Outsourcing Practices and the American Economy

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Companies, businesses, and corporations of all kinds in America benefit from outsourcing every day. The United States has been outsourcing projects, resources, ideas, products, food, and other necessities for many years. The businesses that use outsourcing as an enhancement to profit and grow their business, know the value that outsourcing brings to their organization. This is said because the idea behind outsourcing is to increase efficiency by lowering operation costs which gives the organization more money to use in other parts of the organization for developing new ideas. The definition of outsourcing is the contracting of another company, usually in a different country, to have that country perform an activity the organization has already performed itself (Jones & George, 2004- 2011). Outsourcing typically involves the reallocation of labor oriented jobs of productions tasks to another country while the administrative operations remain centralized. Work is contracted to other countries because of the cost that it takes to get the tasks done.

The fact is, is that outsourcing's history is as old as America. During the early years of America, manufacturing of clipper ship sails were sent to Scotland and the raw material came from India. India was also an outsourcing destination for British textile industry during the 1800s, but eventually the British become more efficient and India started outsourcing their jobs back to Britain.

In more recent times during 1970s, computer companies used to outsource their payroll processing. The job was sent to a company in another state or city, not overseas. Unlike today, offshore outsourcing was not common in those days. In the late 1980s, the U.S saw emergence of offshore outsourcing when companies started sending off their manufacturing jobs overseas. This trend got its boost from the increasing technical advancement and from the Uruguay Round talks of 1986 through 1994 which lead to the creation of WTO. Companies such as Kodak and American Standard were among the first companies to outsource (Ghimire, 2007)

Why Did Companies See the Need For Outsourcing?

According to Stan Reybern, a blogger on www.billshrink.com posted a blog called "12 Reasons Companies Outsource Operations Overseas," there are some rather interesting reasons why companies are outsourcing overseas. The first reason stated was "Lower wages." In industryWeek.com an article by John S. McClenahen says that in a recent Lehigh University study on global outsourcing, between the years 2002 and 2005 the average manufacturing wage in China would only be sixty cents an hour compared to Mexico's $2.46 an hour (McClenahen, 2006). Even at $2.46 an hour, this is still lower than the American minimum wage rates of $7.25. The second reason raised in Reybern's blog was "Lower Regulatory Costs" (regulatory cost is the cost of employing an employee). In America, employees have benefits such as insurance and workers compensation, Social Security, Medicaid/ Medicare, unemployment pay, and regulations from OSHA and FICA. Foreign countries don't have near as much regulatory cost as here in the states. This is just one more reason why companies are so attracted to outsourcing. "Tax Benefits," Reybern says, is another reason why outsourcing has become so desirable. Countries are offering tax incentives to companies that outsource their work to their country. Tax incentives are incredibly incising especially in these hard economic times. The great advantages of why outsourcing on Reybern's blog with the ability to downsize, improve performance, the freeing up resources for core activities, risk management, quicker turnover time, Americas uncertainty over political/ business climate, accelerated time to market, co-modification, and contractual certainty continues to rise while American jobs still continue to fall (Reybern, 2009).

Bruce Bartlett, a senior fellow with the National Center for Policy Analysis says the benefits of outsourcing are not only benefitting America but also the counties it outsources to. In India, outsourced jobs from America are seeing a rapid rise in their wages and living standards. Indian employees are becoming more like Americans, which increases the demand for American goods and lifestyles (Barlett, 2004).

Is Outsourcing Good for Employers, Workers, and This Country as A Whole?

Unemployment seems to be one of the major issues in today's economy. People feel cheated of their jobs when mentioning outsourcing. Although outsourcing has caused job loss, one must think about what the economy is gaining says unknown blogger from the virtualemployee.com. He says that one must take into consideration that if American companies stop outsourcing jobs, then it would not be able to compete with a company in the domestic market. When jobs are not outsourced, other companies will always be able to offer more low cost services and products because there would not be any other companies to compete with. This would make American companies unable to capitalize on the expanding market. By not outsourcing jobs, American companies would lose its resources in all rising foreign markets and all others abroad. He also states that when jobs are outsourced, America gains information, new ideas, and new resources that would benefit the progress of the American economy. In his conclusion he says:

"In conclusion, outsourcing jobs has many beneficial implications for the US economy. The more successful US companies are globally the more successful the US economy is. The success of US companies globally is directly linked to whether they implement the practice of outsourcing jobs. Accordingly it is paramount the US does not prohibit or discourage the practice of outsourcing jobs" (Employee, 2009).

The loss of jobs in America is in fact an issue rather or not outsourcing is or is not to blame, the issue is still there. Some researchers say outsourcing is not to blame, while others say that outsourcing is indeed the major cause to the unemployment crisis and the loss of job openings. The loss of jobs in the U.S. to lower-paid workers overseas is nothing new. Car makers such as Ford have been working in different countries since the early 1900's making tractor parts, which is just one of the many different car companies that outsources to other countries to increase profitability. In a Forrester research project report, it estimated that the U.S. would lose a total of 3.3 million service jobs between 2000 and 2015, and in another report, it estimated that 20% of manufacturers and financial-services companies have outsourced some form of information-technology work and predicted that the percentage would double in the next two years. Christine Ferrusi Ross from Forrester.com says:

Information-technology jobs that are transferred elsewhere represent "bottom-of-the-barrel jobs." These are jobs like low-level computer programming and call-center operators that usually have low retention and high turnover in the U.S., but in India, you can fill them with computer-science engineers who are way overqualified. Companies often can get better work from a stable, low-cost work force by going overseas.

An employee, Diana Farrell, of McKinsey & Company (McKinsey is a management consulting firm advising leading companies on issues of strategy, organization, technology, and operations) pointed out that in 1999, 1.15 million workers lost their jobs through mass layoffs. According to Forrester, here is where some jobs are going:

• Software development: Oracle says it is moving around 2,000 development jobs to India.

• Call centers: Hewlett-Packard moved 1,200 customer-service jobs from Florida to India.

• Back-office accounting: Insurer AIG is establishing an office in the Philippines with about 400 workers.

• Product development: Ericsson sold its India software-development center to India's Wipro (Annett, Wong, & Creighton, 2004).

When labor and manufacturing jobs are outsourced, individuals, families, and communities suffer economic losses. Most people who work in industry sectors are not professionally skilled or academically educated to work in other fields, so their job choices are severely slim, especially when these jobs are shipped overseas. Small towns cannot survive when industries and manufactories get shut down. When there are massive amounts of unemployment within single communities that lose manufacturing jobs, the entire economy of that community becomes threatened, creating other social problems those results in economic costs. The now unemployed has now lost their income and either has to find another job locally that may not pay as much, or they will have to move away. This in return makes the community lose the demand that that person brought into the economy of that community (Hay & Fricker, 2004). Outsourcing can bring about many problems. These problems may include a spiraling personal debt such as the loss of one's car or home or a loss of a child's education would generate a cycle of economic and vocational poverty that cause indirect, but important impacts on the American economy, its employees and employers, and its nation as a whole.

The Future of Outsourcing

The popularity of outsourcing will more than likely continue to increase, but there are some companies that are re-thinking there former plan to outsource. In California, Seesmart LED which makes light-emitting-diode light bulbs in China, are trying to do what they can to support the American economy. This company is exploring new ways of bringing its entire operation back to the U.S. This would bring 250 to 500 jobs back into the U.S economy within the next two years. The CEO of Seesmart LED says that helping the economy of America was far more beneficial than saving on operating costs overseas. Insurance companies such as Allstate, is also keeping its jobs here in the U.S. Allstate recently opened a $12 million call center in San Antonio instead of opening it in India or the Philippines. The customers reached out to Allstate and stated that they would think better of the company if they stayed in America putting jobs back in to its economy (Olson, 2010).

Despite the clear advantages and disadvantages, it is unlikely that outsourcing will decrease in the future. Outsourcing jobs has many beneficial implications for the American economy and nation. Although unemployment is still a major problem, there has been some change in the way companies are forming their business plans. For the small town worker, outsourcing causes many financial strains and hardships which can lead to other problems. Companies need to continue to understand that they have a responsibility not only to ensure their profits, but to also bring profit to the nation's economy as a whole. Outsourcing is a great low cost incentive for corporations, but it may not always the right choice for the American blue-collar worker.