Outsourcing: Enabling International Business or Forced by a Lack of Local Skills - Article Example

Outsourcing: Enabling international business or forced by a lack of local skills? Outsourcing has been in the news recently because of the numerous debates and the view points that it has attracted. Strong arguments against outsourcing have arisen from facts revealed through surveys and studies. Corporate restructuring, downsizing and layoffs have led to fundamental changes at the work place on a global basis. Senior executives and corporate leaders around the world agree that outsourcing is good for the world economy. These executives also realize that outsourcing can deliver more than just labor cost savings1. If cost is not the main factor the question still lurks whether outsourcing enables international business or is it forced by a lack of local skills. The last 15 years in US has been a scene of layoffs, downsizing, urge for reengineering and eventually outsourcing. Salaries being the largest expenditures for any organization, these were the first to be cut. Just when layoffs and ‘pay-for-performance’ was taking place, educated and eager workforce emerged in countries like India, China, Malaysia and Vietnam2. The 1980s and 1990s was a period of change, turmoil and even transformation in industrial relations3. The Asian nations faced pressures on their IR systems. Many Asian nations have experienced unparalleled economic growth in the last thirty years fuelled by low-cost export oriented industrialization strategies. They opened their economies to a great extent to both foreign direct investment and international trade. Outsourcing is just another form of international trade and the developing nations were quick to capitalize on this opportunity. Hemphill4 agrees that international outsourcing assists with a firm’s globalization strategy, helps broaden infrastructure capabilities, and offers local market access advantages and at the same time it can help alleviate the technical labor shortages in the West. The benefit of outsourcing is enjoyed by the consumer too. They benefit from low-cost imports from developing countries as Mexico and China. The McKinsey Global Institute estimates that “offshoring” $1 of U.S. services activity to India results in a global gain of $1.47 or a net gain of 47 cents5. Out of this the US gets $1.14 while $0.33 accrues to India. Out of the $1.14 with US, 47 cents go to the reemployed workers while shareholders and consumers gain 62 cents. Another statistical analysis by Global Insight shows that job loss may be there in short-term but eventually the benefits far outweigh the costs6. Outsourcing increases productivity, lowers inflation and interest rates, boosts business and consumer spending. In addition, real wages were 0.13 percent higher in 2003 and could be 0.44 percent in 2008. These benefits according to the report have resulted in about 90,000 net new jobs by 2003, which signifies that net new jobs by 2008 could be around 317,000. Outsourcing could also add some $124.2 billion US GDP by 2008. The primary reason for global outsourcing according to Hemphill was due to abundant supply of accountants in Philippines, IT engineers in India and mechanical engineers in China. The shortage of qualified labor in US and Europe was directly related to outsourcing. This shortage was partly caused by the IT boom of the 1990s and the need for technicians for the new e-business7. The problem of fixing the Y2K bugs was another strong reason that increased outsourcing to India8. The US born engineers that entered the workforce were not trained in this age old technology. Besides it was considered low-wage, low-prestige job to work on COBOL and FORTRAN when technologies from Microsoft, Oracle and Apple were available. The Y2K conversion required well educated, computer literate English speaking programmers. India had begun its economic liberalization program in 1991 and churns out English speaking graduates in mathematics, science and engineering every year. Indian software companies were eager to prove their capability and capitalized on these graduates and the demand from the US to handle the Y2K bug. IT products and services have an increasingly short life cycle which increased the demand for more flexibility for IT enterprises. Gonsalez et al., contend that it was not possible to create and maintain adequately trained human resources that could cope with the volatility of the demand and heterogeneity of the projects. Outsourcing provided immediate solution to these problems. During late 1990s everyone in America wanted to turn an entrepreneur. Since a few internet companies like Netscape and Amazon.Com had experience success, a lot of new entrepreneurial hi-tech companies came up funded by venture capitalists, says Sourirajan. These forms required bright, sharp programmers to work on technology like Java internet programming technology. The demand was vast and there were few takers. This prompted the government to expand the number of H1-B slots to about 195,000, an increase of 50%, to enable American corporations to hire foreign workers to do these jobs. Real forces of change stem not just from cost factors or value-added services. The OECD populations are aging fast and a sizeable number of baby boomers will retire soon. In the developing nations, the percentage of youth is increasing while in the newly industrializing countries (NIC) and in the newly democratized countries the rise is slow9. The NICs like India and China are increasing their share of global GDP while the US is decreasing in relative economic power for the first time in 50 years. Hemphill adds that the National Association of Software and Service Companies (NASSCOM) one of India’s largest business associations, along with Evalueserve, a US business research and intellectual property service firm commissioned a report that by 2010 US will face a domestic labor shortfall of 5.6 million (generated by aging workforce and immigration restrictions). This could potentially cost the US economy $2 trillion if appropriate measure are not taken. The study further stated that outsourcing keeps the US firms competitive, creates new markets for US goods and services, and fills the labor shortfall that US is predicted to face in the next seven years. Hence research suggests that though outsourcing started due to lack of required skills caused by the IT boom of 1990s, it is now a necessity as baby boomers are due to retire soon. Further labor shortfall has been forecast as the percentage of youth is decreasing. Though initially forced by a lack of local skills, outsourcing is now recognized as just another form of international trade which creates new markets, keeps the firms competitive, broadens infrastructure capabilities, and reduces interest rates and inflation. References: Daga, D., & Kaka, N. F., (2006), Taking offshoring beyond labor cost savings, The McKinsey Quarterly, 22 Oct 2007 Forge, S., Blackman, C., & Bohlin, E., (2006), Constructing and using scenarios to forecast demand for future mobile communications services, Foresight, VOL. 8 NO. 3 2006, pp. 36-54 Gonsalez, R., Gasco, J., Llopis, J., (2006), Information systems offshore outsourcing, Industrial Management & Data Systems Vol. 106 No. 9, 2006 pp. 1233-1248 Hemphill, T. A., (2004), Global Outsourcing: effective functional strategy or deficient corporate governance, Corporate Governance, Vol. 4 No. 4 pp. 62-68 Johnson, N. J., (1999), The Changing Narrative in the American Workplace, Business & Society Review, 104:2 209-224 Kuruvilla, S., & Erikson, C. L., (2002), Change and Transformation in Asian Industrial Relations, Industrial Relations, Vol. 41 No. 2 Marchant, M. A., & Kumar, S., (2005), An Overview of U.S. Foreign Direct Investment and Outsourcing, Review of Agricultural Economics—Volume 27, Number 3—Pages 379–386 Pai, A. K., & Basu, S., (2007), Offshore technology outsourcing: overview of management and legal issues, Business Process Management Journal Vol. 13 No. 1, 2007 pp. 21-46 Sourirajan, S., (2004), GLOBALIZATION and OFFSHORE OUTSOURCING A Tale of Two Realities, 22 Oct 2007 Read More