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Emerald Group Publishing Limited
Copyright © 2004, Emerald Group Publishing Limited
Wrestling with the myths of offshoring
It is with some misgivings that this issue offers a special four-article report on strategic outsourcing, which nowadays often is synonymous with offshoring. Forrester Research predicts that, by 2015, roughly 3.3 million US business-processing jobs will be performed abroad. As more companies see offshoring as a way to cut labor costs, it doesn't seem entirely coincidental that employment in the US stagnates.
It's undeniable that consumers enjoy the benefits of offshoring when their computer hard drive dies over the weekend and a technician in India comes to their rescue via an 800 number. US consumers also benefit when companies pass on savings in the form of lower prices. A technician offshore, for instance, can read a magnetic-resonance-imaging (MRI) scan for a fraction of what it would cost in the United States. Transferring that position abroad might cause a US medical technician to be laid off, but lower prices for such life-saving technologies mean that more sick people can routinely receive them.
However, it's doubtful that each low-wage worker in Asia and India is taking a job from a higher paid US worker. Many service jobs in India today are viable only in a low-wage environment and wouldn't exist in the United States. Without offshoring, US companies would scale back or withdraw services such as round-the-clock customer help.
In the July issue of the McKinsey Quarterly two researchers challenge a number of "myths" of offshoring, such as:
offshoring is responsible for the agonizingly slow pace of job growth in the United States, despite a recovering economy; and
as a result of outsourcing in the service industry, millions of people in the United States will become jobless.
The researchers' counter argument: "Trade in services, like other forms of international trade, benefits the United States as a whole by making the economic pie bigger and raising our standard of living and that of our trade partners. Outsourcing jobs abroad can help keep companies competitive, thereby preserving other US jobs. The cost savings can be used to lower prices and to offer consumers new and better types of services. By raising productivity, offshoring enables companies to invest more in the next-generation technologies and business ideas that create new jobs. With the world's most flexible and innovative economy, the United States is uniquely positioned to benefit from the trend." Ok, but are they being economic Pollyannas?
Maybe not. A 2003 study by the McKinsey Global Institute (MGI) showed that offshoring creates wealth for the United States as well as for India. For every dollar of corporate spending outsourced to India, the US economy captures more than three-quarters of the benefit and gains as much as $1.14 in return.
The case made by the "bigger pie" theorists really rests on the notion that the cost savings from offshoring will be artfully reinvested in innovation or used to produce stakeholder value. To guide our readers to this end, note that Jane Linder's article proposes "Outsourcing as a strategy for driving transformation," Simeon Preston's article argues that "Offshore need not mean outsourced," and Brian Leavy's article explores the potential of outsourcing to support four strategies that can produce competitive advantage. And finally, Ken Grossberg's case illustrates how an American firm can utilize outsourcing to offer Japanese consumers economical funerals as an alternative to the exorbitant ones typical of their industry.
Robert M. RandallEditor
Editor's note: Strategy & Leadership thanks The Center for Association Leadership in Washington, DC – and Ron McNally, their media relations person – for facilitating our interview with Michael Treacy in this issue.