John Akerson's Thoughts

Business, technology and life

The Larger Impact of Outsourcing

Eweek has an interesting article titled “How Offshoring May Be Hurting US Technology Employees.”
Eweek’s article mainly talks about the offshoring pain in a single context. Their claim is that, although offshoring is sold as a process that moves lower paid positions overseas, in fact higher paid positions are also moving. They discuss IBM’s offshoring of personnel increase, from 6000 in 2003 to 90,000 in 2009. They also briefly mention HP’s offshoring of perhaps 12,000 former EDS jobs after their acquisition of that company. The bulk of Eweek’s article is taken from an article in the Rochester Democrat and Chronicle.  That comes from Ron Hira, Assistant Professor of Public Policy at Rochester Institute of Technology Professor Hira’s point is that the interests that drive offshoring have nowhere else to go and no other rational course of action. He points out that CEO’s must ultimately be concerned with profits, costs, delivering value to customers and maximizing shareholder returns. He points out that politicians are responsive to lobbyists, but that “There’s no group that represents the national interest in any way in Washington to counterbalance this. Which is why you see no action in Washington to address these issues. Who represents American workers in this debate? Who represents accountants? Who represents engineers? No one.”

So – the eweek article leads to another and experts quote each other while none seem to any real ideas. The main point, and it is fairly obvious – is that the drain to the US comes because of outsourcing, and outsourcing moves jobs elsewhere. This is not a new concept. The idea that outsourcing moves high-paying jobs elsewhere is also not a new concept.

Here are two new ideas.

Outsourcing also hurts technology nationally because it eliminates career paths within US technology. Until a very recent merger, my company had a brilliant CIO who was once an IT director, formerly an IT manager, formerly a project manager, and started more than 20 years earler as a software/code developer. Given offshoring patterns, there is not a current new-hire developer who can likely follow that path. At some point, the US will pay in terms of seasoned and experienced technology leaders. That is very bad, but unlikely to sway anyone in Washington DC.

DC is driven by money – and the most impact will come from refining a monetary reason to limit offshoring. Here’s a framework, based on the information given in the article about just two companies. IBM has 90,000 employees in India, up from 6,000 in 2003. Conservatively speaking, that perhaps represents an offshoring of 58,000 positions. It might be seen as an increase of 84,000 positions, but that would discount the possibility of offshore growth in the form of new-job creation. HP, via EDS offshored 12,000 positions. Together, two firms offshored at least 70,000 positions. If you assume the average technical worker in the US averages $60,000 annual income – and based on any standard, that is also a very conservative estimate – we have an offshoring of $4,200,000,000.00 in annual income. At a 28% rate, which again is conservative, that is an offshoring of $1,176,000,000.00 in income taxes that Washington DC is losing out on. 2 companies efforts have removed $1.1b from the tax stream. They have also removed more than $3b from churning through the monetary and economic system as spending, savings, and other consumption. Those numbers come from very conservative estimates of people, wages and taxes. To go the other direction, there may have been 96,000 positions offshored – with an average US income of $75,000, which would remove $7,200,000,000.00 from the US economy. Assuming an income tax rate of 34% suggests more than $2.44 billion dollars of tax revenue was lost. In Washington DC terms, changing the behavior of 2 companies (albeit large companies) would have funded more than half of the recent ‘cash for clunkers’ initiave.

The interesting questions – that MUST to be quantified and acted on by politicians in Washington DC are: What if that standard was applied to the top 1000 companies that offshore? Here’s my follow up question: What could the US government do to make it economically advantageous to companies to “inshore”? When can we start? In an economy where unemployment is currently 9.7%, our nation is in debt, and deficit spending increases our debt every day, these are the sorts of important questions that should be asked in Washington, DC.

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September 9, 2009 - Posted by | Uncategorized

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