Transcript Outsourcing/Offshoring

Offshore Outsourcing
Travis Larsen, Lara Osmond, Billy Palmer,
Kyle Smith, April Young, John Youngberg
Background:
Offshoring and Outsourcing
These terms have had various meanings and are used
interchangeably in some of the literature, to clarify:
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Outsourcing: subcontracting business outside of the
company
Offshoring: moving business from one country to another
Offshore outsourcing: transferring business outside of the
country, to another firm
Most of the research pertaining to offshore outsourcing
simply call it outsourcing, we will do the same
Background:
Reasons for offshoring
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Businesses outsource for the purpose of
cutting costs and raising profits. An early
example of outsourcing in America in the
1970’s, IBM developed the IT industry in
India.
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Economically, if some people can use some
of their skills more cheaply than others, then
those people have the comparative
advantage. The idea is that countries should
freely trade the items that cost the least for
them to produce.
Background:
How it came to be:
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Production offshoring got its big push when the
NAFTA made it easier for manufacturers to shift
production facilities from the US to Mexico.
After its accession to the WTO, China emerged
as a prominent place for offshore outsourcing:
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Cheap prices through very low wage rates, cheap loans,
land, and huge economies of scale based on cities with
populations of over a million workers.
Currently, India's engineering talent has made India
the offshoring destination of American high-tech
firms, lead by HP, IBM, Intel, AMD, Microsoft, Oracle,
and Cisco.
A Brief History of Outsourcing
Outsourcing has been practiced for
over a hundred years…
 In the early years of US History,
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America's covered wagon covers and
clipper ships' sails
 Scotland
 India
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India’s textile manufacturing
 England
A Brief History of Outsourcing
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More recently, in the U.S. in the 1970’s, it was
common for computer companies to export their
payrolls to outside service providers for processing.
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In 1979, British voters elected Margaret Thatcher as
their prime minister, and in 1980 U.S. voters elected
Ronald Reagan as their president.
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They worked (as did their successors) to create and sustain
agreements and organizations to promote free trade.
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The General Agreement on Tariffs and Trade (GATT)
The North American Free Trade Agreement (NAFTA)
The formation of the European Union
The World Trade Organization (WTO), which superseded the
GATT in 1995
A Brief History of Outsourcing
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Continuing into the 1980’s, accounting
services, payroll, billing, and word processing
all became outsourced work.
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Until this point, the reasons for outsourcing
had more to do with small efficiencies
than reshaping the economy.
It wasn't until the late 1980’s that
outsourcing began to emerge as a potentially
powerful force in transforming global
economies.
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A Brief History of Outsourcing
The First Wave
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(1987-1997)
Major outsourcing in the manufacturing industry
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Associated loss of blue-collar jobs in many industrial sectors
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Work outsourcing primarily to East Asian countries of
Taiwan, China, South Korea, and Malaysia
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Reasons:
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Low costs of manufacturing
Availability of skilled labor
Promotion of business friendly environment
Existence of production and supply networks in those
countries
A Brief History of Outsourcing
The Second Wave
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Outsourcing of White Collar Jobs
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(Late 1990’s)
Software sector was first to go
Other non-manufacturing sectors –
telecommunications, retail trade, finance, banking
and insurance
What caused this major burst of outsourcing
in the late 1990s?
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Creation and quick distribution of the internet
Transnational networks set up by immigrants in
the U.S.
Liberalization of emerging market economies
A Brief History of Outsourcing
The Second Wave
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Where to?
India
 Malaysia
 Philippines
 South Africa
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Why?
(Late 1990’s)
A Brief History of Outsourcing
The Second Wave
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(cont.)
Push factors vs. Pull factors
Pull factors for Second Wave countries:
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Widespread acceptance of English
Business and communication education
Common accounting and legal system to the U.S.
(at least in some of the countries)
General institutional compatibility and adaptability
Time zone and geographic differences – created
24/7 capability and overnight turnaround times
Large and continuous supply of technically savvy
graduates
Current Outsourcing
"In India, they were pumping these guys out left and right. . . . Look at
the deal here: We've got very highly paid SAP programmers that we
could hire in the U.S. - and they're hard to find. Or we could go to India
and find very talented SAP programmers immediately at 35% to 40%
lower cost."
Network World
July 2004
"...offshore outsourcing will create more than 337,000 jobs by 2010..."
InformationWeek
November 2005
"Demand for offshore IT services isn't slowing, and that trend is showing
up in Indian companies' hiring. Between July and September, Tata
Consultancy Services increased its staff by nearly 12% to more than
53,000, while Infosys Technologies' staff grew 15% to more than
46,000."
InformationWeek
October 2005
"Outsourced IT services brought in $12 billion for India 2004, leading the
world in IT exports."
Santa Clara University's
Leavey School of Business
October 2005
"Only 19% of US businesses have an offshore outsourcing strategy, a
study by Ventoro found. However, the percentage skyrockets to 95% if
only Fortune 1000 companies are considered."
ZDNet Research
October 2005
"Business Process Outsourcing will overshadow and incorporate IT
outsourcing and mainstream BPO expenditure is likely to grow worldwide
by 10 per cent a year from $140 billion in 2005 to over $220 billion by
2010."
LogicaCMG
August 2005
Current Outsourcing:
# of Jobs Affected
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Jobs Lost to Date*: 300,000-995,000
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Projected Job Loss: 3.3 million-6 million
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300,000-500,000 (Goldman Sachs)
400,000-500,000 (Business Week)
995,000 (economy.com)
3.3 million over 15 years (Forrester Research)
6 million over 10 years (Goldman Sachs)
Jobs at Risk: 14.1 million
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14.1 million (UC Berkeley)
* The total size of the U.S. Labor Force is 140 million jobs
International Aspects:
Problems
Jobs are leaving the United States and
going to other countries
 Less people in the United States know
trades that are outsourced
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International Aspects:
Benefits
Domestic companies can employ
foreign workers for less
 Prices lower for products sold in the
U.S. and made in other parts of the
world
 Countries in the rest of the world can
become more developed
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International Aspects:
Options
Keep outsourcing at the current level
 Decrease outsourcing in the future
 Increase outsourcing in the future
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International Aspects:
Keep outsourcing as is
Foreign workers benefit
 Loss of work for domestic workers
 Domestic firms benefit from lower
wages
 Foreign firms lose workers and have
less choice in labor
 No new firms can outsource
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International Aspects:
Decrease outsourcing
More jobs for American workers
 Higher wages for lower skilled workers
 Workers in foreign markets work for
foreign companies
 Less work for foreign employees
 Lower wages for foreign employees
 Domestic companies have to pay
higher wages by using domestic
workers
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International Aspects:
Increase outsourcing
Firms wanting to start outsourcing
benefit
 What else can we outsource?
 More foreign workers can find better
jobs
 More trades will be lost for American
workers
 More workers will no longer work for
foreign firms
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Special Problems:
Negative Consequences
Qualified professionals are losing their
jobs to offshore workers who will work
for less
 Difficulty of monitoring child labor
 Difficulty of managing remote locations
with those who understand the culture,
and are in synch with corporate
objectives
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Special Problems:
Negative Consequences
Loss of incentive for college students to
pursue IT careers as family members
and friends lose jobs
 Loss of trust between employees and
the employer as more jobs move
offshore
 Due to new roles, competencies, and
skills required when outsourcing,
inefficiencies and disorganization result
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Special Problems:
Positive Consequences
Proven beneficial as far as cost, quality,
and value of work delivered
 Improved service delivery and access
to a greater number of highly qualified
talents
 In-house organizations lack the
assurance of quality standards that
those with offshore operations have
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Special Problems:
Myths and Realities
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Myth: A job outsourced is as good as a job lost
Reality: Outsourcing is a budget balancing act.
Outsourcing does not call for job losses, but
increased efficiency. This helps the firm to focus
its resources on their most valuable aspects of
business, namely producing and selling its
products. The end result of this drive toward
efficiency is evident to Americans in lower prices
and higher standard of living. Foreign
outsourcing goes hand in hand with higher
wages, lower prices, higher profits, and
enhanced competitiveness.
Source:
http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities
Special Problems:
Myths and Realities
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Myth: Outsourcing is a one-way street
Reality: We are not only outsourcing jobs, but have
jobs being outsourced to us. There are over 6.4
million jobs in the US that have foreign employers.
They are actually growing at a faster rate than we are
outsourcing. Those foreign employers that are
outsourcing to the US often pay higher than the jobs
that are being outsourced from the US. For instance,
the 4,300 employees that work for BMW in South
Carolina, and the 14,000 employees that work for
Honda in Ohio. The fact is, most of the jobs that are
being outsourced are actually below the US average
wage. As a result, comparatively lower wage jobs are
being outsourced and higher wage jobs are coming in,
increasing the standard of living in America.
Source:
http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities
Special Problems:
Myths and Realities
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Myth: Only greedy corporations benefit from
outsourcing
Reality: Everyone benefits from outsourcing as it is a
means to lowering costs in response to competition.
As costs decline, every consumer benefits by paying
less for the same product, or even for a better product.
The vast benefits of outsourcing are usually overlooked
as the benefits are widespread among the economy.
The few who lose their jobs to outsourcing are much
more vocal than the millions of consumers who save
hundreds of dollars. This results in the American
consumers saving billions of dollars each year.
Source:
http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities
Looking to the Future:
Potential Negatives
American unemployment rate will rise
 Americans will spend less because they
will feel less rich
 American resources such as concrete,
drywall, and oil will be shipped over
seas and America will experience a
shortage of goods.
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Looking to the Future:
Potential Positives
Quality of jobs increase as lower wage
jobs are replaced with high-wage, highskill jobs
 As competition increases, savings from
decreased costs will be passed on to
consumers
 Domestic companies will be able to
compete with foreign companies easier,
causing a decrease in tariffs and
increase in world trade
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Looking to the Future:
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Only time will tell whether the
negatives will out-weigh the positives,
or vice versa