Is outsourcing bad for the first-world economy? – An Analysis

Is outsourcing bad for the first-world economy? – An Analysis

By Abhishek Rungta February 13, 2018 - 3,926 views


To say that we live in a global economy has become a clichéd adage, the benefits of which tend to go overlooked as we grew more dependent on and used to them. Dr. Mark J Perry, economist and professor, states in his article,

“Every time you buy groceries and clothes, use the services of a dry cleaner or a car wash, or eat in a restaurant, you are outsourcing. Just like a business, you compare the cost of producing those items or performing those services yourself, to the cost of acquiring them from others.”

Another leading economist Luke Froeb, writing for the Managerial Econ blog said,

“Will someone please tell the president that outsourcing is only trade…and that trade makes both parties better off. To see this, ask why we outsource banana production to Costa Rica. We could grow bananas domestically, in green houses. We don’t because it is much cheaper to grow bananas in Costa Rica.”

Outsourcing is basically the trading of services, and offshore outsourcing extends this trading to a global platform. In December 2008, NBC News and the Wall Street Journal conducted a poll where they posed a pertinent question for all Americans,

“Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labour?”

While most Americans seemed and continue to be wary of the “immigration of labour force and emigration of GDP” issue, that is a rather skewed and narrow approach towards outsourcing especially in 2018, for reasons that shall be subsequently discussed in greater detail. For now, taking erstwhile US secretary of Housing and Urban Development Alphonso Roy Jackson’s words as our starting point, we shall talk about the paradox of corporate and social responsibility that lies at the crux of outsourcing, and things that are very easy to miss when you’re condemning what is destined to be the future of work.

According to Jackson who worked under Republican President Bush,

“Where the work can be done outside better than it can be done inside, we should do it.”

As an indispensable business tool today, offshore outsourcing has become a gift that keeps on giving ever since its inception in the early days of the LPG (Liberalization Privatization Globalization) model era. But today, a challenging paradigm presents itself every time the economy is struck by a financial recession, regardless of whether that depression is causally related to trade. There is a marked tendency to shift the blame outside the purview of one’s own country; a diversionary tactic that makes people focus on external factors rather than the failures of their OWN legislative and financial institutions. This is how outsourcing has become the universal scapegoat for any decline in a nation’s GDP rate or the number of jobs created (by a first world country) for its countrymen.

Future of Work

With globalisation and the internet revolution, the world became smaller and more open to carrying out economic operations overseas. As the non-feasibility of managing all aspects of business became apparent to corporations, outsourcing presented itself as an alternative that could solve a lot of logistical and quality issues. It enabled them to avoid bottlenecks by allocating peripheral and even core functions to human resources located outside their immediate reach and for good reason. Take a moment to consider this: You now have at your disposal—a resource pool you don’t need to monitor or train, already equipped with a specific skill set that fit the requirements and most importantly, is ready to work for less than employees on the payroll. More importantly, you get to work with the talent which is specialized and can be used from project to project, thus ensuring agility and flexibility in workforce planning. The realisation dawned on business powerhouses that in order to be truly global corporations, they needed to engage and involve people from all corners of the world in the production process.

Lee Kuan Yew, the longest-running prime minister of Singapore[1959-1990] who is also responsible for the nation’s meteoric rise from a third world to a first world nation, used outsourcing as a stepping stone and always endorsed it as a crucial foreign policy for any country to prosper in a neo-liberal open economy.

“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business”

Perry agrees,

“To survive, firms have to operate as efficiently as possible, and this requires them to consider all possible locations for producing goods or providing services at the lowest cost. The result is lower prices for consumers and greater overall output. The process indeed displaces some workers (almost always temporarily) but that should not blind us to the overwhelming benefits everyone derives from encouraging trade and the economic prosperity it yields.”

What about the loss of jobs due to outsourcing?

Business Week recognizes the fear and doubts enshrouding outsourcing even today—

Workers’ fears have some grounding in fact. Outsourcing companies and recruits have always had the benefits of global labour arbitrage to rely on. The prime motive for most corporate houses to jump on the offshoring bandwagon has been to take advantage of the huge wage gap between industrialized and developing nations.”

Unemployment is a global problem irrespective of developed, developing or under-developed economy; and the priority to provide employment to the native labour market directly contradicts the ethos of outsourcing foreigners for cheaper labour. Multinational companies now face the paradoxical problem of choosing between social responsibility (of adding to the nation’s GDP) and corporate responsibility (to reduce their operational costs through outsourcing).

The argument against outsourcing exploits to its advantage the (visible direct) reduction in the job creation rate and the increase in layoffs across certain industries and sectors in the U.S. A fair share of the blame is placed on the practice of purchasing labour overseas instead of at home. In the process of this mass crusade, outsourcing’s (less obvious) “benefit of net job gains” naturally goes unnoticed.

Jayshree Sengupta in her article in ORF vehemently protests against this aporia,

“The truth is that the average American has greatly benefited from trade with China and outsourcing services from India. Trade-in goods and services between the US and developing countries is saving Americans millions of dollars. Americans would have to pay much more for services currently outsourced to India compared to what they would pay if they were to be rendered at home by Americans simply because wages are much lower in India.”

Outsourcing greatly lowers our cost of consumption, raises our standard of living tremendously and directly supports many jobs (Perry, 2004). There are endless tertiary benefits made possible by initial cost savings from outsourcing that allows for the creation of newer jobs and newer markets for consumption. It allows you to focus more of your time and resources on research, development and innovation that would in turn create greater space for employing an educated workforce and generate high paying jobs as compared to skill-based outsourced labour. Another reason for the rapid growth in outsourcing in the unavailability of trained professionals in IT and other areas related to technology.

“Jobless growth is a result of excessive outsourcing” is another myth that sticks out as a sore thumb. According to Investopedia,

“The prospect of a jobless growth economy has ramifications for everyone. An economy that is experiencing growth without an expansion of jobs challenges investors, employees and industries to adapt to the new economic order.”

While a structural shift offers opportunities to some, it also poses some difficult choices for others. And that is the reality of outsourcing. With the flat and centrifugal nature of the global economy today, this was inevitable. But this does not necessarily mean outsourcing is solely responsible for the steadily increasing jobless growth in first-world nations. In fact, the technology that has given offshore outsourcing wings to take flight plays a somewhat crucial role in determining what kind of human resources are employable today. The insane pace of technological advancement now mandates that a smaller or a new kind of workforce replace the existing semi-skilled, less-productive but ready-to-work labour market.

Outsourcing and India

However, the industry anxiety is only temporary; the meteoric rise of the outsourced Indian is testimony to the exemplary quality of services that the country takes pride in, regardless of the sector that employs them. A very high-value proposition comes with high scores on work etiquette, deliverability and management, which the corporate magnates and employers overseas are aware of.

While deconstructing the unfavourable perception that outsourcing has garnered over the years, it is imperative to keep in mind that this shift in public opinion has statistically had very little bearing on corporate opinion. Nor has it toppled India from the position it enjoys as a favourite outsourcing destination. According to Deloitte, 80% of the world’s 500 biggest companies outsource part of their operations to Bangalore, Delhi and Mumbai.

Furthermore, outsourcing has become a levelling field for technology to enter developing nations like the Philippines. Since the 1980s, outsourcing has facilitated the dispersal of new ideas to other parts of the world. This in turn leads to the breeding and incubation of these ideas that ultimately allows for a demanding ecosystem and consumer market to be created. The inroads once created, consumerism plays its part in proliferating outsourcing further, and this keeps the wheels turning.

Nonetheless, it would be impertinent to ignore the growing trend of scepticism, coupled with politically motivated grouse regarding the drain of GDP involved, when you outsource part of your operations overseas. Generally speaking, the global outsourcing industry has not suffered a setback at all. According to a report issued by the IMF in April 2017,

“The world economy is gaining momentum after a disappointing 2016 but the economic growth is expected to rise from 3.1% to 3.5% in 2017”.

The market has eventually regained a firm footing after a preliminary shakedown following Donald Trump’s closed economical approach. In fact, 31% of IT services have been outsourced in 2017; manufacturing and HR sectors aren’t far behind in availing outsourced services either. Industries related to innovation, technology, social responsibility and data security will continue to see massive growth in bilateral trade and outsourcing in 2018 too.

Looking ahead

Today, isolationism is being encouraged and practised to such an extent that some of the most prolific economists, media houses and policymakers are considering outsourcing as a necessary evil but an evil nevertheless, that must be weeded out by new alternatives. The surge of neo-liberalist sentiments, kindled by promises made by populist governments, is giving the free and competitive market a bad name. Outsourcing as a model that sustains this economy, has also accrued an unenviable reputation in the process. It was always a bone of contention over which US elections have been won and lost and continue to cause a lot of political and sociological unrest today which overtly manifests itself today on the global trade landscape. Furthermore, having enjoyed a temporary success in creating a negative impression, outsourcing must now be reinvented with new ways to engage foreign labour and to clarify the conservative minds of such erroneous preconceptions. 

Post-Brexit, the election of a new US administration and a general surge in right-wing governments around nations, stringent immigration laws, tax policies, trade agreements and visa regulations have made onshore outsourcing a difficult prospect to follow through. Governments can restrict the flow of people and maybe they should do that to protect the residents’ right to get hired over a foreigner. However, the work will continue to get outsourced to destinations best suitable for them. This is the fundamental premise of global trade which has existed for centuries and has been accepted globally. Moreover, the impact of service outsourcing in a hyper-connected world will result in global competitiveness and new strategies for knowledge economy stakeholders.

Everyone has to adapt to the changing landscape of global trade. The markets are flat in the truest sense today, and it is going to get flattered in the coming future. It is becoming a challenge to pitch outsourcing as a mutually beneficial model with each passing day. Perhaps it needs new branding for the new world so that it embodies all the good things outsourcing stands for and eliminates that which comes off as unfair and unprofitable. The future of outsourcing is set to evolve into smart sourcing and strategic partnerships. It is becoming more about co-development and co-creation today. Netflix tried this out as far back as 2006. In Brian McCann’s words,

“When Netflix decided that they wanted to invest in improving its software that recommends movies to users, it could have done the work internally or hired an outside software development firm. It decided to do neither, instead opting to offer a $1 million prize in October 2006 to anyone who could submit a solution that improved its current system by at least 10% (if multiple submissions beat the 10% barrier, the winner would be the solution with the greatest increase).
The contest drew over 51,000 contestants from 186 countries. Netflix just awarded the $1 million to a team consisting of two researchers at AT&T Inc., two engineers from Montreal, a research scientist at Yahoo Inc. and two machine-learning researchers from Austria whose solution improved the current system by 10.9%.”

Offshore outsourcing will presumably minimize the burgeoning complexities of manufacture, trade and commerce with flexibility in approach and incorporation of management technology. Anyone with a modicum of foresight and a penchant for simplification will do good to embrace this model for recruiting valuable human resources. As things continue to change, the ones who adapt to them will survive. In the age of automation, outsourcing will eventually move to more intellectual tasks in an experience-driven economy; deep knowledge will support the automation through collaboration with AI/ML driven system.

Outsourcing, or whatever the world decides to call it tomorrow, is trade. And it is here to stay. The form factor may and will change, as change is the only constant.

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