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Business process outsourcing (BPO) and global workers

86 Comments · Business outsourcing

We have been through this situation before. Outsourcing jobs to low-cost, usually foreign, labor markets is a familiar strategy in manufacturing.

When the U.S. automobile industry turned to outsourcing to reduce the costs of producing an automobile, a great hue and dry went up to reverse the trend.

Nevertheless, on further analysis, it became clear to economists and social analysts that outsourcing some labor to offshore destinations actually helped preserve American jobs.

As MIT economist Lester Thurow put it at the time, “Either half the car is produced in Detroit and the other half in Mexico; or the whole car is produced in Japan.

By attempting to use legislative measures to tilt the balance in favor of Detroit over Mexico, one would in fact be tilting the balance in favor of Japan.

The effect of outsourcing on the professional service workers in America will undoubtedly produce short-term pain for many thousands.

In response, and especially in this election year, legislators and politicians will attempt to appeal to those displaced by outsourcing by introducing new laws and regulations that will have long-term consequences for jobs.

One possible response on the worker side is an increasing push to unionize service workers. Currently, most professional services workers are not unionized.

There has been some movement toward unionizing workers in the software industry, represented by organizations such as the IBM Employees’ Union.

If an increasing number of service workers join unions in an effort to curtail the movement of jobs offshore, their numbers could have influential political effects.

The commonly held belief that BPO leads to net job boss in America has been challenged by economic research.

The value of U.S. service exports in computer programming, telecommunications, banking, engineering, and management consulting exceeded $130 billion in 2003, up more than 6 percent from the previous year.

In the meantime, imports of such services were in excess of $77 billion for 2003, up more than 10 percent from 2002.

Thus the United States posted a net surplus in these service areas for 2003, a rarity among its current account balances.

Using government accounting standards, when a U.S. company opens a technical-support center overseas that handles inquiries from the United States, that is considered an import of services to the United States.

Nevertheless, when a U.S. service provider does work for a foreign company, that is considered an export of services.

These numbers suggest that any efforts by the federal government to restrict the flow of service imports could backfire and lead to reciprocal restrictions on U.S. service exports.

Given that the U.S. current account deficit overall hit $541 billion in 2003-a record high-it is not likely that legislation leading to curtailment of the one area of surplus is going to have an easy ride through the political system.

In addition to hiring high-level U.S. white-collar service workers, foreign companies have also increased their direct investment in U.S. firms.

In 2003, foreign direct investment in U.S. companies hit a record $82 billion-nearly double that of 2002.

In addition to the net service-industry current accounts surplus, which largely reflects the activities of large enterprises, small- to medium-sized firms are also creating jobs in the United States by using foreign labor.

For instance, Claimpower, Inc., a Fairlawn, New Jersey-based medical claims processing firm, was able to expand its domestic market share through the use of low-cost foreign labor.

The business, formerly run only by the founder and his wife, now has the capacity to expand nationally.

This will require hiring local managers and sales representatives to develop business opportunities, which will then be processed in India.

Entrepreneurs who see outsourcing as an opportunity to cost-effectively grow their firms will be able to scale their new ventures at a pace never before possible.

We predict that entrepreneurs and venture capitalists will recognize the disruptive potential of outsourcing over traditional modes of conducting business in a wide variety of industries.

Firms that are based on analyzing data as a service are going to be competing on an uneven playing field unless they find a way to leverage the booming global labor market.

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