The latest on offshore outsourcing

Ted Balaker and Adrian Moore have written a lengthy report for the Reason Foundation entitled “Offshoring and Public Fear: Assessing the Real Threat to Jobs.” Click here or a more concise summary of the report. Nut sentence: “Outsourcing is not a newly created threat to jobs. It is merely a version of trade, and like previous versions of trade it brings some pain?but it brings even more promise.” One anecdote that’s given as an example of how offshoring saves and even creates jobs:

Offshore outsouring also helped Donaldson Co. Inc., a Minnestota-based technology components company. Facing competition from overseas manufacturers with much lower prices, Donaldson shifted production to China. The design work stayed with its American team of engineers, chemists, and designers. Offshoring production helped increase Donaldson?s U.S.-based employment by 400 employees since 1990. What if the company had refused to go offshore? ?We?d be out of business,? says an executive.

[Sure, but what about the jobs that will be destroyed in, say, the financial sector?–ed. Hmmm…. let’s check out this Silicon.com report by Andy McCue:

Two-thirds of financial services firms still have no plans to outsource any operations to low-cost overseas countries such as India, according to a new report. But the worldwide study of 400 IT directors by analyst Datamonitor found those banking firms which have already used offshore outsourcing are planning to increase the scope of it and extend it to more complex and core financial services processes. Anders Maehre, financial services technology analyst at Datamonitor and author of the study, told silicon.com there is an increasing polarisation in the banking industry between firms which choose to offshore and those that don’t. “The vast majority of companies will not consider offshore for anything. But two-thirds to three-quarters of those who already do offshore plan to increase it, so the logical conclusion is that some of the fears these firms have don’t materialise and they do experience benefits,” he said. Only about a fifth of financial services firms are currently using offshore outsourcing and another 15 per cent said they are likely to go down that route in the near future, while the rest said they are “completely unlikely” to use overseas resources, according to Datamonitor’s figures. But the figures can be slightly misleading if not put into context: most of the big global financial institutions make up that small number of firms which are offshoring.

So there’s a complex trend going on — some big firms are increasing activity, but almost all small firms are not. My hunch is that the overall effect on employment is a wash.] Meanwhile, a new book coming out suggests that estimates of jobs lost from offshoring are both exaggerated and reversible:

Douglas Brown and Scott Wilson, authors of “The Black Book of Outsourcing,” say many executives they’ve interviewed are reconsidering offshoring because of the high price of fuel and airfare, management challenges, customer complaints and the increasing cost of labor in foreign technology hubs such as Bangalore, India, and a simultaneous lowering of some white-collar salaries in the United States. By 2015, Brown and Wilson say, the United States will likely rank as the No. 3 destination for outsourced work, behind only China and India. “Offshoring undoubtedly offers significant financial benefits for companies across a wide range of fields and sizes,” Wilson said. “Undertaking such a venture, however, requires a cost-benefit analysis that includes downsides such as political instability, language and cultural barriers and time-zone differences.” Instead of farming out work to countries a dozen time zones away, Wilson said, many U.S. companies are looking for relatively low-cost destinations closer to home, including Canada, Mexico and South America. He terms it “nearshoring.”

Click on this paper by Scott Noble to see some reasons why offshoring fails.