The Hindu : Business : Productivity versus Outsourcing

Online edition of India's National Newspaper
Monday, Jun 07, 2004

Business

Business

Productivity versus Outsourcing

Firms striving to stay competitive globally downsize/lay off, consolidate back offices, set up quality processes, cut costs, invest in new technology, re-engineer processes and outsource. So, is outsourcing the sole reason for the job losses? asks Jessie Paul

JOBS RARELY vanish, they only metamorphose. Ever heard of a manciple? He used to be the purchaser of provisions for monasteries and colleges. Technology changed that role to that of the purchasing manager of today. The EPABX did away with switchboard operators, but the contact centre associate of today is a close cousin. Typewriters and their operators were a skilled resource till just over a decade ago and most offices had typist pools. Computer literacy and the low cost of computers have made stenographers and typists virtually extinct — or a luxury. And the typewriter has made the scribe redundant. But all these jobs have a lot in common with the data entry operators of today.

Through history technology has changed the nature and volume of certain occupations. And there is always pain for those involved — either in the form of retraining, reduction in scope, or redundancy. What is happening today is different because of the scale and speed of change.

The U.S. economy is in good shape. Productivity is high. And yet the job market appears gloomy. Outsourcing — specifically offshoring — is seen as the prime culprit. Let us take a dispassionate look at how offshoring and productivity affect the economy and impact the job landscape.

Drivers for outsourcing

The key driver of outsourcing is comparative advantage — value creation activities tend to relocate to areas that have a comparative (cost, skill, or speed) advantage over other countries. This was the case with the manufacturing industry in the 1980s when the overvalued dollar, low productivity, high trade deficit and outdated technology forced firms to first downsize, close factories and consolidate and then cut costs, invest in new technology, re-engineer processes and outsource. A good example of this is Nike which does its design, development and marketing work in-house while outsourcing its manufacturing operations.

More recently, this trend is being mirrored by the service industry. Firms striving to stay competitive globally downsize/lay off, consolidate back offices, set up quality processes, cut costs, invest in new technology, re-engineer processes and outsource. So, is outsourcing the sole reason for the job losses?

The number of outsourced U.S. jobs increased from 6.5 million in 1983 to 10 million in 2000, but the number of in-sourced jobs increased even more in the same period, from 2.5 million to 6.5 million. Take Delta Airlines and IBM. Delta outsourced 1,000 call-centre jobs to India in 2003, but the $25 million in savings allowed the firm to add 1,200 reservation and sales positions in the U.S. With IBM, although critics highlight the offshore outsourcing of 3,000 IT jobs, they fail to mention the company's plans to add 4,500 positions to its U.S. payroll.

Productivity, innovation and job loss

Thus, more than outsourcing, it seems that productivity is responsible for the current situation. Productivity is high, and rising in the U.S. This means that more of a particular set of jobs can be done by fewer people, or fewer employees are needed to do the job more profitably. Labour costs are falling but capital costs are falling faster, and that makes it more advantageous to invest rather than to hire.

The cost savings and freed resources can be invested in innovations or building a competitive edge, thus further improving productivity. Indications are that the U.S. still retains a lot of its competitive advantage, given the not so often cited fact that it imports far more jobs than it exports and has the best re-employment rate (displaced workers finding new jobs) in the world.

In the past, productivity-led technological innovations provided avenues for employment as in the car manufacturing industry in the 1920s, commercial aviation in the 1950s and 1960s and information technology in the 1990s. What is lacking in the current productivity boom are new and innovative industries that create jobs to replace those that are lost.

In the second half of the 1990s, overall employment rose sharply as the technology sector expanded, adding not just engineers and programmers but also marketers, cable installers, Web site designers, and all sorts of high and low-end jobs. In the current scenario, we are still waiting for the next big thing, be it healthcare, pharma, biotech, energy — all of which can make a big impact.

Another factor is that the volatile market and speed of change require firms to be more flexible and manage spikes. Unlike in Europe, where greater union power and regulations make the labour markets more rigid, it is easier for U.S. companies to hire and fire. But if done right, outsourcing enables firms to be flexible without cutting on employment, by enabling them to entrust processes or jobs to specialist vendors who can scale up or scale down rapidly on demand.

Perils of restrictions

With the negative connotations of outsourcing, restrictions and barriers might be a reality. But restrictions will slow down the increase in productivity and impact the ability of firms to cut costs. The extreme case of a closed U.S. market will lead to a dwindling of the competitive advantage of U.S. firms globally and the ability of these firms to leverage innovation.

In terms of benefits, according to the Global Insight study, global sourcing contributes significantly to real GDP in the U.S., adding $33.6 billion in 2003. By 2008, real GDP is expected to be $124.2 billion higher than it would be in an environment in which offshore IT software and services outsourcing does not occur. Consider multinational firms like iGATE which over the years have put in more than $1 billion in payroll and more than $100 million in taxes in the U.S. The firm has hired more than 20,000 with different skill sets in the U.S. since its inception in the late 1980s. Indian firms such as Infosys and TCS have invested in research partnerships and universities.

There is very little real indication that outsourcing is a major cause of the job loss in the U.S. In fact Boston University Professor Nitin Joglekar who examined the effect of outsourcing on large financial firms found that less than 20 per cent of workers affected by outsourcing lose their jobs; the rest are repositioned within the firms. There needs to be a greater focus on managing this 20 per cent and investing in retraining or outplacement.

As the price of services declines, sectors that have yet to exploit them to their fullest — such as construction and health care — will begin to do so, thus lowering their cost of production and improving the quality of their output.

Hopefully the wait will not be long. In the long term, there will be a shift to a more flexible model of staffing — through outsourcing or offshoring — and this will in turn open up new channels of employment.

Jessie Paul

Global Marketing Head,

iGATE Global Solutions

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