There is a growing backlash against outsourcing--sending domestic work to foreign businesses--that erupted in the Senate last week, where anti-outsourcing legislation was adopted on a 70 to 26 vote. Opponents of outsourcing cheered, but investors are becoming aware that these actions threaten profits and stock prices.
There is very little real evidence that outsourcing has caused significant job losses in the U.S. All of the data showing job losses in the millions come from consulting firms like McKinsey & Company, Forrester Research and others, which make money by helping companies do outsourcing. It is in their interest to make potential clients think that all their competitors are doing it, so they must, too.
Of course, no one denies that some jobs have been outsourced. But companies often find that the gains don't match those sold them by the consultants. There are many costs involved with outsourcing that can eat up much of the savings from hiring Indians at one-fifth of what it takes to hire Americans for the same job.
This phenomenon is detailed in a March 3 Wall Street Journal report on ValiCert, a software company based in California that outsourced many operations to India. It quickly found that it required massive and costly effort just to communicate with its Indian workers, due to time differences and the contrasting styles, methods and experiences of American and Indian software programmers. Moreover, the Indians just weren't as productive. It often took them a week to do projects that formerly could have been completed in two days here.
The story makes clear that ValiCert only ventured into outsourcing because it had no choice. The company was on the brink of bankruptcy. All of its jobs would have been lost if it hadn't been able to cut development costs. Although some American jobs were lost in the process, the company was able to remain in business, eventually leading to rising employment in the U.S. in higher-level positions.
Unfortunately, in such cases, people tend to see only the jobs that were lost initially from outsourcing and ignore the jobs that were saved or later gained because of it. General Electric makes this point in its latest proxy statement, in response to criticism from a union pension fund shareholder. Its overseas expansion "has helped keep GE competitive and growing and, in many cases, helped to create and preserve jobs in the United States," the company argues.
Bruce Bartlett is a former senior fellow with the National Center for Policy Analysis of Dallas, Texas. Bartlett is a prolific author, having published over 900 articles in national publications, and prominent magazines and published four books, including Reaganomics: Supply-Side Economics in Action.
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