Few management trends have been as defining -- or as divisive -- for the American economy over the past two decades as the practice of companies moving employment or business functions to other nations that can do the work cheaper or better. Call it outsourcing or offshoring, but one effect is the same: job loss at home.
Whether outsourcing will prove to be a long-term benefit or hindrance to the U.S. economy is debatable. But the point increasingly seems moot. Offshoring is so widespread today that almost any company of size is doing it or preparing to. Indeed, outsourcing of manufacturing to China has become almost standard practice, and it is a prime cause of last year's near-$200 billion trade deficit with the mainland. Gartner Inc. estimates the value of offshore information technology and business-process outsourcing totaled $34 billion in 2005 and could double by 2007. India's 60% share of that business will likely decline due to growing wages there. But countries like Russia, Egypt, and South Africa are ready to step in and could account for $30 billion in outsourced services work in two years.
Competition will only grow fiercer as more countries recognize that, unlike capital-intensive manufacturing operations, service outsourcing is relatively cheap to set up and generates up to 100 times as many jobs per dollar invested. That presents a huge challenge to the security of the American workforce. Eventually, U.S. policymakers will have to determine whether structural changes are needed to allow American businesses to better compete against foreign manufacturers and service providers that don't have to shoulder expensive employee benefits, such as health care or pensions, on their own. For instance, governments of some countries, including Japan, handle most health costs, while developing nations such as China don't even offer certain benefits considered de rigueur in the U.S. and Western Europe. That calls into question the structure of America's safety net, which for the past half-century has effectively been shared by employers and government. Policymakers must focus their attention on this threat to our competitiveness.
But recognizing that the world has changed inexorably need not spark a cost-driven global race toward the bottom for worker pay and benefits. Many successful German manufacturers have shown that a highly trained workforce can still command top wages in today's global marketplace. Developed nations, therefore, must remain focused on education and training to keep their workers competitive. And U.S. shareholder activists, such as employee pension funds, can and should wield their investor clout. They must press companies to use offshoring not just as a cost-cutting tool but also as a way to transform their businesses so as to maintain more stable long-term employment levels back home. Like it or not, the phenomenon of offshoring is here to stay. The challenge now is how best to manage it.