13
Name
Professor
Course
Date
Table of contents
1. Title
2. Abstract
3. Introduction
4. Background information
a. IT global outsourcing types and examples
b. Global outsourcing opportunities in IT skills market
c. U.S IT global outsourcing countries
5. Unemployment impact due to IT skills and call center outsourcing
6. Solutions to the IT skills outsourcing unemployment problem
7. Conclusion
8. Bibliography
Unemployment effect of global outsourcing on IT skills market
Abstract
Currently, global outsourcing receives a lot of attention from academics and business practitioners all over the world. Globalization forces multinational firms to outsource IT products, skilled labor, and other services to reduce cost, satisfying stakeholders and enhancing the competitive capability of such enterprises in the IT sector. However, before the company goes ahead to outsource any of the parts of activities on IT, domestically or from foreign countries, it is essential to understand the impact and effectiveness of such a venture on the IT business and the general global market. This paper aims to explore the aspect of global outsourcing of IT, reasons for the outsourcing, benefits, types of outsourcing, and the loss of employment as the main impact of outsourcing on the IT skills market.
Introduction
Global Outsourcing of IT skills is a business strategy of procurement in which firms look for the most convenient and cost efficient location to manufacture or get IT products, or skilled labor force even if outside the national boundaries. This idea happens when the businesses find it cheaper in manufacturing and delivery of the products from foreign countries due to cheap foreign employee wages than the domestic production. In this case, the best option remains in the contracting of an international manufacturerendnoteRef:1. It sometimes involves the transfer of assets and skilled employees from one company to another. For instance in the 90s the US outsourced IT and computer programming services from India due to lack of qualified programmers in the country. The United Kingdom outsources software development services to India due to cheap skilled labor. 1: Kathawala, Yunus, Ren Zhang, and Jing Shao. “Global outsourcing and its impacts on organisations: problems and issues.” International Journal of Services and Operations Management 1, no. 2 (2005): 185-202.
In-sourcing is the opposite function of the outsourcing process. The primary reason for outsourcing is to reduce certain costs that include; peripheral business expenses, production cost, labor costs, high taxes, high costs of energy and excessive government regulation chargesendnoteRef:2. Besides, when a company wishes to compete effectively with other businesses in the market, it is obliged to obtain better IT resources through various channels and better its comparative advantages through the use of different approaches. Such benefits help firms to either maintain or improve on market shares and profit. Outsourcing IT skills also leads to a developed, faster, reliable communication and cheap data sharing. 2: Sobol, Marion G., and Uday Apte. “Domestic and global outsourcing practices of America’s most effective IS users.” Journal of Information Technology 10, no. 4 (1995): 269-280.
Global outsourcing in IT enables companies to get new sources of cheap but quality labor, different raw materials, and new market opportunities as well as improve their flexibility through constant changing. The aspect of competitive flexibility and comparative advantage push many companies to the idea of outsourcing IT products. However, in the case of firms in the U.S, outsourcing incentives may be greater as corporate taxes are unusually higher and mandated benefits such as Medicare, social security, and safety protection regulations are available. The companies may not also outsource to lower managerial or executive costs. On the same note, the firms who get lured into the idea by such reasons as small expenses, unique materials and flexibility have to face some challenges. The problems are such as loss of business performance, lose assets regarding intellectual property and lose future talent. This aspect makes the companies with no option but to find ways of achieving their objectives. Loss of employment in the local IT sector is the main problem that the outsourcing of IT skills has on a countryendnoteRef:3. 3: Oshri, Ilan, Julia Kotlarsky, and Leslie P. Willcocks. The Handbook of Global Outsourcing and Offshoring 3rd Edition. Palgrave Macmillan, 2015.
IT global outsourcing types and examples
Global outsourcing is classified as either nearshore or offshore outsourcing. The nearshore outsourcing involves getting IT services or work done by other people in the neighboring countries rather than obtaining them domestically. For instance, some companies in the US outsource IT skilled labor to Mexico and Canada. The nation enjoys such benefits as a common language, cultural compatibility, and same time zones. This aspect can be a real solution for the companies operating in the same geographical location and require services that are niche. However, this type of IT outsourcing is based on localized tendencies that may not meet the fast technology and business needs. Given the economic integration, interconnectedness, and global influence, globalization in IT business is inevitable.
The offshore outsourcing involves getting entrepreneurship from overseas nationsendnoteRef:4. The main reason for this type of strategy has reduced the cost of labor and working schedule that is 24/7 operational and flexible. The US outsources IT labor and software services in India and thus is able to get latest technology advancements. The efficiencies benefit the firms; however, such problems as the loss of organizational performance, future talent and intellectual assets still exist. With such advantages as educated labor source, inexpensive, and other merits, offshore outsourcing is the major global business strategy in IT sector. Whether local or overseas outsourcing, the ventures are involved with potential rivals in the market globally. Through offshore outsourcing, enterprises seek to do cost saving by functions to regions of low labor for priorities that are short-termendnoteRef:5. There is the wish to acquire flexibility in staffing and the expedition of the share in the global market through hiring staff locally and accessing the regional markets to achieve strategic goals that are long-term. However, this move normally leads the loss of employment locally since the development of IT development companies does not happen. Whatever the local IT skilled personnel should be doing in a country is being offered cheaply outside the country. This strategy breeds unemployment as the people remain without jobs. 4: Head, Keith, and John Ries. “Offshore production and skill upgrading by Japanese manufacturing firms.” Journal of international economics 58, no. 1 (2002): 81-105.
5: Head, Keith, and John Ries. “Offshore production and skill upgrading by Japanese manufacturing firms.” Journal of international economics 58, no. 1 (2002): 81-105.
Global outsourcing opportunities in IT skills market
As information technology advances, companies get prompted to outsource specific technical functions. The first of all activities in the IT industry is the payroll processing that relieves business of a feature that is very much essential but time-consuming. As the technology evolves, functions that are more sophisticated such as services of data management, storage and documentation and maintenance platform in technology continue to get outsourced. Eventually, most firms in the IT market may take the technology as just a utility service, except those that utilize the IT technology as an essential product or as a competent areaendnoteRef:6. New outsourcing enterprises just like service providers already established assume responsibility for their customers. They manage the delivery of any new service, as they ensure IT performance, availability and scale enabled. Business enterprises such as the ADP provided computer services like the payroll processing and accounting for contracts. Their customers benefited from the venture by primarily accessing latest equipment and highly skilled staff in IT without having to invest tremendously in the industry. Nowadays computers continue to get smaller, very common and cheaper making the IT services also to evolve towards converged platforms of computing, high quality and more affordable networking, distributed computing, packaged software and open architecture. As per the 2003 ‘IT toolbox survey’ of 600 professionals in IT, that purposed to measure and identify the trends of outsourced IT functions all over the world, 70% claimed to be doing IT service outsourcing with 15% outsourcing more than 50% of the company IT functionsendnoteRef:7. 6: Heeks, Richard. India’s software industry: State policy, liberalisation and industrial development. Sage Publications, Inc., 1996.
7: Heeks, Richard. India’s software industry: State policy, liberalisation and industrial development. Sage Publications, Inc., 1996.
US IT global outsourcing countries
Global outsourcing has been viewed as a very essential base of competency among the industries. This makes every business enterprise and entrepreneur to force them into the outsourcing process. America and other European nations like German and the UK are the major importers of IT functions in the global market of outsourcing. On the other hand, developing countries like Russia, China and India are the major exporters in the game. The CEI (cutting edge information) an intelligence firm confirms that over 90% of enterprises in the U.S have at least one function that they are obliged to outsource. For instance, USA is the export market for 60-65% of India’s software servicesendnoteRef:8. 8: Badawi, Aboubakr Abdeen. “TVET and entrepreneurship skills.” Revisiting global trends in TVET: Reflections on theory and practice (2013): 275-308.
India’s prime offshore location enables it to enjoy 90% of revenue from offshore outsourcing. The nation has the largest market in global outsourcing. In the last few years, with a view of cutting costs, western countries including the US have employed more than 170,000 workers in India to work in telemarketing, customer support and payroll accounting services. The IT related exports made over 470 billion rupees between 2002 and 2003 and this led to more than 75,000 jobs created. At the same time, we have close to 450 Indian firms based in Britain, which follows the US. India in a year produces about 300,000 graduates in computer engineering who join the IT market. Thus, the support to have new technologies is easily available although cultural gulf and power outages create problems in communication.
As time goes on, Russia and China continue to gain significant shares in the IT outsourcing market and soon will be among the fast-growing markets. Compared, to other bigger nations in the market, Russia is very young. It gets $150-$200 million per year as revenue from the IT outsourcing ventureendnoteRef:9. Besides being small, the country grows by 50% annually in this sector. The country is known for its firm math and computer capabilities. The World Bank estimated Russia to be third in the production of engineers and scientists per capita globally. It has highly trained and low-cost labor as source of its strengths. However, English language, technology infrastructure and political instability are the biggest challenges. 9: Hsieh, Chang-Tai, and Keong T. Woo. “The impact of outsourcing to China on Hong Kong’s labor market.” The American Economic Review 95, no. 5 (2005): 1673-1687.
China is among the most prominent locations for outsourcing manufacturing functions. Foreign countries opt for china’s manufacturing assistance due to cost advantages. Countries continue to manufacture their IT products in the country. The country thus focuses to offer outsourced services in terms of telecom, retail services, software and financial aid to other nations such as Hong Kong, South Korea and Japan. IT operators are able to converse in their languages in countries like Taiwan and Hong Kong. A Shanghai-based consultancy, ConnectITChina, estimated the software outsourcing revenue of China to double in 2005 and become $5 billion. The country was also expected to obtain over $27 billion from its IT services to other neighboring and offshore nationsendnoteRef:10. 10: Oshri, Ilan, Julia Kotlarsky, and Leslie P. Willcocks. The Handbook of Global Outsourcing and Offshoring 3rd Edition. Palgrave Macmillan, 2015.
Global outsourcing is changing the political environment and economics of many countries to high extend. Outsourcing and global competition leads to a lot of controversial shifts in the economy. IT technology continues to eliminate national boundaries and sharing the world together. The borders are no longer acting as restraints to the IT labor markets. Through the aspect of global outsourcing, countries are sharing skilled labor in the IT sector as they move jobs across the boundaries to enjoy the low costs. Both technology and IT skilled labor movement across the borders of the nations and almost every country has a market share of the global market for IT.
Unemployment impact due to IT skills and call center outsourcing
The US does outsourcing in IT by having its companies hire skilled IT personnel instead of employing the Americans. In total, the US IT companies employed over 14 million people overseas including, Mexico, Canada, and India in the year 2013endnoteRef:11. Mostly the Industries that get affected most are the call centers, human resource, technology and manufacturing all of which deal with IT. Outsourcing of IT jobs makes the country very competitive in the international markets. It can sell to global markets through the foreign branches. Labor costs are low, and this is achieved through the hiring of a low standard of living in the emerging markets. The strategy allows shipping back goods of low costs. 11: Keuschnigg, Christian, and Evelyn Ribi. “Outsourcing, unemployment and welfare policy.” Journal of International Economics 78, no. 1 (2009): 168-176.
On the other hand, outsourcing leads to increased unemployment. IT jobs that would go to Americans get sent to other IT workers in foreign nations. The 14 million jobs that the US has outsourced are double as the current unemployed number stands at 7.9 million. If the jobs outside were to return, other 8 million people would be hired full-time. However, assumptions have to be made such as getting all the jobs returned to the US. Assumptions that same skilled personnel are available locally and the people will be willing to work for the low salaries also are madeendnoteRef:12. Much foreign labor is hired to help in local contacts, marketing, and language. 12: Sobol, Marion G., and Uday Apte. “Domestic and global outsourcing practices of America’s most effective IS users.” Journal of Information Technology 10, no. 4 (1995): 269-280.
America sends IT jobs to China and India since the two countries have similar skills in the sector and at the same time, the wages are also low. Any company pays an IT worker in these countries about $8,400 in India and about $7,000 in China. The firms in Silicon Valley, for instance, offer foreign-born workforce H-1 visas. The living cost in the nations is cheaper than in America. The US does so to access and compete in the domestic markets in IT. Another reason is that workers in India are English speakers.
Call center outsourcing is done in Philippines and India. The reason is that employees are English speakers. It is also done in areas where the cost of living is very low. However, the discrepancy regarding wages is very much reduced, and this means that soon the already outsourced call center jobs in India will get back to the USendnoteRef:13. The strategy of outsourcing call centers is helpful when the area has no natural disasters that can affect the service, and secure telecommunication networks are available. These facts explain why Arizona is a hub for call center services. 13: Hira, Ron, and Anil Hira. Outsourcing America: What’s behind our national crisis and how we can reclaim American jobs. AMACOM Div American Mgmt Assn, 2005.
As much as IT the world markets offer companies low cost and growth opportunities the challenge remains about which functions to retain in the domestic market. Global outsourcing takes the blame after job loss in these local areas from such low costs outside or stiff competition. Outsourcing has also involved, besides manufacturing, outsourcing of white collar jobs that is just as available as the blue collar ones. Some of the large enterprises take advantage of cheap and highly skilled white collar workers who are readily available in overseas countries. This idea affects the development of regional economy, societal fabric and population in general.
Outsourcing also has led to a change in the trade balance among nations affecting the global economy. For instance, the services on advanced technology trade balance moved from a $17 billion to $14 billion deficitendnoteRef:14. The services include the business process and IT enabled outsourcing services, the ones that drive and control the current global outsourcing. Outsourcing of IT grew gradually at 10% annually since 1997 as the US spend over 48% in outsourcing as more of its shares offshore. Trade is supposed to be a reciprocity venture but based on the global labor market; the exchange does not take place, but it’s the domestic jobs being exported. This fact explains why the US has a trade deficit of $125 billion on China only which is in the third world category. It is also the reason the US spend $1.5 billion every day on the outsourced products and services coming back to the markets as imports. It is thus misguiding to blame China for the loss of jobs in the US. This effect leads to the aspect of protectionism, a political issue. The negative impact of outsourcing is the loss of employment by developing nations to the international racesendnoteRef:15. Global labor market is already threatening the political stability and living standards in Europe and America. 14: Görg, Holger, Aoife Hanley, and Eric Strobl. “Productivity effects of international outsourcing: evidence from plant?level data.” Canadian Journal of Economics/Revue canadienne d’économique 41, no. 2 (2008): 670-688.
15: Oshri, Ilan, Julia Kotlarsky, and Leslie P. Willcocks. The Handbook of Global Outsourcing and Offshoring 3rd Edition. Palgrave Macmillan, 2015.
Solutions to the IT skills outsourcing unemployment problem
Political leaders are fighting corporations with a view of curbing the export of skilled labor in IT and other sectors to far foreign countries. The political policies to bring work back to the affected areas, ironically turn out to be some form of protectionism domestically and liberalization overseesendnoteRef:16. The government of the US and the other affected nations need to take strict action on the aspect of outsourcing labor force. This idea can be achieved through passing a legislation to limit the outsourcing to job duties only and not the jobs. Corporations need to be penalized through heavy fines as every single action by these firms significantly affects the economyendnoteRef:17. As a country gets involved in global outsourcing, they should not look and lie on one side of cost saving. They should balance and weigh the extent to which the venture should be done. Instead of outsourcing labor force to the point of neglecting the local areas, only the necessary functions need to be given priority to ensure the balance of trade. 16: Lacity, Mary C., Leslie P. Willcocks, and Joseph W. Rottman. “Global outsourcing of back office services: lessons, trends, and enduring challenges.” Strategic Outsourcing: An International Journal 1, no. 1 (2008): 13-34.
17: Keuschnigg, Christian, and Evelyn Ribi. “Outsourcing, unemployment and welfare policy.” Journal of International Economics 78, no. 1 (2009): 168-176.
Political leaders are fighting corporations with a view of curbing the export of skilled labor in IT and other sectors to far foreign countries. The political policies to bring work back to the affected areas, ironically turn out to be some form of protectionism domestically and liberalization oversees. The government of the US and the other affected nations need to take strict action on the aspect of outsourcing labor force. There are three approaches that if applied will help deal with the high number of unemployed people in America due to the aspect of IT skills outsourcing. The first method is implementing the 10% limit planendnoteRef:18. The program allows companies in the US to outsource, but the jobs outsourced should be only 10%. The strategy ensures that there is stability in the country when workers get employed locally while still enjoying the production at lower costs overseas. When jobs in the US increase and outsourcing continues, it boosts the economy of the country while also enjoying consumer costs that are also low. This plan can be achieved by developing local IT companies through innovation and technology. 18: Sobol, Marion G., and Uday Apte. “Domestic and global outsourcing practices of America’s most effective IS users.” Journal of Information Technology 10, no. 4 (1995): 269-280.
The second approach is maintaining an exchange that is even. This strategy ensures that, jobs between the US and the outsourcing country trade in jobs. Every post the US goes to outsource in a foreign country like India, the same country brings a job back in America that is of equal standing. The plan leads to a constant exchange of employment between the countries. The country will create jobs to the American workers just the same way the US provides jobs to Indians. The plan keeps foreign relations while bridging up the cultural barriers between the nations. The last approach is an application of homeland onshore modelendnoteRef:19. The strategy eliminates outsourcing altogether. The model has the proposal that as the US only outsource jobs in IT, it can outsource to a given state instead of outsourcing to India. For instance, if an IT firm is in California and there is a qualified worker in another state who can work from the home area, the company can outsource to the other state. This move ensures that the Americans also get quality and stable jobs since they are also as competitive as the Indian counterparts. 19: Marvin, K. Tyler. “Global Trends in Outsourcing and their Impact.” PhD diss., WORCESTER POLYTECHNIC INSTITUTE.
Conclusion
Global outsourcing is categorized as either nearshore or offshore outsourcing. The former involves obtaining business functions across the border but with the same geographical region while the latter involves far overseas countries. Nearshore may not lead to global development in technology like the offshore outsourcing that leads to globalization. Global outsourcing by nations is done for various reasons that range from obtaining natural material, process capability, and new opportunities in the market, low labor costs, and flexible schedulesendnoteRef:20. These particular reasons lead to cost saving by the corporations. The cost savings benefits the firms; however such problems as the loss of organizational performance, future talent and intellectual assets still exist. The saved revenue can be directed back to the firms to help in the business growth and creation of future jobs. Global outsourcing is changing the political environment and economics of many countries to high extend. Outsourcing and global competition leads to a lot of controversial shifts in the economy. 20: Elmuti, Dean, and Yunus Kathawala. “The effects of global outsourcing strategies on participants’ attitudes and organizational effectiveness.”International Journal of Manpower 21, no. 2 (2000): 112-128.
As much as global outsourcing leads to the development of the IT markets and an opportunity for every country, the venture also threatens the local areas where the economy of the involved nations may be affected negatively. This effect is caused by lack of employment opportunities in the countries since labor force is being outsourced. To avoid this effect, the governments of developing countries need to control how and the extent the firms do global outsourcing. It ought to apply the 10% model approach, even exchange plan and the homeland onshore modelendnoteRef:21.This fact already creates a stable trade operation. This research paper has explored many avenues of the global outsourcing venture but mostly, the impact on the IT skills market. More research is paramount and should be done to look at the impact of global outsourcing on other business sectors and how the impact affects different economies of various key players in the market. 21: Insight, Global. “The Comprehensive impact of offshore IT software and services outsourcing on the US economy and the IT industry.” Lexington, MA, March (2004).
Bibliography
Badawi, Aboubakr Abdeen. “TVET and entrepreneurship skills.” Revisiting global trends in TVET: Reflections on theory and practice (2013): 275-308.
Elmuti, Dean, and Yunus Kathawala. “The effects of global outsourcing strategies on participants’ attitudes and organizational effectiveness.”International Journal of Manpower 21, no. 2 (2000): 112-128.
Görg, Holger, Aoife Hanley, and Eric Strobl. “Productivity effects of international outsourcing: evidence from plant?level data.” Canadian Journal of Economics/Revue canadienne d’économique 41, no. 2 (2008): 670-688.
Head, Keith, and John Ries. “Offshore production and skill upgrading by Japanese manufacturing firms.” Journal of international economics 58, no. 1 (2002): 81-105.
Heeks, Richard. India’s software industry: State policy, liberalisation and industrial development. Sage Publications, Inc., 1996.
Hira, Ron, and Anil Hira. Outsourcing America: What’s behind our national crisis and how we can reclaim American jobs. AMACOM Div American Mgmt Assn, 2005.
Hsieh, Chang-Tai, and Keong T. Woo. “The impact of outsourcing to China on Hong Kong’s labor market.” The American Economic Review 95, no. 5 (2005): 1673-1687.
Insight, Global. “The Comprehensive impact of offshore IT software and services outsourcing on the US economy and the IT industry.” Lexington, MA, March (2004).
Kathawala, Yunus, Ren Zhang, and Jing Shao. “Global outsourcing and its impacts on organisations: problems and issues.” International Journal of Services and Operations Management 1, no. 2 (2005): 185-202.
Keuschnigg, Christian, and Evelyn Ribi. “Outsourcing, unemployment and welfare policy.” Journal of International Economics 78, no. 1 (2009): 168-176.
Lacity, Mary C., Leslie P. Willcocks, and Joseph W. Rottman. “Global outsourcing of back office services: lessons, trends, and enduring challenges.” Strategic Outsourcing: An International Journal 1, no. 1 (2008): 13-34.
Mann, Catherine L. Globalization of IT services and white collar jobs: The next wave of productivity growth. No. PB03-11. 2003.
Marvin, K. Tyler. “Global Trends in Outsourcing and their Impact.” PhD diss., WORCESTER POLYTECHNIC INSTITUTE.
Oshri, Ilan, Julia Kotlarsky, and Leslie P. Willcocks. The Handbook of Global Outsourcing and Offshoring 3rd Edition. Palgrave Macmillan, 2015.
Sobol, Marion G., and Uday Apte. “Domestic and global outsourcing practices of America’s most effective IS users.” Journal of Information Technology 10, no. 4 (1995): 269-280.
End notes
