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Offshore Outsourcing of Information Technologies Services: Why Are We Doing It?

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Offshore outsourcing is not a new practice in the United States. Offshore outsourcing of information technologies services, however, is relatively new to our nation. It is a hot issue in political debates, with this being an election year. Job loss and job creation in the United States is on the platforms of leading candidates. Economists are projecting that the offshore outsourcing of certain types of jobs will in fact create jobs here at home, ultimately benefiting the labor force and our economy. While there is not significant statistical data yet to support this theory, if one looks to the history of outsourcing as a whole, it does not seem an impossibility. But why are we outsourcing these jobs? What are the factors that have brought us to this place in the labor market? What caused employers to look to other countries for employees?

The purpose of this short study is to consider these questions and provide some thoughts as to where we are now, how we got here, and where we are headed with offshore outsourcing of information technology jobs.

The History of Outsourcing

Outsourcing is the process of subcontracting services and operations to other firms that can provide them more cheaply or better . Companies outsource tasks, projects, and sometimes even entire operations. Offshore outsourcing, then, would be outsourcing to firms in other countries. This practice is not new, just as the loss of jobs here in the Untied States to other countries is not new. The automobile industry and the steel production industry were hit by outsourcing long ago , as factories were built in other countries and manufacturers hired workers at lower wages to produce parts and products. And even before this, workers actually lost "skilled jobs to low-wage foreign competition" as long ago as the Industrial Revolution . In the 1800s British skilled weavers were protected by the government with bans on the use of the textile machinery , but only temporarily as the machines proved to be five times more efficient; Indian cloth makers in the 1830s lost out to British textile workers ; in 1892 Andrew Carnegie's efforts to automate steel production resulted in the infamous Homestead strike of 1892 .

Outsourcing was not the only way low-wage foreign workers affected the work force in the 1800s. There were also millions of immigrants added to the workforce. When that many new workers were added to the labor force, of course it was not without effect on industrial wages--they were driven down.

Both outsourcing and immigration affected the economy in more ways than just the cost of labor. Products were manufactured at a lower cost and thus sold for a lower price. Lower manufacturing costs benefited the companies, and the lower prices of the goods produced benefited consumers.

Outsourcing Today--Offshore Outsourcing

How is it Possible?

According to Philip Kotler, "Today's economic landscape is being shaped by two powerful forces-- technology and globalization." Offshore outsourcing is made possible by these same two factors. This is not surprising, given the history of technological advances' effects on the economy. Advances in communications technologies and information technologies are making it possible. Several jobs can be performed at one place while reporting to another, by electronically sending the work wherever it is needed. And offshore outsourcing is having a tremendous affect on the economies of the countries involved.

The transportation revolution in the late 1900s was driven by technology, and it completely changed the way goods were transported from place to place. Trains and steamboats made it possible to move raw materials and finished goods alike across continents and even overseas. This resulted in a profound change in the way businesses functioned. The cost of shipping goods fell dramatically. Nations began importing and exporting goods, which changed the way U.S. companies worked. Also, these new technologies created new markets and new industries, such as department stores and mail-order catalogs, which were dependent upon the rail cars to deliver goods. The addition of refrigerated rail cars facilitated the beginning of a national meat-packing business, which forced the closure of local meat-packing plants.

In similar fashion, the Internet and the availability of high-speed data access and communications have changed the way we do business today. Some companies allow employees to work from home, via the virtual office. A computer with Internet access and a telephone are the only tools necessary. There are stay-at-home jobs, such as medical transcriptionists, insurance claim processors, and even computer programmers. These also require only Internet access and a telephone. Communication with employers is primarily done via telephone calls and e-mail.

The same technology that created these opportunities for us is now making it possible for workers in foreign countries to compete for them. One example of improved technology making a marked difference is the fiber-optic cabling of telephones into India. According to TeleGeography, a research division of PriMetrica, Incorporated, the capacity of the lines had increased sevenfold from 2001 to 2002 . This improvement also allowed for better Internet and e-mail services by increasing the bandwidth possible on the phone lines. Worldwide, there have been improvements in bandwidth, compression, secure methods of connectivity, and falling prices for Internet services. All these are contributing factors to the offshore outsourcing; it has become technologically possible. And firms are beginning to take advantage of it.

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