Outsourcing Debate - Part I

SAN FRANCISCO: Will the next wave of globalization come in services? Though moving service activities offshore is not entirely new, the pace has quickened of late. Increasingly, components of back-office services, such as payroll and order fulfillment, and some front-office services, such as customer care, are being relocated from the United States and other developed countries to English-speaking, low-wage countries -especially India, but also other nations, such as the Philippines. While increased wages would create greater purchasing power in the developing nations, making them consumers of imported goods from the West, this would not happen quickly enough to calm the protests of those in the US who lost their jobs to India or the Philippines. To bring wages in developing and developed nations in sync would require putting them on a global agenda of poverty alleviation.

The services commonly known as 'business processes' (BP) are among the fastest growing job categories in the United States. And a new phenomenon marking major companies is their increasing willingness to outsource what formerly were considered core activities. It is significant that a substantial number of service activities might move offshore, because it was once thought that service jobs were the future growth area for developed country economies. By contrast, it was accepted that manufacturing would relocate to lower labor cost regions offshore. Should these white-collar jobs begin to move offshore, new government policies may be necessary to accommodate a changing, less certain, labor market.

The reason for relocating offshore is the potential savings in cost while retaining acceptable or even better quality facilities and products. According to our interviews with India-based outsourcers, it is axiomatic that the savings on a given activity have to be at least 40 percent to make relocation worthwhile. Often savings are actually higher. One Fortune 500 firm that moved fulfillment operations to Bangalore reported that the overall cost savings were 80 percent. A 2002 report jointly produced by India's IT industry asscoation NASSCOM and McKinsey found that General Electric, one of the pioneers of outsourcing service operations to India, has achieved an annual savings of $340 million per year from its Indian operations, now seven years old. Even if these numbers are inflated, the savings are remarkable and accrue directly to the firm's profitability. According to NASSCOM, an Indian trade body, the most reliable estimate of offshored BP employment was 171,500 in March 2003, up from 106,000 in March 2002. The NASSCOM-McKinsey report estimates that business process outsourcing (BPO) operations will employ at least 900,000 persons in 2008.

The business model for such offshoring is still being perfected. It is likely, however, that it will encompass a variety of organizational forms, ranging from captives to independent firms, both domestic and international, and kinds of work, ranging from stand-alone call centers to globally-integrated post-sales services. It will also likely encompass increasingly sophisticated work such as actuarial services and medical diagnosis.

The relocation of services could be as significant to the US economy as was the relocation of manufacturing to East Asia in the 1980s. Alternatively, it could be a phenomenon comparable to the rise of the Indian software industry - important to the Indian economy, but with only minor impact on the United States and the global economy.

For the English-speaking developed nations, the job implications of what some observers are calling 'lift and shift' during the next five to ten years are clear - there will be some job loss, but of uncertain magnitude. To reiterate, no one at this moment is sure of the dimensions of this transfer process, though the numbers could be very large. For example, a recent report by Deloitte Research (2003) estimates that two million jobs from the largest one hundred global financial institutions will be moved to India by 2008. Every large financial firm has large numbers of employees discharging routine back office work that does not need to be located in developed countries.

One troubling element of BP offshoring is the rapidity with which it might occur. 'Manufacturing's move to offshore facilities has occurred gradually, since at least the early 1960s. Though punctuated by dramatic factory closings, there was ample opportunity for the US economy to adjust. This may not be true in services where the 'objects' are pixels and electronic pulses, easily transmitted by photons and radio waves.

Formerly, such service jobs were rooted relatively close to where they were generated, due to the sheer logistics of moving paper documents and the formerly high telecommunications costs. Now, they have been made mobile by technological improvements and a willingness on the part of management to consider offshore processing facilities. It is now possible that during the next decade, the winds of globalization will sweep through the formerly cosseted ranks of white-collar workers. The old image of the developed nations concentrating on information services, data processing, and knowledge creation will give way to a world in which knowledge creation will become the critical factor - data and information will simply be commodities processed in Third World factories.

Our research, combined with those of other scholars who are examining industrial globalization, provide grounds for further speculation. Regardless of the speed with which services move offshore, developed nations have little recourse but to further increase their workers' creativity. For example, despite the fact that the world's athletic shoes are produced in low-wage environments, their design remains firmly rooted in developed nations. Even today, despite the fact that electronics manufacturing is located exclusively in developing nations, the bulk of the value-added design remains in the developed nations. Similarly, even if much of the animation for feature-length films relocates to India or the Philippines, the design and marketing of those films will remain firmly rooted in Hollywood.

In aggregate, international trade has been an enormous benefit to developed nations, and particularly the United States. However, there is the possibility that - depending upon how many service jobs are offshored - the current process could contribute to US unemployment problems, especially among less skilled citizens. The historical record shows that in the past, when manufacturing was moved offshore, the US economy responded by creating new jobs. Obviously, many Americans also lost their jobs, causing severe hardships for those affected. Should the offshoring of services grow as large as some believe it might, the US economy's remarkable ability to create new jobs will be tested again. It will be important for the US to develop positive responses to these changes by moving its economy and workers up the economic ladder. Protecting past arrangements is unlikely to offer a long-term solution.

When discussing the costs of moving work offshore, few recognize that these workers may also become consumers, and often have the same consumption patterns as their counterparts in developed nations. These Indian service workers could provide a market for US consumer goods, especially as their workplaces consume Dell personal computers, Cisco switches, and Avaya telecommunications equipment. In the future, it may be important for policymakers in developed and developing countries alike to consider a more comprehensive initiative that increases the consumption opportunities in developing countries. Increased wages would create greater purchasing power in the developing nations, making them consumers of imported goods, thereby creating a positive feedback loop. Though it is unlikely that such a radical notion can yet be placed on the global agenda, current economic difficulties in the developed nations could alter recent thinking and create interest in a more comprehensive solution.