((Published in the BusinessMirror under the Mirror Image column, Nov 11, 2008)
Now that President-elect Barack Obama will be inaugurated on January 20, 2009, many are holding their breath, especially the business-process outsourcing companies in India, the Philippines and others, as to how he can turn around the outsourcing of jobs from the United States. In debates and on the road, Obama repeatedly said that if elected, he would discourage companies from “shipping jobs overseas” by taking away tax breaks, or by giving benefit to those corporations that keep jobs domestically.
“We can keep giving tax breaks to companies that ship jobs overseas, or we can give tax benefits to companies that invest right here in New Hampshire,” Senator Obama said at a joint appearance with Sen. Hillary Clinton in Unity, New Hampshire.
According to CIO magazine, economists and legal advisers contacted about those comments said they are unaware of any specific tax breaks aimed at offshoring or outsourcing tech jobs. Instead, they said, Obama may be targeting broader tax-deferment strategies, such as the ability of multinational firms to avoid taxes on profits by moving money overseas.
But can corporate tax policy alone really do much in stopping the offshoring of US jobs? Some analysts don’t believe so. “Any plans for a Tax Code change are like trying to plug a hole in a leaky dam with your finger—to believe the US government Tax Code promotes outsourcing is a major misconception of the fiery debate around outsourcing offshore,” according to Joe Greco, director of California State University-Fullerton’s Center for the Study of Emerging Markets. Also, according to a Computerworld report, Nielsen Co., the media company known for audience measurement, has given up tens of thousands of dollars in local tax breaks this year after signing up with an outsourcing provider based in India.
Back in 2004, John Kerry was, likewise, criticized for using the same tax-policy argument against offshoring. Factcheck.org, a political-analyst group, pointed out that taxes “are a very small part” of companies’ decisions to move jobs offshore. Those at a 2005 Brookings Institution summit on trade also said taxes had little to do with outsourcing. In addition, Joel Slemrod, a tax expert at the University of Michigan’s business school, said that, “For those who see [offshoring] as a problem, this is not a solution.”
And so US companies continue to outsource. One glaring reason is the huge cost differential between the United States and offshore providers. A programmer can be hired in China for $12 an hour while the same goes for $56 in the United States. Depending on the skill and location of the offshore vendor, the international wage ratio can reach 100:1 as corporations outsource to where they can reduce costs and maximize profits. Experts predict that the significant cost differential between the United States and other countries will continue for 30 years.
Although cost reduction is the major reason US companies do offshoring, there are a number of others why firms do it. According to a 2004 Outsourcing World Summit report, of the Western firms that do offshoring, 9 percent want to gain access to skills and 3 percent require innovation from the outsourcing vendor, and the number is growing. And why not? China and India graduate a combined half a million engineers and scientists a year, versus 60,000 in the United States; India and the Philippines are already recognized globally as the hotbed of information-technology innovation and creativity in the areas of programming, animation and design.
Many of the outsourcing professionals and executives in India and the Philippines are not bothered by the pronouncements of Obama during the campaign. Outsourcing will continue to flourish in the coming years as corporations find ways to stay competitive. As India’s Finance Minister P. Chidambaram commented, “Once Obama is in office, he will realize that it is an interconnected world, and countries have to work together.”
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“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA program of De La Salle Uiniversity Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit his blog at http://rlugtu.blogspot.com.>
Now that President-elect Barack Obama will be inaugurated on January 20, 2009, many are holding their breath, especially the business-process outsourcing companies in India, the Philippines and others, as to how he can turn around the outsourcing of jobs from the United States. In debates and on the road, Obama repeatedly said that if elected, he would discourage companies from “shipping jobs overseas” by taking away tax breaks, or by giving benefit to those corporations that keep jobs domestically.
“We can keep giving tax breaks to companies that ship jobs overseas, or we can give tax benefits to companies that invest right here in New Hampshire,” Senator Obama said at a joint appearance with Sen. Hillary Clinton in Unity, New Hampshire.
According to CIO magazine, economists and legal advisers contacted about those comments said they are unaware of any specific tax breaks aimed at offshoring or outsourcing tech jobs. Instead, they said, Obama may be targeting broader tax-deferment strategies, such as the ability of multinational firms to avoid taxes on profits by moving money overseas.
But can corporate tax policy alone really do much in stopping the offshoring of US jobs? Some analysts don’t believe so. “Any plans for a Tax Code change are like trying to plug a hole in a leaky dam with your finger—to believe the US government Tax Code promotes outsourcing is a major misconception of the fiery debate around outsourcing offshore,” according to Joe Greco, director of California State University-Fullerton’s Center for the Study of Emerging Markets. Also, according to a Computerworld report, Nielsen Co., the media company known for audience measurement, has given up tens of thousands of dollars in local tax breaks this year after signing up with an outsourcing provider based in India.
Back in 2004, John Kerry was, likewise, criticized for using the same tax-policy argument against offshoring. Factcheck.org, a political-analyst group, pointed out that taxes “are a very small part” of companies’ decisions to move jobs offshore. Those at a 2005 Brookings Institution summit on trade also said taxes had little to do with outsourcing. In addition, Joel Slemrod, a tax expert at the University of Michigan’s business school, said that, “For those who see [offshoring] as a problem, this is not a solution.”
And so US companies continue to outsource. One glaring reason is the huge cost differential between the United States and offshore providers. A programmer can be hired in China for $12 an hour while the same goes for $56 in the United States. Depending on the skill and location of the offshore vendor, the international wage ratio can reach 100:1 as corporations outsource to where they can reduce costs and maximize profits. Experts predict that the significant cost differential between the United States and other countries will continue for 30 years.
Although cost reduction is the major reason US companies do offshoring, there are a number of others why firms do it. According to a 2004 Outsourcing World Summit report, of the Western firms that do offshoring, 9 percent want to gain access to skills and 3 percent require innovation from the outsourcing vendor, and the number is growing. And why not? China and India graduate a combined half a million engineers and scientists a year, versus 60,000 in the United States; India and the Philippines are already recognized globally as the hotbed of information-technology innovation and creativity in the areas of programming, animation and design.
Many of the outsourcing professionals and executives in India and the Philippines are not bothered by the pronouncements of Obama during the campaign. Outsourcing will continue to flourish in the coming years as corporations find ways to stay competitive. As India’s Finance Minister P. Chidambaram commented, “Once Obama is in office, he will realize that it is an interconnected world, and countries have to work together.”
---------------
“Mirror Image” is a rotating column featuring writers from the DLSU Professional Schools Inc.
Reynaldo C. Lugtu Jr. teaches management and marketing courses in the MBA program of De La Salle Uiniversity Graduate School of Business. He may be e-mailed at rlugtu2002@yahoo.comThis e-mail address is being protected from spambots. You need JavaScript enabled to view it or visit his blog at http://rlugtu.blogspot.com.>
Comments
Outsourcing an entire group of rock solid developers in the USA to China or India might not be the best thing in the upfront cost.
Second, quality of software from these companies is still to be questioned. It costs a lot of money to retrain Indians how to think like American software developers as it costs vice versa.
A better approach is to develop locally for local markets, and access the global pool of developers. More companies seek this approach than just outsourcing the entire team to India or China.
I fully agree that at some point, the "fair market value" of technical services is going to reach some "equilibrium".
Furthermore, I suspect that like any other "trend" the outsourcing pendulum will overshoot on both the plus and minus side before we reach that "optimum" point where the comparative advantages of each culture and country will be optimized.
As I perceive it, given there are more people than work in the world, I suspect we are all likely to become contingent or part time workers.
BR,
Dr. PDG, Jakarta
Yes, the labor savings are much more significant than any tax incentives or penalties. But at my last company the untracked costs of offshoring eroded a good portion of the labor benefits and in my opinion cost us more in terms of lost quality and market perception (e.g. future sales).
First of all your documentation processes have to be water tight, because the offshore resources coded exactly what is written. And too often when clarification is needed the offshore developers either didn't have the inter-personal relationship (with the onshore designers) and/or take the time to get the clarification needed to prevent code defect. There are so many opportunities for processes to breakdown and erode quality in an offshore model. This model also take a lot more management and oversight than offshoring advocates tend to admit. Perhaps an even more critical risk is the loss of institutional knowledge. Our offshore locations had very high turn over rates, as developers would leave for what we would consider very minor pay increases. This impacted project times and resulted in re-training costs. These undocumented cost to the business have to be consider, but they are often overlooked because they don't show up as a line item on the quarterly P&L.
One practice that Obama should put a stop to is onshoring delivery resources under H1B visas. In recent years I've seen U.S. companies (bidding U.S. rates) lose services work to onshoring companies (bidding offshore rate). In my mind this is a gross violate of the intent of the H1B program.
Ray, I find it interesting that you cited that 3% of companies were looking to offshore vendors for innovation. That means that 97% are only looking for the lowest price possible. Which is about right for us. Unfortunately this trait of our will be America's undoing.
Why do people who complain about it wear clothes made in China/Korea or Italy/France and drive cars made in Japan or Germany?
Do you believe in capitalism and free markets or do you believe in artificial socialism like propping up failing industries and companies?
The first problem is that as long as Americans get health insurance through there jobs, and as long as health care in America is very much more expensive than in other DEVELOPED countries, much less undeveloped countries, because we compensate the drug companies for the lack of profit elsewhere, that aspect of labor in America will be more expensive here than elsewhere, and a reason to move work offshore. I don't like the idea of nationalized health care, but if we live in a world where the price of care is dictated everywhere else by government regulation, then we put ourselves at a cost disadvantage not to do likewise.
Furthermore, we need treaties with other countries governing Americans buying drugs in other countries, and the use of drugs in other countries being evidence that they would be safe and effective in America. The FDA needs to think globally.
About H1B Visas, there are two reasons why an employer uses them. The first is to save money and the second is to get some skill not otherwise available. To keep domestic wages up, we need to get rid of the first reason completely. The best way to do this is to keep the number of H1B Visas the same or smaller, make a small number of visas available every week, and auction them off on something like ebay, to the highest bidder. It is very important that government connections NOT allow some employers preferential access to these visas. It is also important to make the visas rare enough that they are expensive. You save by paying an Engineer $30,000 per year instead of $90,000, but if the visa costs you $500,000 every year, that H1B visa no longer makes economic sense, so you hire the green card holder for $90,000 instead. Yes, you can move the job to China and pay for the same work $5000, but if you COULD move it, you WILL move it, whatever the H1B Visas are, so there is no reason to make H1B visas affordable.
This will mean that it becomes more worth training locally available talent.
About availability of talent, there are at least three problems going on to explain that.
The first is that American public schools are systematically against academic accomplishment. Why are the pep rallies for the football team and not for the math team or the debating team? The second problem is that we spend far too much of educational budgets on expenses that are not related to teaching and learning. Why do we need so many administrators and other people who do not teach? Why are textbooks made available as hardcover paper books instead of online, where correcting the many errors in them becomes practical? The third problem is that many of America's most competitive universities have been importing a lot of their talent, especially in math and sciences, over the past 20 to 50 years. Since 9/11, America is much more hostile to foreigners AND the alternatives to America have improved. Thus, we don't have the same supply of foreign-born faculty. They are going elsewhere, including back where they came from.
Finally, one problem with American corporations is that they evaluate performance in much too short a time horizon. For example, you have a team of Americans with an average of 10 years experience each. You replace them with a team of Indians with an average of 2 years experience each. Short term, you save a lot of money, doubly so because younger people not only get paid less but cost less in health insurance, family health insurance, sick time, etc. In the 5 year term, the quality of your product may go through the floor, because of the lack of experience in your team. I am not saying that Indians are any worse than Americans overall. I am saying that a team with 10 years of experience will be able to make a higher quality product than a team with 2 years of experience.
So...the way to fix that is to shift the business tax policy so that short term gains are taxed to the point where they hardly exist, and long term gains are not so taxed.
The best way to provide incentives to move work back to this country is to get rid of all taxes paid by an employer that are a function of the number of employees or of what they are paid, and to substitute a national sales tax or VAT tax or something that taxes selling stuff here. I do not only mean imported stuff, but since most of what we buy is imported, this will in effect tax imported stuff too. In fact, let's offer negative taxes for hiring permanent employees in jobs that pay well. The sales tax (or whatever) gets paid on that camera whether it is made in China or America, but the negative taxes give a reason to make that Camera in America.
So, government policy can change the incentives. I don't know that there is a political will to do it, and the attempts I list will likely have unintended consequences, but let us not pretend that it cannot be done.
As for the question about what policies Obama will take with respect to globalization, only time will tell. During the campaign Obama quoted from Friedman’s book, ‘The World is Flat’, on a number of occasions. In the area of US education, he used Friedman’s argument that the US should step up to the globalization challenge and compete by investing in better educational programs for the next generation, especially in the area of math and science. I believe in this position as well.
When it comes to Rey’s statement about the 60,000 new engineers versus the 500,000 in other countries, I take exception to Rey’s tone. I believe there is a market reason why this has occurred. Many of the US originated large technology companies and consultancies have taken a pure globalization approach and have closed down development shops in the US in favor of the cheaper labor markets abroad. The result is the appearance of very few entry level jobs in this country in the area of technology. Many of us in the US worked our way up through companies by starting in operations jobs and help desks which are now off-shored. These types of jobs are no longer available for folks getting CSC jobs here. How can we expect a new CSC/CIS graduate to go from 0 to 60 with no runway?
My belief is that the mass exodus of US based programming/helpdesks/R&D to off shore locations is short sighted and motivated by short term financial gains. There are smart people everywhere in the world. They need a chance to prove their abilities. Some globalization ‘friction’ ( to use a Friedman concept ) should be a moral imperative of multi national companies. If we want to see more US graduates in the area of computer science and information systems, then companies which have completely off-shored their entry level work should create some entry level ‘work-abroad opportunities’ for US workers. Otherwise, if there is no-chance/slim-chance at a job in CSC/CIS when graduating from a US college, as a new US college student, why commit to a four year or six year degree program with little to no chance at landing a job in the field?
I do not believe that government ( Obama administration ) should have to create the fiction. Tax loop hole aside, I believe if companies looked long term and would like to keep their options open by having access to labor pools globally ( US included ) then their hiring policies and HR programs should reflect a longer term view. In my opinion, companies should work to create pools of talent all over the world so that the globalization ‘engine’ continues to run on all cylinders.
While at one point in time, unions were very much needed, is there really a reason that unions are needed now? Remember when the dock workers went on strike? The affect of that strike was felt all over the US not only by consumers but by companies too as their food stuffs deteriorated and their merchandise went unsold. The US needs to get rid of these unions and the power they hold over the economy. We do not have a cruise ship registered in the US because of unions.
One day, the playing field will level out. In some industries, it is happening now. Other countries are trying to find resources in the US to fill positions that cannot be filled in their own country but I do not foresee it happening within the next 5-10 years.
Outsourcing can be stopped pretty easily using 3 different rules:
1. Stop allowing people from India, China, and other countries to come into the US to get educated
2. Stop allowing people to come to the US, work at companies, get trained and then go home (stop the work visas)
3. Tell any company that has a contract with the Gov't, whether its State or US, that they will cancel the contract(s) if the company continues to outsource work. The US Gov't wants all the resources employed to be on-shore. If the employee is doing work for a US contract, all employees must work in the US. If they are a global company, then the global workforce can take care of their needs. If the product is sold internationally, then the product must have 50+% of the workforce here in the US. There are no exceptions to the rule.
Now granted, I have stated this in simple terms and realize the oversight would be hard, however, if they make the rules simple (stop laughing), no loop holes, in black and white so that some judge somewhere can not overturn the law, then there wouldn't be an issue. It is getting the politicians who make so much money off these corporations to pass the laws and make them simple will be the impossible part.
Maybe we should protect the title "engineer" and again look at the facts regarding skilled labour.