Several decades ago, as Albert Einstein monitored an exam for a graduate level physics class, a student raised his hand and said there was a problem: the questions on the exam were the same as the previous year’s test. Einstein agreed. The questions were indeed the same, but in a year’s time the answers had changed completely. Given the accelerated pace of change today, the “answers” are not just different from those of last year. In many cases, they are even different from those of last month.

Many Americans, as well as Members of Congress on both sides of the aisle, do not understand why some answers that seemed appropriate only a few years ago do not apply today. On the other hand, some do indeed understand, but choose not to accept the new realities. For example, several policymakers have revealed to this author that taking a globalist view in support of international trade is dangerous to their job security. In fact, one Member of Congress said he understood the need for some companies to outsource services abroad, but could not sell that reality back home. When it comes to outsourcing abroad, also known as offshoring, many politicians are basing their policy decisions on outdated assumptions that may sell in their Congressional districts. But in the end, these anti-globalist positions actually will hurt, not help their constituents.

The fear that offshoring will result in fewer good jobs for American workers is understandable since some activities include the movement of knowledge-intensive services to India and other countries with educated, less expensive, English-speaking labor pools. But careful analysis reveals that worldwide sourcing—made possible by new technologies that digitize and cheaply transmit information around the world—provides real benefits. Unfortunately, little evidence of this has been publicized. And when companies communicate a strategy to outsource certain services via a public relations campaign, they often do so poorly. This does not help. In turn, due to misinformation about offshoring, fear of negative publicity, political pressure, investor objections or employee criticism, many companies have either cancelled or not executed offshoring contracts. Many state agencies have incurred the same problems and turned a blind eye to offshoring opportunities that could have saved their tax payers millions of dollars—funds desperately needed!

If placed in the larger context, offshoring is seen as one of several means by which jobs are lost in the short-term. History tells us that new technologies and improved business strategies displace jobs. For example, automobile workers replaced buggy makers, while ATMs, voice mail and voice recognition software eliminated bank teller, receptionist and medical transcription jobs. As pointed out earlier, the U.S. economy loses an average of 31 million jobs annually. But new jobs are created more quickly than old ones are lost. New technologies, innovation and higher productivity, the primary causes of job turnover, also known as job churn, actually increase wages and improve living standards. In turn, new industries and higher skilled jobs emerge. Thus, Forrester Research’s estimate of 3.3 million service jobs moving offshore by 2015 represents a small fraction of job churn. How many Americans are familiar with this reality?

Lower-tech jobs most likely to be outsourced, such as bookkeeping and customer service, are projected to increase in the United States. And higher-tech jobs prone to outsourcing, like computer programming and software design, also are expected to increase here, according to the Labor Department. In fact, from 2002 through 2012, all U.S. computer-related occupations are estimated to grow by 15 to 57 percent. That’s not all. Many back office jobs (some more skilled than others) are estimated to grow in the United States. For example, paralegal jobs are projected to increase by 28.7 percent, bill and account collector positions are estimated to grow by 24.5 percent, customer service representative occupations are estimated to increase by 24.3 percent, radiologist jobs (which are part of the larger medical field) are anticipated to rise by 19.5 percent, accountant and auditor positions are projected to expand by 19.5 percent, architectural occupations are projected to expand by 17.3 percent and commercial and industrial designer jobs are projected to grow by 14.7 percent.

How does offshoring lead to better jobs? The McKinsey Global Institute estimates two-thirds of economic benefits from outsourcing services to India flow back here. Firms that outsource generate higher profits, have more capital to invest in R&D, become more globally competitive and are better positioned to expand sales worldwide—creating higher-paid jobs.

In March 2004, The Information Technology Association of America (ITAA), a leading U.S. trade association for the IT industry, released The Impact of Offshore IT Software and Services Outsourcing on the U.S. Economy and the IT Industry. According to ITAA, the study conclusively demonstrates that worldwide sourcing of computer software and services increases the number of U.S. jobs, improves real wages for American workers, and pushes the U.S. economy to perform at a higher level, thereby generating many other economic benefits.

Global Insight, a leading economic analysis, forecasting and financial information company, was commissioned by ITAA to conduct the study. The Global Insight research team was led by Global Insight Chief Economist Dr. Nariman Behravesh, one of the world’s most accurate economic forecasters. Nobel Prize winning economist Dr. Lawrence R. Klein, the founder of Wharton Econometric Forecasting Associates (WEFA), Inc. and a Global Insight associate, also made significant contributions to the study.

“We have long held the position that global sourcing creates more jobs and higher real wages for American workers,” said ITAA President Harris N. Miller. “Now we have the data that prove it. Far from being an economic tsunami that washes away domestic IT employment as some believe, global sourcing helps companies become more productive and competitive. The savings produced through worldwide sourcing are invested in new products and services, in new market expansion, and, most importantly, in creating new jobs and increasing real wages for American workers. This research replaces fear with sound economic analysis, allowing for an informed approach to the global marketplace.”

The ITAA/Global Insight study found:

  • Worldwide sourcing of IT services and software generated an additional 90,000 U.S. jobs in 2003; by 2008, net new jobs are estimated to total 317,000.
  • Global sourcing adds to the take-home pay of average U.S. workers. With inflation kept low and productivity high, worldwide sourcing is projected to increase real wages in the U.S. by 0.44 percent in 2008.
  • Worldwide sourcing contributes significantly to real U.S. GDP, adding $33.6 billion in 2003. By 2008, real GDP is predicted to be $124.2 billion higher than it would be in an environment in which offshore IT software and services outsourcing did not occur.
  • Global sourcing contributed $2.3 billion to U.S. exports in 2003 and is projected to contribute $9 billion by 2008.

The study also found that raising barriers to worldwide sourcing would adversely impact U.S. workers and U.S. firms. If all global sourcing of software and IT services terminated completely, the report said, the impact would slow the U.S. economy and reduce the number of new jobs available to American workers. While worldwide sourcing is expected to increase jobs and wages, Miller said much needs to be done to address the challenges of those workers displaced by this economic shift. The report offers a range of recommendations to achieve this.

Catherine Mann of the Institute for International Economics says offshoring of computer manufacturing resulted in a 10 to 30 percent drop in computer costs. In turn, sales of PCs soared. This led to a rapid rise in U.S. productivity and added $230 billion in cumulative GDP from 1995 through 2002. The result: many new jobs emerged, far exceeding those lost to outsourcing.

If applied to select medical services and other fields, offshoring could reduce costs and generate new waves of innovation, resulting in better jobs not yet imagined. As Ross Perot’s early 1990s forecast of a “giant sucking sound” proved incorrect, so is the fear of offshoring. In reality, the U.S. service sector will significantly expand. And since the industry has become more sophisticated, average hourly earnings for service production workers have already caught up to those in manufacturing. Nevertheless, service jobs that require left-brained routine quantitative functions, not intuitive or creative problem solving skills, will increasingly be automated or moved offshore. As a result, those jobs that are lost will increasingly be featured on prime-time news and create the false impression that the American service industry, as a whole, is moving to India.

In the end, these false impressions can be powerful. According to the National Foundation for American Policy, a Washington, D.C. research organization, as of March 17, 2005, there were 112 bills in 40 states designed to restrict outsourcing. On the same date in 2004, there were 107 bills in 33 states. If successful, in the long run, these bills will harm the workers they are intended to help. Stated in the 2005 McKinsey Global Institute report, How Offshoring of Services Could Benefit France, “A new dynamic is emerging in the economic sectors exposed to global competition: early movers in offshoring improve their cost position and boost their market share, creating new jobs in the process. Companies who resist the trend will see increasingly unfavorable cost positions that erode market share and eventually end in job destruction. This is why adopting protectionist policies to stop companies from offshoring would be a mistake. Offshoring is a powerful way for companies to reduce their costs and improve the quality and kinds of products they offer consumers, allowing them to invest in the next generation of technology and create the jobs of tomorrow.”

As business becomes more competitive, companies increasingly will focus on their core strengths and contract out functions that can be provided more efficiently by others. Many of these functions will be offshored. But more will be outsourced within the United States. This provides many opportunities for regions with various advantages. Take Western New York for example. The State University of New York at Buffalo, as well as many other local universities and colleges, graduate tremendous numbers of very well educated students each year. In the Western New York area, housing and corporate real estate costs are among the lowest in the country. The region also has one of the largest international trade and transportation infrastructures, and the quality of life is top notch. According to Jeff Belt, president of Acen, a Buffalo, N.Y.-based software development and web hosting company, “The cost to operate a software firm in Western New York is 48 percent less than in metropolitan Seattle, and all the necessary talent and infrastructure are here.”

Based on these realities, Western New York is naturally suited to attract culturally-sensitive, high-skilled back office operations that require elevated levels of quality control. The target: corporations that operate skilled back office service operations (knowledge-intensive jobs not requiring face-to-face contact) currently located in high-cost metropolitan areas such as New York City, Boston and Washington, D.C. Based on Western New York’s advantages that most regions cannot match, it has an opportunity to brand itself as “America’s insourcing center” and position itself as the high-end “American Bangalore,” free of cultural disconnects, long-distance management problems and political uncertainties caused by Indian-Pakistan tensions and global terrorism. Plus, Western New York offers Manhattan-based financial firms a well-suited data back-up location that exceeds the 200-300 mile distance recommended by the federal government’s interagency white paper on strengthening the resilience of the U.S. financial system. Like so many other U.S. regions, however, Western New York needs to better adapt to new global economic realities in order to seize valuable opportunities within its reach.

This section appeared in Part I: Understanding Today's Global Realities of the book Grasping Globalization: It Impact and Your Corporate Response, 2005.

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.

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