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PITON Staying Ahead Series
The Real Offshore Outsourcing Impact -Separating Facts from Fiction
Offshore outsourcing has created a frenzy of debate in recent years. According to its proponents, it as a necessary and effective strategy for companies to reduce costs, expand skills and capabilities, improve over-all performance, and enhance global footprint. For its critics, it is a threat to American jobs, companies and the whole economy. The industry’s exponential growth further flares up the controversy.
Forrester Research projects more jobs going offshore, from 400,000 today to about 3.3 million in 2015, accounting for some $136 billion in wages. This translates to a loss of about 200,000 jobs every year over the next decade.
Such projections prompted politicians, labor unions and other critics to rail against offshore outsourcing.
Industry experts are convinced that there is an exaggerated concern over jobs moving overseas. While country destinations earn substantial economic benefits from offshore outsourcing, the U.S. acquires the lion’s share of this profit. Moreover, the openness of U.S. economy and flexibility of its labor market can pave for faster job creation than job displacement. The following facts substantiate the significant yields of U.S. from offshore outsourcing:
FACT 1: U.S. Economy Generates Net Additional Value from Every Dollar Offshored
Offshore outsourcing profits companies and consumers, and the U.S. in general, by creating new net values for the economy. These significant economic values can be derived from reduced costs, increased revenues, repatriated earnings, and redeployment of additional labor.
| 1. | Reduced costs | |
| Cost savings are the largest value capture for the U.S. economy. For every dollar spent offshore, about 58 cents are incurred as net savings for businesses. A more efficient cost structure will lead to more profits, increased valuations and improved global competitiveness for U.S companies. These savings may initially flow to investors or be invested in new business ventures. Eventually, the competition arising from the more prevalent offshore outsourcing will pass on such savings to consumers. Thus, cost reductions to businesses would ultimately increase national earnings. | ||
| 2. | New Revenues | |
| For every dollar spent offshore, service providers buy an additional five cents worth of goods and services from U.S. vendors and suppliers. Importing products such as computers, telecommunications equipment, other hardware and software; and services like legal, financial and marketing would create more revenues for the U.S. economy. | ||
| 3. | Repatriated Earnings | |
| Additional earnings of 4 cents for every dollar spent offshore would be repatriated back to the country by service providers who have been incorporated in the U.S. | ||
| 4. | Redeployed labor | |
| New jobs taken by displaced workers due to offshore outsourcing would give the U.S. economy a potential of 45 to 47 cents for every dollar spent offshore. | ||
| Overall, McKinsey and Company estimates that as much as $1.46 for every dollar spent offshore is captured as new net value for the U.S. economy. While offshore outsourcing brings benefits to country destinations of about $33 cents for every dollar spent offshore, the U.S. meanwhile, disproportionately gains revenues of at least $1.13. | ||
FACT 2: Majority of Jobs in the Economy cannot be offshored
Majority of jobs in the U.S. are in retail, catering and personal care services, which cannot be offshored, as they are by nature produced and consumed locally. On the other hand, only 11% of all jobs in the U.S. can be offshored. Jobs involving customer support services, financial support services, software maintenance and development, and medical transcription are commonly outsourced to low-wage countries like the Philippines.
FACT 3: Job creation will outpace offshore outsourcing by a wide margin
The U.S. has been consistently successful in generating new jobs. In fact, about 35 million new private sector jobs were created over the past decade. This fast-paced job creation will likely continue as the Bureau of Labor Statistics (BLS) predicts the addition of 22 million new jobs in business services, healthcare, social services, transportation and communication by 2010.
| A. | Offshoring in Manufacturing has been accompanied by growth | |
| in service |
Although about 2 million jobs in the manufacturing sector moved overseas, job creation in service sector was able to outpace job displacement in manufacturing by as much as 13 times.
| B. | Technology and Medicine will witness most vigorous growth | |
| in jobs |
The projected 2 million new jobs from nanotechnology sector alone would be more than enough to compensate for jobs lost to offshore outsourcing. Meanwhile, the growing and aging population of the U.S. will spur more employment opportunities, particularly for health professionals.
All this means additional output for the economy when workers previously displaced by offshore outsourcing would take on new jobs in other industries.
FACT 4: Jobs Offshored are a fraction of all mass layoffs
Offshore outsourcing represents a small percentage of the total share of all layoffs. In the first quarter of 2004, outsourcing triggered only 9 percent of non-seasonal layoffs in the United States, and less than 30 percent of which were moved offshore. For the same period, less than 2 percent of total mass layoffs accounted for jobs that moved abroad. Further, the 1.15 million job losses through mass layoffs in 1999 were still higher than the projected yearly loss of 200,000 jobs due to offshore outsourcing.
The predominance of layoffs stemming from other factors such as technological changes, economic recession, changing consumer demand, business restructuring, and public policies ascertains that offshore outsourcing is not the primary culprit behind job loss in America.
FACT 5: Redeployment of displaced workers due to offshore outsourcing is very feasible
The U.S. has one of the highest redeployment rates. At the current rate of job creation, the vast majority of displaced workers are expected to be reemployed within 6 months.
Trade-related job losses between 1979 and 1999 validate the high probability of redeployment for the entire economy. The Bureau of Labor Statistics (BLS) revealed that more than 69 percent of workers who lost their jobs due to imports were soon reemployed; with an average capture of 96.2 percent of their former wages. At this level of reemployment and recapture, an additional 45 to 47 cents of value is recaptured for the economy. The flexibility in the job market and the mobility of workers across the country make redeployment, even for those displaced by offshore outsourcing, highly possible.
FACT 6: U.S. Economy is expected to see a significant decline in the share of working population
A significant number of workers are needed because the aging population of the U.S. requires more medical tests, treatments and procedures. At the same time, there is an anticipated shortage of working population as more workers are expected to retire. At current productivity levels, the country will need 15.6 million more workers by 2015 to maintain the current ratio of workers to the total population. This implies that although America will indeed lose jobs, various market forces are demanding more and not fewer workers.
In summary, offshore outsourcing creates substantial earnings for the global economy, with the U.S. enjoying the bulk of these benefits. Offshore outsourcing not only enables business organizations to have cost-efficient structures, world-class quality performance, and improved competitive position; it also boosts the country’s economic gains.
U.S. companies must not be disenchanted by the hyped concerns over job losses primarily because majority of U.S. jobs will remain onshore. Also, services, healthcare, technology and other industries are expected to spur additional employment opportunities – more than enough to offset the predicted loss of 200,000 jobs a year due to offshore outsourcing. Further, redeployment of workers displaced by offshore outsourcing is very strong because of the dynamic and open U.S. economy and increased mobility of its labor force. Finally, the aging population of the U.S., and the expected decrease in the share of working population due to aging, would heighten the need for more workers.
In consideration of the aforementioned, the offshore outsourcing debate should be over. None of the criticisms has been or will ever be sufficient to weaken, much less wreck the offshore outsourcing market because the industry is foreseen to grow even more phenomenally in the years to come.
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