Assignment - 1 American Outsourcing

Group Case Study - 1

American Outsourcing

Questions

1. Will the dominance in software and services outsourcing shift toward

China?
The dominance in software and services outsourcing will definitely shift
toward China one day.

China has the potential value of expanding direct operations, an unparalleled

wealth of highly skilled labor and solid infrastructure to place it atop most short
lists for offshoring engagements. It was recognized by the Chinese Government
two years ago – “Facing the fast growing outsourcing market, China is no longer
satisfied being “the center of world manufacturing”. As a result of over a decade
of liberalization of trade and innovation and entrepreneurship on a grand scale,
China has achieved a significant commercial presence on the world stage, which
has been heightened by accession to the WTO. Although China has positioned
itself as the world’s manufacturing center, it is now poised to become a world
player the IT and BPO sectors.

Foreign BPO companies are pushing to involve China in global business

process strategies. International competition drives business process
transformation in China. And China offers huge growth potential such as the
Chinese workers cost about 15 percent less than equally qualified Indians.
Business process transformation strategies in China will be driven primarily by
the need to respond to rapid market growth. The need for faster services and
capacity will lead many of developed markets to outsource.

In overall ranking of the world’s key economies on their attractiveness as off-

shoring locations in nine categories, including political and security risk,
regulatory environment, tax regime, labor laws, costs, skills, and infrastructure,
China came in Second behind India. However, China has also been reported as

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having a higher attractiveness level as a “potential” outsourcing destination. And

in the “Future opportunity Rank -2015”, China had to be the first rank above
India. While this is good news, much remains to be done to make China a “must
go to” destination for buyers and businesses seeking to outsource IT services
and BPO.

China had been India’s major challenger. Its rates can undercut India’s rates
by 30% average, in many cases even higher. Most Asian-Pacific headquarters
across industries are currently relocating to China from places like Singapore,
Hong Kong and Australia. This move will further spark the Chinese outsourcing
industry. China has already started focusing on providing outsourcing services to
markets in Asia and the Pacific. Nowadays, China is trying to improve English
teaching and other skill sets, increasing telecom density and PC penetration,
reduce the bureaucratic red tape, create clarity and understanding for the foreign
outsourcer, customer, and investor to inform “what to do” and “where to go”, to
continue improving IP protection, process management and process engineering
skills, technical skills, recognized quality standards, rigorous delivery
methodology, and provide assured delivery by stable work force.

So China has great potential and competence to be dominant in software and

services outsourcing, but it still takes time.

2. How will such a pattern affect China’s manufacturing capabilities?

China will be destination for Asian economies, such as Japan for offshoring,
will become attractive over the next 5 to 10 years in IT, will become India’s major
competitor for outsourcing services, and will spur new growth and investment
future high-tech labour force. Its market opportunities will continue to grow and it
will continue to expand R&D and focus on high-end offshoring. Global sourcing is
seen as necessary to be competitive or even survive. Against this background, a
significant number of countries are vying to get a piece of the global pie. These
countries, with varying skills and capabilities and populations are the ingredients
in the battle for global delivery model supremacy. In the outsourcing field, China

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is the biggest challenge and the largest threat to India. With the largest
population and fastest economic growth, China has at least three strengths in the
global outsourcing market: manufacturing, IT and BPO. When the day, which
China dominates the software and services outsourcing, comes, it suggests that
China already shift its keystone. Chinese firms will be creating major new market
opportunities by strategically acquiring business outsourcing companies.
Therefore, it will outsource its manufacturing to other countries (like Vietnam or
other Asian and African countries) and shifts its emphasis from manufacturing to
service.
If China employs people in the manufacturing countries to work, it may raise
unemployment internally. Or it sends people to work abroad, the cost might be
increased. In an Outsourcing Environment, China has a highly competitive cost
structure (arguably, with all other qualifiers being achieved, China’s cost
advantage would be the “winning” criteria). China has extremely low cost real
estate and power; this can be a very attractive to the US companies, which are
looking for cost cutting due to the downturn. When it dominates the software and
services outsourcing, some advantages may disappear, and these may turn
China into today’s America.
On the other hand, with an already established manufacturing base,
increased service outsourcing to China will only strengthen its overall business
productivity as a result of synergies met by fusing manufacturing and services
under one roof, which will give a multiplier effect in the end.

3. Would a GE-like company find it ideal to limit the outsourcing of

manufacturing and services to one country?
It would be considered unwise for a GE-like company to limit its outsourcing
of manufacturing and services to one country only. The main purpose of any
given organization to outsource would be to reduce cost and increase profit.

When a GE-like company considers offshore operations, the management

should consider what is called the context of offshore outsourcing, low cost

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countries. These low cost countries location also belong to a group or groups of
countries called developing countries, countries in transition, third world countries
or emerging economies. Amongst the list of countries would include Canada,
Australia, Ireland, Vietnam, Bangladesh, Pakistan, India, Romania, Brazil and
others.

(Source: http://www.euroitx.com/content/roadmap_country_selection_01.php)

The above figure should the various countries as attractive, feasible or risky
territories for GE-like companies to outsource.

The four quarters of the above chart represent and provides a logical
explanation as to why it would be unwise for a GE-like company to limit its
outsourcing to a specific country only:

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• Secure Markets: there would be a cumulative cost advantage and low

business risk. On the other hand, the cumulative costs are high while the
associated business risk is low. Hence, the business gain opportunity is also
low.
• Attractive Markets: Here the cumulative cost advantage is high while it
maintains a low risk environment. However there is also a cumulative cost
which is low followed by a low business risk environment. Therefore this
would be an attractive environment for outsourcing.
• Hazardous Markets: Cumulative cost advantage and associated
business risks are high. This environment promises extraordinary business
gain for the real enterprising spirits.
• Unattractive Markets: Unacceptable environment as both cumulative
cost advantage is low and business risks are high.

4. Will the American employment losses continue in the short-run?

The decline in manufacturing employment has resulted and coincided with the
increase in outsourcing to domestic contractors, which includes substantial
increase in outsourcing of materials and services inputs to foreign companies or
affiliates, which is also known as off shoring and staffing services. However off
shoring and outsourcing might inevitably result in higher productivity. For
example, an organization might use a recruitment agency to source, allocate and
match worker with the actually production needs
The organization can also opt to outsource noncore functions of the
departments to domestic or foreign contractors whom may have greater
expertise in the required work field. According to Mann (2003), much of the
production in Information Technology industry are outsourced. As a result of this
outsourcing or off shoring, organizations have gained by having lower prices for
high tech equipment which in returns stimulates the diffusion of high-tech
equipment and ensure flow of profits in the U.S. economy.

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The well-known Associate Software and IT company, The National

Association of Software and Service Companies (NASSCOM), has predicted that
one of the biggest growth in IT industry was in India. The industry grew by 70%
during early years of 2000. The main reason for this exponential growth was due
to the widespread usage of Cross-Border Business Process Outsourcing (BPO).
This BPO is another form of practice of outsourcing business functions to
alternative subsidiaries or relevant vendors in other parts of the world. It was
clearly demonstrated by John C. McCarthy’s Research that the positions and job
vacancies in the United States would have been outsourced or off shored by at
least 3.3 Million white-collar jobs and USD136 Billion in wages by the year 2015.

Most American Organizations’ tend to have short-term or quick money

scheme, which includes quarterly results paid bonuses. This malpractice which is
practiced widely in the United States has resulted in losses to their best
employees’ human capital. These organizations’ also tends to replace their
employees with foreigners and have left many American worker unemployed.

Without a doubt, the changes over the past three decades in the American
economy have led to outsourcing and off shoring of manufacturing jobs.
However, American workers, regardless of blue or white collar base have been
promised better rewards, particularly in higher skill and value as the workplace
has become increasingly more high-technological. Having said that, these
rewards are subjected to the American if they agree to work harder, acquire new
skill, adapt quickly to the changing environment and most importantly to be ready
to accept greater job insecurity with extended working hours.

5. Will the outsourcing trend ultimately bring in more jobs in the longer
run?

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In the shorter term, outsourcing will erode a lot of jobs in the developed
counties like US, UK, Germany, France among others. It will create thousands, if
not millions, of new jobs in developing countries of Asia, Eastern Europe and
Africa. It is imminent that most of the jobs (both Manufacturing & Services) in the
developed countries will migrate to developing countries where the wages are
low. Of course, Asian countries where the wages are low will prosper with
millions of new jobs created.

Job creation in developed countries

In the longer term, more jobs will be created in the developed countries as
well. Here is how: The best example is the business relationship between India
and the United States. Since more and more American service jobs are being
outsourced to India, the energy consumption is getting higher and higher
resulting in a huge energy crunch in that country. With very less domestic oil
resources on one hand, and oil prices shooting up to touch the US$200/ barrel
mark on the other, India has to resort to alternative energy sources like nuclear
power. In 2006, India and the US signed an agreement to enable US nuclear
companies to enter India for nuclear power generation for civil purposes. This
proved to be a huge business opportunity for US companies. As a result, it is
estimated that US$ 100 billion worth of revenues will be generated for US
companies. Most of these new jobs will be created in the US. It is a win-win
situation for both these countries in the end. This is how globalization creates
jobs and spreads wealth both in rich as well as poor countries, as in the case of
India, and US respectively, through outsourcing.
(Source:
http://www.businessweek.com/globalbiz/content/jul2008/gb20080718_118267_p
age_2.htm).
It is also noted that IT outsourcing by US companies to India also resulted
in Indian companies creating new jobs in US. It is estimated that Indian tech
giants like Infosys, Tata Consultancy, Wipro and Mahindra have created 30,000
new jobs in the US. Though most of the works are being done in India, other

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much-needed Jobs apart from software developing like Public Relationship (PR),
Marketing and Distribution jobs must be created in these countries like the US
where the clients are present. This is how new jobs are created in the country
where the jobs are lost, by those countries to where the jobs go as a result of
outsourcing.
(Source:
http://timesofindia.indiatimes.com/Business/India_Business/Indian_companies_e
mploy_over_30000_US_citizens_FICCI/rssarticleshow/3204087.cms)
On the other hand, it is worthwhile to be noted that, due to outsourcing
and job migration, countries like China and India are prospering with more
wealth. The standard of living and overall money flow in these countries also
increase year by year. They, in turn, become lucrative and high-growth markets
for Multi-national corporations, and they can sell even more products to even
more customers who are getting rich by the day. This will create another wave of
new job creation in the process.
It is obvious that, in the longer term, millions of newer jobs will be created
both in the developing as well as the developed world.

6. Is it time for the U.S. Government to step in with the outsourcing

regulation?
There is no need for outsourcing to be stopped. The percentage of jobs that
can be outsourced at the most is only 10% of the overall job pool in the US.
McKinsey Global Institute (MGI) has estimated that 90% of the US jobs are of a
nature that they cannot be done elsewhere - they cannot be outsourced. These
are the jobs in the industries like Retail, Catering and Personal Care services.
Between 1993 - 2002, 310 million jobs were lost due to outsourcing, at the same
time, 327.7 million jobs were created with a net increase of 17.7 million.
(Source: http://www.offshoringtimes.com/Pages/2006/offshore_news671.html)

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US Government Regulation - Suggestions

- What the US Government must do is to allocate funds to retrain those
employees who have lost jobs. The US has one of the highest redeployment
rates in the world. All those displaced workers, on an average, are expected
to be re-employed within 6 months of lay-off.
(Source: http://piton-global.com/resource03.html)

- Government must pass new laws to make sure that those companies who are
about to send jobs abroad must give advanced notice to those employees to
be laid off, so that, they could find new jobs.
- These employees must be entitled a proper minimum compensation and
other benefits after the lay-off.
- Government must give tax breaks to those companies whose jobs cannot be
outsourced to other countries.

The reason for the loss of US jobs to other countries was not just the
availability of cheap labour in these developing countries but also the acute
shortage skilled engineers and professionals in the US. This is the reason why
the US tech industry is heavily dependent on immigrant high-skilled professionals
from other countries. The Government must also encourage more and more
students to take up engineering and science studies in the college. This can be
done by giving education subsidies for science and engineering education and
offering more scholarships.

7. Or should the outsourcing market be allowed to prosper without Uncle

Sam’s intervention?
Yes, Outsourcing market must be allowed to prosper without Uncle Sam’s
intervention. Facts give the proof. The accounting side of outsourcing says that
as much as $1.46 in new economic value is created for every $1 spent by US
companies by offshoring & outsourcing activities.

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The study also estimates that US companies save 58 cents ($0.58) for every
$1 spent on these outsourcing & offshoring activities. Just 5% of the wealth
created (or saved) in this way would be enough to re-train displaced workers for
new jobs.
(Source: http://www.rediff.com/money/2003/dec/03bpo.htm)

$1.00 Spending

$1.46 Value Gain

Outsourcing Gains

As a result of all these net savings brought about by outsourcing, the US

economy at large can benefit by huge cost savings. These cost savings can then
be passed on to each and every US customer in the end by ways of lower prices
of commodities and the ability to companies like Wal-Mart to thrive.
Let us assume a Polo T-shirt made in the US sells at about $10. If it is
outsourced to a Chinese company, they will make the same Polo brand T-shirt
for under $2 and sell it for $3 to the US Company who owns that T-shirt brand.
The US company, in turn, can sell it for $5 with a profit of $2. In the end, the
customer who buys this T-shirt also saves about $5. He can buy other things with
this saved money. By this way, other companies can sell their products to the
customers who are left with more cash. In the end, more business is done and
more companies can earn higher profit benefiting the whole of the US economy
and it’s GDP.

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Bibliography
1. Raymond J. Stone, “Human Resource Management,” John Wiley & Sons Ltd.
5th Edition: 2005
2. Ivancevich, J. M. “Human Resource Management,” McGraw-Hill, Boston. 8th
Edition: 2001
3. Fisher, C. D., Schoenfeldt, L. F. And Shaw, J. B., “Human Resource
Management,” Houghton Mifflin, Boston. 5th Edition: 2003

References
1. http://www.businessweek.com/globalbiz/content/jul2008/gb20080718_118267
_page_2.htm
2. http://www.offshoringtimes.com/Pages/2006/offshore_news671.html
3. http://timesofindia.indiatimes.com/Business/India_Business/Indian_companie
s_employ_over_30000_US_citizens_FICCI/rssarticleshow/3204087.cms
4. http://www.rediff.com/money/2003/dec/03bpo.htm
5. http://piton-global.com/resource03.html
6. http://www.euroitx.com/content/roadmap_country_selection_01.php

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