UNIVERSITÄT PASSAU

WIRTSCHAFTSWISSENSCHAFTLICHE FAKULTÄT

OFFSHORE OUTSOURCING: JOB LOSS OR ECONOMIC

OPPORTUNITY?

Franziska Krodel, Alexander Keller, Matthias Ratajczyk, Simone Maier

Abstract: This research is about whether offshore outsourcing leads to job loss or economic

opportunity. Four hypotheses, concerning this topic have been created and will be discussed in

this paper: The cost savings from offshore outsourcing tend to be overcompensated; Job

characteristics affect the likelihood of a job being outsourced. Truth or do we all need to fear for

our jobs?; Insignificance of jobs offshored compared to common layoffs and offshore

outsourcing driving job losses in million – hysteria or reliable truth.

Purpose: This paper has been written in order to find out whether outsourcing only leads to job

loss or is a economic opportunity

Design/methodology/approach: The key question will be answered by discussing four

hypotheses and summarizing the results. The discussion is based on findings from existing

papers.

Findings: The result of the discussion shows, that offshore outsourcing is an opportunity and

can improve the global economy.

Research limitations/implications: The underlying study was only a meta-analysis of the results

of previous studies on this topic. Future research should focus on evidence, that loss of jobs on

the one hand and creation of new jobs on the other hand could be attributed to outsourcing.

Therefore more data of companies and agencies is needed.

Keywords: IT Outsourcing, Job Loss, Displacement, Unemployment, Economic opportunity,

India, USA, United States, U.S.

Paper type: Research Paper

I

TABLE OF CONTENTS

1. Introduction ........................................................................................................... 1

2. Objectives and Structure of the Study ................................................................... 2

3. Literature Research ............................................................................................... 2

4. Hypotheses ........................................................................................................... 5

4.1 The cost savings from offshore outsourcing tend to be overcompensated ..... 5

4.2 Job characteristics affect the likelihood of a job being outsourced. Truth or do

we all need to fear for our jobs? ................................................................................ 8

4.3 The number of jobs offshored is insignificant compared to common layoffs ..11

4.4 Offshore Outsourcing is driving job losses in million. Hysteria or reliable truth?

13

5. Conclusion ...........................................................................................................16

6. Limitations and Implications for Future Research .................................................16

References ................................................................................................................... II

1

1. INTRODUCTION

Basically the thinking of outsourcing already exists since the industrial revolution in the

19th century. Companies started to focus on few products and source goods e.g.

working materials and services from the market. The reason firms were starting to

concentrate on their core activities was the improvement of productivity which was

driven by specialization.

Offshore outsourcing however did first occur in the manufacturing industry. Driven by

cheaper labor in foreign countries and decreasing transportation costs, thanks to

steamship and railroad, firms started to produce offshore. Hence labor arbitrage and

the starting of the globalization made it possible to become more profitable by sending

work abroad than only producing in the domestic market. As a result still today low-

skilled work is sent to countries where labor-cost is cheap.

The IT-revolution during the last two decades started a kind of new era of globalization.

The costless storage and transmission of data via the World Wide Web, the global

spread of personal computers and the standardization of software applications from E-

mail to Google have made it furthermore beneficial to shift services offshore. 1 By

sourcing IT-services, like data center operation or IT-support, from the market,

companies are reducing IT-cost, cutting staffs and increasing efficiency at the same

time. As a result small firms got cheaper access to new and expensive technology on

the one hand and large companies can increase their IT-usage without the risk of

obsolescence on the other.2

However, IT offshore outsourcing is a double-edged sword: It does indeed increase

efficiency and productivity on the one side but also causes unemployment in the

domestic market because of shifting work abroad on the other. Recent protectionist

behavior of the U.S. government concerning visas which are used by foreign workers

to spend time in the U.S. is showing the fear of countries to lose jobs to offshore

outsourcers as business starts to recover and pushing up IT-Spending again. The other

fear which can be seen is the fact that not only blue-collar jobs are sent offshore

anymore but also high-skilled professional services i.e. white-collar jobs are outsourced

to location abroad.

1 See Friedman, T. (2004). p. 29.

2 Kakumanu, P, & Portanova, A. (2006´) p. 1.

2

Concerning to these facts this study is going to investigate the question if offshore

outsourcing is causing job loss in domestic markets or if it is creating new economic

opportunities.

2. OBJECTIVES AND STRUCTURE OF THE STUDY

For the purpose of the study the authors are focusing on offshore IT outsourcing

between the U.S and India.3 This assumption was made because India is the most

popular destination for offshore outsourcing and the U.S. is their biggest client. In the

following study the authors established four hypotheses concerning the controversial

discussion whether offshore outsourcing is causing job loss in domestic markets or if it

is creating new economic opportunities. Furthermore a blog regarding the topic has

been established to:

document our findings and share it,

get input from external knowledge holders and

start a worldwide discussion.

To visit the blog please use this Hyperlink (http://itoutsourcingss2011.wordpress.com).

At the end of the thesis a conclusion and an outlook for further studies are provided.

3. LITERATURE RESEARCH

The objective of our study is a meta-analysis. For this purpose already existing scientific

papers were researched. As a first step we scanned the “Elektronische

Zeitschriftenbibliothek” (EZB) of the University of Passau by entering the following

keywords: “offshore outsourcing”, respectively “IT outsourcing” in connection with the terms

“job loss”, “economic opportunity”, “cost reduction“, “transaction costs”, “competitive

advantage”, “United States“, “India“, “productivity”, “cost savings”, “production costs”,

“unemployment” for a publish period of 2001 to 2011.

Furthermore we started an additional search of journals and eBooks on Business

Source® Premier, Business Source® Complete, SpringerLink.com, ProQuest and

Emerald Insight as well as on the research gate “Infoguide” which contains the stock of

the University of Passau and the Bavarian Union Catalog. Beyond that we also entered

3 Page 67 Tambe and Hitt

3

the above-named search terms into scholar.google.de and on the search engines

google.de and bing.de.

Searching terms of the first search process:

- offshore

- IT outsourcing

in connection with: - job loss

- economic opportunity

- cost reduction

- transaction costs

- competitive advantage

- United States

- India

- productivity

- cost savings

- production costs

- unemployment

Table 1: Searching terms of the first search process

Thereupon we focused on the following IT Journals with regard to suitable articles

concerning our topic:

Journal Website

Information Systems Management http://www.informaworld.com/smpp/title~db=j

our~content=t768221794

Electronic Journal of Information Systems

Evaluation (EJISE)

http://www.ejise.com/index.htm

Industrial and Corporate Change http://icc.oxfordjournals.org

Journal of Management Studies http://onlinelibrary.wiley.com/journal/10.1111/

%28ISSN%291467-6486

Journal of Computer Information Systems http://www.iacis.org/jcis

The Journal of American Academy of

Business

http://www.jaabc.com/

Harvard Business Review http://hbr.org/

Forrester Research http://www.forrester.com/rb/research

Gartner http://www.gartner.com/technology/home.jsp

Table 2: Analyzed journals within the first search process

4

On the basis of the keywords and terms of the so far located articles and the

discussions on our blog the searching words finally were completed with the following

keywords:

Additional search terms of the second search process:

- hidden costs

- moral problems

- blue color workers

- white color workers

- layoffs

- labor arbitrage

- service offshoring

- labor market

- flexible labor market

- protection

- add value

Table 3: Additional search terms entered into the second search process

After that a second search process took place. Thereupon studies not dealing with

India as the destination for offshore outsourcing and the U.S. as their client were sorted

out because of the assumption of our study project. From the remaining articles we

chose the most relevant studies to our issue which where all published in the period of

2002 to 2010. The final selection of the articles was based on the following criteria:

currentness of the studies and

methodological quality

In the following the core findings of these picked papers will be discussed by

hypothesizing and making general conclusions.

5

4. HYPOTHESES

4.1 THE COST SAVINGS FROM OFFSHORE OUTSOURCING TEND TO BE

OVERCOMPENSATED

When talking about offshore outsourcing, managers frequently argue that they can

significantly save costs by shipping IT work abroad, so that the company consequently

is able to earn a greater return. This hypothesis seeks to provide an analysis of both

the cost savings and cost causations associated with offshore outsourcing.

As a result of technological progress in computer, information and business services

can now be shifted from rich countries to lower-cost sites, e.g. India and imported back

later. Thus, companies have access to cheaper foreign labor and different skills, so that

they can gain cost reductions because of a so called “labor arbitrage”.4 Beyond that,

offshored jobs are seen in the low-wage countries more desirable and attractive than in

the developed countries, so that the employees have a higher motivation and

consequently achieve a better performance which e.g. leads to a smaller number of

errors per transaction and therefore to significant cost reductions. In addition, in the

course of the offshore outsourcing venture, companies are able to reengineer their

process design, so that the potential savings can be increased to about 70 percent of

the initial costs. 5

Moreover, David Ricardo demonstrated with his trade theory, particularly the distinction

between absolute and comparative advantage, that for two nations without input factor

mobility, specialization and trade could result in lower costs than if each nation tried to

produce in isolation. This means that nations could gain from focusing on the goods in

which they have a comparative advantage and importing the rest. According to this, IT

offshore outsourcing could reduce costs by producing e.g. supercomputers and other

high tech products in America and low end services, like call centers or code writing, in

India, so that America is able to get services at a much lower cost than they would pay

for in the domestic economy.6

4 Dash (2005), p. 15; Amiti/Wei (2006), p.2; McKinsey (2003), p. 4 f.; Brooks (2006), p. 48

5 McKinsey (2003), p. 5

6 Dash (2005), p.7-8

6

Though, that concerning costs, this is not the whole story is already well-known since

the theory of transaction costs was published in 1937 by Ronald Coase.7 First of all,

when going out to the market, offshore outsourcing can generate additional costs –

also known as hidden costs – such as the cost of selecting a vendor, the cost of

transition, the cost of managing an offshore contract, the cultural costs and the cost of

layoffs.8 While the first three types of costs are relatively well-known in the managerial

literature, there’s still less attention given to the “moral costs”. Companies often have to

close the gap of cultural differences and the lack of specialized information expected by

customers or must police the suppliers so that they produce to the desired quality level,

which otherwise could be lead to much more costs. 9 This means that executives

deciding about offshore outsourcing propositions also have to pay fully attention to

these transaction costs, so that a venture can only be looked upon as efficient if the

production cost savings are higher than the sum of all transaction costs. Apart from

that, the most interesting aspect is indeed, that also the morale problems due to

layoffs, which often lead to disaffection and work slowdowns among in-house

“survivors”, have to be considered. Thus, to create a successful offshore proposition,

executives have to spend a lot of time to communicate with their employees. From the

economic point of view this is particularly important to keep the employees long enough

in the company to share their knowledge with their offshore replacements. Hence, if

executives fail to spend that time to talk about the offshore venture and the layoffs, the

employees are going to make up their own minds about what’s happening furthermore

and probably will be less motivated and unsatisfied. Moreover, as they don’t want their

colleagues to lose their jobs, the staff even may completely reject the offshore

proposition. On top of that, there is possibly later on or in other business areas a need

of exactly these laid-off, disrespected employees, so that, on the bottom line, to train

new workforces could be more expensive and overcompensate the former savings due

to domestic layoffs.

As the extent of the Transaction Costs is difficult to assess without experience or

benchmarking, it is very difficult to decide whether the cost savings are higher than the

sum of all costs.10 In addition, the height of the Transaction Costs also depends on the

difficulty, uncertainty and complexity of the task, so that general statements are difficult

7 Coase (1937), p. 34

8 Overby (2008), p. 2-8

9 Dash (2005), p.15

10 Ibidem (n. y.): p. 34-40

7

to make.11 As offshore outsourcing must be seen as a long-term investment with long-

term payback, Table 1 shows a list of cost reductions and cost causations associated

with offshore outsourcing, which should be noticed when calculating the cost savings.12

Based on this list, derived from literature and former research projects, companies

should be able to initiate every measure required to ensure that the cost savings

wouldn’t be overcompensated. To complete this list future research is needed.

Although promising, there’s still less help for companies to decide whether the total

costs overcompensate the cost savings due to offshore outsourcing ventures. Thus, to

provide companies good practical approaches for their calculations and hence the

decision whether they should outsource or not, much work remains to be done, both

theoretically and empirically.

Reasons Cost Reduction /

Cost Causation

Changes in communication and technological progress in computer

have reduced the cost and time required in transferring large

amounts of data

cost reduction

Companies have access to cheaper foreign labor and different skill

because of a “labor arbitrage” cost reduction

Higher motivation because of jobs which are considered more

attractive in low-wage countries leads to better performances and

e.g. a smaller number of errors per transaction

cost reduction

Companies are able to reengineer their process design, so that the

potential savings can be increased cost reduction

Nations gain from focusing on the goods in which it has a

comparative advantage and importing the rest cost reduction

When going out to the market, there’s a need for more travel,

identifying suppliers, negotiating and contracting, training and

management oversight which cause so-called transaction or hidden

costs

cost causation X

Disaffection and work slowdowns among in-house “survivors” due to

future layoffs or insufficient communication cost causation X

There’s possibly later on or in other areas a need of workers to

train new workforces could be more expensive and overcompensate

the former savings

cost causation X

Table 4: list of cost reductions and cost causation associated with offshore outsourcing

11

Dash (2005) p. 35 12

Overby (2008), p. 2

8

4.2 JOB CHARACTERISTICS AFFECT THE LIKELIHOOD OF A JOB BEING

OUTSOURCED. TRUTH OR DO WE ALL NEED TO FEAR FOR OUR JOBS?

The number of service outsourcing companies grew, due to improvement in internet,

telephone and transportation. These reasons make outsourcing more efficient. As a

result, involuntary job loss grew. The kind of jobs outsourced changed in the U.S.,

before mostly blue color workers (factory workers) where displaced, now also white-

color workers (service providing industries) do not have a stable job anymore.

According to a Gartner’s survey in 2003 80% of companies say they will have

considered shifting U.S. IT jobs overseas and 40% will have already completed some

type of pilot or will source IT services form non-U.S.- based service providers. 13

Compared to all industries, where about 15% of all firms show outsourcing activities,

the percentage of jobs outsourced in the IT industry is more than double (about 42%)14.

At about 8%, IT workers were displaced twice the rate of other workers. But which

kinds of jobs are outsourced in the IT industry? Do the job characteristics affect the

likelihood of a job being outsourced?

Forrester Research forecasted the following numbers, which jobs will be offshored by

occupational category (2000-2015):

2000 2005 2010 2015

Management 0% 6% 7% 9%

Business and Financial Operations 11% 10% 10% 10%

Computer and Mathematical Occupations 26% 19% 17% 14%

Architecture, and Social Science 3% 5% 5% 6%

Life, Physical, and Social Science 0% 1% 1% 1%

Legal 2% 2% 2% 2%

Arts, Design, Entertainment, Sports, and

Media

1% 1% 1% 1%

Sales and Related 4% 5% 6% 7%

Office and Administrative Support 53% 50% 50% 50%

Table 5 - Share of Projeted By Forrester US Jobs Moving Offshore by Occupational Category, 2000-201515

13 Pfannenstein and L., Tsai, R. (2004) p. 74 14

Tambe, P.B. and Hitt, L.M. (2010): p. 64 15 Kirkegaard, J. F. (2004): p. 11 (Source: Forrester Research TechStrategy Research Brief

November 11, 2002, 3.3 Million US Service Jobs To Go Offshore, by John C. McCarthy, p.4)

9

As we see in the table above, Forrester predicted, that only 9% of the management

positions will be offshored by 2015. The highest percentage of jobs, being offshored is

in the office and Administration support section. More than 50% of these jobs will be

conducted abroad by the year 2015.

If we now take a deeper look into the characteristics of the jobs we easily diagnose,

that the jobs, which are mostly outsourced, are below the U.S. average wage.

Figure 1 - Average Wage and Employment by Major Occupational Category 200216

(US National Average Wage calculated as the weighted average of all major categories. Employment numbers rounded at nearest thousands)

Comparing this table, with Forrester’s forecast, we clearly see, that most of the jobs,

forecasted to be outsourced are of low wages categories. In other words, the majority

of jobs forecast to be lost pay less than the US average wage.

A survey, conducted in 2007, where more than 3000 human resource managers and

more than 6000 U.S. workers were interviewed, shows which jobs in the IT industry are

mostly outsourced:

16

Source: Bureau of Labor Statistics, Table A, National employment and wage data form the Occupational Employment Statistics survey by occupation, 2002

10

Figure 2 - Percent of firms reporting offshoring by worker type17

Over 30% of the firms reported offshoring computer programmers and software

engineers, but only approximately half of them, 15.5%, reported offshoring system

analysts. About one quarter offshore outsources customer services but only less than

10% offshore general managers, sales managers or IT marketing. These results

confirm the argument, that lower paying, more routine jobs are displaced most.

If we look deeper in the characteristics of the jobs being outsourced most, we find out,

that they are not only payed below the average, they also need less physical presence

and are more routine jobs. The hypothesis, that “impersonal jobs are more vulnerable

to offshoring” has been proven by the survey of Tambe and Hitt, Mc Kinsey agrees in

their paper. Employers where less likely to offshore jobs in which employees provide

personal jobs. The results significantly prove the negative correlation of employment in

a job providing personal services and the likelihood of jobs being displaced due to

offshoring.

Another characteristic, which correlates with the wage, is that jobs with simple tasks

are much more likely, of being outsourced. E.g. more than 70.000 computer

programmers have lost their jobs between 1999 and 2002. 18 But in this time the

number of jobs in higher-skilled sections, in the engineer level, increased in the U.S..19

17

Tambe, P.B. and Hitt, L.M. (2010) p. 66 18

Bureau of Labor Statistics 19

Kirkegaard, J. F. (2004) p. 16

11

We can summarize, that the job characteristics affect the likelihood of a job being

outsourced. The less skill requirements, the less personal interaction and the less

payed a job is, the more likely is it being outsourced. The Bureau of Labor Statistics

found, that 36% of displaced workers soon found jobs that matched or increased their

wages, but 55% were best working for 85% of their former wages. As many as 25%

saw pay cuts of 30% or more.20 These statistics show us, that even if most of the jobs

being displaced due to outsourcing are the low value service jobs, and offshore

outsourcing may bring an overall benefit to the U.S.. We still must not forget these

people. One suggestion, how companies can support those people is, by extending

their training programs. So the employees become more educated, and these kind of

jobs, are, as we have seen before, not as likely to be outsourced.

4.3 THE NUMBER OF JOBS OFFSHORED IS INSIGNIFICANT COMPARED TO

COMMON LAYOFFS

The following part discusses the question whether the number of jobs offshored,

compared to the common layoffs is insignificant and which villains lead to job losses in

the IT sector. In general the United States has the world’s most dynamic economy. By

this it is able to generate new jobs. As Forrester Research forecasts that 3.4 million

jobs do go offshore by 2015, even in good times, mass layoff numbers are much higher

than this, due to the dynamics of the economy. 21 Another research describes the

Forrester Research figure of 3.4 million jobs to be outsourced as only 0.5 percent of the

jobs in the affected industries. In average, the American economy destroys about 7 to 8

million jobs every quarter through job-churning, thus about 30 million jobs a year. For

all intents and purposes the number of outsourced jobs is just a small proportion of the

grand total of lost jobs.22 In 1999, for example, 1.15 million people, out of a total of 2.5

million job losses, lost their jobs through mass layoffs. In 1996, it was 1.18 million.23

As you can see by this, even if the number of jobs lost due to offshoring is high, the

number of jobs lost due to mass layoffs is much higher. The forecasted number of

about 230,000 layoffs per year for the next decade seems to be insignificant compared

to the common layoffs, as most of the labor gets reallocated in higher-end jobs.

Therefore it is necessary to differentiate between lower end jobs in the IT sector and

higher paying ones. Over the period 1999-2002, while higher paying jobs have 20

Mc Kinsey Global institute (2003) p. 15 21

McKinsey Global Institute (2003) p. 9-10 22

Dash, S. (2005), p. 9 23

McKinsey Global Institute (2003) p. 10

12

increased, lower end jobs have been lost.24 On the other side, it is also important to

examine the number of reemployment as outsourced labor can be reallocated to more

competitive jobs. Between 1999 and 2003 although 70,000 computer programmers lost

their jobs, more than 115,000 software engineers found higher-paying jobs. 25 In

addition to recession the job losses for lower end jobs can be explained by the

increasing standardization of IT technologies, which is making these jobs suitable for

outsourcing.26

So it is not just offshoring that results in job displacement: “technological change,

economic recession, changes in consumer demand, business restructuring and public

policy, including trade liberalization or environmental regulation all can and do play

their part.”27 The slowdown in IT hiring is due to other factors such as the collapse of

the dotcom economy in 2000, the recession in 2001, and the unavoidable march of the

technology that increases labor productivity.28 But as Humphrey says, innovation and

its offspring, offshore outsourcing, is beneficial for the U.S. economy. In the long run it

will create more jobs than it will destroy in the short.29 In addition in the following table

you can see, that the United States is also doing offshore work.

Strategy Principal Examples Others

Cost and Capacity China, India Malaysia

Language Skills Philippines, Mexico,

Costa Rica, India

South Africa, Tunisia,

Morocco, Senegal,

Madagascar, Mauritius

Nearsourcing Canada, Poland, Czech

Republic, Hungary,

Slovakia

Ukraine, Belarus,

Romania, Latvia, China

Special High-End

Skills

Israel, Ireland, Australia,

United States

China, India, Russia

Table 6 - Nations that Do Offshoring Work30

24

Rishi, M.; Saxena, S. (2004) p. 10 25

Dash, S. (2005) p. 16 26

Rishi, M.; Saxena, S. (2004) p. 10 27

McKinsey Global Institute (2003) p. 10 28

Rishi, M.; Saxena, S. (2004) p. 10 29

Humphrey, T. (2004) p. 22 30

Association for Computing Machinery (2006) p. 54

13

As a result of its offshoring strategy, the United States is able to do special high-end

work, which is called by many foreign countries, in favor of acquiring better services.

In summary you can say that the number of jobs offshored, compared to the common

layoffs in the end seems to be insignificant. Even if the number of job losses driven by

offshoring in low end jobs is higher, in the long run reallocation leads to more higher-

paying jobs. As a result of offshoring even the United States benefits from offshoring of

foreign countries, offering highly skilled and specialized work to them. The bigger part

of layoffs is driven by other factors, like mass-layoffs due to recession or other reasons.

Job loss in the IT sector may be driven by offshoring, but offshoring itself is driven by

the inevitable technological change.

4.4 OFFSHORE OUTSOURCING IS DRIVING JOB LOSSES IN MILLION. HYSTERIA

OR RELIABLE TRUTH?

This chapter should give an answer to the question, if offshore outsourcing is really

driving job losses in the United States. The idea for this hypothesis was inspired by an

article named “The Outsourcing Bogeyman” written by Daniel W. Drezner.31

A lot of people think, that the IT-revolution and it’s progeny, most of all offshore

outsourcing, are net destroyers of jobs in the U.S. As Thomas Friedman points out the

3 factors

undersea installation of mega-bandwidth fiber optic cable allowing virtually

costless transmission and storage of data,

global spread of personal computers and

standardisation of software applications

have made it profitable to shift service functions once performed in the U.S. abroad and

thereby throwing Americans out of work.32 The underlying principles of this behavior

are open economies and free trade i.e globalization which makes companies shifting

jobs offshore. Regarding this Forrester Research much cited study estimates that 3.4

million white-collar jobs will move overseas by 2015.33 And up to half of corporations

are planning to send or have already sent jobs overseas. As a result thousands of

American jobs will be lost each year.34 The frightening point regarding this is the fact

31

Drezner, H. (2004) 32

Friedman T. (2004) 33

McCarthy, J. (2004) 34

Working America & AFL-CIO (2010).p.11

14

that not only low-skilled blue-collar jobs are shifted out of the country but also high-

skilled professional services i.e. white-collar jobs are outsourced to offshore locations.

HP for example predicted that by 2010 up to 800.000 back-office jobs are shifted

overseas which allows companies to save up to $30 million a year. Another example is

given by IBM which in 2005 reported 329,000 employees worldwide with almost 40% of

them located in the U.S. At the end of 2009 the firm reported 400,000 employees

worldwide with only 25% located in the U.S. but also 25% located in India where IBM

was becoming the second largest employer.35 The IT-Service market is expected to

grow by about 3.5% in 2011 and 4.5% in 2012 and by the year 2015 India can reach

$130 billion in IT-Business Process Outsourcing revenues which reflects a casual

annual growth rate of 14%. So the offshore outsourcing trend will go on as the steady

recovery from the recession is pushing up IT-spending again.36 And a lot of people

think the job losses in the United States will do so as well.

At first sight this figures are convey the impression that offshore outsourcing did

destroy U.S. jobs in the past and will do so in the future. But when looking inside the

numbers the U.S. has to “separate fact from fiction”.37 The Forrester forecast of 3.4

million lost is spread over 15 years which means that about 230,000 jobs are lost each

year. This sounds immense until you have a look at the total employment numbers of

the U.S. which in April 2011 was about 140 million.38 Regarding these two numbers

outsourcing would affect only 0.164% of the U.S. labor. Another important aspect is

that less than 20% of the labor which is affected by outsourcing is indeed losing their

job. Because most of the workers are repositioned within the firm as an examination of

the effects on large financial firms by Boston University School of Management

professor Nitin R. Joglekar is showing. This is also pointing that offshore outsourcing is

often counterbalanced by high-skilled job creation in the service sector. The theory of

free trade is saying that overall wealth is best off when countries focus on sectors in

which they have a comparative advantage i.e. branches in which countries have the

lowest opportunity costs of production. So as jobs are being lost in uncompetitive

sectors, they have to be reallocated to more competitive ones. As an example is

showing 70,000 computer programmers lost their jobs between 1999 and 2003. But in

the same period 115,000 computer software engineers were hired for higher-paying

jobs.39 In contrast to the general thinking of the U.S. importing lots of services, in the

35

Ibidem p. 12 36

NASSCOM Executive Summary.(2011) p. 8 37

Drezner, H. (2004) 38

See UNITED STATES EMPLOYMENT AND UNEMPLOYMENT DATA (2011) 39

Drezner H. (2004)

15

year 2010 the U.S. was running a trade surplus in services of $168 billion. “This surplus

has grown quickly since 2003, rising $101.2 billion”. 40 As a consequence offshore

outsourcing increases the competitiveness of the U.S service market which accounts

for 76.7% of GDP.41 Furthermore offshore outsourcing additionally boosts demand for

products (notebooks, computers and telecommunication equipment), which are mostly

developed and produced by U.S. firms. Another interesting point which has not been

mentioned yet is that most jobs will not be affected by offshore outsourcing at all

because “close to 90% of U.S. jobs require geographic proximity” and hence cannot be

shifted offshore.42

So if offshore outsourcing is not the main cause for job losses why does everybody

think so? We can see outsourcing for at least 20 years now but no one cared much

about it in the 1990s because there were much more jobs created in the U.S. than

were going offshore. But after the Dot-com bubble bursts voices have been raised

which were saying that offshore outsourcing destroys U.S. jobs. Some organizations

were founded like the Rescue American Jobs and the Coalition for National

Sovereignty and Economic Patriotism which were focused on white-collar tech workers

with statements like “Lost your job to free trade or outsourcing yet?”.43 After the current

financial crisis we can again hear the voices against offshore outsourcing as at the

beginning of the last decade. Regarding to my last Blog “India Outsourcers Feel

Unloved in the U.S.” we can see a protectionist behavior coming from the U.S.

government at this time. To be true it is no surprise that politicians find it easy to blame

outsourcing on job losses and sluggish recovery of the economy during a downturn.

History shows that as the job growth and recovery returns the debate about

outsourcing will go away because offshore outsourcing is beneficial for the U.S.

economy and promise to create more jobs in the long run than it destroys in the short.

40

U.S. Department of Commerce (2010). p. 1 41

Central Intelligence Agency (2010) 42

Drezner H. (2004) 43

Drezner H. (2004)

16

5. CONCLUSION

The four hypotheses as well as the current discussions are showing that there is no

clear answer to the question: Offshore outsourcing: job loss or economic opportunity?

From the authors point of view offshore outsourcing is a benefit for the global economy,

especially for the United States. It promises to create more jobs in the long run than it

destroys in the short. Anyway the U.S. has to face not negligible job losses which have

to be compensated. Therefore the economy needs to show flexibility in times of

globalization. As a result the displaced labor should be repositioned in competitive

sectors i.e. high-skilled jobs which counterbalance the offshore driven job loss. Taking

into consideration Ricardo’s theory of comparative advantage the U.S. economy will

gain large surplus by doing outsourcing. They will not only ensure their own competitive

interests, but they will also add value and create wealth to the Indian markets. In

conclusion a win-win-situation is created for the whole global economy.

6. LIMITATIONS AND IMPLICATIONS FOR FUTURE

RESEARCH

Although these results are interesting and promising, they need to be viewed with

caution given the assumptions and limitations of this study. Future research is

suggested to explore the extent to which these results can be replicated in other

countries. Another research avenue concerning this topic might be to provide

companies good practical approaches for their offshore decisions. We hope that these

results will stimulate others to engage in more research to refine the results and

develop new findings concerning the controversial discussed topic “IT offshore

outsourcing”.

II

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About the authors

Franziska Krodel, Alexander Keller, Matthias Ratajczyk and Simone Maier are

students of the masters program “Business Administration” at the University of

Passau, Germany. “Offshore outsourcing: job loss or economic opportunity?” is

a study project within the field of “IT Outsourcing”. For further information please

visit the team’s blog: http://itoutsourcingss2011.wordpress.com/