The phenomenon of outsourcing emerged on the global financial arena during the 1980s and has since then been mushrooming in various forms. With the passage of time, this process began to proliferate in all major economies of the world. This process of outsourcing proliferation was further catalyzed with the process of globalization which provided a new dimension leading to the consolidation of resources, expertise and labor specializations all over the world. Before we shift our discussion to the pros and cons that are associated with this process, it is significant to understand the dynamics of this phenomenon that will help us in analyzing the process through multitude angles.
The process of outsourcing is defined as using the expertise and potentials of a third-party on contractual basis. The procedure is believed to accommodate various facets of societies on the basis of labor division as outlined by the doctrines of a free market economy and principles of globalization. As stated earlier, it was during the 1980s that the process kicked off mainly due to the efforts of transnational corporations when they initiated to hire labor force across national boundaries. Even though the process of outsourcing has managed to come out from its embryonic stages, there are still a number of dos and don’ts that are associated with the entire process that have developed subsequent effects on the development of the US economy. (Bragg, 2006; pg, 159)
Outsourcing and the US Economy
Since the time the concept of outsourcing was introduced it has been a subject of fierce debate between economists, industrialists and politicians at their respective fronts. Surprisingly, it was the US itself who advocated the conception of outsourcing and now it is the very same country that feels that its economic progress is being threatened by this process. Nevertheless, one may argue that the financial conditions that prevailed two decades earlier are the not the same as they exist today, hence with the change of time course, commercial priorities of economies have also altered.
The topic of outsourcing took an argumentative twist during the 2004 presidential election campaign, in which the two major contenders for the seat John Kerry and George W. Bush implied contrary approaches for the process. John Kerry assailed organizations that encourage outsourcing activities as it poses a serious threat to the economic development of the labor class of the nation. Objections to outsourcing from the labor class were related to associate costs along with the transferring of labor process to an external entity abiding outside national borders.
The debate between the benefits and disadvantages of outsourcing were brought on a public platform by a poll conducted by Zogby International in 2004 which revealed that 71% Americans believed that outsourcing will prove harmful for the economic progress of the country whereas another 62% believed that the government must take legal action against organizations who are responsible for the transfer of domestic jobs overseas. (Bardhan, Jafee and Kroll, 2004; pg 91)
Information Technology and Outsourcing in US: Pros and Cons
Contrary to prevalent belief and the circulating scary stories of outsourcing threatening the labor of United States economy it has been seen that the sector of Information Technology has been able to extract multitude benefits through the outsourcing of Information Technology which has in turn created a number of employment opportunities along with the removal of dust layer that had eroded the foundations of the sector.
According to a study that was conducted in the country by Global Insight in the year 2005, it was disclosed that due to fruitful outsourcing efforts, IT sector was able to generate a surplus 257,042 new employment opportunities in the year which was anticipated to skyrocket to a phenomenal 337,625 by the year 2010. It was further revealed that the sector which contributes an approximate $68.7 billion in the cumulative GDP of the country is expected to add another $38.7 billion by 2010 generated solely from global sourcing of computer software services. The study further accentuated the fact that repeated and effective mechanism of outsourcing will prove helpful in creating new markets for employment and slash inflation rates whereas the termination of such services will only develop adverse repercussions in slowing the progressing pace of the economy. (Olian, 2004)
Regardless of the fact that the entire situation sounded exaggeratingly optimistic as it was festooned with excessively mouth-watering figures, predictions do turn disastrously wrong sometimes. The financial depression that engulfed powerful economies in the mid of the year 2007, ignited a turmoil at home.
Stock market nosedived; mortgage companies began to discharge distress signals and prominent multinational corporations as their counteracting strategy commenced labor retrenchment procedures, as a result of which unemployment began to climb. In such times when recession was reaching its apogee, the only alternative these corporations had to anchor was to search for cheap labor and outsourcing proved to be a silver lining for them. All kingpin computer organizations from Dell to Intel and from Intel to Microsoft began stationing their employees out from national borders. In order to further slump expenses these companies also provided outsourcing countries the convenience of sending their technical support, software development and quality assurance experts to these countries as a result of overseas shifting of employment local labor came on the brink of bankruptcy. (Mezak 2006 pg 103)
In addition to this other organizations began to outsource their services to countries like India and China where staggering population makes the availability of cheap labor much more convenient and as a result entire companies were outsourced to these places due to which it was the local labor that experienced the malignancy of being axed from their companies. In all the economic chaos that followed in the backdrop of such depressing conditions it was the local labor that developed the greatest resentment for outsourcing as they squarely blame it for their impoverishment. (Cook and Nyhan, 2004)
The Benefits and Troubles of Outsourcing for Labor
Despite of the fact that an overly utopist image of outsourcing was provided to people a couple of years back, the reality check they were confronted with shattered the American Dream badly. Recent statistics reveal that over 40% companies are involved either in experimenting or are already engaged in shifting their services overseas in search of cheap labor and services that are being provided by countries like China and India. Such efforts have left local market labor at extreme disadvantage where they are finding it immensely tedious to make both ends meet, leave alone the back-breaking burden of taxes they are being imposed to. With over 40% major company executives registering their opinion by discouraging the process of outsourcing the debate that was previously being won by the advocates of outsourcing has now taken a completely different twist.
Recent surveys conducted by Forrester Research Center disclosed that in the current fiscal year 1.59 million people are anticipated to lose their job and this figure is expected to reach 3.32 million by the year 2015. In another survey that was conducted by the same institute on a wide scale encompassing opinions of over 73,000 executives globally, only 58% of American executives said that outsourcing could explore new ways of economic progress whereas in India 97% of business executives believed that it is indeed beneficial, in China the figure was 86% and in Europe 70% favored policies for outsourcing development. In addition to this when 1,019 adults when inquired about outsourcing, 60% of them straight forwardly polled in negative, whereas only 23% said that it was important for financial rejuvenation. Even though it is a substantiated fact that many prominent organizations belonging to either manufacturing or service providing category have shifted their businesses overseas stranding local labor market, but they have ultimately put at stake the revenues that were being generated from their local market. (Prywes, 2000; pg 79)
During the 1990s when President Bill Clinton laid foundation of the Welfare program, his main objective was to explore novel frontiers of employment that may encourage people to work in order to reduce federal government spending on their sustenance, but with the market not willing to embrace unskilled labor, these people were forced to remain in poverty which is not considered beneficial for the economy of the country as it reduces tax incomes and potentials of consumer spending.
Advocates of outsourcing still argue that the economic condition can be shifted into a positive direction and new job opportunities explored if towering expenditures of corporations are controlled. There are a number of government agencies that outsource their work to different country labor which saves them millions of dollars directly affecting consumer spending as well as expenses being handled by the state treasury. (Baldwin, 2003; pg 100)
In this context a common theory that is applied is that if a company is giving fewer wages to its employees, it directly implies that the company will be making products that are more consumers friendly, hence lowering of prices would directly increase consumer spending and therefore the revenue generated from spending will enable local companies to hire local labor once again.
Another pro-outsourcing point that is often emphasized by the advocates of this process sheds light on the fact that due to outsourcing facilities initiated by developed countries in developing countries may spark an economic progress venture in these countries as a result of which their financial conditions will improve and in turn this will facilitate greater trade opportunities and ventures for the US itself. Furthermore revenue generated from these outsourcing ventures will help in bridging the trade deficit of such countries and will help in lowering their debts borrowed either from the US or from organizations like IMF and World Bank, in either case fostering new bonds of amiable political relationships between the two countries. (Amiti and Wei-Jin, 2004; pg 44)
Another aspect of outsourcing that needs to be addressed here is that not all people or laborers that are outsourced to different locations are provided a very cooperative or economically friendly environment in the country they are outsourced. Most of the companies that deploy their labor force in different countries are not dedicated to provide benevolent working conditions and therefore they are coerced to carry out their job responsibilities in extremely inhumane conditions. In many countries outsourced work are performed by children and many organizations have also faced legal actions on the conduction of such activities. If solutions to such problems are not addressed at appropriate platforms effectively then outsourcing might not play the role of a benefactor bird for the US economy as it is being anticipated by many pro-outsourcing activists.
A major question that pops in mind after reading so much against the phenomenon of outsourcing is that if the entire process is so detrimental for the economy of any country then why is it still being promoted and encouraged and then if is being promoted who are actually the beneficiaries of it? In actual sense there are a couple of major advantage extractors of outsourcing which includes stakeholders of corporate organizations as well as consumers which are sometimes at the expense of American wage earners. A prime advantage of outsourcing is that with cheaper imports flowing in the country consumers are provided the facility of purchasing commodities at a much cheaper rate than what was being offered to them initially. A report published by the McKinsey Institute unraveled that it is intrinsically due to global outsourcing attributes that corporations are able to generate net revenue of 45 to 55% coupled with the profits earned by consumer purchases which helps them in financing their offshore operations of outsourcing. (Hira, 2005; pg 244)
It makes perfect sense to the US to make intelligent use of its scarce natural resources by manufacturing highly sophisticated products like airplanes and highly innovated software systems rather than concentrating on the manufacturing of less complex shoes and textiles. Through implementation on such procedures of outsourcing countries and economies are able to extract maximum benefits by specializing in what they can produce best and at the cheapest price. In long-term such efforts where on one hand makes the economic system more efficient on the other hand provides it with the capability to conduct some groundbreaking research and subsequent development in these sectors which can provide adequate revenues for effectively igniting the economic engine.
However in contrary to the advantages of outsourcing prominent economist and Nobel Prize Winner Paul Samuelson argues that the advantages registered of outsourcing will become almost non-existent and negligible when its disadvantages are contemplated. According to Samuelson jobs are lost and lost forever once victimized by the process of outsourcing. He supports his statement by stating the statistics of a research conducted by University of California-Santa Cruz which stated that people in manufacturing sector such as textile, clothing and footwear felt the greatest pinch due to outsourcing mantra and about one-third of the labor force that was retrenched due to outsourcing exercise were unable to find suitable employment for themselves for the next three years. Even if they somehow managed to get work they were paid 15% less than what was initially being given to them. In addition to this the pinch of getting unemployed is not only being faced by low level labor force but also by a substantial portion of 57 million white-collar employees who are constantly confronted with the challenge that their jobs can be outsourced any time as disclosed by a report published in Business Week.
In defense of these allegation proponents of outsourcing argue that jobs lost can easily be substituted in a dynamic and innovating economy such as that possessed by US, but in order for that to take place heavy investment in the sector of education and training services is mandatory and unfortunately hopes on that front are also bleak as government is framing policies to slash grants being provided to such institutes which can be vindicated by the significant slump in the number of students that were being enrolled in the diverse science, engineering and technology courses that were being offered by various universities all over the country.
Customer Services Effect, Outsourcing and Labor Force
After careful assessment of either sides of outsourcing it can be concluded that outsourcing on entire process has a an advantageous and disadvantageous side related to it, but when outsourcing is considered and subsequently analyzed at a different level of service sector labor force, we find a completely different perspective and the ways through which the exercise of outsourcing is being conducted at service providing or tertiary sector of the US. Service sector can be viewed through three different dimensions through which it can prove beneficial for the progress of the domestic economy. (Amiti and Wei-Jin, 2004; pg 54)
Firstly it is through the decomposition of national accounts for major spending groups such as investments, consumption, government expenditure and export of goods and services. Secondly, it is through the production groups’ performance which is manifested through the Gross Domestic Product figures of the economy and thirdly it is made possible through the characteristics of the labor force which vary from sector to sector. Considering the spending groups first, it can be seen that 60% of spending is done on personal consumption expenditure. Likewise if the production side is considered we will come to know that services such as transportation, insurance, real estate and other sectors cumulatively contribute to over 84% of the services being provided by the private sector employees which are much greater than the statistics obtained from the spending frontier. If the figures are taken at a new level of analysis by segregating them on sectoral basis, we will come to know that over 80% of the labor force currently working in these different sectors belongs to the service providing or tertiary services whereas a miniscule percentage of approximately 13% belongs to the manufacturing sector. These statistics also undergo further alteration as many of the manufacturing sector labor force performs jobs and functions that can be accommodated and categorized under the banner of service type jobs, hence if such professional conditions are evaluated we will realize that a phenomenal 92% of the labor force belongs and is working in the service sector whereas only 8% are involved and earning their bread and butter through the employment and revenue generated by the production sector. For the enormous 92% of the labor force that is constantly being threatened by the scary stories of outsourcing due to their presence in the tertiary sector, it comes as no surprise that the collaborative attack launched on their employment by globalization coupled with the increasing outsource and offshore commercial operations is of great concern. (Wheeler, 2002; pg 30)
In this context the advocates of outsourcing do argue that the US market does posses the potential and capability to recover and can adapt itself to any market dynamics that are taking place anywhere in the world, hence due to the technological innovations and renaissance that has engulfed the country in the recent years and has simultaneously fueled the mantra of outsourcing has enabled the economy to create new market jobs and employment opportunities. Moreover, it is also being said by these very same advocates that with the pace US markets are mushrooming, they are comprehending the change taking place in consumer priorities and are designing products and services that may appeal them the most, through such efforts markets are developing a strategy to increase consumer interest and at the same time increasing their sales. With the increase in sales and consumer consumption, companies are registering greater profits, economic condition is booming and therefore new employment opportunities are emerging to bridge the unemployment that surged to unprecedented levels after the ignition of the worst financial crunch ever. Hence in this way outsourcing is being termed as a backbone that is operating for the benefit of the locally placed labor force. (Holzer and Nightingale 2007 pg 314)
Will Outsourcing Create New Jobs in Future?
Over the years since the phenomenon of outsourcing emerged in the international commercial arena, it has always been looked upon as an extension of the globalization and the virtual consolidation of global economies separating them from all kinds of time and space barriers. Over the years many reputable institutes have periodically expressed their voices of concerns and appreciations regarding the process, but a major question that still remains dominant enough especially in contemporary times is that whether outsourcing or efforts through which outsourcing is encouraged help in compensating the jobs that are lost during the course of the process. A pivotal element that needs to be kept in mind when analyzing the repercussions of such efforts is the oscillating relationship between the potential for increased trade reforms and the demand for such services in the US market. (Scheve and Slaughter, 2001; pg 123)
The major part which makes the analysis of many prominent market experts unreliable is that many of them assume the hypothetical relationship between these two major elements and assume that one-to-one replacement of people can easily take place, but in dynamic market situations such as those faced by US markets, prevalence of such conditions are almost next to impossible because price and income both exhibit an elastic nature. Another issue which is allied with this problem and can be considered its subdivision is that with increasing potentials of specialization, compartmentalization and fragmentation of technological sectors, it is not just the job but the nature of job that has become more important for the labor force. Many proposed economic models by prominent economists and market experts failed to completely manifest the pinching parts of the story.
Many of them ignored the key realities in the process which would have resulted in the amalgamation of globalization with private service providing sector. Some of these elements included the change in demands at worker level when prices and income at the consumer level undergo an alteration. How and in what ways can the digitization and codification of technological services prove helpful in the specialization of production sectors and the global segregation of labor forces? Moreover as said earlier all of them demonstrate a common euphoric assumption of contemplating price and income as inelastic, which is one of the fundamental flaw in the entire model designed as they do not correspond with the existing scenario of technology and trade services. (Turkson, 2005; pg 193)
Until and unless these major shortcomings from the proposed economic models are not filled with a concrete and an effectively managed financial plan recovery either in terms of exploration of novel employment opportunities, stabilization of local market and relief providing efforts to the labor force through outsourcing ventures will only remain and exist as a theory.
Ways of Outsourcing Labor in a Better Way
Regardless of the fact that the process of outsourcing has declined in its charm and enticement for the US market, there are still businesses that are relying overwhelmingly on the process of outsourcing and are using it in various ways for flourishing and taking their businesses to new heights and zeniths of progress and prosperity. Some of the ways which have been devised by people through which effective outsourcing can take place include proper maintenance of service record which is very important as your customer will be something more than just a simple vendor, effective outsourcing and its fruitful results can only be obtained if the specific customer can readily address the outsourcer in a timely manner and can resolve all complications and difficulties encountered by the outsourcer in performing the task.
Another effective way to outsource is to be equipped in technological leadership so that all changing needs of the potential customer are readily accommodated. Furthermore, getting technologically equipped will also help in catalyzing the process of global expansion and providing greater diversification in the quality and quantity of services being provided to clients. Prompt disaster recovery is also a major feature that constitutes effective outsourcing. The information that is send by the client is of prime significance and hence should be treated with extreme cautiousness and confidentiality, the leakage of information or data present or contained in the information must not be subjected to any sort of disclosure under any circumstances. Such violation of secrecy and privacy where on one hand may pose a threat to the credibility of the outsourcer, on the other hand will also put the reputation of the entire company at stake, the adverse ramifications of which will begin manifesting itself in the long-run in the form of non-availability of future projects.
One very important factor that is often overlooked by many is the presence of properly trained and managed staff for the outsourcing work. When a customer provides a company with work, he invests a feeling of trust and credibility in the name of the company and therefore it is mandatory for the outsourcer or the outsourcing company itself to live up to his expectations and refrain from practices that may putrid the relation between the client and the service provider. (Frasier, 2010)
In conclusion it would be appropriate to say that outsourcing remains an issue of debate for the government as well as for the economic circles of United States.People do seem poles apart in their respective strategies that need to be formulated either for the legalization of the process or for its perpetual prohibition. There are one half of people who are of the view that corporations indulging in the practice of outsourcing should face charges of tax law violation as they are depriving government of its deserving revenue and income but they must be appreciated for keeping jobs localized. On the other end there are people who advocate the fact that the temporary loss of jobs that has resulted due to outsourcing activities in the country will eventually result in greater economic progress of the country through which this self-created deficit will be reimbursed, hence the case of outsourcing still oscillates in the court of time who solely has the authority to announce its verdict.