Insight Business

from INSIGHT BUSINESS published by USC's Center for Management Communication © copyright 2006 by USC Marshall School of Business. All Rights Reserved.

The Overlooked Effects of Outsourcing

by Brian Marquez

ABSTRACT: It is evident that the effects of outsourcing go beyond the unemployed worker and affect consumers and society as a whole. Therefore, this essay examines the effects that outsourcing has on America’s education, as well as on the privacy and security of outsourced data. In addition, this essay briefly discusses the hidden business costs that outsourcing entails, such as reduced productivity and decreased customer support. It is important to look into the total costs of outsourcing—and this essay argues that these costs are not worth the savings in wages. The relevant information for this paper comes from newspapers, online news sites, and technology and business industry magazines.

“Pressured by lower-cost competitors, U.S. companies like the instant gratification of savings on wages. But as the real costs of IT outsourcing become apparent over time, many companies may come to realize that it’s no panacea.” - Olga Kharif, the Hidden Costs of IT Outsourcing

Offshore outsourcing has become a hotly debated issue in the current economy. Touted by some CEO’s as a means of slashing cost, outsourcing can be a means of staying alive in a competitive industry. However, to a frustrated worker, outsourcing can become a personal disaster. Jennifer Reingold’s Fast Company article “Into Thin Air” provides personal anecdotes of workers whose careers were destroyed by offshore outsourcing. In some cases workers are forced to train their replacements. However, the grim fact is that workers realize that their careers are not safe anymore. Even more upsetting is the fact that many are unable to quickly retrain to find a new job. While their personal losses are staggering, the effects of outsourcing—whether positive or negative—spill over into society. While outsourcing may reduce costs for businesses, it has additional consequences beyond affecting the livelihoods of jobless employees—including disrupting education, jeopardizing consumer privacy, and introducing business productivity problems. This paper will discuss these indirect negative effects of outsourcing, and argue against it.

Examining the Controversy

The controversy surrounding outsourcing can be distilled into two distinct elements—American workers versus American corporations. Corporate executives see benefits to outsourcing; the primary benefit is cost. A Russian programmer costs 80% less than an American, notes Tom Weakland of the management consultancy firm DiamondCluster (Kharif). Using outsourcing, corporations can save considerable amounts of money. However, this cost savings does not come without consequences. The most controversial impact of outsourcing is the loss of American jobs. Many of these workers—depressed, aging, and unable to retrain—are forced to live off of government assistance. Doug Hill, after losing his job as an automobile designer, lamented “I’m done. I know that. Who’s going to hire me? I’m 60. I’m just living one day at a time, and I do a lot of praying“ (qtd. in Reingold).

Unemployed, and unable to regain their former salary, these outsourced workers do little to help stimulate the economy. Their personal spending is limited, and so are the taxes they pay to the government. Proponents of outsourcing argue that every dollar of offshoring results in 58 cents of savings to the American economy, according to a report by the McKinsey Global Institute (Reingold). However, even the report notes that 31% of workers who lost their jobs never found employment, and 80% took pay cuts. It is evident that although outsourcing saves the American economy money, it also reduces the purchasing power of workers. Companies are able to reduce costs of producing products, but who will have the money to buy them?

Disrupting the Education System

The fear of outsourcing is striking a chord with America’s future employees. Recently, the education system has seen shifts in college enrollment, as college students have begun to shun high-tech fields like computer science. Enrollment in undergraduate computer science courses dropped 19%, and the number of newly declared majors has dropped 23% since last year, according to the Computing Research Association (Schoenberger). The problem has become so bad that Bill Gates personally went on a tour of major university campuses in February 2004 to encourage students to continue with their computer-related majors. Gates points out “Most of these jobs are very interesting and very social—you work with a lot of smart people. I’m excited about the future of computing, and I’m excited to see how each of you can contribute to it” (qtd. in Schoenberger).

However, those remaining in the field are hedging their bets. Information Systems student Vince Ronan notes, “It’s always good to learn more about computer applications, but for stability I think I’m going to focus on business skills” (qtd. in Schoenberger). This exodus of talent from the computer sciences is troublesome to some university department chairs, who are worried about the future of the American technology industry. Economic planners in India and China have made it a national priority to train students in computer science and engineering. The simultaneous decrease of American technology workers and increase of offshore workers poses future problems for the economy, as American companies may be forced to consider outsourcing not only to save costs, but due to lack of local talent.

Some outsourcing advocates blame the education system, instead of the desire for cheap labor, as the primary reason technology companies are turning to offshore workers. The American Electronics Association (AeA), in its report “Offshore Outsourcing in an Increasingly Competitive and Rapidly Changing World,” maintains that American schools fail to provide strong math and science education to students (Delio). Author Matthew Kazmierczak remarks “Companies aren’t outsourcing only in order to obtain cheap labor; they are also looking for skilled technology workers that they increasingly can’t find in the U.S.” (qtd. in Delio). The AeA makes the recommendation that businesses and universities should send their skilled programmers into public schools to mentor and teach, hopefully stimulating in math and science.

However, the AeA’s advice should be taken with a grain of salt. Kazmierczak freely admits the AeA membership is comprised exclusively of business owners, not workers (Delio). As owners, they have a vested interest in saving company money. If they are willing to fire American employees to save money, allowing skilled employees to volunteer and mentor students on company time is unlikely, since that would not be profitable to their businesses. From this perspective, it is clear that critics like the AeA are looking out for their own interests, and are using education as a scapegoat for outsourcing.

Protecting Privacy and Security

Even outsourcing of low tech, non-technology fields can create serious problems. When transcription of confidential records is outsourced to another company, the parent company loses direct control of the data, which is a threat to the security and privacy of records. A disaster nearly took place last year, as an offshore worker in Pakistan threatened to publicly post confidential medical records belonging to the UCSF Medical Center on the internet, unless she was paid. In her message, she warned “Your patient records are out in the open to be exposed. So you better track that person and make him pay my dues otherwise I will expose all the voice files and patient records of UCSF Parnassus and Mt. Zion campuses on the Internet” (qtd. in Lazarus). The shocking part about this was that UCSF had no knowledge whatsoever that confidential patient data left the country. UCSF had originally outsourced their transcription to an American company, Transcription Stat, who subsequently outsourced offshore without the medical center’s knowledge or permission. Even with permission, outsourcing of confidential data is still problematic. Laws in other countries do not have the same rigorous protection for data as in the United States. In Pakistan, where the UCSF security breach took place, there is no foreign equivalent to the Health Insurance Portability and Accountability Act (HIPAA) of 1996, which provides national standards to protect the privacy of personal health information (U.S. Department of Health & Human Services). Since the laws in other countries are different than the United States, it is almost impossible to seek legal recourse for security violations by outsourcing companies.

Analyzing the Hidden Costs

Even if salary costs go down as a result of offshore outsourcing, the total cost of operations for a company need not necessarily decrease. Companies who outsource do not always take into account qualitative measures such as productivity and quality service but tend to focus on quantitative factors such as wages. Tom Weakland, a partner at management consultancy DiamondCluster points out “Most companies can’t accurately measure their productivity and costs prior to and after outsourcing…Most just look at wages” (qtd. in Kharif). Experiences with several companies using offshore workers show that several key factors tend to be overlooked—such as productivity and customer satisfaction.

Productivity is reduced when time zone differences add to the cost and inconvenience of managing offshore crews. When software developer Elance outsourced some of its team to India, the U.S. engineering team had to work past 10 p.m. daily just to communicate with the Indian team (Kharif). Also, costs rose when their company executives traveled back and forth repeatedly between the foreign and domestic offices for training and management. The time spent traveling between offices on two continents, in addition to time spent synchronizing time zones with a foreign office contributed to reduced productivity.

In addition, customer support problems can force a company to move support operations back to the United States. Faced with complaints about the quality of technical support, Dell was forced to move its support center from Bangalore, India back to Texas, Idaho, and Tennessee. Customers complained about difficulty of understanding foreign accents as well as an inability to solve complex problems not on a prepared script. “Corporate customers were telling us they didn’t like the level of support they were getting, and in the normal course of business, we made some adjustments,” a Dell spokesman commented (qtd. in Patrick). The lessons learned from Elance and Dell should be taken into consideration when evaluating the feasibility of outsourcing, since these mistakes can erase any cost savings obtained from lower salaries.

Proponents of outsourcing may point out that the cost saved by moving jobs offshore outweighs the problems. After all, if outsourcing cost more money than it saved, would any company do it? The problem is that while the benefits of outsourcing are clear in terms of wage savings, the problems behind outsourcing take weeks to materialize. Dell did not consider beforehand that the customer support backlash would force them to move back to the United States. Elance did not realize that the time differences would severely disrupt the American employees. Accountants and businessmen can accurately predict the cost savings by reduced offshore wages, but for them to predict the costs of external problems is problematic.

Evaluating the Consequences

When it comes to outsourcing, the issues involved affect more than just saving money. They involve affecting society by discouraging future American computer scientists and engineers. By doing so, companies risk total reliance on outsourcing, which may cause offshore laborers to raise their wages—knowing that companies have no other source for workers. In addition, the issues involve accepting fundamental changes to a business. By actively seeking to replace current employees with outsourced labor, and forcing American workers to train their replacements, companies create an organizational culture where corporate loyalty is rewarded with massive layoffs. In such a culture, employees are compelled to jump ship and voluntarily seek new employment opportunities before they are involuntarily forced out of work. Worker morale degrades even more as previously loyal workers are replaced with contracted offshore employees having little personal connection to the company. These workers often do not share the same corporate vision and drive to excel as the original employees, and the quality of corporate data security and customer service may suffer.

Despite all these issues, there is one driving force behind outsourcing—money. In the rush to improve quarterly earnings reports, the proposition of sharply reducing costs is tantalizing. However, it is important to realize the qualitative costs of offshore outsourcing. While the temporary boost in earnings is easily recognized by any executive, the slow erosion of worker productivity and quality is more subtle. The erosion of quality is not evident until a company, like Dell, is faced with massive consumer complaints about lackluster customer service. When a hospital, such as the UCSF Medical Center, is faced with a serious security breach, the true costs of outsourcing rear their ugly head. Any business executive considering outsourcing must ask themselves one question: Are these potential problems worth saving money? Just one security breach or disgruntled customer can destroy a corporation’s reputation. And reputation, unlike cheap labor, is something money cannot buy.

Works Cited

Delio, Michelle. “Outsourcing Report Blames Schools.” Wired News 24 Mar. 2004. 28 Mar. 2004.,1367,62780,00.html

Kharif, Olga. “The Hidden Costs of IT Outsourcing.” Business Week Online. 27 Oct. 2003. Lexis-Nexis Academic. News. University of Southern California Library, Los Angeles. 28 Mar. 2004.

Lazarus, David. “Looking Offshore: Outsorced UCSF notes highlight privacy risk.” 28 Mar. 2004. 28 Mar. 2004.

Patrick, Ryan. “Signs of offshore backlash growing.” ComputerWorld Canada. 02 Jan. 2004. Lexis-Nexis Academic. News. University of Southern California Library, Los Angeles. 28 Mar. 2004.

Reingold, Jennifer. “Into Thin Air.” Fast Company. Apr. 2004: 76-83. Lexis-Nexis Academic. News. University of Southern California Library, Los Angeles. 28 Mar. 2004.

Schoenberger, Karl. “US students shun computer sciences.” Mercury News 24 Mar. 28 Mar. 2004.

U.S. Department of Health & Human Services. HHS – Office For Civil Rights – HIPAA.
Washington: U.S. Department of Health & Human Services, 2003. 28 Mar. 2004.