Understanding Out-Sourcing

Worried about Out-Sourcing Jobs to India or China?

By Arun Kottolli

Irrational Phobia

• US is experiencing an Irrational Phobia about Job Loss to India

• People are Particularly worried about losing High paying IT Jobs

• This is a classic example of the journalistic inclination to ignore the forest and focus on a few twigs.

Executive Summary

• In recent years, many Americans have lost their jobs and suffered hardship as a result

• Many more have worried that their jobs would be next• There is no point in denying these hard realities, but just

as surely there is no point in blowing them out of proportion

• The innovation and productivity increases that render some jobs obsolete are also the source of new wealth and rising living standards.

• Embracing change and its unavoidable disruptions is the only way to secure the continuing gains of economic advancement

USA is the world Leader

• USA is the largest exporter of Services• US Accounts for 18.1% of the total world trade in

Services• India accounts for only 1.4% of Global Trade in

Services• US had a $64.8 Billion trade surplus in Services in

year 2002• 43% of US Exports are services• US Exports $3.1 Billion worth services to India

US Leader in Services Exports

• Latest U.S. government data shows that foreigners outsource more office work to the U.S. than US firms send abroad

• Total revenue to US from in-sourcing $131 Billion

• Total services revenue in US is $531 Billion!

• Services FDI in US in 2003 is $82 Billion

• Growth in services export in 2003 is 6.4%

Insourcing & The U.S.• Insourcing of Jobs: When foreign firms setup

operations in US– 148,000 jobs in New York City are created by

foreign firms– 22% of US exports are from foreign firms in US

• Even in US heartland, Insourcing is a major job provider– 242,000 jobs in Ohio– 244,000 jobs in Michigan– 163,00 jobs in Indiana– More jobs are created by foreign firms than

homegrown US companies

US – Destination for Business

• The U.S. imports many more jobs than it exports

• US is the greatest beneficiary of outsourcing– Honda increased it U.S. manufacturing by 15% in

2003– Novartis has huge R&D facility in Massachusetts – Samsung invested $500 million in Texas for

semiconductor factory

• Payroll for US employees in foreign firms exceed $350 Billion in 2003

US - Leadership in IT

• In 2002, US had 2,772,080 IT Jobs (According to Bureau of Labor Statistics) Paying an average of $61,630/year

• Jobs outsourced to India are “McJobs” – Disparaging Inferior jobs like:– Tech support

– Handling Insurance Claims etc.

– Telemarketing

– Basic Coding

• Outsourcing low-end services to Asia will help U.S – Reducing costs for U.S. consumers and companies

US -A Technology leader in IT

• All most all Computer Architectures are developed in US by US firms– US dominates in Operating systems, business software,

User application software

– US dominates system architecture design

– US dominates in Microprocessors, Computers

• US spends $247 Billion in research every year• US has the latest technology in Semiconductors,

software and system integration

India – In Comparison

• In Comparison, India does only software services, Very little software packages

• US companies are getting their R&D done in India– That gives US firms to speed up innovation– Saves R&D costs, Which benefits share holders (who

are US citizens)

• Higher Education in India lags behind US in a big way

• India has only about 250,000 IT Jobs

Reality Check• US has always Imported & Exported Goods an Services• US imports twice as many jobs as it exports

– I.e. Jobs created by foreign companies in US

• If Exports creates Jobs, So does Imports– E.g: Siemens has 60,000+ employees in US

• US is exporting low end jobs & Importing high end, High paying jobs

• If the number of jobs are dropping, then wages must drop– Real compensation has increased by 26% since 1998

Globalization in India

• Driven by three factors: – High-speed data connectivity – Proliferation of PCs – Convergence of software to create a genuine

global work platform

• Globalization in a way that has made the very concept of geographical - country, city, state - location irrelevant

Who Benefits?

• According to McKinsey Global Institute Report, For every Dollar spent on outsourcing to India, US economy gains $1.12

• Largest Chunk of $0.58 goes back to the original employer

• American Productivity gains of 2003 is possible by outsourcing

• US Gains by intelligent use of technology

Actual Winners of Outsourcing

• Outsourcing is a win-win proposition• E.g: Medical diagnostics sent to India will save on

medical costs in US, and spur consumption of US made medical equipment in India

• Indiana State recently cancelled a contract with TCS and gave it to the next lowest bidder. – TCS bid $15 Million– Next Lowest bid $23 Million– Loss for Indiana Tax payers US $8Million

Long Term Gains for US

• Increasing productivity makes people richer• Outsourcing increases productivity of US

employees – Enables them to get a higher wages

• Increased productivity => Increased wealth creation

• Increased wealth = Higher standard of living

OEDC Case Study• According to OEDC report, Outsourcing services

led to an additional productivity gain of 1.9% in US during 1995-2002 Vs 1.1% productivity growth in EU

• This led to an increase in average Per Capita income: US $33,271 in real PPP terms for Americans Vs $22,474 in real PPP terms in Europe

• Outsourcing has helped US economy grow at an additional 0.2%

• Outsourcing has led to increased tax collection – As firms improved their bottom lines, US can collect more taxes

Example: 24x7 Call center

Take the case of 24x7 Customer call center in Bangalore. The firm offers telemarketing, customer support & IT support:– Computers it uses are made by HP– Software on those computers are from Microsoft– Air Conditioners in the office are from Carrier– Bottled water is from Pepsi Co. – 90% of Shareholders in 24x7 Customer call center are

US citizens

• Winners: – US firms by increasing exports to and sales in India– Customers worldwide who pay less for services

Migration of jobs across borders only creates opportunities for more products and services to be sold around the world, leading to gains for all.

Future Jobs in US

• Jobs will surely expand because the main driver of growth in our economy is our prodigious technical change

• Technical change nearly always substitutes for unskilled labor, but it creates new skilled jobs, both by creating new products and processes but also because the maintenance of technology also requires skilled labor.

The Current media blitz about imported goods or services resulting in the best

jobs being relocated to some variable list of countries -- first Japan and Germany, now India and China -- has never been

anything more than unadulterated hogwash.