Offshore Outsourcing - Good or Bad?
Most immigrants that I know that came to the country on H1B’s or other visas are on tech jobs. These are
Outsourcing - Good or Bad? Joke by Stuart Henshall
usually jobs related to the IT in industries such as Software development, Manufacturing, Health Care, Etc. Some of them were originally working for (or still work for) companies such as Infosys or TCS in India that moved quickly to take advantage of providing off-shore outsourcing services to American and European companies. Some of us have later taken on jobs with American companies themselves. We’ve played on both sides.
I’ve had many a debate or discussion about whether outsourcing is a good thing or not. Well, someone out there must know the truth - is it really that bad, or is it in fact the perfect solution to American’s problems?
Several people I know (especially those that were laid off from their jobs here because their company shifted operations overseas), argue that it’s evil and will bring the standard of life in the US down eventually. Many, like me, somehow don’t agree with that argument. I’ve always felt that outsourcing is inevitable. In a free economy, work will always get done the cheapest that it possibly can. That’s how everyone benefits - consumers, companies, stockholders, and employees too. As a result of being able to consume services and products at a cheaper cost, American companies and people actually enjoy the benefit of being able to use the rest of their money to INVEST into innovation. The ability to Innovate, ultimately, is the only thing that separates the best from the mediocre, in my opinion. If America remembers that, and stops making all these laws that limit the rights of H1B workers or the benefits to companies that outsource, I think the economy will benefit a lot faster. The idea of free trade and capitalism is fundamentally very sound. Here’s what will happen in my opinion:
Let’s start with 10 years ago:
1. Company A outsources low-cost jobs overseas. Job that cost $5 in the US, now costs $1. Money saved = $4. 10 jobs were shipped abroad.
2. At the time, company A does not realize that unless they re-invest the $4 to innovate, they stand to lose out in the long run. So, they basically pay their remaining employees higher, blah blah, with the $4. Overall standard of living in the US goes up, with little or no additional innovation happening. Their execs buy more jets and their employees and stockholders buy 52″ LCD TV’s. Does that really contribute to a global competitive advantage? Probably not as much. The 10 people that lost their jobs file for unemployment and do not contribute to the economy anymore.
3. Fast forward a few years, thousands of companies do the same thing. Unemployment rises. Government doesn’t have the money to support them. Social Security is unsure whether they can keep supporting the retired anymore. Company A doesn’t enjoy the same profit margins because the job abroad now costs $2.5 instead. Other companies abroad provide the same product or service that they do, using local labor, for the same or comparable price, so they are losing customers and margins. Company A is in trouble, so is the US economy.
That was today.
Let’s fast forward a few years into the future.
Now company A is desperate and so is the Government. However, they do have one major advantage over the developing nations. Infrastructure and a capital of intelligent resources in abundance. They’ve built schools and universities and R&D departments at companies over the last few decades and now is the time to move on them. They have an established system of law, a reliable health-care system, and an ethical community that has the ability to innovate. In desperation, they dig into their resources and come up with products and services that the rest of the world needs. Drugs, defense equipment, research equipment, management services. American companies set up shop in the US and off-shore to provide those services,, which in turn, creates jobs abroad and some here in the US to support those organizations. America uses its abundant management talent to manage enterprises around the world. Low-cost jobs get paid lower in the US as well but that’s OK because more management jobs get created, which are a higher pay, and appropriate for the higher standard of living that Americans have come to expect. American kids in high school don’t think about easy work that paid them $25/hr like they did 10 years ago, because it’s not going to pay them that. Instead, they aspire to take advantage of great universities and enter colleges to be scientists and lawyers, Etc. American lawyers help establish systems of law around the world. American pharma companies now sell around the world. American software companies sell software around the world as well by setting up more shops off-shore and bringing profits back to the people of the United States that manage these companies. US benefits from being the innovator, and developing nations benefit from the availability of large-scale lesser-cost labor. Everyone benefits. GE uses a 70-70-70 rule that says 70% of their work on any project is outsourced, of which 70% is done in Bangalore. And they thrive as a company today, benefiting the US employees as well as their off-shore counterparts. Ford and GM, on the other hand, failed to implement outsourcing effectively and got squashed under union pressure and we know where they are today - battling bankruptcy.
That’s a rosy hunky-dory picture, I know. But as long as innovation continues aggressively and America makes the right use of its talents instead of trying to implement protectionist laws, I don’t see why it can’t be that way. The way I look at it, it’s a natural, positive restructuring of the world’s workforce. Places that have abundant labor and lesser developed infrastructure take on work that’s more beneficial to their growth, whereas countries that are developed and are better positioned to innovate, do just that instead.
And that’s where immigrants come in. US still has the clout to attract the best minds in the world to this country as well as to their off-shore establishments. That’s what separates them from the rest of the world. If they continue to do that, there is no reason why outsourcing will affect them adversely. In fact, if they make laws that prevent such free trade from happening, the loss in the standard of living will happen much more quickly. And I am not the only one that says so. William Anderson, an adjunct scholar of the Mises Institute, teaches economics at Frostburg State University. Read his article on the economics of outsourcing: He makes some outstanding points on why anti-outsourcing as a law makes no sense.
http://mises.org/article.aspx?Id=1488
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January 20th, 2009 at 1:42 pm
The flaws in your theory are as follows:
1. Your assumption that the H-1B visa brings in the best and brightest who will innovate. The H-1B visa brings in ordinary workers to do ordinary work. The best and brightest U.S. students are flocking FROM science and technology fields because the jobs don’t pay enough to be worth the sacrifice.
2. Your assumption that the rest of the world will stand by while we “establish systems of law” in their countries.
3. Your assumption that free trade works both ways. Other countries protect their workers livelihoods, especially the large outsourcers such as India.
4. Your assumption that the corruption of offshoring companies such as Satyam will have no effect on the process.
January 20th, 2009 at 2:37 pm
CoolMower,
Thank you for sharing your thoughts. Here’s my responses to your comments:
The flaws in your theory are as follows:
1. I agree that the H1-B visa system is totally broken. I do think that students that come to the US to get their advanced degrees and then stay back to work with companies in the US, are definitely a brighter bunch. I have no issues with the US establishing a system based on MERIT in addition to diversity alone. I’ve written about this on this blog before. Basically, the entire H1-B and green card process needs a desperate overhaul. But that will not happen unless lawmakers clearly see the end-goal. Half of them want to implement protectionist policies that are short-sighted. I agree with you that the curren H1-B system does actually hamper the process of innovation somewhat. The US has the clout to get the best, and it should stop at nothing to do so.
2. That was just an example. US has an abundance of extremely talented lawyers. The rest of the world needs better systems of law. I am sure some smart company will find a way to get the 2 together. Again, just an example, not sure if that specific one will work out just that way.
3. Protectionist laws are good only when a certain group is being taken advantage, discriminated against or to prevent fraud. There are examples of these everywhere. Protectionist laws against free trade that are meant to simply provide “production” units an unfair advantage just to keep people employed, have very little chances of bringing long-term benefit. Protectionist laws in India, for example, are widely acknowldged as a failure that hampers the development of the country overall.
4. American companies need to do whatever it takes to protect themselves against fraud, corruption, Etc. that is rampant off-shore. That’s just risk management and a business rule 101 in my opinion. I don’t think that Satyams of the world are enough of an issue to re-think the entire concept of Outsourcing altogether.
January 21st, 2009 at 4:06 am
You wrote:
” Protectionist laws are good only when a certain group is being taken advantage, discriminated against or to prevent fraud.”
Here’s proof that highly skilled U.S. citizens are being discriminated against:
1. U.S. Department of Labor STRATEGIC PLAN Fiscal Years 2006-2011(pg. 35) states:
“… H-1B workers may be hired even when a qualified U.S. worker wants the job, and a U.S. worker can be displaced from the job in favor of the foreign worker.”
http://www.dol.gov/_sec/stratplan/strat_plan_2006-2011.pdf
(replace U.S. worker with “black” or “female”, or “Jewish” to better understand the outrage)
Pfizer took advantage of this law to force U.S. workers to train their H-1B replacements before being fired. Yes, they actually had to dig their own graves by training their H-1B replacements. You see, it is the H-1B who needed the training. The entire operation was then offshored.
Multiply this situation by thousands of companies and you will understand why the U.S. economy now has a meltdown.
January 21st, 2009 at 8:45 am
Great article. We need more input from people to fully debate this issue because there are obviously tons of variables and I am not really an expert in economics, maybe comics ha ha.
I do think innovation is the key. If every one of us is curious and willing to learn and motivated towards life, we’ll be fine. Obama’s inaugural speech pretty much said the same and the only way to stay ahead is to make sure that we are the best we can be.
January 21st, 2009 at 10:09 am
I am posting a few friends’ comments that they sent me via email.
Friend 1:
you nailed it in one sentence,
“In a free economy, work will always get done the cheapest that it possibly can.”
i feel “outsourcing is evil” itself is a topic which can never be debated (unless u r a congressman) . i can hardly think of one reason where it is evil. job losses are
not valid reason. its like postal workers protesting against internet. US stopping outsourcing, india not importing chinese goods etc only prevents improvements.
‘embracing change’ will always be called evil in the short term.
Friend 2:
It is not a black or white question,the inevitable will eventually happen, companies will chose the path of
maximum profit and customers will choose what is convenient and cheap. It is the role of the government to make
sure that the process is phased and families are not trampled in the process.The government should be proactive,one example is Denmark where people get 60% of their salaries when their jobs are outsourced.
” Companies are like rivers which flow where they please, it is the role of the government to build canals and dams to ensure maximum people benefit.”
Friend 1 reply:
why would the govt pay 60% salaries to ppl who lost thier jobs. doesnt make sense to me. everybody wud want thier jobs to be outsourced then.
its only incentivating. why dont US manufacture everything here itself, so u can enjoy greater employment rate but dont worry abt not being able to afford.
as srini said, in a free market, whoever is cheap/better survives. others shud just adopt to it or be in denial and lose eventually(just like the auto manuf as he pointed out). every transition as u call it will piss off many ppl in the short term. in the long term it will make the country more competitive and explore other ways to make money. but for policy makers, short term is very important as it wont be welcome by ppl.
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May 11th, 2009 at 2:24 pm
I tottally agree with CoolMower on :
“The best and brightest U.S. students are flocking FROM science and technology fields because the jobs don’t pay
enough to be worth the sacrifice.”
beacause It was very tough to get a job for fresh grad and I still have freinds who couldn’t find jobs and started going into other feilds.