Limitations and implications for future research

Although these results are interesting and promising, they need to be viewed with caution given the assumptions and limitations of this study. Future research is suggested to explore the extent to which these results can be replicated in other countries. Another research avenue concerning this topic might be to focus on evidence, that loss of jobs on the one hand and creation of new jobs on the other could be attributed to outsourcing and to provide companies good practical approaches for their offshore decisions. We hope that these results will stimulate others to engage in more research to refine the results and develop new findings concerning the controversial discussed topic “IT offshore outsourcing”.

Conclusion

The hypotheses as well as the current discussions are showing that there is no clear answer to the question: Offshore outsourcing: job loss or economic opportunity?

From the authors point of view offshore outsourcing is a benefit for the global economy, especially for the United States. It promises to create more jobs in the long run than it destroys in the short. Anyway the U.S. has to face not negligible job losses which have to be compensated. Therefore the economy needs to show flexibility in times of globalization. As a result the displaced labor should be repositioned in competitive sectors i.e. high-skilled jobs which counterbalance the offshore driven job loss. Taking into consideration Ricardo’s theory of comparative advantage the U.S. economy will gain large surplus by doing outsourcing. They will not only ensure their own competitive interests, but they will also add value and create wealth to the Indian markets. In conclusion a win-win-situation is created for the whole global economy.

Offshore Outsourcing

Basically the thinking of outsourcing already exists since the industrial revolution in the 19^th century. Companies started to focus on few products and source goods e.g. working materials and services from the market. The reason firms were starting to concentrate on their core activities was the improvement of productivity which was driven by specialization.

Offshore outsourcing however did first occur in the manufacturing industry. Driven by cheaper labor in foreign countries and decreasing transportation costs, thanks to steamship and railroad, firms started to produce offshore. Hence labor arbitrage and the starting of the globalization made it possible to become more profitable by sending work abroad than only producing in the domestic market. As a result still today low-skilled work is sent to countries where labor-cost is cheap.

The IT-revolution during the last two decades started a kind of new era of globalization. The costless storage and transmission of data via the World Wide Web, the global spread of personal computers and the standardization of software applications from E-mail to Google have made it furthermore beneficial to shift services offshore. (Friedman, T. (2004) p. 29) By sourcing IT-services, like data center operation or IT-support, from the market, companies are reducing IT-cost, cutting staffs and increasing efficiency at the same time. As a result small firms got cheaper access to new and expensive technology on the one hand and large companies can increase their IT-usage without the risk of obsolescence on the other. (Kakumanu, P. & Portanova, A. (2006) p. 1)

However, IT offshore outsourcing is a double-edged sword: It does indeed increase efficiency and productivity on the one side but also causes unemployment in the domestic market because of shifting work abroad on the other. Recent protectionist behavior of the U.S. government concerning visas which are used by foreign workers to spend time in the U.S. is showing the fear of countries to lose jobs to offshore outsourcers as business starts to recover and pushing up IT-Spending again. The other fear which can be seen is the fact that not only blue-collar jobs are sent offshore anymore but also high-skilled professional services i.e. white-collar jobs are outsourced to location abroad.

Job characteristics affect the likelihood of a job being outsourced. Truth or do we all need to fear for our jobs?

The number of service outsourcing companies grew, due to improvement in internet, telephone and transportation. These reasons make outsourcing more efficient. As a result, involuntary job loss grew. The kind of jobs outsourced changed in the US, before mostly blue color workers (factory workers) where displaced, now also white-color workers (service providing industries) do not have a stable job anymore. According to a Gardner’s survey in 2003 80% of companies say they will have considered shifting U.S. IT jobs overseas and 40% will have already completed some type of pilot or will source IT services form non-U.S.- based service providers. Compared to all industries, where about 15% of all firms show outsourcing activities, the percentage of jobs outsourced in the IT industry is more than double (about 42%) . At about 8%, IT workers were displaced twice the rate of other workers. But which kinds of jobs are outsourced in the IT industry? Do the job characteristics affect the likelihood of a job being outsourced? Forrester Research forecasted the following numbers, which jobs will be offshored by occupational category (2000-2015):

	2000	2005	2010	2015
Management Occupations	0%	6%	7%	9%
Business and Financial Operations Occupations	11%	10%	10%	10%
Computer and Mathematical Occupations	26%	19%	17%	14%
Architecture, and Social Science Occupations	3%	5%	5%	6%
Life, Physical, and Social Science Occupations	0%	1%	1%	1%
Legal Occupations	2%	2%	2%	2%
Arts, Design, Entertainment, Sports, and Media Occupations	1%	1%	1%	1%
Sales and Related Occupations	4%	5%	6%	7%
Office and Administrative Support Occupations	53%	50%	50%	50%

Average Wage and Employment by Major Occupational Category 2002 (US National Average Wage calculated as the weighted average of all major categories. Employment numbers rounded at nearest thousands)

As we see in the table above, Forrester predicted, that only 9% of the management positions will be offshored by 2015. The highest percentage of jobs, being offshored is in the office and Administration support section. More than 50% of these jobs will be conducted abroad by the year 2015.

If we now take a deeper look into the characteristics of the jobs we easily diagnose, that the jobs, which are mostly outsourced, are below the U.S. average wage.

Comparing this table, with Forrester’s forecast, we clearly see, that most of the jobs, forecasted to be outsourced are of low wages categories. In other words, the majority of jobs forecast to be lost pay less than the US average wage. A survey, conducted in 2007, where more than 3000 human resource managers and more than 6000 U.S. workers were interviewed, shows which jobs in the IT industry are mostly outsourced:

Percent of firms reporting offshoring by worker type

Over 30% of the firms reported offshoring computer programmers and software engineers, but only approximately half of them, 15.5%, reported offshoring system analysts. About one quarter offshores customer services but only less than 10% offshore general managers, sales managers or IT marketing. These results confirm the argument, that lower paying, more routine jobs are displaced most. If we look deeper in the characteristics of the jobs being outsourced most, we find out, that they are not only payed below the average, they also need less physical presence and are more routine jobs. The hypothesis, that “impersonal jobs are more vulnerable to offshoring” has been proven by the survey of Tambe and Hitt, Mc Kinsey agrees in their paper. Employers where less likely to offshore jobs in which employees provide personal jobs. The results significantly prove the negative correlation of employment in a job providing personal services and the likelihood of jobs being displaced due to offshoring. Another characteristic, which correlates with the wage, is that jobs with simple tasks are much more likely, of being outsourced. E.g. more than 70.000 computer programmers have lost their jobs between 1999 and 2002. But in this time the number of jobs in higher-skilled sections, in the engineer level, increased in the U.S.. We can summarize, that the job characteristics affect the likelihood of a job being outsourced. The less skill requirements, the less personal interaction and the less payed a job is, the more likely is it being outsourced. The Bureau of Labor Statistics found, that 36% of displaced workers soon found jobs that matched or increased their wages, but 55% were best working for 85% of their former wages. As many as 25% saw pay cuts of 30% or more. These statistics show us, that even if most of the jobs being displaced due to outsourcing are the low value service jobs, and offshoring may bring an overall benefit to the U.S.. We still must not forget these people. One suggestion, how companies can support those people is, by extending their training programs. So the employees become more educated, and these kind of jobs, are, as we have seen before, not as likely to be outsourced.

Literature: Pfannenstein, L., Tsai, R. (2004): OFFSHORE OUTSOURCING: CURRENT AND FUTURE EFFECTS ON AMERICAN IT INDUSTRY, In: ITSM Journal (Information Systems Management), Fall 2004 Tambe, P.B. and Hitt, L.M. (2010) p. 64: How Offshoring Affects IT Workers, In: Communications of the ACM October 2010, Vol. 53, No. 10 Mc Kinsey Global institute (2003): Offshoring: Is It a Win-Win Game?

The insignificance of jobs offshored compared to common layoffs

The following post discusses the question whether the number of jobs offshored, compared to the common layoffs is insignificant  and which villains lead to job losses in the IT sector. In general the United States has the world’s most dynamic economy. By this it is able to generate new jobs. As Forrester Research forecasts that 3.3 million jobs do go offshore by 2015, even in good times, mass layoff numbers are much higher than this, due to the dynamics of the economy. (McKinsey Global Institute (2003): “Offshoring: Is It a Win-Win Game?”, p. 9-10) Another research describes the Forrester Research figure of 3.3 million jobs to be outsourced as only 0.5 percent of the jobs in the affected industries. In average, the American economy destroys about 7 to 8 million jobs every quarter through job-churning, thus about 30 million jobs a year. For all intents and purposes the number of outsourced jobs is just a small proportion of the grand total of lost jobs. (Dash, S. (2005): “The Economic Implications of Outsourcing”, p. 9) In 1999, for example, 1.15 million people, out of a total of 2.5 million job losses, lost their jobs through mass layoffs. 1996, it was 1.18 million. (McKinsey Global Institute (2003): “Offshoring: Is It a Win-Win Game?”, p. 10)

As you can see by this, Even if the number of jobs lost due to offshoring seems to be high, the number of jobs lost due to mass layoffs is much higher. The forecasted number of 200.000 layoffs per year for the next decade is insignificant compared to the common layoffs. But it is necessary to differentiate between lower end jobs in the IT sector and higher paying ones. Over the period 1999-2002, while higher paying jobs have increased, lower end jobs have been lost. (Rishi, M.; Saxena, S. (2004): “Is Outsourcing Really as Bad as it is Made to Sound?”, p. 10)

On the other side, it is also important to examine the number of reemployment as outsourced labor can be reallocated to more competitive jobs. Between 1999 and 2003 although 70.000 computer programmers lost their jobs, more than 115.000 software engineers found higher-paying jobs. (Dash, Shalley (2005): “The Economic Implications of Outsourcing”, p. 16) In addition to recession the job losses for lower end jobs can be explained by the increasing standardization of IT technologies, which is making these jobs suitable for outsourcing. (Rishi, M.; Saxena, S. (2004): “Is Outsourcing Really as Bad as it is Made to Sound?”, p. 10)

So it is not just offshoring that results in job displacement: “technological change, economic recession, changes in consumer demand, business restructuring and public policy, including trade liberalization or environmental regulation all can and do play their part.” (McKinsey Global Institute (2003): “Offshoring: Is It a Win-Win Game?”, p. 10). The slowdown in IT hiring is due to other factors such as the collapse of the dotcom economy in 2000, the recession in 2001, and the unavoidable march of the technology that increases labor productivity. (Rishi, M.; Saxena, S. (2004): “Is Outsourcing Really as Bad as it is Made to Sound?”, p. 10) But as Humphrey says, innovation and its offspring, offshore outsourcing, is beneficial for the U.S. economy. In the long run it will create more jobs than it will destroy in the short. (Humphrey, T. (2004): “Ricardo versus Wicksell on Job Losses and Technological Change”, p. 22). In addition in the following table you can see, that the United States is also doing offshore work.

Strategy	Principal Examples	Others
Cost and Capacity	China, India	Malaysia
Language Skills	Philippines, Mexico, Costa Rica, India	South Africa, Tunisia, Morocco, Senegal, Madagascar, Mauritius
Nearsourcing	Canada, Poland, Czech Republic, Hungary, Slovakia	Ukraine, Belarus, Romania, Latvia, China
Special High-End Skills	Israel, Ireland, Australia, United States	China, India, Russia

ACM (2006): “Globalization and Offshoring of Software”, p. 54

As a result of its offshoring strategy, the United States is able to do special high-end work, which is called by many foreign countries, in favor of acquiring better services.

In summary you can say that the number of jobs offshored, compared to the common layoffs is insignificant. Even if the number of job losses driven by offshoring in low end jobs is higher, in the long run reallocation leads to more higher-paying jobs. As a result of offshoring even the United States benefits from offshoring of foreign countries, offering highly skilled und specialized work to them. The bigger part of layoffs is driven by other factors, like mass-layoffs due to recession or other reasons. Job loss in the IT sector may be driven by offshoring, but offshoring itself is driven by the inevitable technological change.

Offshore Outsourcing is driving job losses in million. Hysteria or reliable truth?

This post should give an answer to the question, if offshore outsourcing is driving job losses in the United States. The idea for today’s contribution to the IT-Outsourcing Blog was inspired by an article named “The Outsourcing Bogeyman” written by Daniel W. Drezner.

A lot of people think, that the IT-Revolution and it’s progeny, most of all offshore outsourcing, are net destroyers of jobs in the U.S.. As Thomas Friedman points out the 3 factors

• undersea installation of mega-bandwidth fiber optic cable allowing virtually costless transmission and storage of data,
• global spread of personal computers and
• standardisation of software applications

have made it profitable to shift service functions once performed in the U.S. abroad and thereby throwing Americans out of work.[1] The underlying principles of this behaviour are open economies and free trade i.e globalization which makes companies shifting jobs offshore. Regarding this Forrester Research much cited study estimates that 3.4 million white-collar jobs will move overseas by 2015. [2] And up to half of corporations are planning to send or have already sent jobs overseas. As a result thousands of American jobs will be lost each year.[3] The frightening point regarding this is the fact that not only low-skilled blue-collar jobs are shifted out of the country but also high-skilled professional services i.e. white-collar jobs are outsourced to offshore locations. HP for example predicted that by 2010 up to 800,000 back-office jobs are shifted overseas which allows companies to save up to $30 million a year. Another example is given by IBM which in 2005 reported 329,000 employees worldwide with almost 40% of them located in the U.S.. At the end of 2009 the firm reported 400,000 employees worldwide with only 25% located in the U.S. but also 25% located in India where IBM was becoming the second largest employer. [4] The IT-Service market is expected to grow by about 3.5% in 2011 and 4.5% in 2012 and by the year 2015 India can reach $130 billion in IT-Business Process Outsourcing revenues which reflects a casual annual growth rate of 14%. So the offshore outsourcing trend will go on as the steady recovery form the recession is pushing up IT-spending again. [5] And a lot of people think the job losses in the United States will do so as well.

At fist sight this figures are convey the impression that offshore outsourcing did destroy U.S. jobs in the past and will do so in the feature. But when looking inside the numbers the U.S. have to “separate face from fiction”.[6] The Forrester forecast of 3.4 million lost is spread over 15 years which means that about 230,000 jobs are lost each year. This sound immense until you have a look at the total employment numbers of the U.S. which in April 2011 was about 140 million. [7] Regarding these two numbers outsourcing would affect only 0.164% of the U.S. labour. Another important aspect is that less than 20% of the labour which is affected by outsourcing is indeed losing their job. Because most of the workers are repositioned within the firm as an examination of the effects on large financial firms by Boston University School of Management Professor Nitin R. Joglekar is showing. This is also pointing that offshore outsourcing is often counterbalanced by high-skilled job creation in the service sector. The theory of free trade is saying, that overall wealth is best off when countries focus on sectors in which they have a comparative advantage i.e. branches in which countries have the lowest opportunity costs of production. So as jobs are being lost in uncompetitive sectors, they have to be reallocated to more competitive ones. As an example is showing 70,000 computer programmers lost their jobs between 1999 and 2003. But in the same period 115,000 computer software engineers were hired for higher-paying jobs.[8] In Contrast to the general thinking of the U.S. importing lots of services, in the year 2010 the U.S. was running a trade surplus in services of $168 billion. “This surplus has grown quickly since 2003, rising $101.2 billion”.[9] As a consequence offshore outsourcing increases the competitiveness of the U.S service market which accounts for 76.7% of GDP.[10] Furthermore offshore outsourcing additionally boosts demand for products (notebooks, computers and telecommunication equipment), which are mostly developed and produced by U.S. firms. Another interesting point which has not been mentioned yet is that most jobs will not be affected by offshore outsourcing at all because “close to 90% of U.S. jobs require geographic proximity” and hence can not be shifted offshore.[11]

So if offshore outsourcing is not the main cause for job losses why does everybody think so? We can see Outsourcing for at least 20 years now but no one cared much about it in the 1990s because there were much more jobs created in the U.S. than were going offshore. But after the Dot-com bubble bursts voices have been raised which were saying that offshore outsourcing destroys U.S. jobs. Some Organizations were founded like the Rescue American Jobs and the Coalition for National Sovereignty and Economic Patriotism which were focussed on white-collar tech workers with statements like “Lost your job to free trade or outsourcing yet?”.[12] After the current financial crisis we can again hear the voices against offshore outsourcing as at the beginning of the last decade. Regarding to my last Blog “India Outsourcers Feel Unloved in the U.S.” we can see a protectionist behaviour coming from the U.S. government at this time. To be true it is no surprise that politicians find it easy to blame outsourcing on job losses and sluggish recovery of the economy during a downturn. History shows that as the job growth and recovery returns the debate about outsourcing will go away because offshore outsourcing is beneficial for the U.S. economy and promise to create more jobs in the long run than it destroys in the short.

The Hidden Costs of Offshore Outsourcing (2003)

When talking about offshore outsourcing, managers frequently argue that they can significantly save costs by shipping IT work abroad, so that the company consequently is able to earn a greater return. That this is not the whole story is already well-known since the theory of transaction costs was published in 1937 by Ronald Coase. Stephanie Overby takes it one step beyond and points out that there are also a lot of “hidden costs” which have to be kept in mind.

The most interesting aspect is, that she also considers the morale problems due to layoffs, which often lead to disaffection and work slowdowns among in-house “survivors”. Thus, to create a successful offshore proposition, executives have to spend a lot of time to communicate with their employees. From the economic point of view this is particularly important to keep the employees long enough in the company to share their knowledge with their offshore replacements. Hence, if executives fail to spend that time to talk about the offshore venture and the layoffs, the employees are going to make up their own minds about what’s happening furthermore and probably will be less motivated and unsatisfied. Moreover, as they don’t want their colleagues to lose their jobs, the staff even may completely reject the offshore proposition. On top of that, there is possibly later on or in other business areas a need of exactly these laid-off, disrespected employees.

Apart from that, in my opinion, this is not only a question of economics but also of fairness and social responsibility to its employees! So, what’s your point of view?

India Outsourcers Feel Unloved in the U.S.

This post is referring to an article with the same title from the Bloomberg Businessweek which discusses the offshoring of IT-jobs and how banning the outsourcing of government IT projects will affect the industry in India.

Last year in August, U.S. Congress passed a law raising fees for work visas by $2,000 to over $4,000. This new law, which is used by foreign workers to spend time in the U.S, could cost Indian companies up to $250 million a year.

Also in August, the state Ohio banned the outsourcing of government IT projects to offshore destinations like India.

As the two facts show, the political thinking about offshore outsourcing in the U.S. has a clear and protectionist direction. As the economy is recovering during the course of the year most offshore outsourcing companies are going to benefit from the business recovery, as clients will start spending on IT again. Forrester Research forecasts the U.S spending on outsourcing to increase by 5.6% this year.

A look at India’s $50 billion market in IT service exports shows that the U.S represents the largest part in that market with enormous 61%. That figure illustrates why Indian outsourcers fear that a U.S. counter reaction over job losses will endanger their biggest market.

As a result India’s IT companies are starting to built up their business in the U.S. and thereby creating jobs. An example for this behaviour is shown by the Indian company named Mahindra Satyam. At Oct. 13 the Hyderabad-based firm announced to design a document management system for the Kentucky state with so called near-shore operation to hire locally.

This move is reducing the firm’s dependence on U.S visas and helps to built up their business in the U.S, while efforts elsewhere only slowly taking root.

At the bottom line: At the one hand U.S. government is frightened about loosing U.S. jobs to offshore outsourcers as business starts to recover and on the hand outsourcers fear the loss of their biggest oversee market. As far as I am concerned the cost savings still will be a very important driver to shift IT-work overseas. Nevertheless the protectionist signals from the U.S. government show that offshore-outsources will have to deal with some new difficulties which have never been in this new market before.

Unemployment Through Layoffs and Offshore Outsourcing Linda Levine (2010)

Unemployment comes from various reasons, but the most concerning type of unemployment is, when business layoffs employees. The Report from Linda Levine (Unemployment Through Layoffs and Offshore Outsourcing by Linda Levine (2010)) focuses only on unemployment because of this type of layoff.

The number of outsourcing companies grew, due to improvement in internet, telephone and transportation. These reasons make outsourcing more efficient. As a result, involuntary job loss grew. The kind of jobs outsourced changed in the US, before mostly blue color workers (factory workers) lost their job, now also white-color workers (service providing industries) do not have a stable job anymore. This is an alarming statement. What do you think?

Does Service Offshoring Lead to Job Losses? Evidence from the United States

As a result of technological progress in computer, information and business services can now be shifted from rich countries to lower-cost sites, e.g. India and imported back later. Thus, on the one hand companies have access to cheaper foreign labor and different skills, so that they can gain a competitive advantage, because of a so called “labor arbitrage”. But on the other hand politicians worry that service offshoring may lead to job losses “at home” and hence offer tax benefits to those firms who will invest and create jobs in the domestic industry. Therefore, despite sourcing service inputs from abroad is growing rapidly, there still exists a fear that jobs will be lost by going offshore. To see if these concerns have any foundation, Mary Amiti and Shang-Jin Wei estimate in their paper the effects of service and material offshoring on employment in U.S. manufacturing industries during the period 1992-2000.

The results of the study show that service offshoring only has a small statistically negative effect on employment when industries are disaggregated. Therefore, service offshoring reduce manufacturing employment by around 0.4%. At a more aggregate industry level this effect vanishes. According to this study this means: whether service offshoring leads to job losses depends on the level of aggregation, so that there is sufficient growth in demand in other industries to offset any negative effects. The reason therefor is that companies sourcing service inputs from abroad tend to be more productive and consequently can even create new jobs, because as a result of the higher productivity the consumption increases and this leads to a higher demand for jobs. Thus, these study results show that there are no net job losses from service offshoring in the US labor market which is relatively flexible. But how does it look like on a country with a less flexible labor market? Does offshoring of materials and business services affect employment in Europe? What’s your opinion?