Does Outsourcing Create or Destroy Jobs

Outsourcing is it creating or destroying jobs in the US?

I was reading in the outsourcing trade press this week about the political debate in the US about job losses in the outsourcing market. The debate centres around one of the most vexing questions in the outsourcing market as to whether outsourcing, or more specifically off-shoring, creates or destroys jobs in the outsourcing home country. This furore is particularly felt in the US where a political backlash threatens to develop that may result in government measures to remove some or all of the advantages of outsourcing – such as denial of tax relief on expenses as one example.

The problem is particularly acute if we consider off-shoring where the jobs in the home country are transferred to a receiving country such as India. And as a result the jobs disappear in the host country and those people in the US are let go. So what is the truth in all this and what factors are at play when we consider work restructuring due to outsourcing?

There have been several attempts to justify job losses by recourse to ideas that outsourcing actually creates more jobs than are lost – ergo we threaten this process by any talk of protectionist actions. Although there is no evidence base for any of these ideas they are starting to gain traction as the industry fights back to try and extinguish any legislative activity that may restrict their current free rein.

The arguments seem to boil down to three main points:

  • The savings yielded by outsourcing leads to higher investment in the business and as a result further job opportunities are created.
  • The inward investment in the offshore country increases their standard of living and the demand for American goods and services which leads to increases employment in the US.
  • Any form of protectionism (or legal protection) acts to increase employment expenses and thus to reduce employment opportunities.

Is there anything in these points?

The main problem with the first one is the assumption that outsourcing yields value at anything like 50% as claimed by some writers that can be invested per se. As an example I attended a recent conference in London where it was revealed (from a large scale European survey) that although around 60% of outsourcing organisations claimed some financial savings of these only around a quarter had any idea how this was measured – the rest had no way of assessing success and had no clue where or if this was done in their organisation. This means only15% of organisations can state that they have achieved any savings with any surety. Other researchers and consultancies have also shown that getting any benefit from outsourcing is proving to be a surprising intractable nut to crack – so where’s the money coming from for this investment?

Secondly all of the main offshore countries are notoriously closed as far as inward business is concerned – we have been hearing for years these potential advantages in the UK but we have yet to make any real impression in business terms in the very protected markets in Asia. In the UK we send unemployed princes on foreign trade missions that seem to yield very little of substance and just involve giving away our technology at knock down prices. American trade missions have had little more success and you don’t have princes with time on their hands! Furthermore, the idea that Indian sweat shop workers are queuing to buy American high tech goods is fanciful at least.

Lastly employment law and protectionism are stated to be one of the core reasons preventing job creation. Any restriction on the ability of businesses to move employment from one place to another or to offer any protection as far as workplace rights or working practices is seen as an anathema and opposed by recourse to a ‘jobs being destroyed’ rhetoric. From this perspective outsourcing is seen as an efficiency mechanism acting on employment cost – and the target (of the outsource) depends entirely on where the cost advantages lies at a point in time whether in the US or not. Thus if used correctly outsourcing can allow cost advantage to be maintained over time by switching between suppliers. It is in affect a re-working of the investment idea where the removal of all restrictions on organisations to do what they want can facilitate job creation.

My take on this is that job losses are inevitable in outsourcing but the problem is it is a particular type of loss that occurs and is felt differently across society. It is the entry level IT jobs, lower skilled activities, voice services or manual production tasks that are going offshore – and they are not being replaced like for like. What this means is that specific sectors of our society are being affected and their ability to make a living stopped by outsourcing – it is their jobs that are going offshore. Jobs that used to be for high school graduates or those less successful in education or could only work part-time are going and are not being replaced. So our fundamental question is are we happy with this – is it justice?

It strikes me that the arguments for or against employment losses misses out on another fundamental aspect – the experience of outsourcing of those who go through it. Loss of identity, stress, and feelings of powerlessness occur all to frequently when we carry out an outsource badly. One of the key points about this type of employment structuring is it acts to move workers from the primary sector to the secondary sector. In the secondary service sector employment tends to be fragmented, short term with wages set by the market and overall is much less secure. All this acts to make the experience of work much more instrumental and tightly controlled and denies people any of the positive aspects of work.

We must do better than this. People do want to do a good job, be loyal, and serve customers well – and be rewarded and treated fairly for doing so. Outsourcing is unstoppable but it is controllable for the better good of our society.