Difference between revisions of "Talk:IT Outsourcing: Economic and Policy Analysis"

Revision as of 03:36, 4 December 2004

Some considerations for the project: where the outsourcing predominantly goes to. Some of the main case analysis we could make are India or China. As for as IT outsourcing, I think India is the where most US firms are outsourcing to.

Reasons for this: living costs in India are low, India's government focuses alot of its policies to increase their worker's value in the IT sector. From a source (I will do more research on this), earning a $72,000 salary in India, you could live as if you had $100,000 in the US.

Bush administration encourages outsourcing. There was a recent release referring to outsourcing, and basically the Bush administration is mainly concerned with profit maximization, efficiency, but not American "equity". (Are Americans even at par with Indian workers in regards to education level?)

France enacted tax cuts for firms to discourage outsourcing. There are a few articles on this, but I have yet to read them indepth.

Even with tax cuts, firm expenses [including logistics such as operating expenses like high-speed internet access, janitor wages for its facilities, secretaries, airconditioning, complementary food in break rooms-- things often taken for granted at US firms] are much higher than in countries such as India.

India has a surplus of highly skilled, educated individuals, and they are willing to work for a lot less.

• what risks do we run when we outsource IT?

-Mandy

Economic considerations to outsourcing

On the US-firm side, the consideration of whether or not to outsource is made on the basis of a cost/benefits analysis. In this analysis, US firms take into account some of the following in determining whether they choose to outsource or not.

Costs: Increased transportation costs Increased competition from abroad Lower employee morale with lower employee wages and fear of losing jobs

Benefits: Lower cost of production of good Lower wages paid (due to lower standard of living) Cut costs go towards R&D, marketing, business development Decrease layoffs

On a policy leve (US government policy), we would consider the tradeoff between exploiting comparative advantages by outsourcing and the redistibutional effects of outsourcing (loss of lower-level jobs, decreased wages, increased competetiveness from abroad). Its important to confront the tradeoffs with the various costs and benefits to determine how the US should create policy, if at all, to speak to the issue.

User: mandy_c I think communication could be costly as well. And as far as money saved going into R&D, I think it might be a strong assumption. During an earlier discussion I had with someone, they pointed out to me that there are various things that a firm could do with increased profits. Some of these could be simply pocketing the additional profits to increase the value of their shares, or declare more dividends-- it mostly depends in where on the business lifecyle the firm is and whether R&D is a priority. But yes, you're right that it definitely increases the capabilities of the company to develop.

User: bradstr The series of articles (specifically "Sink or Schwinn") in the Nov 13th Economist has some good themes related to this: "Cheaper labor brings down production costs. This keeps companies competitive, raises profits and reduces prices as firms pass their lower costs on to their consumers....Companies spend their profits on improving existing products or introducting new ones. Customers buy more of the things they already consume, or spend the money on new goods and services. This stimulates innovation and creates new jobs to replce those that have gone abroad."

User: bradstr There may be some interesting data in a 2003 McKinsey Global Instituate Study to bolster the argument for global outsourcing. The fourth paragraph of this (Exploding the myths of offshoring - might require free registration to read) article says: "...offshoring creates wealth for the United States as well as for India, the country receiving the jobs. For every dollar of coprorate spending ousourced to India, the US economy...gains as much as $1.14 in return." I couldn't find the original source of the data, but the library may have premium access to McKinsey content. Quick update - this may be the original source of the data: Offshoring: Is it a Win-Win Game? (may require free registration)

Non-economic considerations in outsourcing

User: mandy_c I think one of the technological incentives to outsource are that older technology and processes can be outsourced to countries such as India, leaving US workers to devote more energy in R&D. But there are also many technological disincentives for outsourcing, one big one being the risk of "losing it all". If technology development and maintenence is outsourced, foreign agencies might not deliver what they had promised, or classified information might leak.

Analysis of existing public policies

I know that France has announced that it will enact tax breaks for 20 "competitiveness zones" in hopes that outsourcing will become less of an issue to its economy. I'm trying to find more information about what industries France is primarily concerned with, and what their ultimate concerns are.

I'm debating whether to take an international stand on research of public policies, or to stick with local ones such as San Jose's "living wage" ordinance that directly involves tech jobs.

I can approach it the following way:
1) Foreign country policies on outsourcing
2) Discussion of industry differences
3) Possible downfalls of the comparison
4) Domestic policies that effect outsourcing--minimum wage laws

US public policies to "manage" outsourcing

User: aamiralavi Im not convinced that these measures are necessary. Several of the articles that were posted claimed that the effects on the US workforce in the long-run will not be negative. Instead, outsourcing is a positive phenomenon in the long-run (its really only hits us in the short-run). Also, several of them showed that its more of the blue-collar jobs that are outsourced, so i dont think extra education would be that effective, unless we can move people from a level of education where they would be blue-collar to white-collar. I think once we do our economic analysis of outsourcing, we might find this to be true. This is because each country is working with its comparative advantage. This saves money for US firms to invest in other initiatives (or skim off the top), but also work towards long-run gains. So i think the policy alternatives (a-e) suggested in section 4 should be reconsidered because i think we still have to do our economic and technological to evaluate if we need to (or should) try and keep jobs in the US. Instead, we can focus on US policies towards outsourcing and maybe based on our sectoin 1 and 2 evaluation, if they should be relaxed or more restricted. I think a bigger issue is dealing with decreased US wages due to outsourcing.

User: jk37I agree with Aamir but maybe we need to do more research on that to decide. Anyway, I will collect the data as much as possible in the beginning. One thing that I am not sure of at this point is whether our research should be normative or not. Of course this should be also decided after our indepth reserach such as reviews on cons/pros and cost/benefit analysis of outsourcing as well as a comparative case study, followed by our discussion. But my question is whether we want to take sides in our conclusion. Or do we just suggest possible best (and alternative) policies like a bi-partisan policy think tank does? I think we need a consensus on this before we get started our research.

User: BradstrProf Maurer's instructions said that we were supposed to create a neutral policy paper. So, for policies, it seems like we should discuss the relevant policies that have been proposed and the pros/cons associated with them. I agree that policies such as penalties for companies that outsource are too far reaching. For bad policies such as this, I think we will find the cons will outweigh the pros. For education though, the paper that discusses outsourcing in Washington State (Global IT Sourcing: Impacts and Implications for Washington State) has some interesting thoughts on why and how our education of IT professionals could be changed to allow us to be better prepared for an increasingly outsourced economy.

The Paper

Introduction

In this brief we investigate the causes and effects of recent increased IT outsourcing to lower-waged countries. In the first section, we examine the economic considerations to outsourcing IT work abroad. The economic considerations include a cost/benefit analysis of the impact that outsourcing has on an individual firm and on the US market as a whole. This section provides insight into the economic incentives to outsource or not. Delving into the economics of outsourcing has important implications for policy because policy can alter decision making of whether to outsource or not by changing incentives. We then analyze the non-economic issues involved in outsourcing. These include looking at the risks and benefits associated with project quality, public relations, employee morale, and time to market. We then address the educational curriculum in the United States, along with recent trends of views on the IT industry in the US. Through recent trend analysis we will provide an explanation for why outsourcing is a growing phenomenon. Finally, we will examine the possible public policies and discuss their feasibility. Although offshoring is still small relative to the total U.S. job market, it is likely to increase in the future and the issue of offshoring across geographic and temporal boundaries requires detailed analysis of complex short and long-term issues, both on the national and international level. With careful consideration of all stakeholders mentioned here, and with thorough analysis of the strategies, outsourcing can be a “win-win” situation for all. Tough tasks remain to policymakers.