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Outsourcing actually creates U.S. jobs, study finds
posted Nov. 18, 2004 | MSN Money staff and news services

Has outsourcing -- the practice of sending jobs to low-wage countries such as India and China -- been unfairly pegged as the culprit behind U.S. economic woes? A new study, a new book and an influential Federal Reserve governor think so.

A study released today by the Information Technology Association of America (ITAA) says that outsourcing white-collar jobs has thrown some Americans out of work, but predicts that the trend will ultimately lower inflation, create jobs and boost productivity in the United States. The ITAA said the migration of tech jobs to low-paid foreigners has eliminated 104,000 American jobs, nearly 3% of the positions in the U.S. technology industry. But that's nothing, the ITAA said, compared with the home-brewed dot-com meltdown that has eliminated more than twice that many jobs since 2000.

"The myth is that we've started this long decline into the midnight of the technology work force,'' ITAA president Harris Miller said. "This report shows that, assuming the recovery continues, the number of IT jobs will actually increase.''

Outsourcing dramatically cuts labor costs (Indian programmers earn a sixth of their U.S. counterparts' wages), allowing companies to sell goods more cheaply or at a greater profit. That means more money to buy equipment, build facilities and conduct research.

Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, with more than one in 10 of them in Silicon Valley or elsewhere in California, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs -- 34,000 in California.

Don't blame trade
Meanwhile, Fed governor Ben Bernanke, tackling an issue that has resonated in the U.S. presidential campaign, said there has been undue focus on the movement of U.S. jobs abroad.

"The single most important factor explaining lagging job creation is the astonishing gains in labor productivity that have been achieved in the U.S. economy in the past few years," Bernanke said in remarks prepared for delivery to the Duke University Fuqua School of Business in Durham, North Carolina.

"Outsourcing abroad simply cannot account for much of the recent weakness in the U.S. labor market and does not appear likely to be an important restraint to further recovery in employment," he said. "I continue to believe that steady improvement in the labor market over the remainder of this year is the most likely outcome," he said.

Investment banker Goldman Sachs last year estimated "offshoring" accounted for 1 million of the 2.7 million manufacturing jobs lost since summer 2000.

Bernanke also said the "dire predictions about a wholesale 'export' of U.S. jobs in coming years" were off the mark. "Outsourcing abroad has proved profitable primarily for jobs that can be routinized and sharply defined," he said. "For the foreseeable future, most high-value work will require creative interaction among employees, interaction that is facilitated by physical proximity, personal contact, and shared cultural experiences."

Treasury Secretary John Snow agreed. "It's part of trade," he told the Cincinnati Enquirer on Monday. "It's one aspect of trade, and there can't be any doubt about the fact that trade makes the economy stronger.
No panacea, if it ever was A survey released last week found that most U.S. companies plan to outsource more of their back-office functions overseas, where labor is cheaper, despite a public relations backlash and weaker prospects for cost savings.

About 86% of 182 U.S. companies surveyed plan to increase the use of offshore outsourcing firms, according to a poll by Chicago-based management consulting firm DiamondCluster International. But companies have lost the illusion of dramatic cost savings from outsourcing, the survey said, because managing far-flung international operations can be costly and difficult. They expect outsourcing to save only 10% to 20% of their costs, down sharply from 50% two years ago.

Companies may decide even that price is too high if they read a new book by a University of Southern Mississippi professor who studied the call center industry for eight years.

David Butler's book, "Bottom-line Call Center Management," examining the job that employs 7% of the American work force, hits print just as the topic becomes a political hot potato.

"What CEOs don't tell reporters is that outsourcing is still experimental and the experiment may not be working," said Butler, who heads the international economic development doctoral program at the University of Southern Mississippi in Hattiesburg.

"Overseas call centers can cost more in customer goodwill than they save in staff salaries."

Many corporate executives who outsourced call centers to Asia confided to Butler that they are plotting quiet moves back to U.S. soil. They don't want to lose face by admitting errors. But they don't want to lose American clients who resent having customer service calls answered on the other side of the world.

"The current political climate and terrible jobless numbers have made outsourcing a hot-button issue even for white collar professionals," Butler said. "Airlines, brokerage firms, banks and manufacturers need to look at call centers as part of brand imaging. Call centers are the continuous bond customers have with companies. Call center staff calm panicky customers with detailed advice. They help them choose new products. They create empathy."

Butler cited a notable example of "call center repatriation" from last year. Dell (DELL, news, msgs) moved its call center support for corporate business from India into Texas, Iowa and Tennessee. Dell clients had complained some Indian staffers spoke with indecipherable accents and responded to technical questions with generic answers.