Economists argue that offshoring is a win-win phenomenon
Oct 28th 2009 | From The Economist online
Offshoring—the wholesale shifting of corporate functions and jobs (particularly those of back-office workers in it and accounting-type roles) to overseas territories—is what gave outsourcing a bad name. It is important, however, to note a crucial distinction between the two:
• Outsourcing need not necessarily result in job losses in a particular territory or country. A job can simply be handed over to another organisation of the same nationality and geographical location where (the company handing it over hopes) it can be carried out more efficiently. Sometimes that other organisation may be in another country, but more often than not it is not.
• Offshoring, however, does involve shifting jobs to another country, but it may not involve transferring jobs to another organisation. For example, a company may simply decide to move its local customer services operation to one of its own subsidiaries abroad. That is offshoring, but it is not outsourcing.
Economists argue that offshoring is a win-win phenomenon: the country that sends the work abroad gains from lower costs, and the country that gains the work gets extra jobs. But countries sometimes panic about the scale of offshoring. When production jobs moved en masse to China and other cheap labour destinations, rich-world governments did not worry unduly because they thought that their workers could glide painlessly from manufacturing jobs to service jobs. Who, they thought, would begrudge giving up a lifetime on the factory floor for a lifetime in a clean, antiseptic office?
The real problem arose when the service jobs also started to go abroad, when every other service company’s call centre suddenly seemed to be based in Bangalore, in the middle of India, not Indiana. What were western workers going to move on to this time, once they had been priced out of the services sector?
At one stage, Americans became almost hysterical about the issue. A 2004 report by Forrester Research, a highly reputable firm, estimated that 3.3m American jobs would have gone offshore by 2015. This was immediately taken as a known fact. But the author of the report subsequently told the Wall Street Journal that his estimates were no more than “educated guesses”. As one commentator said: “The public’s intense desire to understand the scope of the problem has bred a reliance on statistics that even [Forrester] admits are based heavily on guesswork.”
In practice, the hysteria died down, even as the benefits of offshoring were being questioned more and more. Managers found it increasingly difficult to manage far-flung service operations in cultures they did not understand, and firms began to bring some functions back to their home base—especially call centres, where customers often found it difficult to explain localised problems to someone working in a totally different climate in a totally different time zone. Indeed, in 2006 an Indian call-centre operator opened a new centre in Northern Ireland.
Closely allied to offshoring is the concept of nearshoring, a phenomenon whereby companies shift operations, often IT-related ones, to foreign countries that are close to their own, but where they can still gain a labour-cost advantage—from the United States, for example, where Spanish is the second language, to Mexico; or from Japan to the Chinese city of Dalian, which was occupied by the Japanese for many years and where there are Japanese-speakers. Nearby countries are more likely to speak the same language as the country of the corporation doing the offshoring; they are more easily accessible at short notice; and they are unlikely to leave the short-stay visitor with jet lag.