offshore outsourcing 3

8/7/2019 Offshore Outsourcing 3

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Offshore OutsourcingOffshore OutsourcingTravis Larsen, Lara Osmond, Billy Palmer,

Kyle Smith, April Young, John Youngberg

Travis Larsen, Lara Osmond, Billy Palmer,

Kyle Smith, April Young, John Youngberg


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Background:

Offshoring and Outsourcing

Background:

Offshoring and OutsourcingThese terms have had various meanings and are usedinterchangeably in some of the literature, to clarify:

Outsourcing: subcontracting business outside of thecompany

Offshoring: moving business from one country to another

Offshore outsourcing: transferring business outside of thecountry, to another firm

Most of the research pertaining to offshore outsourcingsimply call it outsourcing, we will do the same

These terms have had various meanings and are usedinterchangeably in some of the literature, to clarify:

Outsourcing: subcontracting business outside of thecompany

Offshoring: moving business from one country to another

Offshore outsourcing: transferring business outside of thecountry, to another firm

Most of the research pertaining to offshore outsourcingsimply call it outsourcing, we will do the same


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Background:

Reasons for offshoring

Background:

Reasons for offshoring Businesses outsource for the purpose of

cutting costs and raising profits. An earlyexample of outsourcing in America in the

1970s, IBM developed the IT industry inIndia.

Economically, if some people can use some

of their skills more cheaply than others, thenthose people have the comparativeadvantage. The idea is that countries shouldfreely trade the items that cost the least for

them to produce.

Businesses outsource for the purpose ofcutting costs and raising profits. An earlyexample of outsourcing in America in the

1970s, IBM developed the IT industry inIndia.

Economically, if some people can use some

of their skills more cheaply than others, thenthose people have the comparativeadvantage. The idea is that countries shouldfreely trade the items that cost the least for

them to produce.


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Background:

How it came to be:

Background:

How it came to be: Production offshoring got its big push when the

NAFTA made it easier for manufacturers to shiftproduction facilities from the US to Mexico.

After its accession to the WTO, China emergedas a prominent place for offshore outsourcing: Cheap prices through very low wage rates, cheap loans,

land, and huge economies of scale based on cities withpopulations of over a million workers.

Currently, India's engineering talent has made Indiathe offshoring destination of American high-techfirms, lead by HP, IBM, Intel, AMD, Microsoft,Oracle, and Cisco.

Production offshoring got its big push when theNAFTA made it easier for manufacturers to shiftproduction facilities from the US to Mexico.

After its accession to the WTO, China emergedas a prominent place for offshore outsourcing: Cheap prices through very low wage rates, cheap loans,

land, and huge economies of scale based on cities withpopulations of over a million workers.

Currently, India's engineering talent has made Indiathe offshoring destination of American high-techfirms, lead by HP, IBM, Intel, AMD, Microsoft,Oracle, and Cisco.


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A Brief History of OutsourcingA Brief History of Outsourcing

Outsourcing has been practiced forover a hundred years

In the early years of US History, America's covered wagon covers and

clipper ships' sails

Scotland

India

Indias textile manufacturing

England

Outsourcing has been practiced forover a hundred years

In the early years of US History, America's covered wagon covers and

clipper ships' sails

Scotland

India

Indias textile manufacturing

England


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More recently, in the U.S. in the 1970s, it wascommon for computer companies to export theirpayrolls to outside service providers for processing.

In 1979, British voters elected Margaret Thatcher astheir prime minister, and in 1980 U.S. voters electedRonald Reagan as their president. They worked (as did their successors) to create and sustain

agreements and organizations to promote free trade. The General Agreement on Tariffs and Trade (GATT)

The North American Free Trade Agreement (NAFTA)

The formation of the European Union

The World Trade Organization (WTO), which superseded theGATT in 1995

More recently, in the U.S. in the 1970s, it wascommon for computer companies to export theirpayrolls to outside service providers for processing.

In 1979, British voters elected Margaret Thatcher astheir prime minister, and in 1980 U.S. voters electedRonald Reagan as their president. They worked (as did their successors) to create and sustain

agreements and organizations to promote free trade. The General Agreement on Tariffs and Trade (GATT)

The North American Free Trade Agreement (NAFTA)

The formation of the European Union

The World Trade Organization (WTO), which superseded theGATT in 1995


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Continuing into the 1980s, accountingservices, payroll, billing, and word processingall became outsourced work.

Until this point, the reasons for outsourcinghad more to do with small efficienciesthan reshaping the economy.

It wasn't until the late 1980s thatoutsourcing began to emerge as a potentiallypowerful force in transforming globaleconomies.

Continuing into the 1980s, accountingservices, payroll, billing, and word processingall became outsourced work.

Until this point, the reasons for outsourcinghad more to do with small efficienciesthan reshaping the economy.

It wasn't until the late 1980s thatoutsourcing began to emerge as a potentiallypowerful force in transforming globaleconomies.


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A Brief History of OutsourcingTh

e First Wave (1987-1997)


e First Wave (1987-1997) Major outsourcing in the manufacturing industry

Associated loss of blue-collar jobs in many industrial sectors

Work outsourcing primarily to East Asian countries ofTaiwan, China, South Korea, and Malaysia

Reasons: Low costs of manufacturing

Availability of skilled labor

Promotion of business friendly environment

Existence of production and supply networks in thosecountries

Major outsourcing in the manufacturing industry Associated loss of blue-collar jobs in many industrial sectors

Work outsourcing primarily to East Asian countries ofTaiwan, China, South Korea, and Malaysia

Reasons: Low costs of manufacturing

Availability of skilled labor

Promotion of business friendly environment

Existence of production and supply networks in thosecountries


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e Second Wave (Late 1990s)


e Second Wave (Late 1990s) Where to?

India

Malaysia Philippines

South Africa

Where to?

India

Malaysia Philippines

South Africa

Why?


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e Second Wave (cont.)


e Second Wave (cont.) Push factors vs. Pull factors

Pull factors for Second Wave countries: Widespread acceptance of English

Business and communication education

Common accounting and legal system to the U.S.(at least in some of the countries)

General institutional compatibility and adaptability

Time zone and geographic differences created24/7 capability and overnight turnaround times

Large and continuous supply of technically savvygraduates

Push factors vs. Pull factors

Pull factors for Second Wave countries: Widespread acceptance of English

Business and communication education

Common accounting and legal system to the U.S.(at least in some of the countries)

General institutional compatibility and adaptability

Time zone and geographic differences created24/7 capability and overnight turnaround times

Large and continuous supply of technically savvygraduates


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Current OutsourcingCurrent Outsourcing

"In India, they were pumping these guys out left and right. . . . Look atthe deal here: We've got very highly paid SAP programmers that wecould hire in the U.S. - and they're hard to find. Or we could go to Indiaand find very talented SAP programmers immediately at 35% to 40%lower cost."

Network World July 2004

"...offshore outsourcing will create more than 337,000 jobs by 2010..." InformationWeek November 2005

"Demand for offshore IT services isn't slowing, and that trend is showingup in Indian companies' hiring. Between July and September, TataConsultancy Services increased its staff by nearly 12% to more than53,000, while Infosys Technologies' staff grew 15% to more than46,000."

InformationWeek October 2005

"Only 19% of US businesses have an offshore outsourcing strategy, astudy by Ventoro found. However, the percentage skyrockets to 95% ifonly Fortune 1000 companies are considered."

ZDNet Research October 2005

"Business Process Outsourcing will overshadow and incorporate IToutsourcing and mainstream BPO expenditure is likely to grow worldwideby 10 per cent a year from $140 billion in 2005 to over $220 billion by2010."

LogicaCMG August 2005

"Outsourced IT services brought in $12 billion for India 2004, leading theworld in IT exports."

Santa Clara University'sLeavey School of Business

October 2005


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Current Outsourcing:

# of Jobs Affected

Current Outsourcing:

# of Jobs Affected Jobs Lost to Date*: 300,000-995,000

300,000-500,000 (Goldman Sachs)

400,000-500,000 (Business Week)

995,000 (economy.com)

ProjectedJob Loss: 3.3 million-6 million 3.3 million over 15 years (Forrester Research)

6 million over 10 years (Goldman Sachs)

Jobs at Risk: 14.1 million 14.1 million (UC Berkeley)

* The total size of the U.S. Labor Force is 140 million jobs

Jobs Lost to Date*: 300,000-995,000 300,000-500,000 (Goldman Sachs)

400,000-500,000 (Business Week)

995,000 (economy.com)

ProjectedJob Loss: 3.3 million-6 million 3.3 million over 15 years (Forrester Research)

6 million over 10 years (Goldman Sachs)

Jobs at Risk: 14.1 million 14.1 million (UC Berkeley)

* The total size of the U.S. Labor Force is 140 million jobs


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International Aspects:

Problems


Problems Jobs are leaving the United States and

going to other countries

Less people in the United States knowtrades that are outsourced

Jobs are leaving the United States andgoing to other countries

Less people in the United States knowtrades that are outsourced


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Benefits


Benefits Domestic companies can employ

foreign workers for less

Prices lower for products sold in theU.S. and made in other parts of theworld

Countries in the rest of the world canbecome more developed

Domestic companies can employforeign workers for less

Prices lower for products sold in theU.S. and made in other parts of theworld

Countries in the rest of the world canbecome more developed


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Options


Options Keep outsourcing at the current level

Decrease outsourcing in the future

Increase outsourcing in the future

Keep outsourcing at the current level

Decrease outsourcing in the future

Increase outsourcing in the future


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Keep outsourcing as is


Keep outsourcing as is Foreign workers benefit

Loss of work for domestic workers

Domestic firms benefit from lowerwages

Foreign firms lose workers and have

less choice in labor No new firms can outsource

Foreign workers benefit

Loss of work for domestic workers

Domestic firms benefit from lowerwages

Foreign firms lose workers and have

less choice in labor No new firms can outsource


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Decrease outsourcing


Decrease outsourcing More jobs for American workers

Higher wages for lower skilled workers

Workers in foreign markets work forforeign companies

Less work for foreign employees

Lower wages for foreign employees

Domestic companies have to payhigher wages by using domestic

workers

More jobs for American workers

Higher wages for lower skilled workers

Workers in foreign markets work forforeign companies

Less work for foreign employees

Lower wages for foreign employees

Domestic companies have to payhigher wages by using domestic

workers


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Increase outsourcing


Increase outsourcing Firms wanting to start outsourcing

benefit

What else can we outsource? More foreign workers can find better

jobs

More trades will be lost for Americanworkers

More workers will no longer work for

foreign firms

Firms wanting to start outsourcingbenefit

What else can we outsource? More foreign workers can find better

jobs

More trades will be lost for Americanworkers

More workers will no longer work for

foreign firms


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Special Problems:

Negative Consequences

Special Problems:

Negative Consequences Qualified professionals are losing their

jobs to offshore workers who will work

for less Difficulty of monitoring child labor

Difficulty of managing remote locations

with those who understand the culture,and are in synch with corporateobjectives

Qualified professionals are losing theirjobs to offshore workers who will work

for less Difficulty of monitoring child labor

Difficulty of managing remote locations

with those who understand the culture,and are in synch with corporateobjectives


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Special Problems:

Positive Consequences

Special Problems:

Positive Consequences Proven beneficial as far as cost, quality,

and value of work delivered

Improved service delivery and accessto a greater number of highly qualifiedtalents

In-house organizations lack theassurance of quality standards thatthose with offshore operations have

Proven beneficial as far as cost, quality,and value of work delivered

Improved service delivery and accessto a greater number of highly qualifiedtalents

In-house organizations lack theassurance of quality standards thatthose with offshore operations have


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Special Problems:

Myths and Realities

Special Problems:

Myths and Realities Myth: A job outsourced is as good as a job lost Reality: Outsourcing is a budget balancing act.

Outsourcing does not call for job losses, but

increased efficiency. This helps the firm to focusits resources on their most valuable aspects ofbusiness, namely producing and selling itsproducts. The end result of this drive towardefficiency is evident to Americans in lower pricesand higher standard of living. Foreignoutsourcing goes hand in hand with higherwages, lower prices, higher profits, andenhanced competitiveness.

Myth: A job outsourced is as good as a job lost Reality: Outsourcing is a budget balancing act.

Outsourcing does not call for job losses, but

increased efficiency. This helps the firm to focusits resources on their most valuable aspects ofbusiness, namely producing and selling itsproducts. The end result of this drive towardefficiency is evident to Americans in lower pricesand higher standard of living. Foreignoutsourcing goes hand in hand with higherwages, lower prices, higher profits, andenhanced competitiveness.

Source:

http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities


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Special Problems:

Myths and Realities

Special Problems:

Myths and Realities Myth: Outsourcing is a one-way street Reality: We are not only outsourcing jobs, but have

jobs being outsourced to us. There are over 6.4million jobs in the US that have foreign employers.

They are actually growing at a faster rate than we areoutsourcing. Those foreign employers that areoutsourcing to the US often pay higher than the jobsthat are being outsourced from the US. For instance,the 4,300 employees that work for BMW in SouthCarolina, and the 14,000 employees that work for

Honda in Ohio. The fact is, most of the jobs that arebeing outsourced are actually below the US averagewage. As a result, comparatively lower wage jobs arebeing outsourced and higher wage jobs are coming in,increasing the standard of living in America.

Myth: Outsourcing is a one-way street Reality: We are not only outsourcing jobs, but have

jobs being outsourced to us. There are over 6.4million jobs in the US that have foreign employers.

They are actually growing at a faster rate than we areoutsourcing. Those foreign employers that areoutsourcing to the US often pay higher than the jobsthat are being outsourced from the US. For instance,the 4,300 employees that work for BMW in SouthCarolina, and the 14,000 employees that work for

Honda in Ohio. The fact is, most of the jobs that arebeing outsourced are actually below the US averagewage. As a result, comparatively lower wage jobs arebeing outsourced and higher wage jobs are coming in,increasing the standard of living in America.

Source:

http://www.offshoreoutsourcingworld.com/blog/OutsourcingMythsandRealities


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Looking to the Future:

Potential Negatives


Potential Negatives American unemployment rate will rise

Americans will spend less because they

will feel less rich American resources such as concrete,

drywall, and oil will be shipped over

seas and America will experience ashortage of goods.

American unemployment rate will rise

Americans will spend less because they

will feel less rich American resources such as concrete,

drywall, and oil will be shipped over

seas and America will experience ashortage of goods.


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Potential Positives


Potential Positives Quality of jobs increase as lower wage

jobs are replaced with high-wage, high-skill jobs

As competition increases, savings fromdecreased costs will be passed on toconsumers

Domestic companies will be able tocompete with foreign companies easier,causing a decrease in tariffs andincrease in world trade

Quality of jobs increase as lower wagejobs are replaced with high-wage, high-skill jobs

As competition increases, savings fromdecreased costs will be passed on toconsumers

Domestic companies will be able tocompete with foreign companies easier,causing a decrease in tariffs andincrease in world trade


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Looking to the Future:Looking to the Future:

Only time will tell whether thenegatives will out-weigh the positives,

or vice versa

Only time will tell whether thenegatives will out-weigh the positives,

or vice versa

offshore outsourcing 3

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