Is outsourcing always good for corporations? Is outsourcing always bad for the US Economy? The answers are not as cut and dry as one might think.
Today, the Motley Fool, discusses the tradeoffs of outsourcing. It turns out that many companies can actually lose by outsourcing. They look at the differences in labor and hop on the bandwagon without taking the political temperature and weighing other factors. There are also some surprising benefits from outsourcing to the US Economy.
So there are certain factors that the many corporations overlook (other bullet points omitted):
Less than half of the firms analyzed the tax environments of the nations
they considered moving to. Just three-fourths measured the impact on supply
chain costs, and only 34% assessed the cost of plant or office shutdowns.
"People-related expenses, including training needs and cultural issues" are also
"not sufficiently examined."
While 88% of firms evaluated labor costs and 79% analyzed potential returns
on investment, less than 40% analyzed the local economic/political climate. Just
32% looked at "the impact of employee/union representation considerations at
home or in the location to which they will be moving operations." Also noted:
"Cultural barriers, labor pool quality, and backlash from home-country employees
were also cited as key issues."
The percentage of jobs being moved overseas is expected to just about double
in the next three years, "with an average of 13% of jobs at each company
currently relocated and an additional 12% being considered for relocation within
the next three years."
Brand image and employee morale get both boosted and cut. Some 23% of
respondents said that their global sourcing efforts had a positive impact on
their brand, with 11% indicating a negative impact. About half of the companies
reported no change in morale in a new sourcing location, while half also
reported no change in the home country. Some 19% and 30%, respectively, reported
negative changes in morale in the new and home countries. (I wonder how these
firms are measuring morale, though -- I can imagine many employees not revealing
to their employers how demoralized they are.)
In certain cases, each dollar we spend by outsourcing, brings money back to the US:
Then he pointed out that global outsourcing can bring benefits and make economic sense: "A recent study by the McKinsey Global Institute, an economics think tank, calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. The largest chunk -- 58 cents -- goes back to the original employer. But there are many other benefits. For instance, 30% of Indian offshoring is performed by U.S. companies, so money returns home as earnings. Additional benefits accrue from freeing U.S. workers to do other tasks. A good example is the much-fretted-over idea of sending X-rays to India for analysis. Diana Farrell, the institute's director, says doing so reduces the cost of health care and can free up money for medical innovation."
On person noted that in an outsourced call center, "All the computers are from Compaq. The basic software is from Microsoft (Nasdaq: MSFT). The phones are from Lucent (NYSE: LU). The air-conditioning is by Carrier, and even the bottled water is by Coca-Cola (NYSE: KO)....".