Posts Tagged ‘Offshoring’

Offshoring from Sea to Shining Sea

July 30th, 2013

The year 1979 may very well have been the year when the middle-class in America had first began it’s long decent into oblivion.  According to a U.S. Bureau of Labor Statistics report, manufacturing in the U.S. peaked in 1979 when we had over 19.6 million manufacturing jobs in a labor force of 104.6 million. In 1979 manufacturing was 21.6% of all jobs. Now manufacturing is only 9,9% of jobs in America. Today we have 155.8 million in the labor force with 11.8 million workers unemployed. That’s because manufacturing has left our shores, and it has been on a downward trend ever since — with no end in sight. Outsourcing1

The year 1979 was also when mergers among the labor organizations began increasing — when the total number of union members had peaked at over 22 million. This is also the year when the U.S. broke off formal diplomatic relations with Taiwan and established full diplomatic relations with China. There is no coincidence here. All roads lead to China.

Lewis Franklin Powell Jr. wrote his famous “manifesto” on August 23, 1971 just before he was nominated by President Nixon to sit on U.S. Supreme Court. Less than two years later on March 29, 1973 Master Sgt. Max Beilke was officially designated the last American combat soldier to leave Vietnam. Soon afterwards major U.S. companies initially responded to “heightened competition” from Japanese and European multinational corporations by opening factories abroad during the 1970s (which may have involved using the Laogai labor camps in China). The American multinationals manufactured goods that were formerly produced by comparatively well paid, often unionized, factory workers in the U.S.

According to one technical publication, A Brief History of Outsourcing, the current stage in the evolution of outsourcing is in the development of “strategic partnerships”, which was first pioneered by Eastman Kodak with their decision to outsource their information technology systems in 1989.

Kodak was quickly followed by dozens of major corporations, whose managers had determined that it was not necessary to own the technology to get access to the information they needed. All throughout the 1990s the offshoring of jobs had escalated — mostly tech, call service centers and manufacturing — by companies such as Microsoft, Apple, Hewlett-Packard, IBM and Dell. (During the last presidential campaign, Bain Capital was often mentioned.)

In 1999 Bill Clinton signed the controversial trade agreement with the People’s Republic of China. The trade agreement was the result of more than a decade of negotiations, and lowered many trade barriers between the two countries.

It’s unclear how many jobs were offshored between 1979 and 2001, but data shows there were 398,887 private manufacturing establishments of all sizes in the United States during the first quarter of 2001, and by the end of 2010, the number had declined to 342,647 — a loss of 56,190 factories. So the onslaught has continued for the past 35 years.

And as Robert Oak at the Economic Populist pointed out, according to a study by the Economic Policy Institute, over the last decade (from 2001 to 2011) the United States has lost 2.7 million jobs to China alone (and this is a conservative estimate). The China PNTR trade agreement was signed by President Clinton on October 10th, 2000 and China entered the WTO in 2001. Since then our massive trade deficit has skyrocketed, stunting our economic growth and costing America millions of jobs.

And that doesn’t even include the multiplier effect (when one job generates another job that is dependent on that job). A study by University of Illinois at Chicago concluded that one manufacturing job in the Windy City leads to 2 more. And on a national scale, the multiplier for a manufacturing job is 4.6 — higher because of a larger geographic scope for supply chains and induced spending. So those 2.7 million jobs lost to China over just those ten years alone could theoretically equate to 4 or 6 million more.

Robert Oak goes on to note:

“Of the people who lost their jobs through offshore outsourcing, plant closures, business failures and layoffs during 2009-2011, by January 2012 only 56% of them had gotten another job. These are people who held the job they lost for three years or longer, and there were a whopping 6.12 million of those people in this category.

In an updated BEA summary on sales, investment and employment by Multinational Corporations for 2011, we have a 0.1% increase in hiring for jobs in the United States while MNCs increased their hiring abroad by 4.4%.

From 1989 to 2011, U.S. MNCs decreased their employment in the United States by 3.3 million workers while expanding employment abroad by 6.5 million employees.  The share of employment by MNCs in the United States went from 79% of their total employees in 1989 to 66.3% by 2011.  Multinational corporations are clearly doing their hiring abroad.”

“During the recent great recession since 2007, many observers wrote the American Manufacturing Obituary, claiming that American could no longer be regarded to be a world leader because of intense competition from low-cost competitors. Trade liberalization has increased the economic interdependence among nations. Multinational corporations in the U.S. have established operations in developing counties where labor is cheaper. One consequence of this increased globalization of manufacturing industry has been movement of  jobs and production from the U.S. to Low Labor Cost (LLC) countries (which are often less developed countries) for higher corporate profits. This practice is called offshoring, and is a direct consequence of Monopoly Capitalism, where the prime motive is corporate profits without consideration of job losses for people in the home regions. Globalization works to the detriment of American workers and reinforces unfair labor competition because of lower wages and inadequate working conditions existing in developing nations.”

And this is not because Americans lack skills. This has been the “public relations” spin put out by corporate America in defense of their corporate strategy. Alan Blinder, a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve Board, has stated that:

“Contrary to conventional wisdom, the more offshorable occupations are not low-end jobs, whether measured by wages or by education. The correlation between skill and offshorability is almost zero.”

His conclusion supports the research of a December 17, 2012 Congressional report on offshoring. Alan Blinder was quoted on page 10 as saying a moderate estimate of 25.6% of all U.S. jobs are most susceptible to offshoring — and his more aggressive estimate totals almost 40 million, or 29.0% of all U.S. jobs.

A Washington Post article notes that many people believe that Boeing’s troubles with its 787 Dreamliner jets is because of outsourcing. Critics have long charged that Boeing was far too reliant on offshore suppliers for the 787′s production. More than 30 percent of the jetliner’s components came from overseas.

In his recently published book, After the Music Stopped, Alan Blinder gives the U.S. the post-recession’s macroeconomic performance a failing grade:

Total jobs losses were just under 8.8 million, over a period during which we should have added about 3.1 million more, creating a cumulative job deficit of about 12 million by February 2010. Then the job deficit rose even higher in 2010-11 as job creation fell short of the 125,000/month required to keep up with population growth. By August 2012 total employment was only back to April 2005 levels — for a zero net growth over a period exceeding seven years. In an average month during 1948-2007, less than 13% of the unemployed were jobless for over 6 months; by April 2010, it was over 45% — and is only slightly less today.

And, despite the cost of labor rising in some Asian nations, there are many others (Nike, etc) whose low wages continue to draw U.S. jobs, such as Vietnam. Many American fast food operators (Starbucks, KFC, etc) have also opened businesses there. McDonalds’s also has plans to open soon in Ho Chi Minh City (formerly called Saigon, the city Sgt. Max Beilke vacated.)

From Nike’s website: “When we look at our overall impact on the world, the needs of nearly one million workers in Nike’s contract supply chain overshadows any other group.” And Nike is but one of many examples (albeit, a very classic example) of globalization. It’s a pity that those one million workers in Nike’s supply chain are in Asia, not America.

On May 12, 1998 Nike’s CEO Phil Knight gave a speech at the National Press Club where he spoke of Nike’s reasons for moving factories out of the United States and into mainly third world countries in Asia. “During the 1990s, all our experiences have caused us to really believe in the benefits of international trade. The uplifting of impoverished people, the better values for consumers in industrialized nations, and most of all, the increased understandings between peoples of different cultures.”

That seems to be the morality and mindset of a typical globalist, someone who advocates a policy of placing the interests of the entire world above those of individual nations. As one major American hedge fund manager had privately admitted:

“The U.S.-based CEO of one of the world’s largest  hedge funds told me that his firm’s investment committee often discusses the question of who wins and who loses in today’s economy. In a recent internal debate, he said, one of his senior colleagues had argued that the hollowing-out of the American middle class didn’t really matter.

His point was that if the transformation of the world economy lifts four people in China and India out of poverty and into the middle class, and meanwhile means one American drops out of the middle class, that’s not such a bad trade.”

But then again, are they really so concerned about lifting the poor out of poverty in third world nations, or is it just a simple matter of plain old fashion greed, and they are just using these humanitarian excuses (as a public relations matter) as a cause for their actions?

Since the 1990′s many major U.S. companies have been criticized for offshoring jobs. Businesses in the manufacturing, tech and apparel industries, such as Apple and Nike (to name just a very few) have often been targeted for using cheap labor in very unsafe and slave-like working conditions abroad.

In their book, Producing Prosperity, Harvard Business School professors Gary Pisano and Willy Shih writes:

“For years–even decades–in response to intensifying global competition, companies decided to outsource their manufacturing operations in order to reduce costs. But we are now seeing the alarming long-term effect of those choices. In many cases, once manufacturing capabilities go away, so does much of the ability to also innovate and compete. Manufacturing, it turns out, really matters in an innovation-driven economy. Companies must reinvest in new product and process development in the US industrial sector. Only by reviving this ‘industrial commons’ can the world’s largest economy build the expertise and manufacturing muscle to regain competitive advantage.”

Edward Alden at the Council of Foreign Relations writes:

“They [Gary Pisano and Willy Shih] demolish the comforting story that many economists have offered to dismiss concerns over the shrinking role of manufacturing in the U.S. economy. The conventional argument goes like this: It makes more economic sense to locate the actual production of goods in lower-wage countries, while the United States maintains the skilled parts of the supply chain (R&D, branding, marketing, etc.)

The classic example here is Apple: most of the value of an iPhone or iPad comes from the design, software, branding and retailing, not from the assembly. Therefore, U.S.-headquartered Apple can become the most valuable company in the world, even while making virtually nothing in the United States.”

The World Trade Organization cites a report from 2000 by the U.S. Department of Labor (Displaced Workers Survey) that used data from 1975 to 1995. It found that rates of job losses were particularly high in sectors with high levels of imports and sectors with high import growth.

The Bureau of Statistics Displaced Workers Summary from August 24, 2012 reports there were a total of 12.9 million displaced workers from 2009 to 2011. The prior survey, which covered 2007 to 2009, numbered 15.4 million. The previous survey reflected the steep decline in jobs associated with the Great Recession that began in December 2007 and officially ended in June 2009. According to the Center on Budget and Policy Priorities, 8.7 million net jobs were actually lost during the last recession.

Prior to the last recession, there appeared to be enough job growth to compensate for most of the lost jobs due to offshoring, although, many Americans were forced into taking lower paying jobs (such as in the retail and fast food industries) and most often without any benefits (such as healthcare and pension plans). And many times they only found part-time or temporary positions, which set them on a never-ending course of “job hopping”.

But since the recession, long-term unemployment has been a huge drag on the economy — and according to the Bureau of Labor Statistics, with 11.8 million unemployed Americans, and 8.2 million working part-time, and another 7 million working multiple jobs to make ends meets, all those millions of offshored jobs are looking even more appetizing.

Since the Great Recession major attention has again returned to the subject of offshoring (some are now saying “reshoring”) — and in conjunction to the Occupy Wall Street movement, an ever increasing focus has also been on wealth inequality, income disparity, corporate greed, CEO pay, stagnate wages and the minimum wage. And then it all comes back again full circle — back to offshoring for cheap labor.

Meanwhile, corporate cash is once again at a record high. According to a report by the research firm Audit Analytics, large U.S. companies have boosted their offshore earnings by 15 percent last year — to a record $1.9 trillion, while avoiding hefty tax bills by keeping their profits abroad (rather than invest in American workers). Their overseas earnings stockpile has climbed by 70 percent over the past five years, but most American workers aren’t sharing in the corporate booty. Millions are either under- or unemployed. Now 50% of the work force who are working take home $27,000 a year or less. And instead of seeing a pay increase, they saw the biggest drop in hourly pay on record. It seems workers haven’t been reaping the same rewards as their employers — when “worker productivity” once meant something to the workers too. The Heritage Foundation thinks workers must be more productive.

No…Nike is NOT an American Icon, but it is a typical a job creator…overseas.

Wall Street Journal (June 27, 2013) Nike’s profits are up again — their fourth-quarter profits jumped 22%. Nike also expects overall profits for fiscal 2014 to rise in the low double-digits as sales are expected to climb, helped as Nike gears up for the 2014 World Cup in Brazil. Margins are expected to strengthen throughout the year, helped by higher selling prices. Demand for athletic gear in the U.S. has also been strong in recent years, and Nike’s sales have been bolstered by apparel tied to a contract with the National Football League.

“Nike’s grand strategy for reaping in huge profits every year is really quite simple: just don’t pay workers. That’s how they sell a shoe for $180 that only costs just $5 to manufacture.”

The people who are laboring to make that $180 pair of shoes, and other Nike gear and apparel, are mostly young women, ages 16-24 (Although, in Pakistan, children were once sewing Nike soccer balls for $0.60 a day.) In Vietnam the average worker is paid about $0.20 an hour, or $1.60 a day. (While the cost of eating is reportedly $2.10 a day).

And workers in Vietnam are forced to work 65 hours a week. Not only are they forced into overtime without compensation, the 65 hour work week is in clear violation of Vietnamese labor laws. In the Sam Yang factory in Vietnam there is only one doctor who works two hours a day to service 6,000 workers.

Employees in Vietnam have stated that verbal abuse and sexual harassment are frequent and that corporal punishment is often used. Supervisors have been reported to frequently grab the women’s breasts and buttocks.

Nike has reportedly responded to many of these allegations by widely publishing their Code of Conduct in the factories — but in Vietnam, few workers have even heard of such a code, nor ever learned what provisions were within it.

As of 2013 (from Nike’s interactive map) Nike has 777 factories in 43 Countries employing 1,009,496 workers. Just in Vietnam alone Nike has 71 factories with 311,548 workers, mostly female, with an average age of 30. (For a complete list of Nike’s factories and employees, download the PDF from Nike’s website or the Excel version.)

As with many other major corporations, the Vanguard Group is the largest institutional investor of Nike — followed by many other banks and private equity firms.

Although Nike argues that they enter a country only when it is ready to make shoes, and then leaves when it has developed past this point, the data suggest a different story. Nike’s movement directly correlates with a increased standard of living and increased union bargaining power. When the pressure for wage increase is put on, just like with most other American-based multi-national manufactures, Nike moves on.

This corporate strategy allows for the cheapest labor costs and bargains with the worst governments. The result? Companies like Nike can keep manipulating their stocks, dodging corporate taxes and making shoes for only $1.60 a day — just so that Nike’s CEO can earn $96,000 a day. Heaven forbid if American workers ever made Nike shoes, or else Nike’s CEO might only earn a measly $10,000 a day (unless Nike raised the price on their cow leather and rubber shoes to $500 a pair.)

And Nike is just but ONE of many U.S. corporations that operate like this. That’s how they can afford to pay their CEOs too much. Here’s a list of the top paid CEOs from Forbes and what they earn in just ONE year — many of them on the back of cheap and exploited foreign labor, at the expense of the American worker.

In a letter from Rep. Mark Pocan and others to Rep. Sander Levin expressing concern about the TPP and Fast Track Authority.

“As the economy continues to recover from the greatest financial crisis since the Great Depression , we can all agree that we cannot afford to have American production and American jobs sent offshore because of unfair trade agreements that undermine our economic growth. When jobs and production factories are offshored, American wages are lost, American-made products decline, and our international interests are compromised.”
In his economic speech at Knox College, President Obama acknowledged the role of unfair trade in stagnant wages and growing inequality:

“In the period after World War II, a growing middle class was the engine of our prosperity…But over time that engine began to stall, and a lot of folks here saw it…Global competition sends a lot of jobs overseas. It became harder for unions to fight for the middle class…And so what happened was that the link between higher productivity and people’s wages and salaries was broken…So the income of the top 1percent nearly quadrupled from 1979 to 2007, but the typical family’s incomes barely budged.”

So then WHY is Obama planning on extending “free trade” with the TPP trade agreement? Last year’s congressional study on offshoring says 29% of U.S. jobs are prone to outsourcing — and then we can also add in all the new guestworker and H-1B visas with the new immigration bill, flooding an already over-saturated labor market — then on top of that, we can also add over 4 million long-termed unemployed (and the 99ers) that we already have, and there will be plenty of shoe-shine jobs available for a nickel a shine.

Bring jobs back to America and pay workers a “living wage”…no excuses, Just Do It!


SA a favoured offshoring destination

July 11th, 2013

Gartner research ranks SA as one of its top 30 software development outsourcing destinations.

Greg Vercellotti, executive director at Dariel Solutions, agrees, noting that SA is increasingly becoming a favoured international location for business process outsourcing (BPO) and offshoring.Outsourcing1

“Information technology (IT) outsourcing is, indeed, a growing business in South Africa. We have a diverse local market, first world know-how and a developing country environment that makes it ideal to test new models and drive innovation,” says Vercellotti.

“IT outsourcing makes up a large portion of the IT services market, and is driven largely by the need to reduce operational costs and support growth strategies for expansion – and this is key for businesses in South Africa.”

While there are those opposed to outsourcing, there are many who laud its advantages, which include the favourable exchange rate, high rates of English fluency and a broad base of management and service provider expertise, he says. Disadvantages focus mainly around loss of control over the process, says Vercellotti, which need not be a factor if open lines of communication and active participation by the client are achieved.

“Ultimately, the decision to do partial outsourcing, majority outsourcing (over 80% of IT is outsourced) or majority insourcing (over 80% of IT is kept inhouse) is a personal one,” adds Vercellotti.

“Businesses need to carefully outline their goals and relay this information to the IT company they decide to outsource to. Choosing a company that has a long-standing record in the South African market as a reputable and reliable provider is very important,”

It is critical that when choosing an IT outsourcing partner, you familiarise yourself with their business model and modus operandi, he concludes. “By aligning yourself with a company that has common philosophies and goals, you are more likely to create a sustainable relationship that results in mutual benefits and really showcases South Africa as the outsourcing destination of choice.”


Destination Korea: an emerging market for IT services

June 3rd, 2013

South Korea is being touted as the latest outsourcing market for global IT services firms to target, and could even emerge as an offshoring destination in its own right in the future, according to analyst outfit Ovum.outsourcing47

The IT analyst’s latest Emerging Outsourcing Opportunities reportclaims the South Korean IT services market is now one of Asia’s most mature, and will grow by 7 per cent over the next three years to be worth $16.4bn by 2016.

This offers global giants like IBM and Capgemini the opportunity to cash in if they can overcome the formidable local presence of large local chaebol incumbents including Samsung SDS, LG CNS and SKC&C, which between them control almost 50 per cent of the market.

The best chance global providers have of countering the chaebol influence is offering elements like offshoring, global delivery and commodity services which Korean buyers have historically not been accustomed to, report author Jens Butler told The Reg.

“However, changes are afoot and in certain markets, especially financial services, the chaebol presence is expected to decrease and the reformist agenda for the new government is also starting to make headway,” he added.

“With the local economy not expected to grow substantially in the near future, the larger local providers are looking to increase their revenue streams from international sources, and this may the leave an opportunity to service the local market.”

To do this, new entrants will have to impress upon local buyers how they can drive cost savings, efficiencies, quality, speed and productivity, whilst remembering to give their services a local flavour, explained Butler.

Korea also has potential as an offshoring location in the longer term, although its relatively high cost base, low number of English language speakers and local servicing focus have ruled it out up until now.

“However, with the main local players’ drive to expand into higher growth markets and its geographical and educational/skills affinity with its two large neighbour, China and Japan, where a higher level of language skills exist, these opportunities may start to grow, from a near-shore perspective at least,” Butler argued.

Unlike many other mature IT services markets, infrastructure services represent 53 per cent of the outsourcing market at the moment and Butler pinpointed “datacentre” and hosting as a couple of areas where Korea could become a favoured destination.


Soaring labor costs are turning US outsourcing into a thing of the past

April 2nd, 2013

Labor markets have for the past quarter century been at the center of the globalization disputes under the “off-shoring and out-sourcing” rubric. How many jobs were lost at home to cheap labor abroad? What were conditions for those overseas workers? But the rapidly changing nature of the global economy has changed much, though not all, of that “off-shoring/out-sourcing” debate. Today, cheap labor is only one of many factors leading global companies to choose where to do business in diverse nations across the world. Major economic changes like the internal growth of emerging markets have scrambled debates about the global economy, posed challenges for international business, stimulated contradictory public policies and confused the general

It was often cheap labor in emerging markets that, more than two decades ago, led companies in developed markets to move company jobs away from the home country either to company owned facilities (off-shoring) or to third parties (out-sourcing) in developing markets. The broad idea was that less expensive manufacturing or inexpensive white collar workers would create goods and services in developing nations that would serve world markets. China, especially, would be the global product-manufacturing center; India, via the web, would be the global service provider.

The well known debate ensued between free-trade (more competition, cheaper goods in U.S., growth in developing markets) and fair trade (only wealthy benefit, hollowing out of U.S. middle class, exploitive labor standards overseas). The debate heated up in political years (including 2012), when “outsourcing” became an especially dirty word. But, in addition to dramatic economic growth in emerging markets, four recent trends have significantly modified this old off-shoring and out-sourcing schematic.

First, labor costs for many businesses may no longer be the critical or even primary factor in global location decisions. Wages are rising in many emerging markets due, in part, to increased demand, new labor laws, and greater worker voice. Wages are declining in developed markets like the U.S. where depressed economic conditions for workers have led to lower wage and benefit packages, especially for lower entry level workers, and often through negotiations with organized labor. New technology, such as robotics, and higher productivity have also lowered the price of labor as a percentage of total product or service costs. When labor cost differences are not as dramatic or important, other costs like materials, energy, transportation, currency, capital, government imposed costs (tariffs, regulation) — which were always important — may have as great (or greater) impact on the location as cheap workers.

Second, companies are retaining but modifying their global supply chains by selectively reversing the long-term trend of outsourcing. They are “making” important parts of the products or services rather than “buying” from third parties, as described recently by U.S. business people and journalists, Companies are recognizing that closely interrelating, even co-locating, research and development, design and marketing, manufacturing and assembly close to the markets served can lead to much faster response to market shifts and to much faster innovation. The old practice of designing at home and then manufacturing abroad can slow the pace of innovation and product change to a crawl. So companies are making complex trade-offs between “making” and “buying” — and between the need to develop technology at connected global R&D centers and the need to apply it in a variety of local settings in a variety of ways.

Similarly, companies which were enamored of outsourcing key service functions like information technology to nations like India are discovering that these, too, are key to fast-paced innovation and should be “made” not “bought” — bringing them back in-house, with corporate units integrated across the world under global/local management. The “de-verticalizing” outsourcing process – when a company sent many of its functions between raw materials and the finished product to third parties – is now being partially reversed with “re-verticalization.” But, even with changes, global supply chains, even if owned more by the company and less by third parties, will remain critical.

Even when labor is still a significant portion of the cost of a product (e.g. textiles, toys, some electronics), there is a growing movement among major, developed world companies, as I have detailed elsewhere, to engage in responsible off-shoring and out-sourcing by adopting labor and quality standards which aim to create decent wages, working conditions and environmental protections as well as more rigorous quality checks. The apparel industry has an off-shoring/out-sourcing code of conduct monitored by a third party, the Fair Labor Association (FLA), a practice now followed by Apple, but not the electronics industry as a whole.

But it must be emphasized: there are still great problems in supply chains for low cost products (as demonstrated by last year’s deadly factory fire in Bangladesh), and there is a great deal yet to do. Most brand-name, iconic multi-nationals, however, do understand that labor and quality standards are needed — both in their own overseas facilities for their own employees and in their supply chains — which will either increase costs or ameliorate some of the worst practices. And, at least for these major companies, this is another factor which may mean that decisions about location and employment are not made purely on the cheapest possible labor.

Finally, companies’ choice of where to do business across the globe is heavily influenced by a witches’ brew of complex, often contradictory governmental policies at national, regional and local levels. Governments may seek to attract foreign investment yet also discriminate against it. They may promote non-protectionist policies for economic growth (infrastructure, R&D, more open immigration, skilled work force) or they may, especially in a recession, enact protectionist measures. They may, like China, engage in a host of illicit activities – pay-offs, piracy, hidden subsidies — to promote national champions. Or to counter state capitalism like China’s, they may engage in explicit subsidies or tax breaks or preferences or soft loans to promote domestic business’s ability to compete overseas against state supported or state owned companies — trade promotion ideas which teeter between reasonable competitive measures and bad crony-capitalism.

Ultimately, governments may recognize that virtually every other government has its thumb on the scale of economic activity and thus frustrates real global competition which can mean new jobs at home (even if old jobs may suffer). As a result, they may seek new free trade agreements to knock down tariffs and other trade barriers — as in current major trade talks in the Atlantic (between the U.S. and the EU) and in the Pacific (involving the U.S., Japan and others) — to stimulate economic growth and also to counter the rising power of China’s state capitalism. All these currents and cross-currents in present and evolving government policy have significant impact on location of global business activity.

These four trends take place in the context, as noted, of one central change: faster economic growth in developing markets than in developed markets. Much activity of global companies is now an attempt to sell in those new markets by having a powerful new local presence, even as they retain global supply chains. This is called “on-shoring” because it involves creating new, additive economic efforts in emerging markets which are far different than “off-shoring” jobs to cheap markets to export products back to expensive ones. Take China. Foreign auto makers (Japanese, European and American), have roughly 60 percent of a 15 million unit per year market, with tens of production facilities frequently owned with Chinese partners. GM is the leading car-maker in China with about 20 percent of sales (selling more units than in the U.S.) and has 11 assembly plants and four power-train plants in eight Chinese cities. For many U.S. multi-nationals, approximately half their revenues and 30-50 percent of their work-force are outside the United States, reflecting the need to serve overseas markets.

Similarly, foreign companies have been “on-shoring” in the United States for years. Foreign automakers built more than 3 million cars at 16 facilities in the United States in 2011, with 70 percent of Japanese cars sold in the U.S. made in North America. Announcements of acquisitions or new plants in the U.S. are made almost every day by non-U.S. companies, like Airbus, Siemens, Lenovo, Infosys, Ikea, and Foxconn. Indeed, foreign companies employ nearly 6 million Americans and account for 13 percent of manufacturing jobs and about 18 percent of exports.

Stories of foreign investment in the U.S. have been matched in the past few years with the “re-shoring” of overseas work back to the U.S. Iconic American companies like Apple, Google, Caterpillar, Ford, Emerson, GE, and Intel are adding plants and jobs in the U.S. or North America. The decisions are driven by some of the economic trends noted earlier (competitive overall cost for U.S. markets, desire to “make” not “buy” and integrate corporate functions for innovation close to customer). “Re-shoring” also helps symbolically and politically to counter, to an extent, the old “off-shoring” critiques. But, while “re-shoring” may slow the decades long decline in U.S. manufacturing jobs, from 20 percent of the workforce in 1980 to about 9 percent today, it is not likely to reverse it, much less herald a return to the glory days (the Bureau of Labor Statistics estimates that only 7 percent of the workforce in 2020 will be in manufacturing).

For most of the public, this significant modification in the off-shoring, out-sourcing debate is not well understood and people still revert to the old schematic “this is because of politics”. Companies are struggling to adjust to new global realities but generally try to present a strong nationalist face in their home countries (now aided by modest “re-shoring”). Importantly, nations that practice some version of “market capitalism” (less government intervention than “state capitalism”) are schizophrenic: torn between government policies to support real global competition and policies to support national companies and local workers. Broad adjustments in knowledge and attitudes about changes in global economic integration are necessary in developed “market capitalism” to reach the right balance of policies promoting the long-term ideal of global competition, adopting near term measures that counter state capitalism without engaging in crony capitalism, recognizing that with competition new domestic jobs may replace old ones and protecting domestic workers whose jobs may be lost due to technology and productivity – not just changes in trade.


Is Nokia’s offshoring a sign of the pressure it is under and a way of hiding redundancies?

February 1st, 2013

Nokia was once the dominant force in the mobile phone sector. Then came the smartphone giants. The likes of Apple and Samsung have ripped into Nokia’s market share and quickly put the Finnish firm under pressure.

Given the loss of its dominance the company looks like it is on a mission to cut costs. Just recently it has signed a couple of IT outsourcing contracts with offshore suppliers.Outsourcing11

This month Nokia appointed Indian IT giant Tata Consultancy Services (TCS) to support and develop its global business applications as it consolidates the support of systems under a single supplier. It has also signed an IT outsourcing agreement with HCL Technologies.

The agreements saw hundreds of jobs cut and transferred to the suppliers, who both have operations in Finland.

Not only is it interesting from a Nokia perspective but is also very revealing in that countries in the Nordics are increasing their use if offshore based suppliers. Nokia looks set to work with TCS and HCL in the long term.

This article by a Finland based Wall Street journal writer asks if Nokia outsourcing its redundancies?

The recession has really changed things on the continent. A few years ago many IT professional viewed continental Europe as a safe haven, where they were unlikely to lose their jobs to lower cost staff provided by a supplier. Not anymore it seems.

Read this article about a UK IT professional who moved abroad so he could compete for work.


Will IT Outsourcing Reverse?

January 30th, 2013

With all the hype about the cloud and other IT outsourcing, GM’s about-face last year in regard to its IT strategy raises questions about whether the hype has taken the industry too far in one direction. Is “insourcing” the new wave, or are GM and recent declines in outsourcing growth simply bumps in the road?graph12913-612x300

Differentiating Between “Outsourcing” and “Offshoring”

Because so many people have visceral reactions to the word outsourcing, it’s important to note that outsourcing does not always mean “sending jobs overseas.” Hiring a Chinese or Indian firm to tackle an IT or other project is, for this reason, better labeled offshoring. Offshoring is a subset of outsourcing; the two are not identical.

Outsourcing Takes Hit in 2012

The rush to outsource IT showed signs of weakness in 2012—particularly in the second half. According to technology analysis company ISG, the global outsourcing market saw a drop of 11% in 4Q12 compared with the previous quarter, or a 27% decline year over year. For the full 2012, the global market fell 3% from the previous year. These numbers are for commercial outsourcing contracts whose annual contract value (ACV) is a minimum of $5 million. A set of slides from ISG shows a more granular breakdown of the outsourcing market by region and several other criteria.

According to Network World, research firm Everest Group reported that the number of new publicly reported IT and business-process outsourcing contracts fell from 472 in 3Q11 to 381 in 3Q12. Furthermore, the total annualized value of these contracts in 3Q12 declined to $1.5 billion, roughly a 44% year-over-year decrease.

Although GM’s plans to move its previously outsourced IT operations back under the company’s umbrella is not necessarily indicative of a larger market trend, it does raise the question. Forbes notes that the automaker’s planned budget shift would reverse its current 90% outsourced/10% in-house mix to 90% in house/10% outsourced. The company hopes to accomplish this goal within three to five years.

What’s Driving (No Pun Intended) the Change?

In light of 2011 being a record year according to ISG, a 3% drop in the 2012 global IT outsourcing market may not be as bad as it would otherwise seem. A breather in a fast-growing market is not necessarily surprising. Possible factors contributing to the 2012 decline include a weak economy in Europe and the U.S. The debt crisis in Europe, which is in the midst of a second recession, is troublesome owing to the obvious need for major governmental reforms. The U.S. is following the same path as the federal government puts on political theater over raising the debt limit (is there any doubt that the debt limit will be raised as often as requested by the president or Congress?). The stagnant economy may well return to recession in 2013, barring effective efforts on the part of the Federal Reserve in attempting to create faux growth by further debasing the dollar. These conditions have broad economic effects, and IT outsourcing is no exception.

ISG partly blames the recent U.S. elections and hurricane Sandy as possible contributing factors to the quarterly market decline. Furthermore, with offshoring getting a renewed lashing from politicians as they struggle to bring down a stubborn unemployment rate, many companies have hesitated to sign contracts with foreign providers. Network World cites Everest Group’s practice director for global sourcing, Salil Dani, as saying that “banks in the U.S. in particular delayed decisions relating to offshoring to locations like India and the Philippines because a number of them have taken funding from the government, and didn’t want to be seen as offshoring while the political rhetoric was at its hottest.”

GM’s decision, however, may reflect a more fundamental issue with outsourcing that is independent of the current economic and political climate.

Are All the Supposed Benefits of Outsourcing Real?

Listing many of the espoused benefits of outsourcing is simple, mostly because these benefits make logical sense. For instance, by outsourcing IT operations, a company can focus its time and energy on building its core business rather than on maintaining and developing peripheral infrastructure. In addition, outsourcing eliminates many of the capital costs, typically converting them to ongoing operational expenses—presumably yielding savings as service providers amortize capital costs across many customers. The quintessential example of IT outsourcing today is the cloud.

DatacenterDynamics’ Ambrose McNevin summarizes one of the concerns of outsourcing to the cloud: “Why tie up your capital when you can outsource to a third party who will manage the IT headache for you? Sound familiar? However what many forgot was that you can only outsource once and the savings don’t accrue, the costs do…[W]hat GM is telling us is that nothing is free and the price of savings is control.” This lack of control begets various difficulties; for one, data and services are entrusted to third parties rather than being kept in house—a deal breaker in some industries, but a questionable matter in others. Dissatisfaction with service providers can also be a headache, as such matters can be more difficult (and expensive) to handle compared with in-house issues.

Although outsourcing sounds great—and no doubt works out well in many cases—it is not a panacea for all situations and all needs. predicts that GM’s move back toward in-house IT signals a trend in which “low-level and routine tasks will remain with third-parties while higher value positions like capacity planning, architecture, and configuration management will move back in [house].”

Industry Seeks Balance?

GM may be a manifestation of an approach to IT that has moved too far to an extreme—outsourcing—in search of cost savings and a leaner business strategy. Certainly, hype can drive an industry to overreach in one direction, leading eventually to a rebound from the extreme. On the other hand, GM may not be the best indicator of a viable business approach. The automaker, known not-so-affectionately as “Government Motors” for its recent federal bailout, has yet to prove that it can maintain a profitable business without extensive outside supports. Bailouts, far from creating an atmosphere of corporate responsibility, simply remove the risks of bad business practices. Other examples of returning to in-house IT might serve as a better, if less remarkable, indicator of market directions.

For offshoring in particular, rising standards of living in foreign countries mean that the cost of doing business with companies in these nations will increase. Such changes will reduce the benefits of offshoring in favor of dealing locally, which avoids the hassles of foreign laws, language barriers, physical distances and so on. This trend, however, would be a longer-term effect and would not necessarily stifle the overall outsourcing market.

Another important point is that GM is a large corporation and thus does not necessarily represent the IT trend for smaller businesses. Mega companies have more capital resources than small companies, so the task of moving IT in house after having already outsourced is—although still expensive—less high of a hurdle. Thus, IT outsourcing trends may differ significantly depending on business size, as well as industry.


IT outsourcing probably hasn’t reached a major turning point, but GM’s plans to bring most of its IT back in house offers companies a reason to pause before blindly outsourcing. The consequences of moving IT operations outside the company are certainly not all positive, but the balance sometimes tips in favor of keeping IT under the company’s roof.


Restrict IT offshoring and prevent immanent skills shortage

January 22nd, 2013

Yet another survey about an IT skills shortage hit my inbox today.

It is an article about how the UK will have 33,300 less IT workers than it needs by 2050.
These surveys always surprise me because I am in contact with quite a few unemployed IT workers. There is talk of there being about 40,000 unemployed IT professionals in the UK. Furthermore IT students coming out of university with IT qualifications are the largest group of unemployed graduates.Out9

The survey blamed: a skills shortage, with people having the wrong sort of skills; an ageing workforce; and a restrictive migration policy, for the shortfall.

On the skills from it seems a shame that the government can’t introduce good schemes to help unemployed IT professionals retrain to fill the gaps. I mean these people have an aptitude for IT so it will only be a case of topping up.

Also the report said another problem is that work related emigration has risen 16% since 2007 while work related immigration has fallen 24%. But if you ask a lot of unemployed workers why they lost their jobs they will often say it was because their jobs were taken over as part of an offshoring contract. This means offshore workers come to the UK to do their job for less, but only for a short period before they are replaced by another, which stops it being recorded as work related immigration.

Also I have spoken to many UK IT professionals that have emigrated and they have done so because they cannot compete on price with offshore workers in the UK.

So workers lose their jobs as a result of the role being offshored. From this point the UK worker ceases to learn new skills on the job, hence adding to the skills shortage. Secondly a worker loses job to offshore worker and emigrates because it is impossible to compete on price, hence adding to the skills shortage.

The third point is that recent graduates cannot get their feet on the IT career ladder because entry level jobs are offshored. John Harris, chair of The Corporate IT Forum and chief architect and head of IT strategy at pharmaceutical firm GlaxoSmithKline (GSK) for example told Computer weekly in a recent interview that years of outsourcing commodity IT skills has much to blame for the lack of grass-roots IT talent today. “It is important to feed the pipeline at the bottom end,” he says.

So why doesn’t the government do something about this. I have nothing against offshoring personally but there has to be a balance. Perhaps flying in low cost labour for short periods isn’t fair. It is up to the government to control this. What is cheap now could be costly in the future.


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