How outsourcing will destroy the US Economy

1
How outsourcing will destroy the US Economy

• Nicole Ball
• Daniel Castillo
• Navid Hajisaghati

2
Table of Contents

• Definitions
• Historical Background
• Implications of Outsourcing
• Conclusion

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Definitions

• Outsourcing
• The procuring of services or products from an
  outside supplier or manufacturer in order to cut
  costs.
• Offshoring
• Relocation of business processes to a lower cost
  location. It can be seen in the context of either
  production offshoring or services offshoring.
• Insourcing
• The delegation of core operations or jobs from
  internal production to a subcontractor or other
  external entity that specializes in that
  operation.

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Historical Background

• 1970s
• Companies start exporting payroll applications to
  external providers
• Payroll processes did not vary significantly
  between companies and lead to the creation of
  third party providers
• 1980s
• Free Trade Agreements
• US-Canada Free Trade Agreement
• The fall of Berlin wall-11/9/89
• Free market capitalism
• The world is a single market
• Adoption of common standards

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Historical Background

• 1990s
• Netscape went Public (1995)
• It gave the first broadly popular commercial
  browser to surf the internet
• The roll-out of Windows 95
• Start of the Dotcom era
• Work flow software
• Development of new data description language-XML
  and related transport protocol-SOAP.
• PayPal facilitates customer-to-customer
  transactions.

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Historical Background

• 1990s
• Open-Sourcing
• Open-source software is shared, constantly
  improved by users and made available to anyone
  for free
• Intellectual commons movement
• Free software movement
• Out-sourcing Y2K
• Outsourcing from America to India, as a new form
  of collaboration led to e-commerce and main frame
  applications.
• Y2K readjustment work was done largely by
  low-cost Indian workers.

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Historical Background

• 1990s - XXI Century
• Offshoring- Companies build off-shore factories
• Obtain cheaper labor for products they want to
  sell in America or Europe.
• Serve foreign market without worrying about trade
  markets and gain dominant foothold there.
• China emerges as the preferred destination for
  production offshoring
• India consolidates as the dominant player in the
  services offshoring domain

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Historical Background

• 1990s - XXI Century
• Supply-chaining
• The development of fast, efficient and effective
  supply chains to deliver products from anywhere.
• The Wal-Mart effect
• In-Sourcing
• Doing logistics- Fed-Ex, UPS
• A new form of collaboration and creating value
  horizontally.
• In-Forming
• Web-Search- Google, Yahoo!, MSN
• The rise of groups and web-blogs.

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The Triple Convergence

• The creation of a global, web-enabled playing
  field that allows multiple forms of
  collaboration, the sharing of knowledge and work,
  without regard to distance or geography, and soon
  even language.
• Global companies lose walls, floors and
  buildings. Employees are now a vast , global pool
  of specialist, assembled (and disassembled)
  according to needs.
• New opportunities are created for individuals to
  compete against anyone, anywhere in the world
  using the new, Flat Rules.

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Implications of Outsourcing

• Reduced quality
• Tax fraud
• Security breaches
• Employment losses
• Skill premium erosion
• Reduced competitiveness
• Instability

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Reduced quality

• On par with expected standards?
• Goods sector standards
• Food safety recent pet foods scandal
• Drugs safety
• Service sector standards
• Local management vs. management overseas

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Tax fraud

• Reduction in tax income to US government
• Corporate tax frauds
• Individual tax frauds
• Money laundering

13
Security breaches

• Different laws, regulations and punishments
• Sensitive personal and financial data
  regulations?
• April 2005- Citibank case
• National security
• Our trade partners Friends or Foes?
• The case for outsourcing sensitive technology
  overseas

14
Employment losses

• Forrester Research predicts 3.3 million service
  jobs will be outsourced between 2000 and 2015
• BLS reported 8 of mass layoff events in 2007Q1
  were due to outsourcing
• Increases worker insecurity, changes expectations

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Consumption holds GDP up
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Employment losses

• Forrester Research predicts 3.3 million service
  jobs will be outsourced between 2000 and 2015
• BLS reported 8 of mass layoff events in 2007Q1
  were due to outsourcing
• Increases worker insecurity, changes expectations
• An acceptable level of unemployment means that
  the economist to whom it is acceptable still has
  a job.

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Skill premium erosion

• Lower prices, same skill set
• Downward pressure on wages
• Declines in consumption
• Benefits of higher education decline
• Costs of higher education continue to rise

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Government spending on education falls
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Skill premium erosion

• Lower prices, same skill set
• Downward pressure on wages
• Declines in consumption
• Benefits of higher education decline
• Costs of higher education continue to rise
• Less innovation

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Reduced competitiveness

• Technology is a main component in innovation
• Lose competitive advantage in outsourced-sectors

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Instability

• Interconnected world
• Changes in government regulations and policies
• Natural disasters, war
• Increased volatility

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Benefits of Outsourcing?

• Distortions in real-world skew the theoretical
  benefits
• Large income disparities

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Conclusions

• Outsourcing is BAD
• Quality reduction
• Problems with tax fraud, security breaches
• Employment losses are real
• Skill premium erosion hurts innovation
• Reduction in US competitiveness
• Instability in all markets