The Economy -- The Outlook: Outsourcing Abroad Draws Debate at Home
14 July 2003
The Wall Street Journal
WITH THE JOB outlook grim, outsourcing overseas is an increasingly thorny
issue.
Those opposed say it effectively means exporting work and jobs, a
controversial strategy given that the overall number of people collecting
unemployment benefits reached a 20-year high last week. Those in favor say it
enables U.S. companies to compete globally. One thing is clear: The debate is
bound to escalate as the practice spreads.
Forrester Research Inc. predicts that American employers will move about 3.3
million white-collar service jobs and $136 billion in wages overseas in the next
15 years. Concern about the impact on the nation's economy and its workers is
prompting union protests and congressional hearings. At least five states
introduced legislation aimed at keeping jobs in the U.S., among other things, by
blocking companies from using foreign workers on state contracts. The House
Small Business Committee held a hearing last month on outsourcing, just one week
before high-tech workers protested outside New York's Waldorf-Astoria, site of
an outsourcing conference. In Seattle, high-tech workers rallied outside the
city Chamber of Commerce, where local officials were meeting with a British
outsourcing firm.
Outsourcing took off in the 1990s when companies, mainly manufacturers,
wanted to cut costs and concentrate on their core high profit-margin tasks. The
price didn't seem high. The lost jobs were lower-skilled and lower-paid. The
labor market was tight. But then the recession hit. Companies, looking for ways
to further slash costs in the face of global competition, sent more work
overseas, and laid off workers at home. Affected were not only those unemployed
workers, but midsize and small suppliers who couldn't compete on price.
BUT NOW THE PRACTICE is spreading well beyond assembly and data-entry.
Business-processing outsourcing company iGate Corp., Pittsburgh, started a
life-science unit to outsource clinical trials of new drugs in India and
elsewhere for pharmaceutical companies that want to get drugs to the market
faster, but are required by regulators to conduct larger trials. General Motors
Corp. built a $21 million research and engineering center in Bangalore, India,
which is also home to a General Electric Co. lab where scientists and engineers
work on next-generation refrigerators and jet engines.
Pradip Kamat, who runs Indus International Inc., a Cleveland-based
business-consulting firm, has organized a delegation of 30 companies from India
to tour Ohio, including one that wants to design and produce parts for huge
cellular telephone towers. The tower parts would then be shipped to the U.S. and
constructed here. It's a cost-savings issue, he says, noting that engineers in
India earn about $5,000 to $10,000 compared with at least $50,000 in the U.S.
"In the short run, it raises unemployment issues in the U.S., but in the long
run it's necessary to compete."
For the most part, companies say they aren't taking jobs from the U.S. and
moving them overseas, but rather getting additional resources at a lower cost.
Moreover, in the case of moving research and development functions overseas,
they can get products to the market faster, because work can be done 24/7 with
scientists and engineers in one part of the world passing off the project at the
end of their day, to those just waking up overseas. That makes them more
competitive and nimble to compete in the world market.
SMALLER AND MIDSIZE companies are getting into the act, too. A recent study
by the Outsourcing Institute found that 60% of companies with fewer than 500
employees expect to spend between $1 million and $5 million on outsourcing in
the next 12 months for technology, manufacturing and logistics. "Growing an
enterprise has evolved," according to Frank Casale, chief executive of the
institute. "It's no longer about what you own or build; success is hinged to the
resources and talent you can access."
For many it's a matter of survival, having found they can't compete with
low-cost foreign producers or service providers. But, they are also able to tap
into a growing number of organizations clearing the way for them. Plante &
Moran, an accounting and consulting firm, is holding a session for midsize
manufacturers in the Midwest this week on business in China. The session,
drawing close to 500 top executives, was sold out.
One 25-employee company, which had been told by its biggest customer that it
needed to lower its prices, looked to the World Trade Center Cleveland for
advice. David Yen, executive director, helped find a partner in Taiwan to make
low-cost circuit boards and win the company a $1 million contract.
Many companies, though, are feeling only the downside. Wes Smith says
outsourcing by big automotive customers puts the squeeze on his 250-employee
metal-stamping company in Michigan. "As our customers go offshore, that's where
the jobs are going. There are a lot of guys like me who wonder if there is going
to be anything left to hand to our children," he says.
===========================
As the following Deloitte press release suggests, the financial services
sector is following trends already well established in industries such
clothing, footware and high tech. Moving financial services jobs to
countries replete with cheap brain power would seem to make good business
sense. Rich world financial service companies will become "branders", as
Naomi Klein would put it. Their function will be to sell the product,
and to make certain that it meets the standards that their brand names
require. Someone else, far away, will do the actual work. Is there
a problem with this? Well, perhaps. As more and more such jobs are
moved to the poor world, fewer will be available in the rich world. But
one could argue that the savings in cost will be invested to create
replacement jobs.
A greater problem may be the instability of the poor world. Do rich
world countries really want to tie themselves so fully to countries that could
become hostile or that could spin out of control? How high might the
costs of keeping the poor world stable for rich world business be? Rich
world dependence on poor(er) world oil may be a case in point. To keep
the oil (or brain power) flowing, you may have to move in and sit on
someone.
Ed Weick
Press Release
Top 100 global financial-services firms seen transferring $356 billion of
operations, 2 million jobs offshore over 5 years
Deloitte Research study sees 39% savings from moves; India to
benefit most
New York (NY) - April 9, 2003 - In the most comprehensive survey of their
moves offshore, the world's 100 largest financial-services companies indicate
they expect to transfer an estimated $356 billion of their operations and two
million jobs offshore over the next five years in efforts to reduce their
costs significantly.
The survey by Deloitte Research found that financial institutions expect to
reduce costs by nearly $1.4 billion each by 2008 by sending work to low-cost
centers like India from developed economies in North America, Europe and
Asia.
The survey, in which 27 of the world's largest institutions participated,
offers a snapshot of what financial-services concerns are planning in their
efforts to transform their operations by reducing their cost base and making
their organizations more international.
The shift of operations offshore already is now underway. Thirty percent of
the respondents currently have existing offshore operations and that
percentage is expected to climb to 75 percent within two years, according to
the survey. It suggests that the firms achieve 39 percent cost savings from
moving operations to low-cost centers where salaries and other costs are much
lower.
"Offshoring is gaining momentum at a rapid pace," says Christopher Gentle,
a director at Deloitte Research. "And getting offshoring experience as soon as
possible translates into greater benefits - from higher cost reductions to
more business processes being handled by the low-cost centers."
The study draws four principal conclusions:
- The offshore trend is driving a radical shift in the structure of the
global financial-services industry and this transformation is just
beginning.
- Financial institutions that can utilize their existing offshore
facilities expect significant future savings because they leverage offshore
scale and scope; the challenge is achieving economies of scale.
- Firms aspiring to move offshore should move quickly to capture the
benefits of doing so, but the challenge is building capabilities quickly and
prudently.
- Firms who don't move offshore risk being left behind because companies
moving offshore estimate future cost savings at about 45 percent.
Deloitte Research emphasizes that offshore steps must be planned and
executed carefully to be successful. The survey finds that more than one-third
of the historical moves offshore have been unsatisfactory with the
institutions planning no further relocations.
These unsuccessful moves have common characteristics, including cost
reductions significantly below the average, a narrower scope with fewer
functions moved offshore; a scale nearly one-fourth smaller than average, and
a much shorter timeframe for planning and execution.
Of financial-services firms transferring functions offshore, nearly half
are targeting India, which has a huge market of IT professionals who earn much
lower wages than elsewhere. Ireland and South Africa are also attractive
offshore centers, with China, Malaysia and Australia growing in
popularity.
"India stands to be the major offshore hub because of its combination of
low cost and high technology expertise," said Gentle. "But there's no
guaranteed bonanza for India unless it continues to deliver improved services
at globally competitive wage rates. Competition from other countries around
the Indian Ocean rim from South Africa to Australia will be fierce."
Deloitte Research estimates that more than a million jobs - or about half
of the estimated relocations - will move to Indian Ocean rim over the next
five years.
The survey shows that banks and insurance firms are transferring offshore
such functions as application development, coding and programming, accounting
and finance, operations, processing and administration, contact support and
call-center operations.
Since decisions to go offshore are significant ones, the chief executive
officer, chief financial officer, chief information officer or chief operating
officer makes 90 percent of them. And as the size and complexity of the
offshore moves increase, approval by the CEO is set to increase to 45 percent
from 20 percent.
Deloitte Research said its estimate that $356 billion in financial-services
firms' cost base will shift offshore is based on a $2.34 trillion cost base
for the top 100 institutions globally. The survey indicates that the
financial-services firms plan to shift, on average, 15 percent of their global
cost base offshore over the next five years.
Using that same 15 percent assumption, Deloitte Research figures that two
million positions of the 13 million people employed in the financial services
sector of North American, the European Union and Switzerland, and the Asian
developed economies of Hong Kong, Japan and Singapore will shift to low-cost
offshore locations.
