Offshoring: The Job Creator

Employee unions and various politicians have long blamed offshoring for overall job losses in the U.S. economy. Business lobby groups who perceive “labor arbitrage” as a means for cutting cost and a sure-shot way to impress Wall Street, have defended it vehemently. They have used studies by thought leaders to argue that in the long-term offshoring creates value for the U.S. economy. McKinsey Global Institute, in a study three years ago, estimated that for every dollar spent on offshoring by the U.S. companies, $1.47 worth of value is created for the global economy, out of which close to $1.14 comes back to the U.S. economy. Free-trade proponents, among them economists like Gregory Mankiw and Jagdish Bhagwati, have also maintained that offshoring is not very different from any other international trade, and at the end, everyone gains. President Bush, during his India visit, defended offshoring by saying, it creates markets for American products.

Since for the average person, there is no way of measuring “value creation” for the economy, these theories have remained largely doubtful.

But a study conducted by Booz Allen Hamilton using the Offshoring Research Network at Duke University has concluded that offshoring has not always led to job losses.

The research studied 537 companies — that included 60% companies that have used offshoring and 17% more that are considering it — spread across U.S. and Europe. It measured, function-wise, whether offshoring implementation has actually led to job losses.

The results are revealing. It found that while offshoring of simple back-office functions did lead to some job losses, it was much less when it came to higher-value functions. Even in Human Resources (HR) and Finance and Accounting (F&A) outsourcing, where the job losses were maximum, in as many as 54% of offshoring cases, there was no job loss. The figure of “no job lost” offshoring increases as it moves to higher-value functions. In engineering services, for example, in as many as 70% instances there was no job loss. That figure is 74% in product design and 87% in marketing and sales.

Interestingly, the figure was highest for research and development, where it was 106%, meaning in some cases, jobs actually got created onshore because of offshoring.

“The obvious implications from the above findings is that as companies offshore functions that require higher-skilled talent, they are less motivated by labor arbitrage,” the study notes.

In fact, across functions (including HR and F&A), in more than half the cases, there was no job loss due to offshoring. For higher-value functions, in three out of four cases, there was no job loss. So obviously, the companies are creating value not just by replacing high-cost labor with low-cost labor. In simpler terms, labor arbitration, in reality, is not labor arbitrage.