OFFSHORE OUTSOURCING OF INFORMATION TECHNOLOGIES SERVICES: WHY ARE WE DOING IT? MBA 500 TABLE OF CONTENTS INTRODUCTION 3 THE HISTORY OF OUTSOURCING 4 HOW IS IT POSSIBLE? 6 WHY DO WE OUTSOURCE 10 WHO ARE WE OUTSOURCING 12 THE FUTURE OF OFFSHORE OUTSOURCING 13 CONCLUSION 16 BIBLIOGRAPHY 17 Introduction Offshore outsourcing is not a new practice in the United States. Offshore outsourcing of information technologies services, however, is relatively new to our nation. It is a hot issue in political debates, with this being an election year. Job loss and job creation in the United States is on the platforms of leading candidates. Economists are projecting that the offshore outsourcing of certain types of jobs will in fact create jobs here at home, ultimately benefiting the labor force and our economy. While there is not significant statistical data yet to support this theory, if one looks to the history of outsourcing as a whole, it does not seem an impossibility.
But why are we outsourcing these jobs? What are the factors that have brought us to this place in the labor market? What caused employers to look to other countries for employees? The purpose of this short study is to consider these questions and provide some thoughts as to where we are now, how we got here, and where we are headed with offshore outsourcing of information technology jobs. The History of Outsourcing Outsourcing is the process of subcontracting services and operations to other firms that can provide them more cheaply or better. Companies outsource tasks, projects, and sometimes even entire operations. Offshore outsourcing, then, would be outsourcing to firms in other countries.
This practice is not new, just as the loss of jobs here in the Untied States to other countries is not new. The automobile industry and the steel production industry were hit by outsourcing long ago, as factories were built in other countries and manufacturers hired workers at lower wages to produce parts and products. And even before this, workers actually lost "skilled jobs to low-wage foreign competition" as long ago as the Industrial Revolution. In the 1800 s British skilled weavers were protected by the government with bans on the use of the textile machinery, but only temporarily as the machines proved to be five times more efficient; Indian cloth makers in the 1830 s lost out to British textile workers; in 1892 Andrew Carnegie's efforts to automate steel production resulted in the infamous Homestead strike of 1892. Outsourcing was not the only way low-wage foreign workers affected the work force in the 1800 s. There were also millions of immigrants added to the workforce.
When that many new workers were added to the labor force, of course it was not without effect on industrial wages-they were driven down. Both outsourcing and immigration affected the economy in more ways than just the cost of labor. Products were manufactured at a lower cost and thus sold for a lower price. Lower manufacturing costs benefited the companies, and the lower prices of the goods produced benefited consumers. Outsourcing Today-Offshore Outsourcing How is it Possible? According to Philip Kotler, "Today's economic landscape is being shaped by two powerful forces -- technology and globalization." Offshore outsourcing is made possible by these same two factors. This is not surprising, given the history of technological advances' effects on the economy.
Advances in communications technologies and information technologies are making it possible. Several jobs can be performed at one place while reporting to another, by electronically sending the work wherever it is needed. And offshore outsourcing is having a tremendous affect on the economies of the countries involved. The transportation revolution in the late 1900 s was driven by technology, and it completely changed the way goods were transported from place to place. Trains and steamboats made it possible to move raw materials and finished goods alike across continents and even overseas.
This resulted in a profound change in the way businesses functioned. The cost of shipping goods fell dramatically. Nations began importing and exporting goods, which changed the way U. S.
companies worked. Also, these new technologies created new markets and new industries, such as department stores and mail-order catalogs, which were dependent upon the rail cars to deliver goods. The addition of refrigerated rail cars facilitated the beginning of a national meat-packing business, which forced the closure of local meat-packing plants. In similar fashion, the Internet and the availability of high-speed data access and communications have changed the way we do business today. Some companies allow employees to work from home, via the virtual office. A computer with Internet access and a telephone are the only tools necessary.
There are stay-at-home jobs, such as medical transcriptionist's, insurance claim processors, and even computer programmers. These also require only Internet access and a telephone. Communication with employers is primarily done via telephone calls and e-mail. The same technology that created these opportunities for us is now making it possible for workers in foreign countries to compete for them.
One example of improved technology making a marked difference is the fiber-optic cabling of telephones into India. According to Tele Geography, a research division of PriMetrica, Incorporated, the capacity of the lines had increased sevenfold from 2001 to 2002. This improvement also allowed for better Internet and e-mail services by increasing the bandwidth possible on the phone lines. Worldwide, there have been improvements in bandwidth, compression, secure methods of connectivity, and falling prices for Internet services. All these are contributing factors to the offshore outsourcing; it has become technologically possible. And firms are beginning to take advantage of it.
Here in the United States, communications companies and fiber-optics specialists hit with a whirlwind, and "the glut of high-speed fiber-optic telecom networks in the U. S. led to a near-total collapse of domestic pricing along those routes in the late 19990 s: during 1998, in a period of less than a year, prices fell 50%, and they have fallen 80% more since then, according to On cept. But now, the impact of overcapacity of telecom is reverberating throughout other industries as companies rush to take advantage of improved technology, plummeting costs and cheap labor." We saturated ourselves and now the market is ripe. The physical location of potential employees is no longer a constraint.
We have made it possible to share information over data and communication lines in a matter of seconds, from several thousand miles away, and at a reasonable price. Recently in a speech Bruce P. Mehlman, Assistant Secretary for Technology Policy of the U. S. Department of Commerce, said it like this: " Advances in communications technologies (e. g.
broadband Internet) have empowered once-distant service sector workers to compete in real-time, while foreign workers and service providers continue to improve their quality, processes and expertise." Globalization has influenced offshore outsourcing, also. To some extent, globalization is driven by technology. Physical borders are no longer boundaries, and neither are seas and oceans. More and more businesses are serving multiple countries with their products and services. The ease with which the products can be moved creates a need for laborers as well as skilled workers and management in each market served. According to Dr.
Catherine Mann of the Institute for International Economics, globalization caused the 0. 3% growth in the U. S. gross domestic product between 1995 and 2002. Manufacturing is not the only industry involved but also service industries, such as information technology call centers and software design and development. Why Do We Outsource As defined in section one, outsourcing is the process of subcontracting services and operations to other firms that can provide them more cheaply or better.
Firms that outsource believe the job can be done more efficiently by outsiders than by their employees. Traditionally, outsourcing work was about finding workers at lower wages to cut labor costs. The lower wages are still a factor today, in offshore outsourcing. "Wipro, Limited pays its Indian engineers a fraction of what their U.
S. counterparts make." Also, Proctor and Gamble found that offshore labor rates were about twenty percent of those in more advanced economies, such as the United States. Other estimates have rates at thirty percent of salaries in the U. S.
However, some experts say offshore outsourcing of information technology jobs today is less about reduced labor costs and more about the quality of work and turnaround time. Bob Evans, Editor in Chief of Information Week, said, "The truth -- as galling and bitter as it might be for many in this country to accept -- is that companies are turning today to offshore outsource rs because in return they can get better quality in shorter times at lower cost... and the object of that hunt is twofold: new sources of reasonably priced innovation and new sources of reasonably priced quality." Workers in places like India, Warsaw, the Philippines, Malaysia, and Indonesia are educated, well trained and extremely motivated. Their economies are bad and they desire to raise the standard of living for themselves and their countries.
In India, it seems to be working. The economy grew 10. 4% in the quarter ended in December as compared to one year ago, helped by agriculture, manufacturing, and the services sector-which includes outsourcing contracts from other countries. Companies have also benefited by the time difference from the U. S. to Asian countries.
There are fourteen time zones from shore to shore. That puts a new spin on working around the clock. The U. S. stands to gain from offshore outsourcing, too.
In global competition, our nation's companies can "gain opportunities to win global business, particularly as developing nations improve their own domestic markets for hardware, software and services... Expanding operations around the globe enables American companies to operate closer to growth markets and new customers, improving economies of scale for entire enterprises with global reach and tapping the best-and-brightest talent around the world." Who Are We Outsourcing Manufacturing jobs are not the only ones at risk today. Jobs ranging from clerical and processing work to software design and development have recently been off shored. Customer service functions in the technology and financial services industries are also vulnerable. For the most part, the jobs are lower level jobs, such as call center operators, help desk functions, and low level computer programmers.
As one reads and studies these trends and statistics it becomes obvious that these are the type of positions that generally, here in the U. S. , have high turnover rates. Companies often replace them through offshore outsourcing with over-qualified workers for less money.
It is not uncommon for a software engineer in India to fill a low level programmer position. Although globalization is a major contributing factor, it is not just global giants like, Microsoft, American Express, and General Electric, doing the offshore outsourcing. Medium and small business are finding that they can benefit, also, by reducing costs, improving quality and increasing speed. The Future of Offshore Outsourcing Offshore outsourcing does eliminate jobs. It will, however, also yield benefits. "A study conducted by the Information Technology Association of America says offshore outsourcing eventually leads to the creation of jobs in the United States." By shifting jobs overseas, companies are cutting labor costs and getting high quality work in a shorter time period.
This boosts productivity. Goods and services are produced at a lower cost to the company, and will in turn be sold at a lower price or at a higher margin of profit. Economists and industry analysts expect a ripple effect on the economy. The Information Technology Association of America Vice president Bob Cohen said, "We " re already seeing benefits. Basically, companies gain cost advantages that translate into price advantages. It's a very positive situation." This is exactly what happened with the personal computer.
"According to Catherine Mann at the Institute for International Economics, globalized production of IT hardware-that is, the offshoring of computer-related manufacturing-accounted for ten to thirty percent of the drop in hardware prices. The resulting increase in productivity encouraged the rapid spread of computer use and thereby added some $230 billion in cumulative additional GDP between 1995 and 2002." The offshore outsourcing of IT jobs is expected to cause a fall in software and service prices, which will promote the further spread of IT through new business processes and process re-engineering. There will also be opportunity for companies to take advantage of the cheaper IT prices. These things working together will promote the IT industry. This is the basis for the prediction that offshoring will actually create jobs in the U. S.
According to one survey by the Business Council, fifty-four percent of large company executives interviewed reported that they had moved work overseas in 2003. Small and medium sized firms are catching on and soon more and more of their work will be outsourced. The key for the U. S. is to stay competitive. Again, Bruce Mehlman said, "One thing we already know is that American workers and employers will face unprecedented global competition going forward, and we must be ready.
We will need to develop management approaches and systems that can anticipate and address rapid and complex changes in the marketplace. This means improved learning environments and training opportunities. We will need to find ways to boost the productivity and effectiveness of American knowledge workers to overcome global wage disparities, building a dynamic and responsive re-skilling landscape that uses innovation to generate new jobs, companies and opportunities." Conclusion Offshore outsourcing in the IT industry seems to be the next step in globalization. It will benefit the U.
S. economy by ultimately creating jobs, and it benefits the economies of the countries of the workers by stimulating growth. This is little comfort to displaced U. S. workers now, just as in times past when the automotive and steel industries went through a similar process. Analysts today say our economy is on the upswing, and that by pulling out of the recession the job market will improve somewhat in the very near future.
But the IT jobs lost will not return. New ones may be created, and they will require training and knowledge. The IT industry has changed rapidly even over the last ten years. Perhaps this is another phase of change. Bibliography An nett, Tim, Yu Wong, and Deborah S.
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