The Outsourcing War: Let Economics Triumph Over Politics

            

Authors


Authors: Sanjib Dutta, Abdul Khader
Senior Faculty Member, Research Associate,
ICMR (IBS Center for Management Research).



<< Previous


The Economics of Outsourcing Contd...

In an article, "Why Your Job Isn't Moving to Bangalore" in the New York Times, Jagdish Bhagwati, a senior fellow at the Council on Foreign Relations and professor at Columbia University writes that the panic and furor over outsourcing is completely unwarranted. He further says that no jobs are being taken away from America. He says that the affect of changes in technology is being felt in the labor intensive industries. According to him, the loss of jobs in the US is due to technological changes.

Professor Bhagwati is also critical about politicizing the whole issue. He says that outsourcing will strengthen the competitiveness of the US companies. Firms ignoring the cheaper supplies would lose out. Professor Bhagwati further says that outsourcing service jobs is nothing different from importing of labor-intensive textiles and other goods. According to him, all empirical studies in the US over the last two decades suggest that wage stagnation in the manufacturing industry is more due to automation of the processes, not the cheaper imports. The same is applicable to service industry as well.

Jane Linder of Accenture's Institute for Strategic Change says that companies outsourcing the traditional back-office work have more control and discipline over their operations. Moreover, employees of the company can concentrate on framing strategies. Further, outsourcing also results in greater efficiency and lowering costs. This allows companies to offer better services to customers. A study done by McKinsey Global Institute reveals that for every dollar of work outsourced by the US, it gets back $1.14 as income, and the countries to which the work is being outsourced gains 35 cents. This shows that outsourcing is a win-win situation for both the countries.

Benefit per $1 of US spending on outsourcing , 2002 est.

Benefits for US

Benefits for India

Savings to US investors or customers

0.58

Labor

  0.1

Imports of US goods and services by providers in India

0.05

Profits retained in India

  0.1

Transfer of profits by US based providers in India back to US

0.04

Suppliers

  0.09

Net direct benefit retained in US

0.67

Central government taxes

  0.03

Value for US labor reemployed

0.45-0.47

State government taxes

  0.01

Potential net benefit for US

1.12-1.14

Net benefit to India

  0.33

Source: Mckinsey Global Institute

Next >>