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Offshoring: The Debate Rages On

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One of the hot-button issues in the upcoming presidential election is the debate concerning US jobs going overseas. “Offshoring” is employing foreign workers in their home countries to perform high-tech services like writing computer code and developing software.

In March, US business consultancy A.T. Kearney published a study predicting that in the next five years US banks, brokerages and other financial service companies will move more than half a million jobs overseas. John C. McCarthy, an analyst with Forrester Research, sees the number rising exponentially in the longer-term future. He forecasts that in the next 15 years, 3.3 million US service jobs, from accounting to software development, will relocate overseas to countries like India, Russia and China.

As the debate dominates headlines, the two sides loudly voice their opinions. Proponents claim that by embracing globalization domestic businesses can save substantially and experience faster turnarounds on projects. Brian Behlendorf, founder and CTO of Silicon Valley start-up CollabNet believes that in the long run, spreading the wealth internationally is good for the world. He wants CollabNet to be a truly global company, with no distinction made between employees in one country or another.

Opponents caution against equating offshoring with cost savings and point to its start up as well as hidden costs. "Factoring in travel, moving and development costs takes the bloom off the relocating rose,” says economist Mitch Amspaugh. “Over the long haul, many companies are not going to experience cost savings.”

The realities of this sensitive issue are complex, and it’s worth examining the different viewpoints for and against offshoring.

Cost Savings: Myth or Reality?
Proponents believe that the savings businesses experience by offshoring are instant and dramatic. "Outsourcing can provide a pretty big, immediate cost savings,” says Darrel Raynor, managing director of Texas-based Data Analysis. Companies list advantages such as quicker innovation and reduced time to market to further generate revenue.

Others argue that the conversion takes a big initial investment and it can be years before companies see savings. According to Hank Zupnick, CIO of GE Real Estate, "You can't expect day-one or even month-six gains.” Because the investment is long-term, businesses need enough capital to cover the costs of moving and creating a workforce. “Offshoring can put a big strain on your internal IT structure," concedes Raynor. Corporate giants like HP, IBM and GE have the considerable resources to cover the expense of overseas relocations. Mid-sized businesses may not have the up-front capital that moving requires.

Productivity Issues
Those in favor of offshoring tout the increases in productivity as a major incentive to relocate. Productivity simultaneously increases both profit margins and revenue. And productivity can grow year after year. Experts point out that from a corporate executive’s viewpoint, taking advantage of workers who do twice the work for half the money is smart business.

On the other hand, communicating across time zones can create lags in productivity with cultural differences and language barriers complicating things. High turnover puts another dent in productivity. “People in India are doing quality work faster, and a quicker burnout rate and more turnover comes with the territory,” says Amspaugh.

Zupnick echoes the sentiment that the effect on productivity is a cause for concern. "Unless you can somehow address that in your contract, you're paying for someone to learn your product and then they're gone," he says.

Regulating The Future of Offshoring
In the past, offshoring was typically low-skilled, consisting mainly of customer service and basic tech support jobs. Now that higher-paying white-collar positions are going overseas, many are speaking out about regulating it. In March, California state Senator Joseph Dunn addressed an application for a tax exemption by Infosys Technologies Ltd., India's leading software-services company, with the charge that such companies “want to steal jobs” and “taxpayer dollars.”

A recent survey by the Information Technology Association of America (ITAA) downplays many of the fears associated with the wave of offshoring. According to the study the migration of tech jobs to lower-paying foreign markets has slashed 104,000 American jobs, or nearly 3% of US tech industry jobs. However, ITAA representatives point out that offshoring has affected the job market far less than the demise of the dot-coms in 2000, when companies eliminated as many as 268,000 positions.

The study recommends against "Protectionist legislation or regulations as a result of the political pressures being created by this economic transition." Instead, the ITAA advises the U.S. government to take action to help displaced IT workers and direct efforts toward encouraging students to enter the field.

Regulation promises to be hotly debated in the near future. Over half of the states are considering bans on offshoring government contracts. Companies are being lured by the prospect of cheap labor and drastic profit gains. The bottom line is that businesses should conduct in-depth research before committing to relocating segments of their workforce overseas.

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