Offshoring: The Future of Our Economy

Offshoring: The Future of Our Economy

Outsourcing jobs to foreign countries or offshoring is often viewed as the demise of the American economy. A more accurate view of offshoring is that it is the groundwork for the future of our economy. By enabling businesses to conserve costs, grow and have access to a large untapped pool of talent, offshoring is essentially securing the stability of our economy by securing the vitality of our businesses. In order to remain or become competitive in today's economy, US based companies must outsource jobs to foreign countries.

The cost savings that can be derived from hiring employees in underdeveloped countries such as India or China are astounding. According to Agrwa and Farrell (2003), "For every dollar of spending on business services that moves offshore, US companies save 58 cents, mainly in wages." The average salary for low level finance positions in 2006 is $58,500. (Report on Salary Surveys, 2006). By performing a simple calculation, we discover that by hiring offshore for low level finance positions, US based companies will save approximately $33,390 per employee. According to Jean Paul Vellotti (2006), a journalist for Business News, a typical offshore IT setup includes one technical lead, two senior programmers and two junior programmers. If the salaries of these five positions are added together, they equal approximately $100,000 a year. What makes this statement more telling is that this amount is the same as the salary of one senior programmer in the United States. In a 2005 survey conducted by the Financial Executives Research Foundation, 71% of businesses who sent jobs offshore did so for the cost savings (Sennett, 2006)

On top of the savings from salaries, US based companies can save an additional 35 to 40% of the salaries paid to offshore associates on benefits (L. Francillon, personal communication, April 27, 2006). If a company were to choose China for their offshore location, they would have no employer healthcare costs because the government of China provides social medicine for its citizens. Employer sponsored healthcare coverage is one of the highest priced benefits an employee received. The cost of healthcare is only topped by federally required benefits, such as FICA, federal and state unemployment and workers' compensation. The cost of federally required benefits in 2004 added an additional $2.07 an hour to an associate's salary (EBRI, 2005). Of course, these costs do not have to be paid when the employee lives in another country.

The most innovative companies in the world, while very different in service and style, share one common factor. They all outsource jobs to foreign countries. According to an ongoing survey from the Offshoring Research Initiative, growth is rapidly gaining on costs savings as the most common reason companies outsource. Growth is the goal of all companies. Growth creates profit, and profit creates more growth. For example, Apple saw stock returns of 24.6% between 1995 and 2005 and it is no surprise that their margin of growth in that same timeframe was 7.1% (McGregor, 2006). At IBM's innovation themed leadership forum last April, a man named Sunil B. Mittal gave a speech explaining how he created growth in his telecom company by outsourcing all functions with the exception of marketing and customer management. The cost savings he saw allowed him to charge 2 cents a minute for phone calls. As a result, he now adds one million customers a month (McGregor, 2006).

Now that the initial exodus of manufacturing jobs has all but ended, the next wave of offshoring will take place in companies who want to expand their business, but would not have the capital to do so within the United States. Lewin and Peeters (2006) of the Harvard Business Review stated, "In the current wave of offshoring, which includes far more innovation and product development than the first wave did, the ratio of jobs created offshore to jobs eliminated in the United States is 13:1 - consistent with growth." This means that for every 13 jobs created offshore, only one job is lost in the United States as a result. The idea behind offshoring for growth is that companies can hire several offshore associates to handle more routine tasks while their existing, higher paid, associates in the United States are free to take on those tasks that have the possibility of creating more growth. In his article, Pros and Cons of Offshoring, Velotti (2006) tells the story of a company that manufactures plastic knobs, dials and pointers for other devices. This company decided to offshore because they were recording an overall annual loss of $750,000. By offshoring the manufacturing type positions, this company was able to create jobs in other, higher paying divisions of this company, two of which were sales and marketing. If a company can save money and create growth at the same time, why would they not send any jobs they could offshore?

Because the talent pool in the United States is so small, it is almost always necessary to educate your employees after they are hired. This education is costly, and is usually an investment that rarely generates a return, as the average longevity of any worker, lower than a senior manager, is approximately two years. With a talent pool as large as China's, an employer can choose a candidate