Politics and Economics of Offshore Outsourcing

There are two hot topics in the offshore outsourcing industry today-first, what the likely impact of the recession will be and second, what will be the likely impact of Barak Obama's presidency. While the former has attracted some good intellectual debate, with sound arguments and evidence to support both sides of the story, the latter has received pretty naive coverage, mostly from senior executives of offshore outsourcing or advisory firms desperate to allay their customer's concerns. One fundamental question that they fail to address is why Obama should care about offshore outsourcing. If it was so simple and so straightforward that offshore outsourcing is good for corporations, good for countries, good for economies, then why would Obama even consider doing anything about it?

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The debate began when Obama campaigned, "I will stop giving tax breaks to companies that ship job overseas and I will start giving them to companies that create good jobs right here in America." This was subsequently detailed in October 2008 as a $3,000 tax credit for the next two years to businesses, for each new full-time employee they hire onshore. The general response to this scheme has been that it hardly matters and will not make any difference to companies engaged in offshoring. The credit amount will be made up by just one month due to the wage differentials. Some concerns also arose about whether Obama will cut the current H1B visa cap of 65,000. But this fear is largely unfounded-Obama in fact favors a temporary increase in limit and a permanent reform of the system, as stated in a pre-election interview.

Recently, as if to allay all concerns about potential adverse impact of his stance on outsourcing, Obama filled some of his top White House posts with people who not only support expanding the H-1B visa program, but see offshore outsourcing as a plus for the U.S. economy.

But is offshore outsourcing a plus for the U.S. economy? This is a question being asked increasingly not just by economists, but also by ordinary U.S. citizens impacted by the surge in unemployment .

When offshore outsourcing started, it was at a micro level. Companies were happy with this new supply of high quality, low cost labor, and no one was complaining. Then companies started offshoring in droves and it became a macro level phenomenon. McKinsey recognized this trend, built up a consulting practice around it and won many projects in advising governments on how to tap the global labor market using outsourcing, and advising companies on how to get their global sourcing strategies right. Offshore outsourcing works for all was the general perception.

But then came a problem-someone asked "hey what happens to all the jobs that we let go here onshore. Isn't that kind of bad for the local economy?" So the backlash started. To respond, the McKinsey Global Institute (headed by Diana Farrell, who's just been appointed as deputy economic advisor to the president) released a study that created a new thumb rule for offshore outsourcing: For every dollar spent on a business process outsourced to India, the U.S. economy gains at least $1.12. It relied on estimates by Forrester (yes, yes, the same Forrester that, on seeing the magnitude of the global crisis, rendered all its previous studies obsolete) to conclude that offshoring is already benefiting the U.S. economy. In addition, it also argues that offshore outsourcing frees up U.S. workers to do other tasks (I wonder if collecting unemployment benefits was included in that list of tasks!). In 2005, another of their studies predicted that multinational companies in the entire developed world would have outsourced to low wage countries only 1 percent of total number of service jobs in developed countries.