The Real Impact of Offshoring


    ITAA, the Information Technology Association of America, has released a research report titled, “The Comprehensive Impact of Offshore Software and IT Services Outsourcing on the U.S. Economy and the IT Industry.” You can read the 15-page executive summary here. The research was conducted for the trade group by Global Insight, Inc. a Lexington, MA researcher firm as an update to similar research it performed in 2004.

    According to this coverage from InformationWeek by Spencer Chin, the study “painted a positive picture of global outsourcing of U.S. technology jobs — a stark contrast to a number of reports over the past few years which criticize global outsourcing as detrimental to the economy.”

    Here’s a paragraph from the summary report that distills the findings down to their essence:

    The benefits of free trade — lower costs, higher labor productivity, and more efficient production — induce businesses to leverage offshore resources. The use of offshore resources lowers costs, frees domestic resources to pursue other productive ends, yields high quality software and services, and increases labor productivity among end-users. These benefits flow through to lower prices, lower interest rates, and higher spending throughout the economy. While offshore software and IT services outsourcing (ITO) has displaced and will continue to displace workers in software and IT services occupations, increased economic activity creates a wide range of new jobs — both IT and non-IT. As the benefits compound over time, the U.S. economy operates more efficiently, achieves a higher level of output, creates more than twice the number of jobs than are displaced, and increases the average real wage.

    The report states that even though global software and IT service outsourcing displaces some IT workers, total employment in the US increases “as the benefits ripple through the economy.” This economic activity generated 257,000 “net new jobs” in 2005 and is expected to create 337,000 net new jobs by 2010. (The summary doesn’t explain if that’s in addition or as growth on top of the 257,000 jobs.) In other words, the way I read this is that the offshoring of a particular type of work has little impact — perhaps slightly tending towards the positive — on the overall employment picture.

    Global Insight estimates that this narrow segment of offshoring had displaced about 112,000 people as of 2003. The job decline that started in 2001 when the dot-com bubble burst cost about 425,000 jobs. That means other factors — the end of aggressive high tech hiring, corporate belt-tightening during the recession and productivity advances — led to the loss of 313,000 jobs — almost three times the number lost to offshoring itself.

    Also, spending for global sourcing of software and services is expected to grow about 20% annually, increasing from $15 billion in 2005 to $38 billion in 2010. (This number looks remarkably conservative against estimates put forth by Gartner and other research firms.) The savings that companies will accrue through offshoring will grow from $8.7 billion to $20.4 billion.

    More dramatically, the research suggests that a benefit of applying offshoring to work actually suppresses inflation and interest rates:

    As the offshore ITO spending and the associated savings and productivity benefits increase through 2010, the GDP price level is expected to be 2.5% lower in an environment with offshore ITO than without it.

    In turn, the combination of “savings, higher productivity, lower inflation and lower interest rates yield an additional $68.7 billion in real GDP.” That, in turn, presumably leads to job creation, higher wages, and so on.

    For those left behind — the ones who can’t afford the cost of retraining or are of an age where getting rehired is a major challenge — the report recommends government assistance (skills training, relocation help, childcare, healthcare…) and programs comparable to those offered to manufacturing workers who lose their jobs due to offshoring.

    It also recommends a major push to increase student interest in math and the sciences and incentives for companies to keep R&D in the US.

    Last, I’ll share this bit of practical intelligence from the report. The researchers estimate that in 1995 the average cost savings across all companies doing offshoring in this segment amounted to 29.2%. Of course, that takes into account the newbies to outsourcing as well as the experienced companies. (And the report points out that many companies incur higher costs in their first year of offshoring — the result of legal costs, negotiating costs, severance costs and productivity loss in the domestic operation.) By 2005, the average had risen to 36.4%. It’s expected to hover above and below 35% between now and 2010. In a way you could use that part of the report to project your own organization’s expected rise and fall of savings over the life of an outsourcing contract. Once you hit stride, the numbers will probably maintain.