The outsourcing phenomenon: The good, the bad and the ugly

It’s been tossed about like a political hot potato during this contentious presidential election year: the subject of outsourcing.

In their attempt to gain an advantage in the race for the White House, both major parties have greatly oversimplified a complex economic issue.

Presumptive Democratic nominee Sen. John Kerry has assailed “Benedict Arnold companies” for sending U.S. jobs overseas. Meanwhile, some Bush administration officials have characterized outsourcing as a net plus for the American economy.

In a world of partisan rhetoric and 30-second sound bites, what is the truth about outsourcing?

A distinguished panel gathered Thursday at the Rhodes Center in Tacoma in an attempt to answer that question. Half a dozen prominent area officials assembled to discuss outsourcing and its implications for the nation and Washington state, where seven out of 10 jobs are related to international trade.

“What is this thing we call outsourcing?” asked discussion facilitator Alan Hardcastle, a senior research associate at Washington State University.

Broadly defined, outsourcing is the procuring of services or products from an outside supplier or manufacturer in order to cut costs, although there may be other reasons as well. Outsourcing jobs to other countries, sometimes referred to as offshoring, is the cause of debate associated with this topic.

“To say this is a controversial issue is an understatement,” Hardcastle noted.

While numerous U.S. companies have chosen outsourcing as a viable approach to sustaining business operations and increasing their global market competitiveness, some perspective is needed.

There is no doubt that outsourcing has become prevalent in certain industries such as manufacturing and customer service, as the economy switches to an information/technology base.

“In the industry I work in, there’s a heck of a lot of outsourcing going on,” said Robert Freid, founder and president of Bellevue-based Contract Manufacturing Consultants, Inc.

In today’s economy, there is increased competition, he said, and more risk-taking.

“Outsourcing has been moving up the value chain as far as I can see,” he said.

Jobs that involve repeatable skills and little interaction between people are being outsourced, offered Madhu Rao, an assistant professor of e-commerce and information systems at Seattle University.

Generic jobs are going overseas, while specialized jobs are staying, noted Wally Santella, business development manager with Validio Software out of Bellevue.

“That may change in the future,” he said, “but for now, the U.S. remains the home of innovation.”

Bruce Kendall, president and CEO of the Economic Development Board for Tacoma-Pierce County provided some perspective to an issue he said the media inflames by focusing on the exodus of some jobs.

“Technology jobs are on a growth curve in the United States today,” he said, noting the U.S. Bureau of Labor Statistics projects 670,000 new technology jobs in America over the next five years.

Texas Instruments and Yahoo!, for example, are looking to hire significant numbers of people, he said.

“What are we hearing from companies?” he asked. “They have jobs to fill!”

A small sliver of technology-related jobs in the U.S. are being outsourced, Kendall said, noting that most technology-related jobs in the world are in fact located in the U.S.

“That won’t change this generation or in the next generation and probably not in the next generation,” he said.

Still, part of the problem is the media spotlight on the relatively small number of people adversely affected by outsourcing, said Kendall, who is not insensitive to the plight of those who have lost their jobs.

“There will always be individual stories to tell,” he said.

In spite of the negative publicity outsourcing has been receiving recently, it remains an integral part of a free trade economy.

The most obvious benefit of outsourcing is as a cost-saving measure, Rao said.

“That tends to get blown out of proportion,” he said, pointing out that companies typically save about 35 to 40 percent.

“It is not just the cost factor,” said Sreekanth Nagarajan, director of marketing at Aditi Corp., a software product development company based in India, which has an office in Bellevue.

In addition to being a cost-cutting measure, outsourcing sometimes allows companies to produce the best quality product available, Rao said.

Some companies don’t have in-house people who are qualified to do the necessary work, he said, and outsourcing solves that problem.

While proponents of outsourcing view it as part of a free trade global system that leads to increased economic activity and overall job creation, outsourcing is not without its downside – other than jobs lost.

Security is a big concern, Rao said, especially as far as intellectual property is concerned. Your competition may be outsourcing to the same country, he explained. Also, while the U.S. has strict intellectual property laws, he said those laws may not be applicable abroad.

Nagarajan agreed, noting cross-cultural communication is a problem on both sides.

Local and federal governments are developing incentive policies to retain companies and jobs.

“The question is: Should they be doing anything?” asked Rao. “Some businesses say just let it take its course.”

At the federal level, the government should avoid the appearance of protectionism, he said, while at a local and individual level, the government should help temporarily displace workers by providing job retraining and short-term insurance.

Meanwhile, universities and colleges continue to research emerging technologies and customize workforce training programs to meet the needs of a changing labor market.

Those on the panel recommended that higher education expand its focus beyond technology to embrace cross-culture specialization, communication skills, management and entrepreneurship.

“Americans are good at adapting,” Santella noted, “and will do so with outsourcing.”

Rao agreed, saying the future looks bright.

“I don’t think this is a short-term trend,” he said of what he characterized as a paradigm shift in the economy and education. “It always results in something better for the country that outsources.”