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Outsourcing - Looking beyond Rhetoric

General Business News

August 2004

Outsourcing - Looking beyond Rhetoric

Don’t let the title of this article fool you; this is not an article espousing any particular viewpoint. However, in light of the political and business realities of this present age, we thought it might be nice to give you a little unbiased information to help you make up your own mind in the coming months and years.

First, let’s discuss what outsourcing really is and what it is not. Outsourcing, has come to mean the process of large American corporations firing highly paid employees in the United States and replacing those employees with low paid employees in other countries. While there is some truth in this, it is an inaccurate definition. A more accurate definition would be hiring someone outside of your own business to do work your business could do, but at a lesser cost.

Here are some of the things that businesses typically outsource that don’t involve taking jobs offshore:
  • Accounting work, including bookkeeping, tax preparation, payroll preparation, etc,

  • Auto parts, including seating, seat belts, and numerous other items needed to build an automobile, which are produced by suppliers that sell to the auto makers,

  • Customer service centers such as call centers located throughout the United States.

  • Restaurant reservations. Recently, I needed to find the number of a restaurant in another city. I dutifully called the phone company, requested the number, and when I mentioned I wanted to make a reservation, the operator said she could make the reservation for me and a minute later, the reservation was confirmed with no cost to me.

  • Even the cleaning service in your office (assuming it’s not you) may be outsourced to a company that isn’t owned by the building owner.
To be sure, there are many functions once performed by American workers that are now handled in India, Mexico and all around the globe. What’s more, there is no doubt that there have been many U.S. workers displaced by the movement of these jobs outside of the United States; however, the doom and gloom that the politicians and media have attached to these movements does not convey the full story - a story that is far more complex than most of us will ever understand. The following information will try to tell the other side of the story.

Job Losses. We have been told by various groups that millions of jobs have been lost to lower paid workers in other countries. According to an Alliance Capital Management study of global manufacturing trends, over the period from 1995-2002, the United States lost about 11 percent of it’s manufacturing jobs, China lost 15% and Brazil lost 20%. Overall, the global loss in manufacturing jobs was about 11%. Since one major source of outsourcing losses is the loss of such jobs to overseas operations, this in itself argues against American job losses being the sole responsibility of outsourcing. When you take into account the increase in output of approximately 30%, it’s hard to argue that the sole culprit in U.S. job losses is outsourcing. Rather, much of the loss results from technological innovation.

Service sector job losses are not necessarily due to shipping jobs offshore either. While Dell did send its call center operations to India, many of those jobs are now being brought back onshore because of customer complaints. In many cases, while companies have outsourced certain operations, a number of employees have been moved to another department instead of summarily losing their jobs. Government estimates expect the number of IT-related jobs to actually increase 43 percent by 2010.

The bottom line in the jobs sector is not that some jobs are going overseas, but that businesses must make a profit to keep the value of their stock up. This may seem somewhat self-serving and greedy, but consider how many Americans have their life savings in IRA or 401(k) plans. The value of these plans depends on the value of their investments and that, in turn, depends on the values of the underlying stocks.

Consider this also. If you are like me, you have been scratching your head to understand the statistics you hear from the various political parties. One politician says we lost 3 million jobs while another says we lost 1.8 million, etc. Did you ever wonder where those numbers come from and how both could be right? Let’s take a look at some numbers from the Bureau of Labor Statistics at the U.S. Department of Labor.

If I told you that the U.S. economy lost 2.9 million jobs from the time President George W. Bush took office, I would be telling the truth. I would also be telling the truth if I told you the real number was a net loss of 1.1 million jobs. How does this happen? The government issues jobs information in both seasonally adjusted and nonseasonally adjusted numbers. It also issues the numbers on an annual basis. In this example, the job loss number came from a seasonally adjusted comparison of jobs at the end of January 2001 and January 2004; the job increase was calculated using the nonseasonally adjusted jobs figures for January 2001 and June 2004. These numbers are for private sector non-farm jobs.

The point here is not to make you believe one thing or another, but simply to point out that statistics are only as good as the people who quote them. In this presidential election year, we all need to be aware of the accuracy of the information we hear and read.

Wage reductions. Just as the outsourcing phenomenon has purportedly reduced jobs in the United States, it has also been alleged that real wages have decreased also. Depending on whom you believe, the fact is this may or may not be true. For example, one source reports that some large IT companies have outsourced some of their functions while simultaneously increasing domestic payrolls. Another source reports that many manufacturing jobs that are lost are being replaced by jobs that pay $9,000 less annually. So what’s the truth? Well, both statements are true, but not necessarily for the same reasons. The fact is that many companies where there has been an outsourcing of jobs have, eventually brought those jobs back because of customer dissatisfaction or quality concerns. At the same time, the reality is that many industries have found the work product from lower cost overseas labor to be the same quality as that which would have been produced in the United States.

Again, the bottom line here is that we must all be careful in what we hear and accept. The fact is there are good and bad points in this outsourcing stuff, whether to another company, city, state or country, and we need to do our homework in this election cycle. But it’s not the "macroeconomics" that most of us are concerned with, so let’s talk about the real world next - our businesses.

Your business. In general, what most of us live on are our daily earnings and the success of our businesses. The decisions you make that affect your business are extremely important and one of those decisions will be the outsourcing of certain business functions. The decision to outsource your business functions will depend on several things that will always be driven by cost efficiency. You will need to look at the initial cost of outsourcing, to whom you will give the contract, the on-going cost of the outsourcing, customer satisfaction and your own satisfaction with whatever contractor you may choose. Each of these factors will be discussed in depth in next month’s article.

Conclusion. This month’s article was designed more to help you understand there are dynamics involved in the debate over "outsourcing" and, specifically, offshore outsourcing, than may meet the eye. In this election year, emotions are running high and most of us, including the author, are more likely to take the emotional side of the issues rather than using pure objective analysis. In business, however, objectivity is a key ingredient in success. If you are thinking of outsourcing some of your business functions, give us a call. We can help you make your decisions based on what’s best for your business and not only what sounds good based on the sound bytes we will hear over the next three months.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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