Outsourcing

C

Service Industries

An important new development in outsourcing took place in the late 1990s. American companies began to outsource services. Banks moved some call-center operations, which handled customer queries or marketed bank services, to Ireland, India, and other countries with English-speaking workers. Many telephone companies and computer companies also hired firms in India and other countries to handle their call-center operations.

United States accounting firms now often use accountants in India and the Philippines to prepare tax returns, paying those accountants $4,000 a year, compared with the $60,000 annual salaries earned by many American accountants. Many banks have moved their back-office work to Asia so that lower-wage workers there do the unglamorous work of processing financial transactions. Many insurance companies have also moved back-office work overseas, including jobs that involve processing bills and completing and processing insurance claims.

Some architecture firms have farmed out design and blueprint work to architects in Hungary and India. These architectural firms often ask foreign workers to transform rough sketches sent from the United States into finished designs and to generate drawings based on designs sent by American architects. Foreign architectural firms also perform computer-aided design and drafting, complete work on architectural details, and create legal documents needed for construction work.

American law firms have also begun sending work overseas. This outsourced legal work usually involves having overseas lawyers use computers to do document searches, research various laws, write basic contracts, and prepare paperwork for patent filings.

---

---

Finally, many software companies have also outsourced work, especially to the high-tech center of Bangalore, India. Basic software coding, but also more sophisticated software development work, has been sent offshore.

III

Reasons for Outsourcing and Offshoring

A

Wages

The main reason for outsourcing is savings in labor costs. Garment workers in the United States usually earn $6 to $10 an hour, while garment workers in China and Bangladesh often earn just 25 cents to 50 cents an hour. Workers at factories in the Midwest who make durable goods such as refrigerators often earn $15 an hour, but when those jobs are outsourced to Mexico, the workers there frequently earn just $2 an hour.

Wage differences have also fueled outsourcing in the service sector. In India, in the early 21st century, a chip designer with a master’s degree in electrical engineering and five years’ experience often earns $12,000 a year in a country with a per capita annual income of $350. In the United States a chip designer with those credentials often earns $85,000 a year. In India, the salary of a financial analyst is usually about $12,000 a year while in the United States financial analysts generally earn $85,000 or more a year. These savings are often offset somewhat by greater training needs, higher communication costs, and lesser efficiency in doing business abroad.

B

Communications

The surge in offshoring has been made possible by rapid advances in communications technology. Fiber optics and communications satellites have made international phone calls far cheaper, making it economical for businesses to move call-center work from the United States to other countries. The development of the Internet, with its e-mail capabilities and high-speed connections, has also been an important factor in helping many businesses move service operations offshore. For example, the increased bandwidth of high-speed connections makes it easy to send large volumes of scanned documents overseas. Due to the Internet, a financial analyst who studies the performance of hundreds of companies is in a position to do that research just as well in New Delhi as in New York City.

Similarly, advances in videoconferencing have made it easier for executives in the United States to maintain business relationships with contractors, executives, and employees in other countries. Many American companies that want to provide round-the-clock service to customers—as is often the case with computer companies and their help desks—find it desirable to have customer service representatives available in India. By working in the early morning hours, these Indian workers can provide service to Americans in the evening hours. In addition, the development of standardized business software has helped standardize corporate practices and documents, making it easier to pass off work from one country to another.

C

Transportation

The outsourcing of manufacturing has been helped by technologies that have reduced transportation costs. More efficient cargo ships, known as container ships because cargo is preloaded into container-like trailers and then placed onboard, are being used. Container ships make freight handling more efficient and cheaper. Goods are being shipped in large metal containers of uniform size that can easily be loaded right onto trucks and train cars. As a result of containerization, 20 times the amount of cargo can be loaded and unloaded per hour, compared with previous decades when goods were usually shipped in different-sized boxes and containers. See also Shipping Industry.

D

Trade Agreements

Outsourcing and offshoring have been encouraged by international agreements that call for freer trade. Countries have reduced tariffs and removed protectionist barriers that made it hard for companies to set up communications or financial services operations in other nations. Agreements such as the North American Free Trade Agreement (NAFTA) have encouraged outsourcing by protecting foreign investors against economic threats, such as expropriation (government takeover) of their foreign operations. In decades past, some foreign governments angered American and European companies by expropriating their operations, often at a price that was far below the value of the operation.

	More from Encarta
	•  Important Notice: MSN Encarta to be discontinued. Learn more. •  Presidential Myths Quiz •  Coffee break: Recharge your brain