Offshoring, Smart Business Or Shortsightedness?

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Companies have been outsourcing work for many years. This trend has been carried to an extreme in the case of offshoring - sending work and jobs to other countries where labor is cheaper.

Outsourcing made sense. Specialized companies provided their services to many client companies at lower prices than the client companies could do the work in-house. Both companies, the service provider, and the client profited from the arrangement.

Unfortunately, like the building of conglomerates before it, outsourcing got carried to extremes. Companies began outsourcing work to the lowest bidder and lost sight of the effect it had on the company except for finances. Outsourcing this work to "foreign" or "offshore" companies, solely to take advantage of lower labor rates in those countries, became known as offshoring.

The offshoring of professional and technical jobs by US companies is done to save money, but it has raised concerns. As the US struggles to recover from the recession, the rate of job creation lags far behind the expected pace. There is growing concern that this is due to offshoring.

Offshoring is neither the cure-all it has been portrayed by business nor the economy-destroying monster laid-off workers claim. While offshoring does have financial advantages for businesses, these advantages are often far smaller than first anticipated due to hidden costs.

There are also non-financial costs to businesses from offshoring, including lowered public perception and reduced morale/productivity from remaining staff. Offshoring can be beneficial for workers of the US companies because their employers will be financially stronger and better able to compete.

Latest Developments

Initially, manufacturing jobs were outsourced. Other countries were able to manufacture goods more cheaply than in the US because of lower standards of living and less restrictive laws and environmental regulations. Recently, companies have begun outsourcing service jobs as well. The motivation here is solely financial. As this new wave of outsourcing hits the middle class, struggling with a near jobless period of economic recovery, many citizens and lawmakers are beginning to question the wisdom of offshoring.

Background

For decades companies expanded their conglomerates by buying other companies. Initially, these companies were related businesses, often suppliers. Soon the conglomerates began buying companies with no relation. Profit motives and the desire to be the biggest became sufficient justification. Ultimately, the conglomerates began to collapse under the weight of the acquired companies. Profits started falling and companies began to retract to their "core" businesses. Next, they discovered that they could shed even core functions by hiring them out to companies that could do them more efficiently and, thus, less expensively.

Payroll processing was subcontracted. Shipping was farmed out. So was manufacturing. Companies were hired to do collections, customer call centers, and employee benefits. Collectively, this was called outsourcing.

Outsourcing made sense. Specialized companies provided their services to many client companies at lower prices than the client companies could do the work in-house. Both companies, the service provider, and the client profited from the arrangement. Unfortunately, like the building of conglomerates before it, outsourcing got carried to extremes. Companies began outsourcing work to the lowest bidder and lost sight of the effect it had on the company except for finances. Outsourcing this work to "foreign" or "offshore" companies, solely to take advantage of lower labor rates in those countries, became known as offshoring.

Keep reading for pros and cons

Pros

The arguments for offshoring center around free trade and globalization.

  • When a product or service can be produced more cheaply overseas, it makes more sense to import it than to produce it domestically.
  • Much of the revenue earned abroad returns to this country in wages for other employees, investment in R&D, profits for shareholders, and taxes for the government.
  • It doesn't matter where the work is done as long as the US companies earn the profit to return to their shareholders.
  • Companies must do what's best for themselves.
  • Lower priced goods and services are good for all consumers.
  • New, more sophisticated jobs will be created in America to fill the void now that the less important jobs have been sent overseas.
  • It will help improve the economies of poorer countries so they won't need so much financial aid from the US.

Cons

The arguments against offshoring focus on impacts on the American consumer and the danger of a brain drain.

  • Since prices drop only marginally due to offshoring, while wages decrease substantially, the consumer will be unable to purchase the product or service.
  • America was able to turn on a mighty economic engine that ultimately won World War II. Offshoring destroys the ability to do that again.
  • The considerable profits to be made from offshoring are retained by the rich, while the middle class pays higher taxes and loses purchasing power.
  • Foreign workers do not contribute to US Social Security or other taxes. The increased tax revenue from corporate profits does not equal the amount lost on US workers income taxes.
  • Companies could save more costs by offshoring the CEO job. The average US computer engineer earns six to seven times his Indian counterpart, but the US CEO gets paid 400 times as much as his average worker.
  • The "more sophisticated jobs" that US workers are supposed to move on to now that their jobs have been outsourced do not exist. They are never firmly defined. And it is an affront to the US worker who trained for the "jobs of the future" only to see those computer programming jobs outsourced.
  • The goods and services that have been outsourced overseas are often sent to countries who laws are not as protective of workers and the environment as in the US. We ultimately pay for those oversights in further damage to the planet.

Where It Stands

  • Offshoring is currently perceived as yet another way for the super rich corporate executives to get richer at the expense of individual workers.
  • Outsourcing work to companies that can do it more efficiently and less expensively does make sense, provided that it is actually less expensive at the bottom line.
  • Hidden costs include the danger that consumers will stop buying from companies engaged in offshoring.
  • Offshoring jobs means unemployed Americans will not be able to purchase products and services and lowly paid workers overseas will not earn enough to purchase them. Companies that save money by offshoring will go out of business from lack of customers.
  • Offshoring makes sense only if it truly saves money at the bottom line.

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