Nearshore Americas

The Contrarian: A Modest Offshoring Proposal

“The biggest weakness I think we have in America is we have forgotten the long term”, says Larry Fink the founder and CEO of BlackRock, Inc., the world’s largest asset management company.  A similar sentiment can be heard from Warren Buffett, the quintessential investor.  What does this have to do with offshoring?  Offshoring is, I believe, a perfectly acceptable method for cost management – usually.  I say usually, because in our current situation, offshoring’s short-term gains could have undesirable long-term consequences.

Technology broke the bonds of co-location previously required for many jobs. Now co-workers, or even employee and customer could be across the room, across the country, or across the globe.  This distance independence allows the substitution of cheaper labor from other countries providing an effective way of reducing costs.  The offshoring market is estimated at around $100 billion a year and growing at around 20 percent annually.  For the most part, workers are not being hurt by offshoring, at least at the macro-level, if the economy can create new jobs of equal or greater value, that exceed or at least match, the level of offshoring.  And it more or less has – until now.

Companies considering offshoring face a short term verses long term conundrum, whether they know it or not.  While offshoring might be a good short-term decision, its long-term benefits are questionable.  Why?  The US consumer, that’s why.

We live in a consumer driven economy.  Some countries, like China, are export driven, deriving the majority of their income from selling their wares outside their borders.  Not us.  We rely on the US middle-class consumer to buy our goods and services.  Three significant factors are now converging to upset our middle-class driven economic applecart. First, while consumption has risen over the last four decades, real wages have not, resulting in the US consumer going into debt – significant debt – to keep the corporate lights on.  In 2009, US consumer debt was nearly $2.5 trillion dollars or almost $8,100 for every man, woman and child in the country.

Second, if that’s not bad enough, increasingly the goods and services the US consumer is buying are made in foreign countries by foreign workers.  For four decades now our net imports have eclipsed our net exports.  The trade deficit for the month of August 2010 was $46 billion.  Neither our consumer debt nor our four decades old trade deficits are sustainable.

What does this have to do with offshoring?  Well, offshoring is the third leg of our poverty troika.  By taking jobs from middle-class consumers we are eating our seed corn.  We currently have 15 million Americans out of work by government count, and up to 50 percent more according to other sources.  Workers we rely on to buy our refrigerators, purchase our cars, and eat our Big Macs.

And things could go from bad to worse.  According to a 2007 Princeton study, and backed up by one done at the Harvard Business School the following year, somewhere between 25 and 42 percent of all American jobs – a potential 57 million US jobs – are “offshorable”. Unemployment even close to that level would place significant pressure on the wages of those who have jobs, lowering middle-class purchasing power even more.  The result would be a customer base effectively cut in half.

In short, the system is broke.  This reality seems to fly in the face of our visceral belief in free trade which, after all, brings cheaper goods to the US.  The flood of products from lower cost producing nations means US consumers pay less for the bobbles that adorn their heavily mortgaged homes.  But since consumers are making less in real dollars than they did a few decades ago, or not making anything at all if unemployed, they are slowly going broke saving money on these imports.

In general, free trade and open competition are the right courses of action for an industrialized nation.  They are the activities, if not the life blood, of a healthy economy.  The operative word here is healthy.  While some activities are good and proper for a healthy human, those same activities could be deleterious when the person in sick.  We have an ailing economy and what was appropriate for it when it was healthy might turn out to be injurious now that it is sick.  For business this means that, while corporate goals may remain unchanged, the times dictate a strategy correction if we are to realize those goals.

Let’s  institute a temporary suspension of offshoring until the middle class can get back on its consuming feet.  How long? Don’t know. Maybe two years, maybe five years. Certainly until the economy can, once again, create more jobs of equal or greater value than it loses.

The one thing that economists agree on (and maybe the only thing) is that economies like stability.  We need a stable work force, a stable credit market, a stable set of government regulations, a stable consumer base, and a stable almost anything else you think of, for a good business environment.  But right now things are out of wack and all Americans, from your grocer to your CEO, are going to suffer unless we get back on track.  We need a prosperous customer base that is willing to shell out hard earned dollars for the goods and services our companies peddle.  What can we do to restore that stability?

Sign up for our Nearshore Americas newsletter:

Well one thing we can do is institute a temporary suspension of offshoring until the middle class can get back on its consuming feet.  How long? Don’t know. Maybe two years, maybe five years. Certainly until the economy can, once again, create more jobs of equal or greater value than it loses.

How much impact will a suspension of offshoring have on joblessness?  Well, probably less than one would hope.  It took us forty years and many hands for us to get into this mess.  No one remedy is going to solve it.  Reducing or temporarily eliminating offshoring will help.  And saving just one job is a big thing, especially if that job is yours.

Is this some flag waving appeal to patriotism?  Not at all, it is just good long-term business sense.

George Tillmann is a former CIO, management consultant, and the author of The Business-Oriented CIO (John Wiley & Sons, 2008). He can be reached at

Tarun George


  • If there really is a need to do something drastic, I think a temporary suspension on foreign imports is a more viable solution. To suspend outsourcing is to deprive businesses of one of their primary cost management tools. And while it may temporarily have a positive impact on employment rates, forcing companies to increase the costs of doing business (in this case by forcing them to employ significantly more expensive labor) is never a long term solution. It will only leave business in worse condition when the suspension finally ends. Meanwhile, those who do secure employment in the "new" job market will most likely use their income to continue purchasing the cheap foreign imports, be they cars, electronics, appliances. Especially since the prices of domestic goods and services will no doubt have to increase in order to cover increased wage costs.

    At the very least, a suspension (or severe restrictions) on foreign imports puts the U.S. in the driver's seat. You get to control who has access to your markets and make them pay a premium for that access. At the same time, U.S. companies can continue to utilize outsourcing as a means of reducing costs and focus on creating products and services that can truly compete in quality and price in the global market.

    In the end, both strategies have one serious flaw: they create an artificial wall around U.S. markets that removes companies from competitive global markets. And this self-imposed isolation can only have a negative impact in the long term; with isolationist strategies and government regulated control of competition comes the death of the need to innovate and evolve. And if U.S. companies need to learn anything right now to protect their future, it is how to innovate and evolve.

  • Great points John.

    One aspect you've missed however is rural sourcing, or home sourcing in the US. With employees working from home, many of the regular brick and mortar overhead costs of a call center or IT delivery operation are eliminated. As well, because of the slump in employment there are plenty of qualified workers ready to go, and with perfect English. That takes care of two main concerns for firms – scalability and language proficiency. Wages in rural locations are also much less than in large cities.

    Yes those wages are higher than in an offshore location, but all of this considered, your point about US workers being 'significantly' more expensive labor is not fully accurate. But I do agree that a suspension of outsourcing is not the way to go. Restrictions on imports may be more like it, however doesn't solve the main issue that George was getting at, which is US unemployment.

  • Let’s not minimize the seriousness of our situation. Last night on 60 Minutes, in the segment on Fed Chairman Bernanke, the comment was made by interviewer Scott Pelley, that never has the gap between US rich and US poor been greater. I do not know if this is true, but even if he is close the thought is chilling. He also stated that the gap is greater in the US than in any other industrialized country.

    A university study showed that from 1990 to 2005 CEO compensation increased 300% (adjusted for inflation) while workers gained only 4.3%. According to the BLS worker productivity for the same period was up almost 40%. So the productivity gain achieved by the workers was pocketed by senior executives.

    Is this bad? Well when the disparity between rich and poor gets too great political upheaval can result. I don’t mean the French Revolution or the Russian Revolution, thought I guess it is not 100% out of the question, but rather a fed up middle class could bring about political, legal, regulatory and tax changes that hurt far more than allowing the middle class to enjoy comparable gains to the wealthy.

    I am not Chicken Little. I worked in Japan in the mid-eighties and never felt that the Japanese would overtake the US as was commonly felt here. I don’t scare easily. But I do believe that a sustained imbalance is not good for the middle class, not good for the poor, and not good for the rich. Stability, where everyone shares in the pie is the best course. It is, I feel, what the framers of the Constitution meant when they said we should “insure domestic tranquility…[and]… promote the general welfare.”

    Outsourcing and offshoring are not wrong. They are just not the right tactics to use while our economy is in this terrible state.

  • Tarun: Your points about rural sourcing are interesting and do address the issue of cost. Opportunity cost also needs to be considered: how many clients are lost due to the inability of an offshore CSR to accurately comprehend their needs, whether that is due to cultural or linguistic differences? Still when we talk of outsourcing, we are not just considering the voice processes. Manufacturing and BPO work constitute a massive piece of the outsourcing pie. I do find it difficult to believe that company X is going to find U.S. based workers willing to assembly a pair of jeans or electronics for the wages paid when those processes are near- or off-shored. Likewise with accounting services.

    George, I completely agree that the issues currently facing the U.S. cannot be trivialized. My main point was that, in my opinion, a U.S. company focused on innovation, with access to low cost labor and resources, is going to be the engine that drives the economy forward. Retreating behind a protectionist wall may be a short term solution, but I truly believe it will leave companies in worse shape when the suspension ends.

    Thanks for the discussion!

  • Interesting and provocative. One could take something like this as "ha ha funny" or seriously. I am talking the argument seriously. To say "…one thing we can do is institute a temporary suspension of offshoring until the middle class can get back on its consuming feet…" is conceptually interesting, but you could say the same for physical supply-chains. Let's not buy anything that has imported items in it's supply chain. That would have two effects: (1) – 90%+ of the items in Wal+Mart would have to go, and (2) whatever remains would become incredibly expensive and the consumers, specially the pooorer consumers would suffer greatly. Sorry bro, no iPad for you, since it is designed in California but MADE in China with global parts. Sorry pal, no BMWs, and even more strange, no Chevy Pickup trucks since they have imported parts. Another problem is that the global economy is less dependent on the US economy, and the BRIC+ countries could (at some point) decouple. This could create a gigantic problem – where would the US exports go ? So, no, I do not think the argument is practical – what America needs to do is to invest for the long term in education and infrastructure to make the economy more competitive. Another measure would be to depend less on imported oil and create a real alternative-energy economy. However – I hope I am wrong and there is a good, short-term fix to this. By the way, rural sourcing is an excellent idea, and some parts of South Texas are much cheaper and less developed than, let's say, Sao Paulo Brazil, or Shanghai China.