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Outsourcing Ourselves?: Rapid advance of information technology contributes to shift of jobs overseas, expert explains

“Outsourcing Ourselves?” is the fourth story in Think Democracy, a six-part series focused on the upcoming presidential election. As the nation approaches the November election, experts from The University of Texas at Austin will offer their perspectives on a range of issues and topics. Future stories will look at the youth vote and communications during the presidential debates. Watch for a new Think Democracy feature every month through October.

When a computer programmer in Plano, Texas, loses her job to a programmer in Bangalore, India, who can do the work for a slimmer paycheck, the reverberations are felt beyond Plano. That’s because something similar may be happening to an X-ray technician in Boston, a customer service representative in Denver or a medical transcriptionist in Cincinnati.

Offshore Insourcing: Processes are done at an offshore subsidiary of the firm; Offshore Outsourcing: Processes are sourced from offshore vendors; Domestic Insourcing: Processes are done in-house in the home country; Domestic Outsourcing: Processes are sourced from a domestic vendor in the home country.White collar jobs in the U.S. are moving overseas, and presidential candidates John Kerry and George W. Bush understand that the loss of jobs for U.S. workers is an election issue for U.S. voters. Discussing the economy this election year necessitates discussing where jobs are being created, lost and shifted to other countries.

The terms outsourcing and offshoring are being bandied about, but the two terms are not interchangeable. To outsource is to transfer a business function from one business to another business, often within the U.S. For example, when Procter & Gamble contracts to have Hewlett Packard manage its information technology, that function has been outsourced.

The larger concern for workers and voters is offshoring, where business functions are transferred to locations and workers outside the country who may be independent contractors or hired by the company as employees. The practice has grown enormously in the past decade, as instant and cheap communication, paired with the rise of millions of newly educated workers in low-wage nations, have made international borders easier to cross, if not invisible.

“The critical thing for many services is whether you have connectivity, and a very robust connectivity exists or is evolving all over the world,” says Dr. Prabhudev Konana, director of the undergraduate Management Information Systems program at the McCombs School of Business. “Location is becoming irrelevant.”

Thus, U.S. workers feel vulnerable in a way they may not have in the past. Any job that doesn’t require face-to-face contact with a client, customer or patient risks being transferred to someone in another country who can do it for less money. The expansion of information technology is resulting in a job market in which information-driven functions can be done from anywhere the technology exists.

The critical thing for many services is whether you have connectivity, and a very robust connectivity exists or is evolving all over the world. Location is becoming irrelevant. Dr. Prabhudev KonanaCheap telecommunications mean it doesn’t matter if a phone is answered in Toledo or in Hong Kong. Software advances mean that a Power Point presentation can be put together as easily in Mumbai as in New York City. Digital transfer of data means that bookkeeping can be done from anywhere there’s an Internet connection and an adding machine.

A nervous electorate makes this an issue that neither candidate can afford to ignore.

The loss of American jobs to other countries is nothing new. Manufacturing jobs have been leaving the U.S. for decades now, and even the most iconic American businesses produce products outside the country’s borders. Take, for instance, Levi Strauss. It’s hard to imagine something more American than a pair of Levi’s blue jeans, pictured on soldiers during World War II or blazoned across the cover of Bruce Springsteen’s album “Born in the USA.” Even so, Levi Strauss closed its last U.S. manufacturing plant earlier this year.

“Why is it we’re so worried about offshoring and outsourcing now?” asks Konana. “It’s primarily the nature of jobs. Before it was manufacturing and blue-collar jobs as the economy progressed more toward the service and knowledge-intensive sectors. But people are not yet willing to accept that a white-collar job could go.”

But white-collar jobs are clearly going. Driven by cheaper labor and significant tax breaks, offshoring is a cost-cutting measure for corporations. But it isn’t simply cutting costs that drives a company to set up outside the country. Konana, who studies how companies make decisions to outsource and offshore, says moving operations overseas can also be a strategy for growth.

“The most important thing for a lot of these companies is that they have a presence in other countries,” he explains. “So look at where they’re going: China, India, Philippines, some of the former eastern bloc countries in Europe.

“All of these countries are growing, so if they’re growing you’d rather have a presence there so that you can enter the market by the time the market is ready to start buying your products.”

The answer to outsourcing is to make Americans more competitive in the global marketplace, not isolate ourselves from it. George W. Bush campaign Web siteKonana points to the growth of the automobile market in China—which is estimated at 70 percent—and of technology in Asia in general, which is growing at a far more rapid pace than in the U.S. A company that is already established within a growing market is more able to expand within that market.

For the presidential candidates, and for legislators in general, one of the challenges of this issue is that it’s unclear just how many jobs are going overseas and what the ultimate impact will be on the U.S. labor market and economy. Data on offshoring are inconsistent and often contradictory.

It’s hard to even say exactly how many jobs are being lost to offshoring. The Bureau of Labor Statistics (BLS) recently reported that only 2.5 percent of the major layoffs in the first three months of 2004 were a result of jobs being sent overseas. This was the Labor Department’s first-ever measure of offshoring, but economists admit that the figure may underestimate the total loss. It only covers companies that have laid off 50 or more workers at one time for 30 days or longer, and it doesn’t account for jobs created overseas that might have otherwise gone to U.S. workers.

Still, the BLS figure suggests that offshoring may not be responsible for as many job losses as people think. A recent article in the Harvard Business Review suggests that automation in the service industry—from online airline ticket purchases to self-service checkouts at the hardware store—is itself a similarly significant source of service job losses. Projections for future job losses are also confusing.

The best-known projection is by Forrester, an information technology consulting firm, which expects the number of U.S. jobs offshored to grow to 3.3 million by 2015. This could mean as many as 250,000 layoffs a year. A study at the University of California, Berkeley, suggested that up to 14 million Americans now work in occupations that could reasonably be considered “at risk.”

As president, John Kerry will cut taxes for businesses that create jobs here in America instead of moving them overseas. John Kerry campaign Web siteThose potentially at risk include paralegals, medical technicians, financial analysts and computer and math professionals. And Konana points out that if the jobs move, they can move quickly.

Moving manufacturing jobs offshore has generally been a slow process because manufacturing requires that an infrastructure be set up, equipment purchased and labor trained. With technological jobs, the turnaround is much quicker.

“Let’s assume American Express says they want to move their call centers to India,” says Konana. “How much time does it take? It can be done in a snap. In India they need computer software and communication devices, then they train employees and are operational in quick time. People don’t have the time to react.”

Politicians, however, are reacting. They approach the issue from two directions: by trying to slow the loss of jobs and by trying to increase the growth of new jobs to replace those lost.

Democratic Presidential candidate John Kerry has proposed changes to the U.S. corporate tax code to make it less appealing for companies to send jobs overseas.

U.S. corporations doing business overseas are able to defer tax payments on income earned abroad until such earnings are “repatriated” to the U.S. If the income earned abroad never comes back to the country and is instead held in foreign subsidiaries or invested back in the corporation overseas, those tax payments are permanently deferred.

For example, The Washington Post reported that the pharmaceutical giant Merck & Co. reported a cumulative $18 billion in foreign earnings untaxed at the end of 2003. Kerry’s plan would have companies like Merck paying taxes immediately on foreign profits that are not taxed by another country. It would also allow for a “tax holiday” that would lower the rate on repatriated earnings for a year and would include an overall lowering of the corporate tax rate.

Economic theory points to two quite robust conclusions...Overall, offshoring will offer economic gains. But some American workers, companies, and possibly communities will just as surely lose out in the process. The Brookings InstitutionAt the same time, Kerry’s campaign calls for investing in new technologies and the new jobs that will accompany them.

President George W. Bush comes out against Kerry’s tax changes and focuses instead on creating new jobs in the U.S. His budget calls for $23 billion to be spent on job training programs throughout the government in the next year.

Avoiding economic isolationism is the key to Bush’s policy. His campaign literature says, “The answer to outsourcing is to make Americans more competitive in the global marketplace, not isolate ourselves from it.”

As is always the case with political campaigns, the candidates look at immediate concerns. Both Bush and Kerry have three months to convince voters that they offer the best options for the country. Every anecdote about a technology worker who lost his or her job gives them impetus to talk about jobs for Americans.

For Konana, the ultimate question is less immediate.

“How do you prepare the next generation for an entirely new economy?” he asks.

However the projections pan out, however offshoring is slowed or sped up, the economy is always evolving. The roughly $1 billion budgeted for nanotechnology research by the National Nanotechnology Initiative indicates that jobs in emerging fields like nanotechnology and biomedical engineering may drive job growth. The economy will prosper, Konana says, when it looks toward new innovation and looks to the future.

Konana may be right. First, however, the nation will look to November.

Vivé Griffith

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  Updated 2014 October 13
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