Outsourcing is a good thing—mostly

"Cost reductions from outsourcing ... open up new market opportunities for U.S. companies and generate additional jobs here at home... Outsourcing and the savings it generates are the beginning--not the end--of the adjustment process."

OUTSOURCING IS NOT a new phenomenon--although the subject has hit the headlines only recently. Many service companies started creating jobs overseas to gain access to foreign markets. They audit, consult, and repair where customers are located. To put it mildly, they do not tell the overseas customers to come here. Moreover, many foreign markets are growing quickly as numerous domestic ones have become saturated. Approximately 60% of the revenue of American information technology companies is estimated to originate overseas. That is not unique. In various industries--ranging from banking to consumer products to .job placement to aerospace-leading firms report that their overseas revenues exceed their domestic sales.

Remember, too, that some businesses hired specialized workers overseas to adjust to U.S. immigration limits. When they could not get those workers here, they had to send the work to them. While doing so, the companies learned how to use modern technology to shift the location of work economically. They become accustomed to taking advantage of lower costs, domestic and foreign. Telecommuting from employees' homes may have paved the way for some enterprises to extend the process to new suppliers, at home and abroad.

Most fundamentally, a great many companies are focusing their efforts on their core competence. They subcontract out most of their activities to domestic suppliers. Viewed from that perspective, overseas sourcing is a minor part of the trend to decentralize business operations. In addition, these companies have learned that, in many cases, the higher productivity of U.S. workers offsets the wage differentials and other costs of operating overseas.

Outsourcing can help a company operate in an increasingly competitive global marketplace. Lower costs are key to maintaining a firm's position in the modern global economy. Outsourcing can enable a business to provide 24/7 coverage, especially for customers who need around-the-clock support. On the other hand, it is impractical for a firm to adopt a unilateral policy against outsourcing work--especially when its foreign and domestic competitors are doing it.

The specific decisions are made on hard-nosed business grounds--including balancing productivity and labor costs. Not too surprisingly, the result is that most U.S. jobs stay here. About 400,000 U.S. positions in information technology have gone offshore. Meanwhile, total U.S. employment rose from 129,000,000 in 1993 to 138,000,000 in 2003--mainly in services. Only about 1.4% of the $120,000,000,000 spent on information technology (IT) services in the U.S. in 2003 moved offshore. Of course, the 98.6% of the work that stayed here was not deemed newsworthy.

Overseas warning

A word of wanting is necessary in the face of the current business enthusiasm for overseas workers. Companies that outsource to foreign workers just because "everybody is doing it" may be surprised by unexpected costs and complications. Businesses that arbitrarily set a fixed percentage of work to be outsourced likely will regret it. They probably will encounter a variety of difficulties dealing with arcane legal systems, protecting their intellectual property, and meeting the requirements of different tax and regulatory agencies aside from encountering corrupt officials in the public sector.

Furthermore, overseas managers often do not understand the American business environment--our customers, lingo, and traditions as well as our high quality control standards and expectations for prompt delivery of goods and performance of services. Many U.S. manufacturing firms stubbed their toes badly in their initial encounters with new venders in Asia. They did not plan on geopolitical risks, as in Indonesia where chaos followed the ouster of the longtime national leader. Nevertheless, the trend toward outsourcing is a continuing development.

The effect of outsourcing on U.S. employees is far more complicated than it at first appears. The visible part (the tip of the iceberg) is widely known: some U.S. employees lose their jobs or get shifted to less desirable locations. In recent years, this iceberg may have a very large tip. However, any serious analysis must extend to the rest of the iceberg. Looking at the total employment effects of outsourcing, the less visible part of the impact is much linger. Far more U.S. employees keep their jobs because outsourcing helps the company stay competitive. Some get new or better positions because the firm enhances its financial strength. For example, as companies upgrade their software systems, them may be less domestic demand for basic programmers, but more for higher paid systems integrators. Corporate IT departments are changing their mix of in-house skills. They now emphasize managerial experience, business process knowledge, and understanding the domestic customer--capabilities that cannot be provided effectively overseas.