Study: Offshore outsourcing creates jobs

Offshore outsourcing helps the U.S. economy by lowering production costs for IT vendors and product costs for their customers and by helping to keep inflation low, according to a study released this week by the Information Technology Association of America (ITAA).

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The economic benefits from offshore outsourcing will create more than 337,000 jobs by 2010, on top of jobs lost through outsourcing, according to the study, by economic analyst Global Insight Inc. ITAA called offshore outsourcing a "net positive for American workers and the U.S. economy."

But the Institute of Electrical and Electronics Engineers-USA (IEEE-USA), representing U.S. IT workers, disputed the study, saying Global Insight failed to factor in concerns about outsourcing such as national security and the future IT innovation in the U.S. Both national security and the future of innovation will be at risk if the U.S. continues to export high-tech jobs and lose expertise in creating new defense systems and new IT products, said Ron Hira, chairman of the IEEE-USA's research and development policy committee.

"It should also weigh out the costs and the downside," Hira said of the study. "They ignore national security and technological innovations in these studies."

While the study seems to assume that displaced IT workers will quickly find jobs, that's often not the case, added Hira, a professor of public policy at the Rochester Institute of Technology. A U.S. Bureau of Labor Statistics survey, released in July 2004, found that of the 5.3 million U.S. workers who lost their jobs between January 2001 and December 2003, 35 percent had not found jobs by January 2004, Hira noted.

Combined with a push by the ITAA and many tech vendors for the U.S. to increase the number of foreign workers allowed under H-1B visas, offshore outsourcing hurts many workers, Hira said. "The bottom line result from the simulation is that U.S. software workers are losers," he said. "And ITAA continues to undercut U.S. software workers by arguing for more H-1Bs."

But Global Insight and outsourcing provider Sierra Atlantic Inc. defended the study, saying the economic benefits of offshore outsourcing are real. Large companies outsourcing their IT support and maintenance functions can eventually expect cost savings of 30 to 50 percent, while companies outsourcing portions of their new IT projects can expect savings of up to 40 percent, said G.K. Murthy, vice president of enterprise solutions at Sierra Atlantic.

The study links those savings with benefits to the overall economy. Currently, about a third of Sierra Atlantic customers tell Murthy they plan to hire additional workers with the savings they achieved with outsourcing, Murthy said.

"In some cases, they actually go and hire new people to launch a new initiative," Murthy said.

Offshore outsourcing, or "global sourcing," as the study calls it, helps raise U.S wages and raises the nation's gross domestic product. Offshore outsourcing will contribute to a US$0.06 increase in U.S. hourly wages in 2005, climbing to $0.12 in 2010, the study says.

At the same time, spending on offshore outsourcing of computer software and services will grow from about $15.2 billion in 2005 to $38.2 billion in 2010, according to the study. During the same time period, total cost savings from offshore outsourcing of computer software and services will grow from $8.7 billion in 2005 to $20.4 billion in 2010, with much of those savings reinvested in the U.S., the study said.

Offshore outsourcing can cause lower wages in the outsourced industries, but the cost savings create other economic benefits, said Nariman Behravesh, Global Insight's chief economist. "[Wage increases] don't necessarily occur in the IT sector, but it does happen in other parts of the economy," he said. "You can see the pain; it's a bit tougher to see the gain, but it's there."

Addressing concerns about national security and IT innovation, Behravesh said national security could be a concern in the long term. "We have to be very careful of the national security concern," he said. "Having said that, national security is often the last refuge of protectionists."

IEEE-USA's Hira questioned the objectivity of the study's authors, saying the study is more of an advocacy document than an unbiased research report. This is the second year ITAA has worked with Global Insight on a study about the benefits of offshore outsourcing. "Running a computer simulation is just an exercise when you've set up the exercise to get the results you want," he said.

Behravesh acknowledged that the study makes several policy recommendations, including more assistance for displaced U.S. workers and a bigger government focus on research and development. "We wouldn't do it from an advocacy standpoint unless it makes sense," he said.