Outsourcing: myths, facts and statistics
Work is no longer bounded by co-worker proximity or time zone. It also involves a much broader set of ‘workers’ – not just employees, suppliers and partners, but customers, freelancers and an increasingly capable network of smart devices and interconnected systems, all tied together by business processes that span organisations, time and distance. Outsourcing is an integral part of this story.
Myth One: Most companies outsource work to reduce costs
Fact: These days the primary reason for outsourcing is global expansion and to add value in terms of capability and capacity.
Important to remember outsourcing does not necessarily mean offshoring. A lot of outsourcing work doesn’t actually leave Australia’s shores. Admittedly, when offshore outsourcing began, the outsourcer’s biggest focus was cost saving through labour arbitrage. But most outsourcing relationships based purely on cost have a tendency to fail. Research conducted by The Sauce last year (Attach executive summary) showed that cost savings, although important, ranked number eleven. The primary drivers are global expansion and access to skills.
We know that as companies become more sophisticated and better understand the benefits of outsourcing, they move past the basic inhibitor of outsourcing which is “Can someone do this business process more efficiently and better than I can and for a cheaper price?” In the early development of the market, there were serious concerns about security safeguards; however, these days as the market has matured these concerns have largely disappeared as most modern outsourcing vendors have very sophisticated security programs and management in place.
Myth Two: A job outsourced is a job lost.
Fact: Outsourcing means efficiency.
Outsourcing is a means of getting more final output with lower cost inputs, which means lower costs for local business and consumers. Lower prices lead directly to higher standards of living and more jobs in a growing economy.
As we contribute to the growth of developing nations and we see a fast-growing middle class, in return we receive more tourists, university students looking to pay and get high-quality degrees and a market for our higher-value goods and services which leads to better more diverse and tolerant society.
One only has to look at the Philippines, previously trapped in third-world poverty and now the poster child for the global contact centre industry. So much so that last year it was the second-fastest-growing nation in Asia after China and it’s incredible to see how its economy has transformed into a fairer, more equitable community due in large part to the benefits of outsourcing. The multiplier effect for the money that is brought into the country through outsourcing trickles down through the food chain so that everybody gets to share in the wealth.
We in developed first-world countries have a moral responsibility to assist and develop the poorer nations so that the world becomes a fairer and better place. Outsourcing allows us to play our part.
Myth Three: The government should do more to prevent outsourcing of jobs.
Fact: Protectionism is isolationism and has a history of failure.
The Los Angeles Times has just reported on a massive EU tariff hike on American-made women’s denim trousers, jumping from 12 per cent to 38 per cent, enacted in retaliation against continued US protectionism against the EU. This new EU economic nationalist legislation is forcing US jeans makers to consider moving their production out of the country. Brazil has similarly been forcing tech industries like Apple and Asia’s Foxconn to relocate jobs to Brazil by means of subsidies and by threatening to maintain high tariffs on imports.
Economic nationalists, ignoring these inconvenient connections between protectionist legislation and outsourcing, instead more comfortably focus their ire on Free Trade Agreements. Such critics, however, must realise that protectionist policies are not inherently a panacea for the ills commonly associated with neoliberalism.
Nor is protectionism inherently in opposition to the forces of global economic integration, despite what diehard free-market neoliberals might say to the contrary. Rather, protectionist policies, whether by way of high tariff walls, government subsidisation, or currency manipulation, are part and parcel of modern globalisation – and part and parcel of job relocation.
In other words, FTAs do not have a monopoly on outsourcing. Rather, both FTAs and protectionist legislation have the ability to simultaneously send jobs out and bring them in, depending on the job and depending on the sector.
Myth Four: Outsourcing is a one-way street.
Fact: Outsourcing works both ways.
Labour costs in Australia have grown at twice the pace of other OECD countries over the past decade, which would suggest that wages in Australia are out of line with the rest of the world. This has resulted in major announcements from major Australian manufacturing companies that they are either pulling out of Australia or in the case of major service organisations (banks, telcos, Financial companies etc) they are now finding that the cost of the labour price differential in Asia too compelling to ignore.
Over the decade from 2002, on average, labour costs per unit of output rose 3.25 per cent a year in Australia. That is more than twice the 1.4 per cent annual growth in the decade to 2001. It tells us that wages were rising much faster than labour productivity. The gap between wage growth and productivity growth in Australia was easily the highest among the ten largest Western economies. Growth across the OECD averaged about half of Australia’s rate.
Over the decade, unit labour costs rose 37 per cent in Australia, compared with 21 per cent in the US and six per cent in Germany.
However OECD figures show the difference in growth in labour costs between Australia and its peers is less significant than the dramatic rise in the Australian dollar’s value over the same period.
In the year 2000 one Australian dollar brought US$0.55; fast forward to recent times and one dollar brought as much as US$1.10. More recently it has dropped below parity. The point being that the Australian dollar has basically doubled in value in US dollar terms.
It’s not rocket science to know that when costs rise faster in Australia than in other countries, it weakens Australian competitiveness. But the difference between Australia and the rest of the world in labour-cost growth, while significant, is far smaller than the impact of the rise in the value in the Australian dollar, which only amplifies the cost differential when compared to the Philippine peso or the Indian rupee against the US dollar.
Myth Five: Free trade, free labour, and free capital harms the economy.
Fact: Economic freedom is necessary for economic growth, new jobs, and higher living standards.
Economic freedom or economic liberty or right to economic liberty denotes the ability of members of a society to undertake economic direction and actions. This is a term used in economic and policy debates as well as a politico economic philosophy.
As with freedom generally, there are various definitions, but no universally accepted concept of economic freedom. One major approach to economic freedom comes from classical liberal and right-libertarian traditions emphasizing free markets, free trade and private property under free enterprise, while another extends the welfare economics study of individual choice, with greater economic freedom coming from a “larger” (in some technical sense) set of possible choices. Other conceptions of economic freedom include freedom from want and the freedom to engage in collective bargaining.
The free market viewpoint defines economic liberty as the freedom to produce, trade and consume any goods and services acquired without the use of force, fraud or theft. This is embodied in the rule of law, property rights and freedom of contract, and characterized by external and internal openness of the markets, the protection of property rights and freedom of economic initiative.
There are several indices of economic freedom that attempt to measure free market economic freedom. Empirical studies based on these rankings have found higher living standards, economic growth, and income equality, less corruption and less political violence to be correlated with higher scores on the country rankings. (Source: Wikipedia)