On The Comparative Advantage of Outsourcing Service

Jobs to India

IMS 3310-001
Professor Woldu

Wael Abdel-Hakim
Gene Cummings
Alexander Rivera
Ritika Bhatia
Robert Opdyke
Introduction

With the interconnectivity of the world growing exponentially in the last few
decades it would become inevitable that in one form or another individuals and
corporations alike will seek some sort of method to not only bolster their finances but
their hold on their shares of their respective markets. With this growing need came the
idea to begin receiving certain services from outside of ones home country by
relocating certain aspects of ones business elsewhere.

To many Americans the word offshoring gives off the negative connotation of
workers being fired and having their jobs moved overseas, and while this is true, what
they are thinking of is outsourcing and not in fact offshoring. Offshoring and outsourcing
are fairly similar but there is a difference between them. During outsourcing, a company
has quit making or providing a certain product or service altogether and are now
purchasing it through a third party provider. This doesnt mean that the third party is
foreign however. Offshoring on the other hand is when a company moves the location of
its services or production to a foreign location. Offshoring can apply to companies that
outsource though. Take for example if GM were to offshore to a country like China, and
then the Chinese production plant outsourced the creation of certain parts to other
facilities in China. (Offshoring vs. Outsourcing, n.d.)

Offshoring is a growing part of the worlds economic landscape, day in and day
out the human race is finding itself increasingly interconnected to the point that the
barriers of the past (which would have made a business concept such as offshoring
impossible) are being torn down at a breakneck speed. Therefore, in search of ways to
not only bring about financial growth for a firm but also growth in both the scope and
magnitude of their reach and spheres of influence. Offshoring has made its way to the
forefront of many firms business plans as the age of the internet makes it increasingly
easier to communicate with others not only across state lines but over countries borders
whole oceans away.

Offshoring does not solely affect large business, nor does its impact focus in
upon the corporate world alone. Small businesses can find themselves using offshoring
in a similar manner to their older siblings who grace the annals of the Fortune 500, and
for them the returns might just be greater as growing businesses could find a healthy
platform on which to build if they choose to move certain activities to places such as
India. Though as stated above Offshoring has an impact outside of the business world,
often times the focus of those on the outside is set upon the Americans whose jobs
would be at risk should their respective firms choose to look overseas.
 Perhaps the most famous location for both offshoring, and its often mistaken
sibling outsourcing, is of course India, a country according to the CIAs World Fact Book
which has a population of around 1.25 billion and climbing as of 2015 (The world
Factbook central intelligence agency, n.d.), a rather large proportion of said
population being able to read, speak and write in the English language giving it a large
comparative advantage over many of its fellow countries considered offshoring havens.
With a heavy majority of its population under the age of 55 the pool of workers available
in India is enough to make any firm think twice about moving functions elsewhere
(though there will be more on that later).

(Population Pyramid of India circa 2015 via CIA World Fact Book)

In the business world offshoring poses many questions, as the benefits which it
presents to most if not all firms are often too enticing to turn down. A firm may have to
face the ethical conundrum of whether they are willing to ship away jobs overseas
and, as some would see it, away from American workers in order to not only gain
greater profits but also attain other benefits. Do the boons of offshoring outweigh the
negatives which they may or may not cause? One needs to first carefully weigh each
possibility out before ultimately coming to a decision.

The Advantages do not stop at the coffers

By using offshoring to complete tasks which would otherwise take up valuable

man hours back stateside, a company is opening up themselves to begin to focus more
of their efforts on their core functions. This means they no longer have to delegate
someone domestically to deal with trivial tasks that can be easily taken up by someone
overseas, for a fraction of the cost mind you, freeing up time and money that could be
spent (as stated above) on the main objectives of their specific firm. This plays on the
idea of efficiency versus effectiveness. The companies that engage in offshoring are
gaining the ability to focus more on important tasks, but they will require someone to
oversee the newly delegated members of their overseas team and ensure that they are
also effective in delivering the service. This provides the opportunity for the companies
that are doing offshoring to effectively create new management jobs for employees
that would have otherwise been displaced due to offshoring.

Another advantage for companies growing into new territory is that through
offshoring the company/firm also opens its doors to working with a source of knowledge
from an outside global entity. Smaller firms might benefit even more than their larger
counterparts because they could find an outsourcing facility which has, under their
employment, people with both the skills and education that they need and might not be
able to find readily available in their home region/area. On top of that they might also be
exposing themselves to a new foreign market as well, and with the offshoring site (if
they have any control over the collocation facilities) they are cementing their foothold in
a region which is growing rapidly day in and day out (speaking in terms of India that is).

Another advantage of offshoring is that the home company minimizes their

exposure, in some aspects, to having any sort of risk if the task is delegated to an
outside source. This presents the company with plausible deniability if they are in fact
outsourcing rather than offshoring. Simply put if there is a problem with their product or
service they can easily fix it without too much outside involvement, and therefore save
face in front of their potential critics.

Offshoring, an Ethical Dilemma?

In short, yes, a company will ultimately have to face some sort of ethical
questions when deciding whether or not to conduct any sort of offshoring activities. First
and foremost, is the fact that in shipping jobs overseas to places such as India or any
other country with a large population of English speaking countries they are effectively
taking jobs (at least in the eyes of some) away from American workers who are equally
if not even more qualified to conduct the jobs here stateside.Once again this brings up
the question of efficiency versus effectiveness. While the decision is ultimately made
looking at business ethics, and in that regard offshoring makes perfect sense, what they
risk in potential loss is still a factor. When the company offshores it risks having to
retrain many of the new hires overseas and even then societal differences may change
the way the service is done.
 Is the loss of jobs in the United States really worth the risk for a cheaper labor
force? In 2015 alone the United States saw nearly 2.4 million jobs leave our shores for
those abroad with the large majority of those jobs lost being from the Computer
Programming and Software engineering industries (Brain, 2012). Of the nearly $146
Billion market, which is from the United States alone, offshoring to India factors in for a
whopping 55% (Indian IT and ITeS industry analysis, n.d.). Many people seem to feel
that the quality of service from non-domestic workers is less than acceptable when
compared to those whose jobs were sent overseas.

Another fear is that when jobs go overseas the money that would have been
made over here in the US, instead stays abroad. It appears that many of these fears,
are however, misguided. The McKinsey Group Institute estimates in their research that
for every $1 (USD) that is sent overseas to places such as India for
offshoring/outsourcing purposes about $1.12 is generated domestically in both direct
and indirect income (Patterson, 2010). As our money flows out into developing
countries, it eventually flows back in in slightly greater numbers. This effectively boosts
the economy in the long run.

The Ups and Downs; Stateside and Overseas

While the Pros of Offshoring for American firms may seem rather appealing the
Cons are something which will inevitably have to be dealt with sooner or later. One such
hindrance is the factor of additional costs which the firm may have to deal with. While
yes by shipping, for example Information Technology (IT), jobs overseas to India firms
are saving often times multiple thousands of dollars PER employee by paying their
foreign counterparts a fraction of their wages the firm may also incur additional costs in
having to train these workers and in the end the savings they produce (while not
altogether disappearing) might be far less drastic than initially thought.

Perhaps the most prevalent, and of course the factor which would no doubt
weigh most heavily upon the decision to move operations offshore, is the fact of the
domestic job loss that will no doubt take place once said jobs are sent out of country. As
stated previously American jobs will be lost when offshoring is implemented, and there
is no guarantee that the employees would be able to find employment elsewhere in the
company let alone outside of it, especially when one factors in the generally low
perceived skillset which is needed to take up a job; for example a job in a call center.

It could be argued that if offshoring becomes too prevalent a tremendous amount

of jobs could be lost on American soil, which will no doubt be a detriment to the
unemployment rate and in turn the economy if the now jobless employees are unable to
find work. Not to mention the fact that with most similar work being shifted overseas
they may not be able to find a job which is in need of their particular skillset and thus will
be forced to either take up positions with lower wages or head back to school in hopes
of being able to find work in the future, further saturating that particular market as well,
as we have seen after the most recent market turmoil. A thought like that is only
bolstered when one looks at data like those collected by StatisticBrain.com which shows
that a staggering 89% of Economists polled viewed job outsourcing as something which
hurts the economy. (Brain, 2012)

Another unforeseen factor may be the fact that with the mundane jobs being
taken over in another country thousands of miles away there is always the possibility
that the quality of service will not be able to be upheld 100% of the time as there is no
way of being certain that company guidelines are being upheld at all times, which some
could argue would be a far easier task if the jobs were kept stateside.

Though this all might have the ability to be taken with a grain of salt, as Linda
Levine points out in her work for the Congressional Research Service (Levine, 2012),
while yes there is no doubt an effect on US jobs when it comes to outsourcing there are
No comprehensive data exist on the number of production and services workers who
have lost their jobs as a result of the movement of work outside U.S. borders. (Linda
Levine, Specialist in Labor Economics), meaning that while we have all the signs that
there are in fact jobs being pulled away, packaged and sent overseas we have yet to
have a definitive method to show just how prevalent of a problem we have on our
hands. What little data we have is either gathered from sources in the industry with no
way of truly verifying the results, and of course there is the U.S. Bureau of Labor
Statistics (BLS) which takes in data regarding mass layoffs. The only problem with that
is that it seems the scope of their findings only cover mass layoffs of companies with
over 50 employees, and not the slow trickle of jobs being sent over seas nor the large
amounts of small businesses which might be taking advantage of labor overseas.
Further underlining this is a study performed by three Economists between 2000 and
2007, which showed that rather than hindering American jobs offshoring may just
bolster them. In the study it was shown that for every 1% increase in offshoring
American jobs saw a 1.72%, which albeit is a rather small increase and could be seen
as being more evident that the two sides of the coin (offshoring vs american domestic
jobs) increase more or less in neutral terms. (Khimm, 2012)

Long Term and Conclusion

 Jobs which are being lost domestically in the IT fields, while yes some of the laid
off employees are finding new work after being let go, will more than likely be replaced
by lower quality employment opportunities more often than not in the service industry
which provides far lower wages and little to no benefits. Or in order to find work of a
similar wage they might have to resort to shifting their career path altogether.
(Outsourcing Statistics: The Pros and Cons. (n.d.)) If offshoring/outsourcing to foreign
countries is allowed to continue America will be far more susceptible to seeing its vast
stores of human capital depleted in the not so distant future. This upheaval in the
balance of human capital will have a traumatic effect upon the upward mobility which
American citizens have become so accustomed to. Workers, as we saw in the market
crash in 2008/2009, will then be forced to return to school having seen their
employment opportunities dwindle as they will have to find some way to increase their
viability in the job market. This may have the unforeseen effect of lowering the value of
college degrees in some areas, as some fields have seen in recent years with so many
people breaking into the job market with a Bachelors degree that is something which
will no longer set apart a candidate for a job. So new graduates will be forced to either
take positions which are not altogether what they had originally set out to look for in
order to build experience, or even return to University in order to ascertain higher level
degrees.

As stated above, offshoring in one way or another, reduces the amount of

employment opportunities in technical fields thus lowering the university enrollment in
majors pertaining to those fields. While this may not seem like a problem at first glance
it has terrible repercussions for the system as a whole. Take for example what happens
in many Public School systems throughout the United States and no doubt abroad as
well, in search of ways to reallocate funds more often than not we see programs being
cut which no longer seem to have the numbers to justify keeping them around. If more
and more students in the US see IT and Tech related jobs as being at increasingly high
risks of being sent overseas they will no longer choose to major in those fields,
eventually colleges and universities will cut down on the number of courses in the fields
to save on money. But by doing this they in turn lower the strength of the IT degrees
which they offer, which will lead employers to have to look for foreign talent as US
graduates will no longer appear to be up to snuff compared to their foreign counterparts
in places such as India.

Offshoring of lower skill IT jobs will no doubt disrupt and displace many US
workers, who may have specialized in their specific jobs thinking they were secure, and
since they did so they will not be qualified to find worker of a similar level due to their
lack in training. In order to quell the demand for a domestic side workforce (if it is at all
necessary), firms would be forced to pay large amounts to train the workers to perform
tasks at even the most entry level of tasks.

While yes offshoring provides a firm some sort of savings in terms of salary, as it
is well documented that foreign workers make charge a fraction of what American
workers do. For example, as CIO magazine pointed out in their 2003 September issue
(which was published right around the start of a monumental growth in Offshoring), the
case of the American worker charging $100 being undercut by a foreign counterpart
charging $20 has become more fact than fiction. (Overby, 2003) However as Stephanie
Overby, the author of the article, as well as many others point out that 80% savings
cannot be taken at face value because the worker might be making a staggering
amount less than their American counterpart but they could be costing their firms many
times more by having to ship the work overseas. Not only do firms have to face an initial
cost of entrance into the foreign labor pool which can range anywhere from the tens of
thousands to the millions for many large firms, but they also have to incur variable
amounts in both monthly upkeep of a functional network to unforeseen complications in
a market which see drastic changes on a quarter to quarter basis. These massive
amounts of fees eventually begin to rack up, and the firm may find themselves throwing
money into something which does not even give a return equivalent to all the work
being put in.

In short offshoring can be a very useful measure of keeping products and

services cheap, and in the long run can even yield more money coming back than what
is put in. However, as stated above, even with the inflow of more money, offshoring
does not allow for the costs required to place the workers whose jobs are no longer
here. Therefore, offshoring is something that the US should probably not do. There are
far more costs than there are revenues. People will be displaced and may never be able
to get an equivalent job again, they may have to go back to school or even just go
through new training to give them a new skill set to be hired somewhere else. All the
while there is less money moving through the american market. To answer the question,
no we should not offshore, it ultimately has more negative impact than positive.
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