Offshoring: The Pros and Cons

A person holding a crystal globe
•••

Benjamin Howell / Getty Images

Companies have been outsourcing work for many years. In outsourcing, specialized companies provide their services to client companies at lower prices than the client companies could do the work in-house. Outsourcing this work to "foreign" or "offshore" companies, solely to take advantage of lower labor rates in those countries, became known as offshoring.

As the US struggles to recover from the recession, the rate of job creation lags far behind the expected pace. There is growing concern that this is due to offshoring, but is offshoring all bad?

Background

For decades companies expanded their conglomerates by buying other companies. Initially, these companies were related businesses, often suppliers, but soon the conglomerates began buying companies with no relation. Profit motives and the desire to be the biggest became sufficient justification.

Ultimately, the conglomerates began to collapse under the weight of the acquired companies. Profits started falling and companies began to retract to their "core" businesses. Next, they discovered that they could shed even core functions by hiring them out to companies that could do them more efficiently and, thus, less expensively. Payroll processing was subcontracted; shipping was farmed out; so was manufacturing; companies were hired to do collections, customer call centers, and employee benefits.

Outsourcing made sense because specialized companies could provide their services to many client companies at lower prices than the client companies could do the work in-house. Both companies, the service provider, and the client profited from the arrangement.

Unfortunately, like the building of conglomerates before it, outsourcing got carried to extremes. Companies began outsourcing work to the lowest bidder and lost sight of the effect it had on the company except for finances.

Latest Developments

Initially, mainly manufacturing jobs were outsourced. Other countries were able to manufacture goods more cheaply than in the US because of lower standards of living and less restrictive laws and environmental regulations. Recently, companies have begun outsourcing service jobs as well. The motivation here is solely financial—as this new wave of outsourcing hits the middle class, struggling with a near jobless period of economic recovery, many citizens and lawmakers are beginning to question the wisdom of offshoring.

The Pros

The arguments for offshoring mainly center around the benefits of free trade and globalization:

  • When a product or service can be produced more cheaply overseas, it makes more sense to import it than to produce it domestically.
  • Much of the revenue earned abroad returns to this country in wages for other employees, investment in R&D, profits for shareholders, and taxes for the government.
  • It doesn't matter where the work is done as long as the US companies earn the profit to return to their shareholders.
  • Companies must do what's best for their investors.
  • Lower priced goods and services are good for all consumers.
  • New, more sophisticated jobs will be created in America to fill the void now that the less skilled jobs have been sent overseas.
  • It will help improve the economies of poorer countries so they won't need so much financial aid from the US.

The Cons

The arguments against offshoring focus on impacts on the American consumer and the danger of a brain drain:

  • Prices drop only marginally due to offshoring, while wages decrease substantially due to unemployment. This reduces the American consumer's ability to purchase the product or service.
  • America was able to turn on a mighty economic engine that ultimately won World War II. Offshoring destroys the ability to do that again.
  • The considerable profits to be made from offshoring are retained by the rich, while the middle class pays higher taxes and loses purchasing power.
  • Foreign workers do not contribute to US Social Security or other taxes. The increased tax revenue from corporate profits does not equal the amount lost on US workers' income taxes.
  • Companies could save more by offshoring the CEO job. The average US computer engineer earns six to seven times his Indian counterpart, but the US CEO gets paid 400 times as much as his average worker.
  • The "more sophisticated jobs" that US workers are supposed to take on do not exist and it is an affront to the US worker trained for the "jobs of the future" to have their job outsourced by their American employer.
  • Work is often outsourced to countries where laws are not as protective of workers and the environment as in the US. We ultimately pay for those oversights in human rights abuses and further damage to the planet.

    The Bottom Line

    Offshoring is perceived as yet another way for the super-rich corporate executives to get richer at the expense of individual workers, but offshoring is neither a cure-all for business nor an economy-destroying monster. The financial advantages for businesses can be smaller than first anticipated due to hidden costs. In the long term, there is the danger that consumers will stop buying from companies engaged in offshoring or that neither the Americans unemployed due to offshoring nor the lowly pair workers overseas will be able to purchase the company's products.

    Outsourcing work to companies that can do it more efficiently and less expensively does make sense, provided that it is actually less expensive at the bottom line.