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Business process outsourcing (BPO) and global economics

278 Comments · Business outsourcing

From an economic perspective, outsourcing service jobs to offshore labor markets makes obvious sense.

Of the approximately $1.45 to $147 of value derived from every dollar spent offshore, U.S. firms receive $1.12 to $1.14, while foreign firms receive only $0.33 of the value.

Moreover, if income taxes paid by H1-B visa holders, and software and service imports by India are considered, outsourcing provides an aggregate benefit to the U.S. economy of $ 16.8 billion.

The global economy has suffered potent shocks over the past decade: the collapse of the Japanese, Mexican, and Russian economies; the unbelievable rise and fall of the Internet economy in the United States; and the rise of terrorism that threatens nearly everyone.

These global shocks are usually “let with great uncertainty and hand wringing by tycoons, politicians, and blue-collar workers alike.

BPO has been elevated to levels of everyday consciousness that is usually reserved for more exciting business trends.

Given the pressing concern about economic recovery in the post-bubble era, and given the amplification of small issues during an election year, anxiousness about job loss from offshore outsourcing is heightened.

Despite the obvious overemphasis on the impact of outsourcing, there are clear economic implications of the trend that need to be examined and understood.

Business leaders must take stock of outsourcing from the perspective of strategy-seeking to understand how they can leverage outsourcing for their own purposes in line with the movement of the global economy.

The most significant concept that can be applied to BPO from an economic perspective is David Ricardo’s theory of comparative advantage.

Every economics student learns Ricardo’s macroeconomic theory, which states that sovereign nations should compete in the global economy on the basis of advantages that stem from their natural resources or geographic location.

For instance, Saudi Arabia could conceivably compete in the global economy by attempting to make and sell automobiles.

From the perspective of comparative advantage, however, it would not be in the Saudis’ interest to do so.

Although it is entirely possible for the nation to be an efficient source of automobiles, it is far more advantageous for them to be the source of the world’s crude oil.

Saudi Arabia happens to have been blessed by the fates to be located atop one of the largest oil reserves in the world.

Comparative advantage simply states that a nation should pursue those economic interests in which it has an advantage compared to its competitors.

To bring the concept into greater clarity, Milton Friedman used the example of the high-paid attorney and the administrative assistant.

While it entirely possible that the attorney would be a more efficient administrative assistant, it is neither to the attorney’s nor the company’s comparative advantage to divert him or her from legal to administrative duties.

Better to have less efficient administrative assistant continue in that role and allow the attorney to pursue higher-value interests.

Comparative advantage has nearly imperceptibly shifted from a theory of leveraging natural resources to one of leveraging the intellectual and human resources of a nation.

The service and information economies of our time place high value on the ability to manipulate symbols.

A decade ago, former U.S. Labor Secretary Robert Reich wrote a book titled The Work of Nations.

In that somewhat prescient work, Reich identified the new class of knowledge workers emerging in America and called them “symbolic analysts.”

According to Reich, symbolic analysts are those individuals who spend the bulk of their workday in front of computer terminals crafting original material, analyzing data, and sending and receiving electronic messages.

The level of expertise required for these individuals to perform their duties is comparatively rare, placing them among the higher strata of the U.S. socioeconomic classes.

When Reich wrote during the early 1990s, the United States was hardly threatened by international competitors for symbolic analyst roles.

In fact, Reich was fairly comfortable that America would continue to lead the world in that regard. His book was written in part to assuage the doomsayers who felt threatened by the pace of American manufacturing shifts to foreign providers.

Reich reasoned-nightly at the time-that the U.S. higher education system would enable the nation to stake out a long-term lead in symbolic analyst roles, employing the world’s labor only in the grimier, more menial tasks of physical labor.

The great shift that has occurred since Reich’s book is the upgrading of the higher education systems around the world to match their superior K-12 systems, which had been the subject of some concern for years.

Americans have long known that the K–12 system in the United States produces graduates that are comparatively weak by international standards.

Concern about the United States bagging far behind European and Asian counterparts on K–12 educational attainment had been offset in part by our vastly superior higher education system.

That edge remains, but the gap has closed markedly and likely will disappear in a very short time.

The United States no longer enjoys a dramatic comparative advantage in the critical role of symbolic analyst.

Around the world, eager young people are seeking to improve their economic status by applying the technical and analytic skills that are at world-class standards.

They will transform their nations by creating the critical middle class that has been missing.

The consumerism mindset that is necessary to drive an economy to greater levels of growth is taken for granted in the United States, where the middle class has enjoyed nearly 70 years of unabated consumerism.

Not so in the Asian and Latin American countries that are the hotbeds of offshore outsourcing.

The rising middle class that is being created through offshore outsourcing will demand products that fit their middle-class lifestyle, many of which are offered by U.S. companies.

It is likely that global demand for higher-value goods and services associated with middle-class lifestyles will increase rapidly in the coming years.

This global economic shift has a positive-feedback potential that could eventually raise all participating nations to higher living standards.

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