Outsourcing: The Impact of Strategic International Job Placement - Term Paper Example

Outsourcing: The Impact of Strategic International Job Placement Table of Contents Introduction 2 Effect of Outsourcing on GDP 3 Outsourcing of Manufacturing and IT jobs 4 Facts and Figures 8 Conclusion 11 Introduction Outsourcing is a process involving the subcontracting of jobs by an organization. This phenomenon has gained much popularity these days. Almost every organization has cultivated the practice of outsourcing some of its functions. The function that is outsourced in not included in the core business operations. Outsourcing or hiring in a crude sense has existed in field of business for a long time. But recently specialization has been observed in regard to this issue. There are frequent cases where companies are seen to deploy outsourcing models for functions like billing, payroll and data entry. The companies hired for these functions are well equipped with trained personnel and tolls to perform the jobs more efficiently and cost effectively. Typically, an outsourcing process includes four different stages. The first stage includes the strategic thought processing for building up the philosophy for outsourcing activities. The second stage involves the evaluation of the outsourcing projects and selecting the suitable one. The third stage deals with the development of the contract and the determination of the price of SLA (service level agreement). Finally, the fourth stage deals with the relationship management between the client and the service provider. Business Process Outsourcing and Information Technology Outsourcing are the most common forms of outsourcing. The task of outsourcing becomes more delicate when the work is offshored i.e. the work is done in a different country. This brings in certain differences of culture and time zone. In USA, business processes are outsourced at a huge rate. Since 1980s the outsourcing by US started gaining momentum. The range of outsourcing is also wide since USA outsources material inputs outside the firm and also hires services from beyond the borders through FDI in foreign countries. The process of outsourcing thus has multifaceted implication on USA. It has influenced USA’s trade, labor market, welfare, growth and industrial structure. Out of all the impacts of outsourcing, the impact on the US labor market happens to be the most sought after issue. Effect of Outsourcing on GDP The prime reason for outsourcing in US is the cost and time savings. These benefits of outsourcing offer immense growth potential for the US firms. The outsourcing of functions in USA has had a significant effect on the country’s GDP. It is estimated that outsourcing added $33.6 billion to the real GDP of USA in 2003. The analysis in 2003 estimated that by 2008 outsourcing will add $ 124.2 billion to the real GDP of USA. The trade effects of outsourcing were seen to be positive. In 2003, US exports were higher by $2.3 billion because of outsourcing and the estimated value of exports from outsourcing in 2008 was $9 billion. Extensive research on outsourcing revealed some magical figures on savings. It was seen that the IT industry in USA will save up to $ 390 billion through software development and offshore services. The GDP of USA also grew considerably through massive rounds of outsourcing. Between 1999 and 2002 USA experienced an additional growth of $230 billion in their GDP. Some of the remarkable figures in US export and import indicate that the significant improvement is due to outsourcing. In 2004, the export figure on services was $343.9 billion in services while the import was $296.1 billion. US trade in services increased by 33 % from $482.3 billion (1999) to $640 billion (2004), with exports rising by 22 percent and imports increasing by 48 percent (Greene W. January 2006). Outsourcing of Manufacturing and IT jobs The benefit of IT outsourcing is enhanced productivity. II capital prices are significantly low and tend to fall. Hence, a company which is focusing on the outsourcing IT will have two options open before it; purchase IT capital and produce the relevant services internally or outsourcing IT services to some other source. But as the costs of production in IT market are low, the companies prefer to use the IT market. Thus, the whole process simply reorganizes the production bringing a change in the vertical structure of the IT market. Survey shows that magnitude of productivity benefits of IT outsourcing varies considerably depending on different time period of USA. During 1992-1997, outsourcing didn’t show much efficiency, whereas during 1998-2005, outsourcing was preferred over computerization. This is because the productivity benefits on the computerization was more during the former time period and the productivity benefit on outsourcing was more in the latter timer period. Like outsourcing, in-sourcing is also paired with certain benefits. Outsourcing helps a firm to buy services at a rate lower than the cost of production. While in-sourcing assists a firm to sell the services at a higher price than the production cost. It was seen that credit unions experienced a 30 % cut in their costs due to outsourcing compared to managing an in-house IT. The overall cost saving of the industry stood at $ 6.5 billion per annum in 2005. The benefits of IT outsourcing has also enhanced the productivity in banking and financial services (Knittel C.R. and Stango V, n.d.), ( Panagariya A. n.d.). The most vital area that has been affected by outsourcing is US employment. As the definition of outsourcing implies; the sub-contracting of business functions to other organization has reduced the employment opportunities in USA. The labor market in USA has been analyzed from several angles to study the effect of outsourcing on it. The in-house computerization of a firm benefits the local inhabitants by raising new jobs. Similarly the converse is also true; offshore outsourcing takes away the job opportunities for the local inhabitants. Economists around the world consider offshore outsourcing as a source of international trade in services. And this trade eventually leads to gains for the countries engaged in trading. Viewing the process of outsourcing as a form of trade in services makes it equivalent to trade in goods. This relevance of the outsourcing with goods trading raised several burning debates. This similarity of trade in services with outsourcing offsets the disadvantages of outsourcing on the labor market of USA (Chakraborty K. and Remington W., n.d.). The growing interest of outsourcing the business functions to the developing countries provided cost advantage. The developing countries like India reflected a growing number of skilled professionals in computer programming. These skilled professionals were able to do the IT jobs required in US within a fraction of the cost in U.S.A. According to a study among 62 outsourcing cases, it has been observed that failure of the in-house IT services had been a serious issue in US. The globalization also played a key role in enhancing the outsourcing practices. During the last ten years, deregulation of service industries has boosted the trade in services. In developing countries, deregulation of service sectors like telecommunication, transportation and financial services has increased to get access to the foreign service providers. Due to this radical change the developing countries rapidly adopted the technologies. This consequently made the developing countries an ideal destination for outsourcing of US jobs and the jobs of other developed nations (Chakraborty K. and Remington W., n.d.). Studies on the service trading between US and India revealed that outsourcing will increase the relative income of the skilled labor and at the same time will reduce the relative income of unskilled labor. Theories state that reallocation of resources as a result of offshoring would make a temporary job loss in the importing sector but eventually, in the long-run, the benefits of outsourcing will raise the income and standard of living in the country (Chakraborty K. and Remington W., n.d.). The benefits of outsourcing significantly rest on the economical structure. Outsourcing a service is not seamless. It has many faces since there are various objectives associated with the outsourcing. In case the outsourcing is done primarily on the low level IT services, the overall effect will be solely productivity enhancing of the firms. On the contrary when outsourcing is done to supply products at a lower price, the over effect is a gain in the real income (Chakraborty K. and Remington W., n.d.). The phenomenon of outsourcing has had considerable effects on the US job opportunities for the jobless people as well as the people having jobs. The short-run effect of outsourcing on the US job market is the reduction in jobs. This has resulted in a generating more psychological pressure of the people staying in jobs. The remaining working force faces the fear of wage reduction. It is often noticed that due to outsourcing, firm stops hiring new employees. This makes the job market even worse. This temporary jobless situation tends to take a permanent picture as the workers are not recalled by the same employer, as a result of which jobless workers shift from one job to another. But the long-term effect of outsourcing is positive. The reason supporting this fact is the increase in the labor productivity, real wages, employment, GDP and lowers costs of production. But these positive effects are less visible compared to the negative short-run impact of outsourcing (Chakraborty K. and Remington W., n.d.). The outsourcing has serious effect in the manufacturing industry as well. Global outsourcing has caused the disappearance of 2 million jobs from the industry since 2000. Gains in productivity by the firms account for some of these job reductions. With development, the US firms have now seen the path to produce more with fewer workers. But a greater part of these job reductions has been caused by the offshore shifting of American jobs. Of late outsourcing has paved its path in various levels of IT jobs too. The call center services and data entry facilities are now increasingly being relocated to the places where cheap skilled labor is available. Similarly, highly sophisticated jobs like engineering, nanotechnology and computer chip designing have also started to move away from USA. All these relocation of jobs is bringing a vast structural change in the global economy (Lieberman J. I., May 2004). At a glance outsourcing provides a positive competitive edge to the American companies. However, an in-depth analysis of this growing competitiveness shows the serious damage it has caused in the American infrastructure. Gradually not only goods and services are moving offshore, America is also transporting a considerable amount of innovation infrastructure, talent and technology to the developing nations (Lieberman J. I., May 2004). The outsourcing also has effects on the wages of the less-skilled labors. Since 1980s, following the advent of outsourcing, both the real wages and nominal wages on less-skilled workers has fallen by leaps and bounds. There are two prime reasons for this growing wage inequality; trading with countries of lower wages and the growing dependence of skilled workers in the technical field. However, out of these, the technical dependence is the major cause yet the impact of outsourcing cannot be ignored. The process of outsourcing has significant positive impact on the US consumers as well as the shareholders. They benefit from the low cost of products and services. But this advantage of outsourcing is too meager before the loss of its infrastructure. The technological edge that USA has achieved since 1990s is slowly draining away. The foothold that America had created in the fields of capital, facilities, knowledge and technology are constantly being offshored. These sophisticated services are gradually moving away from USA. This issue raises a serious question regarding the stability of the next generation workforce of US. Facts and Figures There is an urgent need for USA to think on this issue and workout for long-term policies. The facts and figures about the unemployment in USA will display a poor picture. The impact of outsourcing on the job market of USA is extremely adverse. If the current situation is not controlled the problem of unemployment will surely become more acute. The following section of the article will show some facts about the unemployment in USA. After the recession of 2000, United States has experienced extremely low employment growth rate relative to earlier post-recessionary periods. This out of character employment pattern shows a structural change that suggests a permanent redistribution of workers to fresh new industries and a thorough decline in rehiring. About 79% of employers are permanently removing job opportunities for a variety of reasons. The reasons include a permanent fall in demand, improvement in productivity, advent of new technologies, reorganization, and domestic as well as international outsourcing. This recent trend is notably different from the 51% structural change which occurred in 1980s. Several research works on this issue has predicted that fewer than 40% of workers whose jobs have been moved offshore in 2005 will be redeployed by their existing employers. From 2000, America has lost 2.7 million manufacturing jobs. Out of these lost jobs, over 500,000 were in high-tech industries which are marked by large investments in Research and Development. A huge amount of these jobs belonged to IT industries, like electronics, telecommunications, and semiconductor component production. Amongst the high-tech manufacturing industries, 28% of jobs have vanished since 2000. A large number of these jobs moved to foreign countries, aggressively following the technological leadership with their industrial subsidies, policies, and incentives proposals. Presently, we are observing the loss of services jobs, particularly in the technical, professional, and business services industries. Between the period 2000 and 2003, the technical, professional, and business service sectors had the second highest long-term unemployment. The first place was in long-term unemployment which was occupied by the manufacturing sector. The offshoring of white-collar jobs in service sector might help to explain the abnormally high long-term unemployment rate in these industries. The number of people looking for work for more than 6 months in this sector has ascended at a rate of 339.2% between 2000 and 2003, which is much faster compared to the rest of the sectors. The loss of jobs is not confined to low paying industries. It has thoroughly affected high tech industries that need a proper conventional education i.e., post secondary education and training. From December 2000, 632,000 jobs have disappeared in high technology services industries. Within 48 of the 50 states of America, jobs in the higher paying industries have been swapped with jobs in the lower paying industries. This is the result of the dotcom bust that created a recession in 2001. The IT services faced a decline in employment by 9.2% during the period of 2001-2002. The college graduates are also finding it difficult to get jobs, since rate of long-term unemployment rate is 19.1 %. Between 2000 and 2003, the unemployed college graduates increased at a rate of 299.4% compared to 156.1% for workers with education of high school degree or less than that. The IT industry in USA forms a crucial area when the issue of outsourcing is discussed. The contribution of IT industry in USA’s national income is significantly high. IT industries accounted for about 8% of U.S. GDP in 2003. It accounted for approximately 28% of real economic growth during 1996-2000. In 2001, total GDP obtained form IT industries was $828.9 billion, with an estimation of $871.9 billion in 2003. The phenomenon of outsourcing to other countries in services was initiated in the late 1990’s. During this period the IT industry professionals had to go abroad in order to meet the labor shortage in the United States. This labor shortage was caused by the excessive workload which aroused from the dot-com economy. Having been interested by the large cost savings and advances in IT, corporations continued to offshore IT services (Lieberman J. I., May 2004). Conclusion The unemployment problem created by the process of outsourcing can be solved with the help of thorough planning. There is an urgent need to create a successful strategy by the government to address the issue of unemployment. Safety nets should be created for helping the affected workers. Effective trade policies and robust trade enforcement are also required. The strategies must be designed in such a way so that it can restore fiscal sanity and reduce the deficits. References Chakraborty K. and Remington W. Impact of Offshore Outsourcing of IT Services on the US Economy. Texas Christian University. 29 April 2009. . Greene W. Growth in Services Outsourcing to India: Propellant or Drain to the U.S. Economy? U.S. International Trade Commission. 2006. 29 April 2009. . Knittel C.R. and Stango V. The Productivity Benefits of Outsourcing. University of California, Davis. 29 April, 2009. . Lieberman J. I. Offshore Outsourcing and America’s Competitive Edge: Losing Out in the High Technology R&D and Services Sectors. University of Michigan. 2004. 29 April, 2009.. . Panagariya A. Defending the Case for Free Trade. Columbia University. 29 April, 2009 . Read More