Gods, what an awful word, and what an awful prospect. But as much as Blinder may be technically correct, my bet is that “offshoring,” or sending US jobs overseas, won’t go nearly as far as Blinder fears.
You probably didn’t notice Princeton economist Alan Blinder’s testimony to the Joint Economic Committee a few weeks ago, but Blinder has peered into the future and identified a crisis that’s just waiting to explode. It’s called offshoring – the movement of jobs or business processes to other countries. So far offshoring has only touched a few areas – manufacturing notable among them – but Blinder thinks that up to 29% of American jobs are offshorable, including many service-in dusty jobs. Even if only half those jobs go overseas, that’s a crisis of epic proportions.
Offshoring isn’t the kind of globalization that you’re used to hearing about. It’s not just affecting manufacturing jobs. If you’ve ever called technical support to fix your computer, you’ve probably talked to someone in a call center in India. Those jobs have been offshored. And it’s not just about low-skill jobs – even management consultants now offshore production of their power point presentations. As Blinder notes,
[T]he dividing line between jobs that are deliverable electronically (and thus are threatened by offshoring) and those that are not does not correspond to traditional distinctions between high-end and low-end work.
The added danger of offshoring is compounded by the rising inequality America has seen since the 1970s. Earnings from work for less-skilled and less-educated workers can’t keep up with earnings of the elites in society. These troubles, caused by the market, not by government, have in the last few years been “piled on by enacting tax cuts for the rich while either permitting or causing large holes to emerge in the social safety net.” So when your job is offshored, you’ll be worse off because of the recent erosion of the nation’s social and economic safety programs.
With all due respect, when people talk about globalization, this is precisely the phenomenon I think about. US investment banks and UK law firms have been sending junior level grunt work to India for years.
But despite the keen interest, and extensive experimentation, I question how far this trend will go. The reasons are that the results to date haven’t been great, and it appears many of the problems aren’t easily remedied.
In April 2005, Deloitte Consulting published the results of a survey of 25 companies with revenues over $50 billion. These are large, experienced international players, in the best position to succeed at outsourcing. Their experience? “In the real world, outsourcing frequently fails to deliver on its promise.” Over 70% of the companies reported having a “significantly negative” experience.
Why would this occur? Consider a clearly leaked document from IBM, that was the basis of a front-page Wall Street Journal story. IBM was going to outsource some programming to China, where the labor cost was 25% of US programmers. However, experts noted that the cost savings were likely to be only 15 to 20%.
Why the big gap between the labor cost reduction and total savings? Because of administrative and coordination costs. And these costs did not allow for the introduction of greater risk. More distance and more parties involved means more communication, and with it, more opportunity for critical information to be lost or distorted. And more parties introduces more rigidity, making it harder to react to marketplace changes, and may also make the process take longer. And that’s true merely if you’ve replaced US labor with employees you hire in your overseas operations. The risk and complexity increases greatly if you don’t manage the foreign labor directly, but instead have contracted with, say, WiPro. This is a great deal of complexity and risk to assume for a mere 15 to 20% savings, if you attain even that much.
Now offshoring boosters may argue that CRM (customer relationship management) systems had high dissatisfaction rates in the early days, but 10 years on, they are now widely implemented with generally high satisfaction rates. While the state of the art with outsourcing and offshoring will doubtless improve over time, there is no getting around the fact that it is a tradeoff between savings versus greater risk and rigidity. There is no way to solve for the greater administrative complexity involved in offshoring. CRM, by contrast, has vastly fewer moving parts.
Another issue is that consumers are increasingly resistant to foreign customer service representatives, one of the first types of jobs sent abroad. Indeed, Dell had to pull its call centers back to the US in the face of complaints. I have noticed that one bank makes a great point of announcing where the representative you are speaking to is located (always in the US).
But even if the level of offshoring comes nowhere near the level that Blinder fears, it can still have significant ramifications. First, American workers below the CEO level have little bargaining power as it is. Major corporations have been cost cutting relentlessly, and most costs key off of headcount. That’s why, despite decent GDP growth, wages have been stagnant. Even a very limited amount of offshoring will keep labor in check.
Second is that it is eroding the quality of the workforce in the US. There are now hardly any entry level IT jobs in the US. They go to Indian or Chinese software engineers. Similarly, the legal and investment banking tasks sent overseas are the yeoman’s work that historically enabled young people to learn the profession. Fortunately, most service firms aren’t of a scale where this sort of outsourcing is viable, but nevertheless, it reduces the number of domestic training positions. It’s a hollowing out of service industries.
So in the end, Blinder is still very likely correct in sounding alarms, although not for the reasons he cites. And it also suggests that outsourcing threatens even high-level career paths, which means the commonly-invoked remedies of re-training displaced workers may not be all that helpful.