. Perhaps we should offshore acounting and executive positions and then see how those people feel about offshoring jobs. I’ll bet their opinions will change.

Market-based economy theorists admitted that in their model they did not consider the “human” element and it was an error. Accountants and executives better start considering that they are dealing with peoples’ lives and not just the short term financial element. Corporations do have an obligation to the community, and only looking at shareholder profits is a short-term benefit that can ruin the American community. If all aspects are included in the equation, business leaders would get a better sense of the big (real) picture. But leaders that remove the aspects that don’t support their desired outcome will always have a cockeyed view of reality and screw things up.

Unfortunately it can take years for the flawed logic to surface. All shareholders are not American, and those dividends leave our country and our economy. As American purchasing power shrinks and others (like China) grow the corporations and the rest of the world will not give our American economy the attention it gets now. It is a spiral that will result in America’s demise. But it will take time to surface. And by the time it is apparent, it will be very difficult if not impossible to turn around. Now is the time to keep America strong. Our huge government debt is similarly contributing to the downward spiral because it also relies on foreign investment that sucks money out of our country.

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Steve Bober

November 22, 2006

Looked at from a global perspective, outsourcing jobs formerly done by Americans to workers in foreign countries with lower wage rates is a good thing. It gives more to those who currently have less.

Looked at from the perspective of Americans, however, it’s terrible! The ultimate end of this process is to move the entire world towards a single standard of living. You can be certain that Americans would not be happy at the average standard of living in the world today!

Regarding Mark’s comment about a shirt costing an American one hour’s labor, and costing the person who made it one week’s labor, would Mark be happy with that shirt ultimately costing both the maker and the American consumer two day’s labor?

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Mary Reynolds

December 2, 2006

Americans have collectively opted to spend more time living and less time working. This is a natural alternative to working ALL the time and never enjoying life. Part of enjoying life is being able to control one’s surrounding cirsumstances.

We need to take advantage of the opportunity the Federal Government has given us to be more literate and intelligent. Each person can learn what he or she feels is necessary to preserve the peace. We have some serious realities to deal with in the coming years…predicted by the repetitive nature of history. All Americans need to establish intellectual ties with each other and understand that we were disliked because we had so much, while others had so little. It’s not going to hurt us to part with some of what we have in excess.

The struggles of recent history left us all shaking our fists at government for some reason; even though our government is made up of people just like us who were brave enough to step up to the podium and take the hisses and tomatoes in the face, while we justify our freedom of speech. It’s time to realize that we got what we asked for when we were opposed to foreign aid. People who teach people how to help themselves are doing a wonderful thing. How can we criticize communism if we are not willing to teach the communists to be capitalists?

I agree that we should not buy goods made in Vietnam if it hurts the feelings of our soldiers, but many Vietnam-era soldiers were fighting to have something that was not being equally shared with them in their own country. So why blame the Vietnamese?

We should take our place in the world as the people who came together to save ourselves from ourselves and heed the warnings of all inspired writers. There’s only one GOD and whether the language barrier is designed to prolong or shorten the time we have to set up a kingdom of heaven on earth depends on how we relate to people we don’t quite understand. Our blessings come from a fairly stable ecological system and we should create more jobs for young people preserving what we have in natural resources. We are draining some countries of theirs and think nothing of it. Our wants, not needs, have caused
others to fight among themselves and we should be
less critical of the results of our actions. Our people like to extend their free lifestyles to the rest of the world and they took their jobs with them. We don’t have a right to ask them to come back but we do have a responsibility to see to it that working in America is more attractive than working someplace else. The whole idea of getting and keeping what we work for is being underminded by forces that we have control over. Exercising that control should be on our agenda. If we don’t, we WILL be taken without a shot being fired.

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Mark Pearce

December 2, 2006

Economists who promote outsourcing see labor as a commodity. The human element is never described in an economist’s graphs, charts or theories. Outsourcing is intended to reduce labor cost and, therefore, must result in a shift of standard of living. America’s lower classes will suffer and offshoring countries will benefit.

Here is the catch.

Squeezing more for less from production labor risks long-term harm to the buying power of the American consumer while creating only marginal selling opportunities in foriegn countries.

Remember, two-thirds of the US economy relies on consumer spending (i.e. consumer’s paycheck). Freidman’s scorched earth economics is causing businesses to feed off the consumer/labor pool without returning enough wealth to the bottom consumers to keep the cycle going.

We have been living off consumer debt and foriegn investment in the dollar. If our economy hits a bad spell, we will desparately wish we had not sent all those dollars overseas. God knows we won’t sell many Ford Explorers to the Chinese if our consumers can’t afford them.

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Nick S.

December 6, 2006

Here are the facts:

Offshoring happened first because of the cheap labor and, mainly, educated cheap labor. That is working labor, not unionized labor.

Now offshoring will continue not only to make products overseas and sell them back home but more and more to make them for the countries where they are made, namely China and India. These countries have become huge markets, and with populations in the billions, there is a huge incentive for companies to open shop there. Who will miss this piece of the pie will probably have no cake later.

The solution to this is to force the Governments of these countries to let their currency self-adjust rather than control it. If the currency of these countries will go up: first, the rate of change will slow down; and second, the buying power of the ordinary Chinese will increase, therefore they will be able to come on par with the Western consumer much faster.

However, nobody should dream about going back and getting the business back home. The cat’s out of the bag and nobody can change this. The huge Chinese and Indian market make corporations salivate with greed.

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Dennis Lynch

December 18, 2006

Such anger, such fear and such hatred!!!

This is what I percieve from a few of these responses.

Many good issues have been raised and some thoughtful analysis, presented. Some people seem to perceive this as an “us vs. them” issue. I don’t. If we think of this as a competition, we will always lose. If we think of this as a cooperative venture, everyone will win. More jobs means more pay, more customers and more sales.

The problem seems to stem from the excessive zeal of the corporate and political structure to reduce regulations over working conditions and pollution, because these things cost money.

A more rational humanist approach would see these challenges as opportunities to improve conditions and make a better world.

Unfortunately, it is easy to try to force “our” system down everybody else’s throats than try to learn. The rest of the world seems less interested in accepting this bullying. Our blindness to that will be our undoing.

The limits on resources are a world problem, not an American problem. Going the way we have for more than a century will simply speed the collapse of all the systems upon which we rely.

Reliance upon American military strength to settle all the world’s problems will always fail. Since the unjust Vietnam war, we have been involved in bombing more than 20 countries, not one of which has ever developed a functioning democracy. And in some countries (like Iran, Iraq and Chile), where we didn’t like the democratically elected leaders, we had them overthrown, or killed.

It is irresponsible and shortsighted to think of this as just our problem. I expect more from our government and our industrial and corporate leadership. It is sad to be so constantly disappointed.

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Anonymous

December 18, 2006

Why we refuse to give a job to poor countries — let’s offshore all the jobs that we can and invent new ones — is it hard to create a new type of jobs…How much money do we need to pile on stock market and not spend it for creativity…

States needs to understand that there is a limit for spending tax money…so the sooner we reform ourselves the better is will be.

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Rod Adams

December 19, 2006

There is more to building and running a business than just making money. (I know that it heresy to many MBA types.)

In some cases, the business is actually a creation of an individual or motivated team that wants to build something special for themselves, their employees and their community. They certainly want to create resources so that they can sustain the growth of their creation, but they also recognize that VALUE is defined by more than just a low price.

Workers that are well trained and enthusiastic about their jobs and their products are more than just a commodity — they are human beings with their own creative capacity. They can anticipate problems, think of better ways to complete their tasks, and even deevelop product improvements that can lead to increased sales. A dedicated workforce can be the company’s most effective evangelists.

Outsourcing or offshoring some minor functions may be a temporary cost savings measure, but the most successful companies know very clearly that work done internally is where they create their real value.

‘B’ schools are doing us all a disservice by preaching a gospel of cost reductions without considering the effects on long-term value.

In my most cynical moments, I think that business “leaders” recognize that they cannot farm out as much work as some studies might imply, but they talk about outsourcing or offshoring loudly enough and often enough to keep their employees from demanding their fair share of the business output. It might just be a scare tactic.

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Rich Holodak

December 19, 2006

Off-shoring is not the problem. Rather, it is the symptom.

Back in the ’90s, I got a phone call from some pollster asking if I would take a 10-minute multiple-choice poll. Since I had the time and they assured me it would not be politically motivated, I agreed. The first question asked was “What do you think is the biggest problem the USA faces currently?” and the choices were things like “the economy,” “the deficit,” “the lost war on drugs,” etc.

As I thought about the answers, I said that I didn’t think any of their choices represented the biggest problem this country faces, and when I asked whether “none of these” was a choice (“No”), he then asked me what I thought the biggest problem was. I said “Greed” and how that has accelerated the breakdown of the family unit. He was a bit surprised at my answer, but he agreed it was so obviously valid that he’d recommend it be added to the list of posssible answers.

I don’t know whether it was added (although I doubt it), but I believe the driving force of Greed — and all its symtoms — continues to be the biggest problem faced by the USA. It will likely lead to our downfall.

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John B

December 21, 2006

Henry Ford knew in the 1920′s that his best customers were his own employees. American corporations have forgotten this lesson. Who do they think will buy their products when average American incomes are declining? It won’t be some poor slob in China or India.

Also China has a rule that everything sold there has to have 40% Chinese content, maybe the US have the same law. Can you imagine what impact that would have?

Or perhaps we could cut income taxes fund the government how Alexander Hamilton wanted, with tariffs on imports and exports.

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Kwabena Adjei-Ntow

February 23, 2007

It is absolutely clear that it is time for offshore companies to look towards Africa, especially Ghana. There are highly qualified IT professionals and data entry operators in Ghana. It will create jobs and offshore companies will benefit greatly from the good investment climate now in Ghana. I am committed to this industry.

Do contact if interested.

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