Cutter Consortium
20 December 2005

TWO POSITIONS: THE OFFSHORE OUTSOURCING DEBATE

by E.M. Bennatan, Senior Consultant, Cutter Consortium

There are two positions held by the supporters and the opponents in the offshoring debate. Generally, supporters of offshoring cite a persuasive list of global business-related advantages that result from offshore outsourcing. Most of the opponents concentrate mainly on the loss of jobs and the loss of technological advantage in the outsourcing country. We will discuss some of the main arguments from each side of the debate.

The Supporting Position

The advantages of offshore outsourcing, according to a recent UN report [4], include not just lower labor and capital costs but also:

  • A better utilization of time (the workday in India corresponds to nighttime in the US)

  • High quality (due to an educated workforce and high motivation to succeed)

  • Easy coordination (due to a knowledge of foreign languages -- especially English -- and local supportive legislation)

  • Freeing up the outsourcing company to concentrate on its core business

A similar position is summarized in a report sponsored by the Information Technology Association of America (ITAA), which states:

Although "lower cost" is the most commonly cited reason for offshore outsourcing, intense global competition in an environment of slower growth and low inflation demands constant vigilance over costs. Due to the low costs and high quality, using offshore resources in selected countries makes good economic sense. Beyond the cost incentive, global sourcing provides several other practical benefits including: the ability of multinational organizations to efficiently stage 24x7 operations; the opportunity to customize products and services to meet local needs; and the means of geographically deploying workers and facilities to succeed in globally dispersed, highly competitive markets. [2]

These are persuasive arguments, except that offshoring is not currently meeting expectations.

The Opposing Position

The formal position announced by the US branch of the IEEE states:

The offshoring of high wage jobs from the United States to lower cost overseas locations is currently contributing to unprecedented levels of unemployment among American electrical, electronics and computer engineers. Offshoring also poses a very serious, long term challenge to the nation's leadership in technology and innovation, its economic prosperity, and its military and homeland security. [1]

The position paper then goes on to recommend a string of government steps to control offshoring and to protect US jobs and technology.

There have been other prominent voices raised against offshoring that share the IEEE position to varying degrees. At a global technology summit, as reported in Forbes, the legendary former Intel CEO Andy Grove presented his position on the subject of offshore outsourcing with the words: "I'm here to be the skunk at your garden party" [3].

While Grove's opposition is less strong than that of the IEEE, his arguments are no less forceful. As summarized in the article, Grove's position is that "software and technology service businesses are under siege by countries taking advantage of cheap labor costs and strong incentives for new financial investment." Grove did not offer a solution, saying only that the government needs to help decide the proper balance between a company's responsibilities to its shareholders and to its employees. Otherwise, he said, companies will revert to their obligation to increase shareholder value.

-- E.M. Bennatan, Senior Consultant, Cutter Consortium

References

[1] IEEE-USA. "Position: Offshore Outsourcing." IEEE New York, March 2004.

[2] ITAA. "Executive Summary: The Comprehensive Impact of Offshore IT Software and Services Outsourcing on the US Economy and the IT Industry." Prepared by Global Insights (USA), Inc., Sponsored by Information Technology Association of America (ITAA), March 2004.

[3] Krim, Jonathan. "Grove Says U.S. Is Losing Edge in Tech Sector." Forbes, 10 October 2003.

[4] UNCTAD Secretariat. "Business Process Offshore Outsourcing: Untapped Opportunities for SMEs." The United Nations Conference on Trade and Development, Document UNCTAD/SDTE/TIB/2005/6, United Nations, 2005.

Two Positions: The Offshore Outsourcing Debate