Offshore Outsourcing

A discussion of whether offshore outsourcing of software and services jobs strengthen the U.S. economy or weaken it.

The paper provides an overview of recent research on the economic and labor impact of offshoring IT services to low-cost destinations. The research identifies key determinants, recent trends, occupations affected, magnitude, and benefits of offshoring to the U.S economy. The analysis indicates that the current wave of offshoring involves IT services threatens mainly white-collar occupations in the low-income group, but is counterbalanced by job creation in the high-income sectors. The research argues that the jobs lost to offshoring are a negligible percentage; on the other hand, the reduction in costs of IT services due to offshoring will increase labor productivity, job creation, boost Gross Domestic Product, and further strengthen the U.S. economy.

Table of Contents
1 Background
2 Definition of Terms
3 Determinants of Offshore Outsourcing
4 Outsourcing and Productivity
5 Protectionist Measures
6 Conclusion
“Traditionally, cost reduction has been the overwhelming motivation and perceived payback for outsourcing. While offshore outsourcing is not new (companies have been offshoring manufacturing for many years and reaping significant cost and productivity improvements), the offshoring of business processes is still in its infancy. In the past, outsourcing has often been used tactically, as a rapid and often short-term solution to a particular need or problem, which did not form part of an overall business strategy. The experience of manufacturing illustrated that when it is possible to do things cheaper elsewhere in the world, the work will migrate there. With the relentless pursuit of the lowest global costs, offshoring is getting institutionalized in many companies. So much that firms might resort to a strategic use of outsourcing by working with one or more suppliers in order to effect a significant improvement in business performance. This enables the firm to focus on those products that lie closest to the company’s core capability set and consider jettisoning the rest. ”