Offshore Outsourcing:Effect on American Competitiveness

Subhash C. JainUniversity of ConnecticutPresentation made at the Fairfield

Economy ConferenceDecember 2, 2004

Concept of Outsourcing In open markets, greater competition

requires allocation of labor and capital to more profitable sectors of the economy

Job requiring series of simple rules disappears

Job goes to either computer (voice recognition) or offshore (phone inquiries)

New jobs emerge to replace those lost

Benefits of Outsourcing Home Country

Cost reduction Other advantages

Host Country Employment Technology

Estimated Benefit of $1 of Spending “Offshored” 2002 ($)

$1.00 previously spent in US now offshored

in India

 $1.00

0.33

 0.67

0.45-0.47

 $1.45 - $1.47

…..delivers value to India

……brings savings and returns to the

US…

…….and creates new value from re-

employing US labor

….…creating $0.46 in additional economic

value

  

            

1.12-1.14

Further Value creation potential through•Increased global competitiveness of US business•Multiplier effect of increasing national savings

0.040.050.58

0.670.45-0.47

Savings accrued to U.S. investors and

/ or customers

Import of US goods and services

by providers in India

Transfer of profits by US providers

in low wage country to parent

Total direct

benefit

retained in the US

Value from US labor reemployed

(conservative estimate)

Potential for total

value creation

in the US economy (conserva

tive estimate)

Current direct benefit *Potential future benefit

Value Potential to the US from $1 of Spending Offshored to India 2002 (Dollars)

Problems of Outsourcing Short Term

Unemployment in the home country Long Term

Migration of brain jobs

Service Jobs Brainpower jobs Clerical jobs Low-end jobs

Increasing Complex Transaction

Back Office Customer Contact

Common Corporate Functions

Knowledge Services and Decision Analysis

Research and Development

Basic Data EntryApplication formsData ConversionTransaction ProcessingDocument Management

Customer RelationsCall Centers (inbound and outbound)On-line customer serviceTelemarketingCollections

Shared Corporate servicesFinancesHRProcurementIT Help Desk Maintenance Infrastructure Applications Development

InsuranceApplications and Claims processingBenefits Administration

Research ServicesCustomer AnalysisPortfolio analysisClaims ProcessingRisk ManagementCredit underwritingConverting text, engineering drawings, architectural designs and maps from paper to digital formatDesktop publishingPage layoutAdvertising campaignType setting and color separation

Content development, engineering and designNew product designDesign specsPilot/prototypeProduction and design optimizationAnimation3-D animation special effectsLinear and nonlinear editingMedicalRemote diagnosis

Two Pillars of Innovation Education Immigration Policies

Education Shortage of people with skill of

brain or cerebral skill

Source: U.S. Census Bureau

0

50,000

100,000

150,000

200,000

TALENT POOL

Undergraduate degrees in engineering granted in 2003 CHINA 195,354

INDIA 189,455

JAPAN 103,440

RUSSIA 82,409

U.S. 60,914

SOUTHKOREA 45,145

Immigration U.S. Population Trend

Falling Birth Rate Career Cost of raising a child: Over $200,000 No incentive for having children

Latin Population 25% of population in 2050

Mexican 65% of Latin Population

Students from Asian countries Develop realistic immigration policy