Outsourcing:
The Government, the People and the Companies
Jeffrey W. Coleman
Webster University

Abstract
Making a decision about whether or not to move these activities offshore is a decision of far-reaching consequences. Developing countries have been unable to radically alter their industrial structure due to numerous internal institutional and external technological barriers. Consequently, they have sought global participation through outsourcing activities. This is indeed a break from the traditional self-reliant way of doing business. Outsourcing arrangements are technologically and organizationally complex, and present a variety of challenges to manage effectively. Outsourcing benefits include cost savings, quality improvement, and the ability of the organization to concentrate time and resources on its core business. Outsourcing trends change from year to year, and usually involve changes such as progressive outsourcing, cloud sourcing, mergers between organizations from different parts of the world and protectionism. In this paper we will look at a few of these areas such as the how in recent years the business practice of outsourcing jobs has been considered both a blessing for American business and a concern for the American worker, the amount of outsourcing being done and why, the affect on the economy in the United States, and the role government plays in outsourcing. The paper concludes, however, that the trend is just beginning and how our country can and should responsibly move forward on this issue.

Outsourcing:
The Government, the People and the Companies
Do you work for a company that has employees outside of the United States of America? Well the fact of the matter is that many of us work for companies or states that has or will outsource work. Some may see this as a problem on many different levels and other might see it as an added bonus to the USA economy. As we take a closer look at this evolving issue we will notice some trends that are forcing Americans to both catch up and re-think how we pursue the issue of outsourcing.
Outsourcing has become a huge issue lately especially as we move further and further into election season. Is it us the American people that suffer at the hands of corporate executives who move jobs to turn a larger profit? Maybe it is us that benefit from the lower cost of goods and services. No matter what side of the isle you are on it is possible that at some point you have benefitted from outsourcing.
Big American companies such as AT&T, Wells Fargo, Bank of America, and Kaiser Permanente all conduct some type of outsourcing. Why they do it, well that is all a matter of who you ask and who will implement the decision making process the company has to endure when making the tough choice to carry jobs outside the boarders of the United States. Outsourcing can be a catalyst for quick change and cost reductions. The outsourcing of back-office processes, such as payroll processing or indirect procurement, promises to lower cost and raise the service level. This sector has undergone tremendous growth in the past decade, with global revenues in excess of $200 billion globally and an anticipated growth rate of 10% per year (Holweg & Pil 2012).
Some of the reasons given as to why companies feel the need to outsource are the global jobs deficit allows companies to move work wherever labor is cheaper, foreign governments are desperate for skilled workers, overproduction (companies have little ability to adjust prices to maintain profits, since someone somewhere will produce and sell for less), and foreign governments can provide the highest subsidies with the fewest environmental and social protections. Before we go any further it is important that outsourcing is clear and understood. The word outsourcing is a work arrangement made by an employer who hires an outside contractor to perform work that could be done by company personnel (outsourcing 2012). Some companies have chosen to go this route for cost and some have done it for efficiency reasons.
Outsourcing has been a frequent point of dispute for organized labor. If, for example, an employer has a labor contract with a union, and union members could perform the outsourced work, then the union will typically object to such a practice because it takes work away from the union’s members. Management favors outsourcing, or subcontracting, often to nonunion providers, because these activities can often reduce costs. Outsourcing can also reduce the number of employees in a collective bargaining unit (Outsourcing 2012).
Our government has a tough task ahead to try and curve the outsourcing epidemic that has hit the United States in the past decade. Even if outsourcing seems like a great solution to curve a deficit plagued country it may not realize that the morning after choosing to outsource could bring some unpleasant surprises. No industry has gone through greater outsourcing catastrophes in the past year than government IT. Last fall, Texas cut short its seven-year contract with IBM, an $863 million deal that called for IBM to provide data center and disaster recovery services for 27 state agencies (Nichols, 2010).
As mentioned earlier there are people for the expansion of outsourcing and there are people that would like to see this practice eradicated. They sometimes argue that short-term job losses brought on by outsourcing are mitigated in the long run by gains to American workers from consumption growth and free trade in low-wage countries (Hasan 2008).
In an attempt for companies to remain competitive in the global workspace it may leave them with no option other than outsourcing. For example, if a Chinese company can produce the same good or service for the same quality at less cost, they will grow while a U.S. Company that has not remained competitive will decline and most likely cease to be in business. In 2004, American software programmers averaged $70,000 per year, while Indian programmers $8,000 (Holweg & Pil 2012).
All though outsourcing is very popular in the United States, a lot of people remain skeptical and think that it is harmful and damaging to the workforce in American. The biggest concern here is that jobs sent overseas reduce the number of jobs available to the American worker. “According to the Bureau of Labor Statistics, the number of manufacturing jobs has been reduced by more than three million due to work being moved overseas” (Whalen, 2005). “Also, Forrester Research of Cambridge, Massachusetts estimates that the number of service jobs moved outside the United States will reach 3.4 million by 2015” (Associated Press, 2004).
Some researchers say that because of our economy we will lose jobs and gain jobs over the same period. It is projected that 450 million jobs will be created in America. However it is also projected there will be 430 million jobs eliminated and 3.4 to 14 million (as mentioned above) of these jobs will be lost due to outsourcing (Holweg & Pil 2012). This might be cause for great concern to workers in industries being affected by this move. The uncertainty of when these positions could be shifted abroad leaves many employees feeling the stresses of possibly losing their ability to earn a living and support their families. Opponents of outsourcing feel that the unemployment rate is evidence enough to show the damaging attributes of sending jobs to other countries. Another concern is that most workers displaced by the loss of their jobs are forced to take pay cuts in order to gain reemployment (Whalen, 2004). Statistics from the United States Labor Department show that a third of all workers forced to find new jobs during a company's outsource downsizing will settle for a 20 percent reduction in pay.
Not all people in the United States are totally opposed to outsourcing. There are many people that believe that outsourcing does not cause harm to America's workforce. In some cases, supporters believe that it even benefits it. A study done by Mary Amiti and Shang-Jin Wei (2004) shows that the United States workforce is not at risk from outsourcing. In their study, they show that while the US is a large exporter of jobs to international markets, they are also the largest importer of outsourced services from foreign countries. Amiti and Wei's research shows that only 0.4 percent of the total gross domestic product or GDP of the US was earned from business service imports. Rather, they found that underdeveloped countries outsource more jobs that they received. Another stance that supporters in the international outsourcing community take is the belief that outsourcing creates new positions domestically. By moving 1,000 jobs to India in 2003, Delta Airlines was able to reduce cost by $25 million. They then used this money to fund 1,200 new reservation and sales positions in the United States (Weidenbaum, 2005).
Outsourcing in some cases represents the ultimate win-win situation in all forms of international trade on any scale. The mutual gains from trade do not depend upon lines drawn on a map. There is no economic difference between outsourcing a job to India and outsourcing it to a firm across the street. If the outsourcing saves money, it saves resources and saving money on any level some people say is grounds for applause (Nichols, 2010). * Chart above shows number of jobs outsourced and expected to be outsourced between 2000 and 2015.

According to (Drezner 2004), the predictions of job losses in the millions are driving the current outsourcing frenzy. He warns that it is crucial to note that these estimates are gross and not net losses. No one much worried about job outsourcing during the 1990s because more jobs were being created in the US economy than the ones leaving. The predictions would not seem as ominous once they are analyzed closely. Outsourcing overseas is not an available option for about 90 percent of the total jobs in the US. These jobs include service areas such as retail, restaurants, marketing, personal care etc., which require geographical proximity between producers and consumers. About 10 to 11 percent of the jobs have been identified as at risk of being sent abroad. These include any service jobs that can be sent through fiber optic wires, jobs such as telephone call centers, computer data entry operators, business and financial support, paralegal and legal assistants, accounting, bookkeeping, payroll etc. (McCarthy, 2002). The American workforce is not the only thing affected by outsourcing. The populations of local communities are also affected by it. Some communities in the United States are formed around, and rely on, one or more corporations based there. If companies make the decision to outsource and move jobs away from the communities, the workers are then forced to find new jobs. In some cases, the need to move to another community to find work is necessary. While some people find this to be a problem, others say that it is not reason to raise concern.
The study conducted by Amiti and Wei showed that more jobs come to the United States from other countries than we send abroad, it is important to examine this issue. Honda, a Japanese car manufacturer, is one large importer of foreign services. A Honda plant and its subsidiaries in Marysville, Ohio employ over 8,000 employees in that area (Honda, 2007). That’s over 4,000 less than 5 years ago. Firms are increasingly pressed to decrease output time on project all while reducing research and development (R&D) costs. However, even as businesses are required to do more with less, successful innovation in new products and services is still the lifeline of any company, no matter if the company is new or established, large or small. Unfortunately, the risks associated with R&D are more ubiquitous than ever. This is in part due to the increase in global competition combined with shorter lifecycles of products. Product and service failure rates are still high, at approximately 40 percent (Marion & Friar 2012).
The government has some influence on outsourcing in the United States; this was a huge issue in the 2004 presidential election, the debate still exists during the 2012 presidential election. While some Government Officials support outsourcing, and encourage it in American business, others are making an attempt to prevent it from happening all together. Either way, those on both sides of the issue work to ensure that some of the workers that are displaced by outsourcing are helped in some way. For Example, Trade Adjustment Assistance is granted to manufacturing workers to provide income benefits, training and healthcare assistance to those who have lost their jobs (Whalen, 2005).
The issue of outsourcing is a difficult one for a lot of Americans. While some of the data collected by researchers show that outsourcing has negative effects, other data suggest we look in the other direction. As the debate still stands and will continue throughout the years to come, it is up to us to decide what we believe. Whether or not we believe that outsourcing causes harm to the American worker by displacing them and leaving them out of work, it is important to realize that the issue affects many people across the country. Until a unified solution is found the debate is bound to continue for generations to come.
So in the spider web debate over outsourcing and if it is good or bad, who actually benefits from it? The United States investors, shareholders and American consumers stem the benefits of outsourcing, although sometimes at the expense of American wage earners. Another supportive argument is that outsourcing jobs to other less developed countries helps those countries economically and helps increase trade for United States products. It also gives those countries the ability to pay back their debts to the United States.
Some experts on the issue believe that the greatest saving potential comes from outsourcing simple assembly work and/or services. Outsourcing is a difficult issue to tackle, but just about everyone to include the supporters and the opposition agree on one thing, that outsourcing cannot be completely eliminated. Some people feel companies that outsource should be taxed for outsourcing and those that do not should be rewarded.
In an economy that harshly penalizes people and companies for inefficiency, outsourcing production seems like an obvious choice, which is why contract manufacturing of electronics and pharmaceuticals has long topped $100 billion a year mark. Americans, who are in poverty and willing to do minimally skilled jobs find it harder to find jobs, and poverty does nothing for the United States economy, it just might only reduce consumer spending and tax revenues.
The middle class of American are not far behind as even his job is being outsourced. This level of outsourcing mostly involves the computer and technology industry, but as shown above it goes far beyond that. The million-dollar question seems to be just how does outsourcing affect the efforts to rebuild the limping American economy.
If outsourcing in these areas continues to be carried out by big corporations it will not leave enough jobs for qualified Americans. If a person does not have a job then they cannot purchase homes or spend money. When people can’t or don’t buy then producers can’t make money. With all the outsourcing being done the government also experiences a loss in income, which in turn could raise tax rates. Less jobs being maintained in the USA does not help with the contribution to our Social Security and Medicare programs. By outsourcing, not only skilled labor is lost but monetary gains too.
What must be understood is that service jobs do not pay as much as manufacturing jobs do nor do they create national wealth. On the other hand, they absorb wealth. Manufacturing jobs have by far the greatest impact on national economy, in terms of losing skills and the time taken to retrain such a force. Another thing is the loss of industrial infrastructure with the closing down of United States factories and then exporting the capital abroad. This money is then not available for the expansion of the United States economy.
Service jobs on the other hand do not need much training and require very little capital investment. Companies in the United States derive savings in wages and more importantly in health benefit payments by outsourcing these jobs. Of course there is no doubt there is a loss of national wealth by sending money abroad to pay their wages and salaries. Certain professional roles like retail, personal care, catering cannot be outsourced because of inherent personal interactions between the consumer and the deliverer. Because the service sector encompasses about 70 to 80 percent of the United States economy, outsourcing can impact only a sliver of United States work force. Cheaper rates mean more consumers buying the products. The theory is that by paying people less for work means that these companies have the ability to produce things cheaper and will be able to transfer these savings to their consumers back in the United States.
One example occurred in the early 90s, when the price of personal computers dipped because the chip manufacturers in the USA outsourced this offshore in turn reducing chip prices between 10 to 30 percent. Many government agencies outsource a part of their work in order to save money; this actually helps economy and helps federal spending.
During the presidential campaign of 2004, no economic issue generated more heat or shed less light than the debate over off shore outsourcing. This fact was probably apparent at the time to any economist who followed politics. The topic of off shore outsourcing is as much a political topic as an economic one. In Washington, DC, and elsewhere, outsourcing was the subject of countless press conferences and panel discussions (Mankiw & Swagel, 2006).
The candidates then and now are equally concerned. President Obama has issued a “Blueprint for an America Built to Last,” This is a plan that is intended to encourage companies to create manufacturing jobs in the United States. Governor Romney has promised to issue an executive order to sanction China for unfair trade practices on his first day in office. Recently, the United States presidential race has gotten tied up in the debate about outsourcing and outsourcing of manufacturing jobs. The problem is not outsourcing, but rather it is inappropriate outsourcing. Companies have been purchasing products abroad that could be made as or more cost-effectively at home.
When the United States policies throw up unnecessary barriers to domestic production; foreign governments unfairly subsidize businesses or simply keep out competitive American products; or United States Companies have some kind of bias toward foreign sourcing. President Obama’s bans and tough restrictions on oil and gas development in the Gulf, off the Atlantic and Pacific Coasts and in Alaska do not benefit the global environment if those do not reduce USA’s petroleum use but merely shift the sourcing abroad, where environmental risks may be less effectively managed. China keeps its products artificially cheap, and forces the relocation of United States manufacturing jobs. China does this by maintaining an artificially undervalued currency, imposing high tariffs, and outright exclusions on competitive United States products.
Billions of dollars of United States stimulus money were spent in China, instead of the United States. Private equity has an inherent bias toward outsourcing that is neither helpful to the firms it reorganizes nor healthy for our economy. Unnecessary outsourcing is responsible for almost half of the trade deficit. If the government were to eliminate half of that deficit would boost domestic demand and GDP by about $500 billion and add 5 million jobs.
Scott Paul, executive director of the Alliance for American Manufacturing said, "outsourcing has become a major lightening rod, and the media coverage they're likely to get is unfavorable," The Washington Post reported. Technology giant Apple, pharmaceutical behemoth Pfizer and household product company Procter & Gamble are among those that do not divulge how many of their workers are domestic and how many jobs are sent overseas.
Some companies with track records of sending jobs overseas are now advising the government on how to grow more jobs at home. General Electric Chief Executive Officer Jeff Immelt has said, "If you want to be an admired company, you better know (the figures), you better have accountability and you better think through where the jobs are". Immelt is the chairman of President Barack Obama's task force on jobs creation, which has raised some eyebrows, as GE, which does divulge its workforce statistics, has 46 percent of its workers in the United States, down from 54 percent in 2000.
The “Great Recession” of the early 2000s caused unemployment rates to skyrocket as high as, 10.2% nationally in October 2009. The recovery has been slow and extremely brutal for the long-term unemployed. The blow the “Great Recession” caused to the national economy may have been cushioned if American jobs were not outsourced. Groups have formed around the USA dedicated to exposing American corporations that outsource American jobs and the damages they have inflicted. The unemployment rate would be 2.6% if American companies did not or did very little outsourcing (Hasan 2008).
The Bureau of Labor Statistics states that approximately 15 million Americans are currently unemployed. If we could somehow turn around what seems to be a national norm we could help the unemployment rate immensely. According to Outsourcing, Apple, Inc. employs about 27,000 Americans, which are primarily in its retail stores. When talk about manufacturing jobs; (which has lost its strength in the United States) Apple employs approximately 920,000 people outside the country.
Some of the other companies in the US that outsource include Adobe Systems, Anheuser-Busch, Boeing, Ethan Allen, John Deere, Radio Shack, and unfortunately, many, many more. Outsourcing has provided corporations with a means to continue production at an extremely low cost and it may be at the expense of Americans’ livelihoods. When a company can pay a Software engineer in India just over $10,000 a year as compared to $90-$100 per year for the same job done in the United States they are almost forced to outsource and maximize the company’s profit. Spending on outsourcing is pegged at 7.1% from the total IT spending. This figure remained unchanged from the prior year based on the study conducted by Computer Economics in 2011 (IT Statistics 2011/2012), which measured IT outsourcing activities.
Cisco Systems, which had 26 percent of its workforce, located abroad at the start of the decade, but by the end of 2010 had 46 percent of its workforce abroad. They are is currently involved in a lobbying campaign titled “Win America” which calls for a tax repatriation holiday that would let big corporations bring money they have accumulate overseas back to the confines of American boarders at a lower tax rate. A similar tax break in 2004 actually increased the amount of money companies can store overseas.
The trend of outsourcing is said to be in the beginning stages how our country responses to this will determine to what extent Americans live our lives. Outsourcing certain administrative functions can be beneficial to most small firms or solo practitioners. It is less clear whether outsourcing substantive legal work, either locally or off shore, will be beneficial to a company.
White collar jobs ranging from call centers to software engineers to medical technicians are being "outsourced" to India resulting in comments from the White House and the presidential candidates in the USA.
If India can turn into a fast-growth economy, it will be the first developing nation that used its brainpower, not natural resources or the raw muscle of factory labor, as the catalyst. India desperately needs China-style growth. No matter what side of the isle you are on we can all agree on one more thing, outsourcing is not the right tool for every job, but it is a good tool for the right job. All in all, the future of outsourcing appears to be fairly bright and positive.

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