This House Would Encourage Offshoring

Offshore outsourcing lowers the cost of goods and services. There is no real need for all of the goods and services that are consumed within a highly developed economy to be produced in that economy. The sale price of a particular form of good or service is determined by a wide range of factors, including the pay demands made by the workers assembling the good or providing the service. Seeking out a labour force willing to accept lower wages and work longer hours enables a business to reduce the price and increase the overall supply of the products it offers[i].

As more expensive and elaborate goods become available to more people- due to reductions in price- living standards throughout an economy will rise. Concurrently, increased demand for goods produced abroad will lead to increased business for offshore firms that take on outsourced work, leading to more money flowing into developing economies. Standards of living will also increases in these economies – albeit at a lower rate than in the import economy.

Offshore outsourcing does nothing more than reflect labour distribution patterns that already exist in domestic economies[ii]. Different types of activity will be carried out in centralised urban areas- where land and operating costs may be higher- than in the countryside or peripheral, industrialised districts. Certain regions of a state, by dint of geography or earlier investment decisions, may produce a concentration of certain type of worker, service or skillset. Competition within these areas will drive labour costs down – but a downward trend in service and production costs will usually lead to an upward trend in demand. This interrelationship has successfully fostered developed within all of the worlds’ largest economies, without creating unmanageable regional inequalities and without undermining workers’ rights.

Greater social mobility and education attainment within developed economies reduces the availability of the types of skilled and semi-skilled manufacturing-oriented labour that drove first-world economies during the twentieth century. First world nations now compete in knowledge-led economies, seeking to provide research new technologies and provide novel services to consumers in other highly developed nations. The residual power of collective bargaining mechanisms such as unions, coupled with expectations of high pay and highly refined working conditions mean the relative competitiveness of first-world manufacturing industries has dropped. Even if a state were to give preferential treatment to domestic manufacturers and low-level service providers, it would still run the risk of being out-competed by its counterparts in the developing world.

Better standards of education, growing personal wealth and the frequent use of credit to purchase assets have created a collective action problem in first world states that practice off shoring. While, in the long-term, the number of highly skilled workers within domestic economies will grow, in the short term, a significant number of older manual and clerical workers may become unemployable as a result of more intense overseas competition. However, side proposition argues that this constitutes a marginal and bearable cost in term of the wider benefits to quality of life that outsourcing achieves.

Further, the potential costs of assisting excluded domestic workers to re-enter the job market will be covered by increased taxation and excise revenues resulting from more frequent trade with offshore outsourcing firms.

[i] “Idea. Offshoring.” The Economist, 28 October 2009. http://www.economist.com/node/14301171

[ii] “The once great offshoring debate.” Real Clear Politics, 16 May 2007. http://www.realclearpolitics.com/articles/2007/05/the_once_great_offshoring_deba.html

Failures and defects in outsourced labour and products take longer to detect and are more expensive to remedy. Whilst customer feedback or angry employees may indicate flaws in outsourced support or payroll services, a company may only realise that a component manufactured by an offshore partner is faulty when they take delivery of it. The process of returning the component to its place of origin adds further expense to the costs caused by the delayed completion of a client firm’s product.

Offshore outsourcing reduces the amount of control that a client firm can exercise over component manufacturing even further. The expense of sending supervisors to contractor’s factories will increase. In addition, an offshore contractor may engage in outsourcing itself, entering into relationships with dozens of sub-contractors. This practise further limits the client firm’s ability to control the practices used to produce the materials it has ordered. A client may not be provided with complete information on the actions of sub-contractors; inadequate auditing of a lead contract may conceal the existence of sub-contractors.

In 2004, the aircraft company Boeing announced that it would use subcontractors (many of them offshore) to build the majority of the components that would make up its new 787 passenger jet. Many of Boeing’s offshore partners produced substandard components that failed to fit together or function properly[i]. Boeing inadvertently became entangled with a number of sub-sub-contractors who had been hired in order to meet deadlines imposed on sub-contractors without Boeing’s authority. When a number of firms engaged in the manufacture of key 787 components came close to financial failure, Boeing was forced to take them over and settle their debts. Boeing had concluded that the cost of bailing out its offshore partners would be lower than the expenses incurred by delaying the launch of its aircraft.

Takeovers of failing outsourcing partners by larger firms are becoming an increasingly common occurrence[ii]. While, in the short term, this practice may enable the client firm to maintain production schedules, in the long term the cost of integrating a new subsidiary into a larger business may prove crippling. Moreover, bailing out an outsourcing partner does not provide a guarantee that they will complete the tasks assigned to them in a timely and efficient fashion.

Especially in manufacturing dependent industries, but also in other sectors of developed economies, offshore outsourcing is indicative of flawed, short term strategizing that attempts to engineer higher profits by reducing investment in staff and taking unacceptable risks.

[i] “The trouble with outsourcing.” The Economist, 30 July 2011. http://www.economist.com/node/21524822

[ii] “Boeing’s woes. Nightmareliner.” The Economist, 03 September 2011. http://www.economist.com/node/21528275

Offshore outsourcing incentivises wider engagement with education in developing states, for longer periods of time. While- even more so than in the wealthy world- education is seen by citizens of developing nations as offering a path out of poverty or subsistence-level economic activity, worries about property rights, the breakdown of families and communities and the acquisition of essential skills may lead to schooling becoming a lower priority for older children and young adults. The connection between education, skills acquisition and improvements in income and living standards are not immediate. There is little impetus for workers and parents to pay for forms of education that are not directly linked to the sorts of economic activity that are predominant in their communities. In developing states that lack a growing service sector, the value of a qualification in science, accounting or computing cannot be immediately realised. This situation may prevent social mobility in one of two ways.

Firstly, a child who is only educated to a certain standard, or who is encouraged to gain knowledge that is relevant only to a certain field, may be unable to adapt to changes in his economic circumstances later in life. A worker with training in computing will be able to compete for a much wider range of jobs than someone who only has a basic education that only focused on literacy.

Secondly, although it may be possible to educate a teenager on the finer points of irrigation engineering or vehicle maintenance, the utility of those skills will still be limited by environmental factors. A teenager trained to construct a modern irrigation system will still find that his father’s farm fails when it is caught up in a drought or crop blight. By linking education to “traditional” economic activities, families are unable to take advantage of alternative sources of trade or income.

Where a state fosters a healthy service economy, and offers additional benefits to foreign firms who employ its businesses as outsourcing partners, demand for highly educated workers will increase.

The educational policies of developing states should not be tailored to the needs of businesses in the developing world. Arguably, cross border trade in commodities and products is as important for nations in the developing world as partnerships with wealthy companies in Europe and the USA. Cross border trade of this type requires skills distinct from those required by established forms of economic production (farming, heavy industry, resource extraction) and those required by the service industry.

Development theory encourages poorer states to increase both their workforce’s skill base and the adaptability of their economies. The more flexible an economy, the more resistant it will be to shocks and changes in individual markets. Side proposition’s argument would lead to developing economies exchanging dependence on agricultural and manufacturing activity for a dependence on outsourcing.

All forms of economic activity are vulnerable to crises and market failure. Side proposition can do little to prove that the service economy, or skilled manufacturing are inherently more robust forms of economic occupation than farming, craft or semi-skilled manufacture.

Side proposition believe that individuals who are trained to serve a service economy will be inherently more adaptable and employable than those trained in fields tied to more traditional forms of economic action. Why should these two areas of expertise be mutually exclusive? The large families and highly integrated communities that are predominant in the most populace developing states should encourage the acquisition of a wider range of skills – the better to ensure that all economic eventualities will yield some form of profit and prosperity.

Offshoring spurs the development of poorer states. Offshoring relies on the existence of a basic industrial base and certain essential forms of state infrastructure, including an education system. These facilities are likely to be partially or wholly absent in a developing economy. The readily available capital that is located in the developed world, along with the example provided by other developing states that have successfully engaged in offshoring projects incentivises investment in service infrastructure and high quality education.

Many contemporary development strategies focus on developing a state’s industrial and agricultural sectors before its service economy. Expansion of developing states agricultural sectors is already proving to be a politically contentious issue, thanks to the generous and entrenched subsidies that farmers in the developed world are provided with. Resource extraction from developing states is not possible without ceding control of land and hiring of employees to wealthy supermajor oil firms, which exercise an effective monopoly over skilled geologists, miners, scientists and oil drilling experts. Under these circumstances, a conservative approach to development is likely to take an extremely long time to substantially improve economic prosperity and living standards within a poor state. However, an immediate focus on the service sector may allow a state to “leap frog” these developmental stages[i].

Offshoring provides businesses within a developing state with access to foreign markets far larger than those in their native economy may contain. This will allow offshoring businesses to take advantage of economies of scale and capital inflow in order to develop with greater speed.

A state’s political culture will also stand to benefit from increased outsourcing. Offshore businesses will demand increasingly accountable, predictable and non-arbitrary forms of national governance. A level of reliability and foreseeability is essential in any system of civil law; so is a restrained, stable government that is prevented from using its power to expropriate private assets or spend tax revenue capriciously.

[i] “Strengthening India’s offshoring industry.” McKinsey Quaterly, August 2009. http://www.mckinseyquarterly.com/Strengthening_Indias_offshoring_industry_2372

Side proposition’s description of the economic processes underlying off shore outsourcing is overly optimistic, and makes claims about educational and industrial development in the first world that are highly contestable.

By shifting production and support services to the developing world, western businesses are, in effect, circumventing protections built into first world employment laws designed to ensure that the demands of the market do not abrogate individual liberty or basic standards of welfare. Limitations imposed on market freedom, such as the minimum wage, are justified by the risk of incentivising businesses to cut wages to such a level that employees are forced into lives of subsistence, with restrictions on their spending power and mobility effectively tethering them to a particular employer or trade.

Offshoring presents a direct challenge to the creation of liberal democratic ideas, norms and institutions within developing states. Offshoring favours states that provide a consistent supply of cheap, reliable labour – even if the availability of that labour is a result of poverty or government authoritarianism. An authoritarian state may ban unions, or create unbalanced labour laws that give no protection to employees.

Businesses that engage in offshoring have no control over the uses that the taxes paid by their overseas partners are put to. It is frequently the case that undeveloped states will continue to underinvest in infrastructure and public services. Instead, tax revenue will be kept low enough to attract further investment, with takings spent on entrenching the position of undeveloped states’ controlling institutions and social elites. Such practices may ultimately undermine the development process within poorer nations. A diminishing supply of workers will be obliged to taken on the burden of a declining standard of living. Workers will be forced to pay for increasingly costly educational and medical services in order to meet the needs of their families and extended families. Payment of bribes will become common. Without sensible reinvestment of tax revenues, workers are likely to become dependent on foreign in order to meet their domestic needs. Eventually, excessive growth in dependency may push an economy into competitive decline, as the state fails to maintain the size or education standards of its working population.

Offshore outsourcing lowers the cost of goods and services. There is no real need for all of the goods and services that are consumed within a highly developed economy to be produced in that economy. The sale price of a particular form of good or service is determined by a wide range of factors, including the pay demands made by the workers assembling the good or providing the service. Seeking out a labour force willing to accept lower wages and work longer hours enables a business to reduce the price and increase the overall supply of the products it offers[i].

As more expensive and elaborate goods become available to more people- due to reductions in price- living standards throughout an economy will rise. Concurrently, increased demand for goods produced abroad will lead to increased business for offshore firms that take on outsourced work, leading to more money flowing into developing economies. Standards of living will also increases in these economies – albeit at a lower rate than in the import economy.

Offshore outsourcing does nothing more than reflect labour distribution patterns that already exist in domestic economies[ii]. Different types of activity will be carried out in centralised urban areas- where land and operating costs may be higher- than in the countryside or peripheral, industrialised districts. Certain regions of a state, by dint of geography or earlier investment decisions, may produce a concentration of certain type of worker, service or skillset. Competition within these areas will drive labour costs down – but a downward trend in service and production costs will usually lead to an upward trend in demand. This interrelationship has successfully fostered developed within all of the worlds’ largest economies, without creating unmanageable regional inequalities and without undermining workers’ rights.

Greater social mobility and education attainment within developed economies reduces the availability of the types of skilled and semi-skilled manufacturing-oriented labour that drove first-world economies during the twentieth century. First world nations now compete in knowledge-led economies, seeking to provide research new technologies and provide novel services to consumers in other highly developed nations. The residual power of collective bargaining mechanisms such as unions, coupled with expectations of high pay and highly refined working conditions mean the relative competitiveness of first-world manufacturing industries has dropped. Even if a state were to give preferential treatment to domestic manufacturers and low-level service providers, it would still run the risk of being out-competed by its counterparts in the developing world.

Better standards of education, growing personal wealth and the frequent use of credit to purchase assets have created a collective action problem in first world states that practice off shoring. While, in the long-term, the number of highly skilled workers within domestic economies will grow, in the short term, a significant number of older manual and clerical workers may become unemployable as a result of more intense overseas competition. However, side proposition argues that this constitutes a marginal and bearable cost in term of the wider benefits to quality of life that outsourcing achieves.

Further, the potential costs of assisting excluded domestic workers to re-enter the job market will be covered by increased taxation and excise revenues resulting from more frequent trade with offshore outsourcing firms.

[i] “Idea. Offshoring.” The Economist, 28 October 2009. http://www.economist.com/node/14301171

[ii] “The once great offshoring debate.” Real Clear Politics, 16 May 2007. http://www.realclearpolitics.com/articles/2007/05/the_once_great_offshoring_deba.html

Failures and defects in outsourced labour and products take longer to detect and are more expensive to remedy. Whilst customer feedback or angry employees may indicate flaws in outsourced support or payroll services, a company may only realise that a component manufactured by an offshore partner is faulty when they take delivery of it. The process of returning the component to its place of origin adds further expense to the costs caused by the delayed completion of a client firm’s product.

Offshore outsourcing reduces the amount of control that a client firm can exercise over component manufacturing even further. The expense of sending supervisors to contractor’s factories will increase. In addition, an offshore contractor may engage in outsourcing itself, entering into relationships with dozens of sub-contractors. This practise further limits the client firm’s ability to control the practices used to produce the materials it has ordered. A client may not be provided with complete information on the actions of sub-contractors; inadequate auditing of a lead contract may conceal the existence of sub-contractors.

In 2004, the aircraft company Boeing announced that it would use subcontractors (many of them offshore) to build the majority of the components that would make up its new 787 passenger jet. Many of Boeing’s offshore partners produced substandard components that failed to fit together or function properly[i]. Boeing inadvertently became entangled with a number of sub-sub-contractors who had been hired in order to meet deadlines imposed on sub-contractors without Boeing’s authority. When a number of firms engaged in the manufacture of key 787 components came close to financial failure, Boeing was forced to take them over and settle their debts. Boeing had concluded that the cost of bailing out its offshore partners would be lower than the expenses incurred by delaying the launch of its aircraft.

Takeovers of failing outsourcing partners by larger firms are becoming an increasingly common occurrence[ii]. While, in the short term, this practice may enable the client firm to maintain production schedules, in the long term the cost of integrating a new subsidiary into a larger business may prove crippling. Moreover, bailing out an outsourcing partner does not provide a guarantee that they will complete the tasks assigned to them in a timely and efficient fashion.

Especially in manufacturing dependent industries, but also in other sectors of developed economies, offshore outsourcing is indicative of flawed, short term strategizing that attempts to engineer higher profits by reducing investment in staff and taking unacceptable risks.

[i] “The trouble with outsourcing.” The Economist, 30 July 2011. http://www.economist.com/node/21524822

[ii] “Boeing’s woes. Nightmareliner.” The Economist, 03 September 2011. http://www.economist.com/node/21528275

Offshore outsourcing incentivises wider engagement with education in developing states, for longer periods of time. While- even more so than in the wealthy world- education is seen by citizens of developing nations as offering a path out of poverty or subsistence-level economic activity, worries about property rights, the breakdown of families and communities and the acquisition of essential skills may lead to schooling becoming a lower priority for older children and young adults. The connection between education, skills acquisition and improvements in income and living standards are not immediate. There is little impetus for workers and parents to pay for forms of education that are not directly linked to the sorts of economic activity that are predominant in their communities. In developing states that lack a growing service sector, the value of a qualification in science, accounting or computing cannot be immediately realised. This situation may prevent social mobility in one of two ways.

Firstly, a child who is only educated to a certain standard, or who is encouraged to gain knowledge that is relevant only to a certain field, may be unable to adapt to changes in his economic circumstances later in life. A worker with training in computing will be able to compete for a much wider range of jobs than someone who only has a basic education that only focused on literacy.

Secondly, although it may be possible to educate a teenager on the finer points of irrigation engineering or vehicle maintenance, the utility of those skills will still be limited by environmental factors. A teenager trained to construct a modern irrigation system will still find that his father’s farm fails when it is caught up in a drought or crop blight. By linking education to “traditional” economic activities, families are unable to take advantage of alternative sources of trade or income.

Where a state fosters a healthy service economy, and offers additional benefits to foreign firms who employ its businesses as outsourcing partners, demand for highly educated workers will increase.

The educational policies of developing states should not be tailored to the needs of businesses in the developing world. Arguably, cross border trade in commodities and products is as important for nations in the developing world as partnerships with wealthy companies in Europe and the USA. Cross border trade of this type requires skills distinct from those required by established forms of economic production (farming, heavy industry, resource extraction) and those required by the service industry.

Development theory encourages poorer states to increase both their workforce’s skill base and the adaptability of their economies. The more flexible an economy, the more resistant it will be to shocks and changes in individual markets. Side proposition’s argument would lead to developing economies exchanging dependence on agricultural and manufacturing activity for a dependence on outsourcing.

All forms of economic activity are vulnerable to crises and market failure. Side proposition can do little to prove that the service economy, or skilled manufacturing are inherently more robust forms of economic occupation than farming, craft or semi-skilled manufacture.

Side proposition believe that individuals who are trained to serve a service economy will be inherently more adaptable and employable than those trained in fields tied to more traditional forms of economic action. Why should these two areas of expertise be mutually exclusive? The large families and highly integrated communities that are predominant in the most populace developing states should encourage the acquisition of a wider range of skills – the better to ensure that all economic eventualities will yield some form of profit and prosperity.

Offshoring spurs the development of poorer states. Offshoring relies on the existence of a basic industrial base and certain essential forms of state infrastructure, including an education system. These facilities are likely to be partially or wholly absent in a developing economy. The readily available capital that is located in the developed world, along with the example provided by other developing states that have successfully engaged in offshoring projects incentivises investment in service infrastructure and high quality education.

Many contemporary development strategies focus on developing a state’s industrial and agricultural sectors before its service economy. Expansion of developing states agricultural sectors is already proving to be a politically contentious issue, thanks to the generous and entrenched subsidies that farmers in the developed world are provided with. Resource extraction from developing states is not possible without ceding control of land and hiring of employees to wealthy supermajor oil firms, which exercise an effective monopoly over skilled geologists, miners, scientists and oil drilling experts. Under these circumstances, a conservative approach to development is likely to take an extremely long time to substantially improve economic prosperity and living standards within a poor state. However, an immediate focus on the service sector may allow a state to “leap frog” these developmental stages[i].

Offshoring provides businesses within a developing state with access to foreign markets far larger than those in their native economy may contain. This will allow offshoring businesses to take advantage of economies of scale and capital inflow in order to develop with greater speed.

A state’s political culture will also stand to benefit from increased outsourcing. Offshore businesses will demand increasingly accountable, predictable and non-arbitrary forms of national governance. A level of reliability and foreseeability is essential in any system of civil law; so is a restrained, stable government that is prevented from using its power to expropriate private assets or spend tax revenue capriciously.

[i] “Strengthening India’s offshoring industry.” McKinsey Quaterly, August 2009. http://www.mckinseyquarterly.com/Strengthening_Indias_offshoring_industry_2372

Side proposition’s description of the economic processes underlying off shore outsourcing is overly optimistic, and makes claims about educational and industrial development in the first world that are highly contestable.

By shifting production and support services to the developing world, western businesses are, in effect, circumventing protections built into first world employment laws designed to ensure that the demands of the market do not abrogate individual liberty or basic standards of welfare. Limitations imposed on market freedom, such as the minimum wage, are justified by the risk of incentivising businesses to cut wages to such a level that employees are forced into lives of subsistence, with restrictions on their spending power and mobility effectively tethering them to a particular employer or trade.

Offshoring presents a direct challenge to the creation of liberal democratic ideas, norms and institutions within developing states. Offshoring favours states that provide a consistent supply of cheap, reliable labour – even if the availability of that labour is a result of poverty or government authoritarianism. An authoritarian state may ban unions, or create unbalanced labour laws that give no protection to employees.

Businesses that engage in offshoring have no control over the uses that the taxes paid by their overseas partners are put to. It is frequently the case that undeveloped states will continue to underinvest in infrastructure and public services. Instead, tax revenue will be kept low enough to attract further investment, with takings spent on entrenching the position of undeveloped states’ controlling institutions and social elites. Such practices may ultimately undermine the development process within poorer nations. A diminishing supply of workers will be obliged to taken on the burden of a declining standard of living. Workers will be forced to pay for increasingly costly educational and medical services in order to meet the needs of their families and extended families. Payment of bribes will become common. Without sensible reinvestment of tax revenues, workers are likely to become dependent on foreign in order to meet their domestic needs. Eventually, excessive growth in dependency may push an economy into competitive decline, as the state fails to maintain the size or education standards of its working population.

Reliance on offshoring and offshore outsourcing is likely to lead to increases in inequality and reductions in social mobility within developed western liberal democracies.

Trade with developing economies typically results in a price premium becoming attached to specialised, skilled labourers and service providers in western economies. Poorer countries- even rapidly growing states such as India- produce smaller quantities of highly educated, highly skilled workers, such as vehicle designers, microchip fabricators and architects. In view of this, developing states concentrate on creating semi-skilled jobs that can be assigned to workers lacking- for example- university degrees. A larger proportion of Indian citizens are educated to a lower standard, so the creation of jobs accessible to them will generally be seen as politically astute. Opportunities for employment as a call centre operative or a pay roll clerk will rise in a developing state in response to an increased interest in offshoring by first world businesses.

Concurrently, as some of the money businesses save by offshoring is reinvested in advanced training, consultation exercises and research and development, demand for the services of specialists and highly skilled professionals will rise. Less skilled workers in a developed economy will see a decline in both employment opportunities[i] and pay. Professionals and those who can afford postgraduate education are likely to see their salaries increase. The gap between the rich and poor strata of society within developed economies will grow.

In short, while professionals, executives and decision makers will benefit from offshoring, seeing demand for their services rise, foreign competition is likely to undermine the domestic market for less skilled labour[ii].

A reduction in demand for white-collar clerical workers, bookkeepers and assembly line workers will increase the burden placed on state social support schemes such as public housing, jobseekers’ payments and subsidised medical care[iii]. Although businesses may benefit from cheap overseas labour, the state will be left to contend with increasing expenditure in the short term and impaired educational and welfare standards in the long term. Children and communities within developed states that lose jobs to offshore operations will be less able to access further and higher education and are more likely to suffer

The social costs engendered by outsourcing do not balance against the financial benefits that accrue to businesses and professionals. Attempts to tax profits generated as a result of offshoring practices may fill a state’s coffers, but will not provide and effective solution to job losses and an increasing dependence on state assistance within less economically mobile communities within the developing world.

Finally, it should be noted that companies encountering financial difficulty or attempting to adapt to recessions come under intense pressure to cut costs. Increasingly, large businesses achieve these savings by engaging in outsourcing[iv]. For the reasons described above, such a practice may exclude a large number of individuals from the labour market. Outsourcing may therefore entrench and prolong a recession.

[i] Fig 3, “Labour-market trends. Winners and losers.” The Economist, 10 September 2011. http://www.economist.com/node/21528434

[ii] “Free Trade’s great, but offshoring rattles me.” Blinder, A S. The Washington Post, 06 May 2007. http://www.washingtonpost.com/wp-dyn/content/article/2007/05/04/AR2007050402555_pf.html

[iii] “Idea. Offshoring.” The Economist, 28 October 2009. http://www.economist.com/node/14301171

[iv] “Passage to India.” The Economist, 24 June 2010. http://www.economist.com/node/16439006

Side opposition have created an argument for increasing the quality and affordability of education within developing states. Thanks to Trade Union’s intensive involvement in the decisions taken by large western businesses, companies that engage in offshoring are often compelled to invest a portion of the savings that they make from offshoring their operations into retraining schemes for staff at risk of redundancy. In 2005, the large IT services company CSC reached an agreement with the Union Amicus that required it to share a portion of the savings that it made through expanding its use of outsourcing with its staff[i]. Rather than declaring any redundancies, CSC gave its staff the opportunity to retrain by devoting almost £5000 for each of its English employees to education and development schemes.

It is conceded that the offshoring relationships formed between America and India and China during the nineteen nineties formed the basis of the industrial booms that both of those states are currently experiencing. An influx of expertise and increases in education and living standards funded by companies specialising in offshore have enabled both Indian and China to reduce their dependence on US manufacturers in many areas of their economy. However, the transition of manufacturing-led industries into developing economies is only one aspect of the offshoring narrative.

Increases in living standards within the developed nations of Europe and north America will only be sustainable if the individuals benefitting from higher wages and access to global markets for goods and services are able to maintain access to these advantages independently of the state’s intervention and changes in industrial practices. This goal is only possible if levels of education within a state are increased. Although side proposition believe that the increased burden on state support services that offshoring may cause is intractable, investment in education can limit the impact of such negative trends to only a single generation.

The affluence of many developed states is also reflected in intense entrepreneurial activity within their economies. In states such as Germany the proliferation in highly specialised small and medium sized businesses- that are unable to afford the services of offshoring businesses- has sustained demand for skilled and semi-skilled jobs. Many of these firms are sustained by larger businesses seeking outsourcing opportunities that are unwilling to engage in offshore outsourcing.

The size and relatively low individual incomes of German-style mittelstand enterprises prevents them from taking advantage of offshore outsourcing, often seen as (proportionately) too expensive and too risky[ii] by mittelstand executives. Such companies also help to sustain employment within economies that place a high premium on specialised technical and professional knowledge, but neglect equally complex and specialised vocational and craft skills.

[i] “CSC to retain staff with offshoring cash.” 09 August 2005. http://www.guardian.co.uk/business/2005/aug/09/7?INTCMP=SRCH

[ii] “Big is back.” The Economist, 27 August 2009. http://www.economist.com/node/14303582

Companies that rely on directly hiring new employees to cover their back-office, estates and maintenance needs will not run the risk that the cost efficiency of those services might suffer as a result of union action or state regulation of pay.

Companies that rely on outsourced offshored labour to fill back-office and administrative roles expose themselves to the risk that those relationships will be undermined, damaged or abused by legal disputes or negotiation failures.

When a dispute develops between a business and a worker that it employs directly, the consequences of that dispute- in terms of lost productivity and lost profits- will usually be limited by the nature of the role that the employee occupies. It will be relatively cheap for a multinational firm to settle a dispute with a sacked cleaner. In addition, the loss of a single cleaner from a large facilities department will not compromise a company’s ability to do business.

The situation is quite different when the services and productivity of an entire company department are dependent on a relationship with an outsourcing firm. The collapse of the relationship between the media firm BskyB and its outsourcing partner EDS resulted in combined legal costs of $70,000,000 and a court case that lasted for almost five months[i]. A dispute over the terms of a contract or a crisis within the state in which an offshore outsourcing service is based can cut a company off from the workers and systems that it has hired. If a company has transferred all responsibility for its payroll or customer support operations to an offshore location, it will be completely paralysed by disagreements or emergencies of this type.

Ordinarily, the equity value and insurance liabilities of businesses could only be directly threatened by large scale union action, a failed product launch or the departure of a senior manager. However, the web of high dependency relationships that a business must enter into to remain competitive has now grown. By decentralising their authority and giving up their right to regulate relationships with its labour force on a one-to-one basis, businesses have exposed themselves to a greater amount of risk.

[i] “The trouble with outsourcing.” The Economist, 30 July 2011. http://www.economist.com/node/21524822

Greater risk will simply oblige companies to be more diligent in screening and selecting the outsourcing firms that they choose to do business with.

While examples such as the construction of the Boeing Dreamliner serve to demonstrate how outsourcing can go wrong, they do not undermine the value of the idea itself. Indeed, an increased emphasis on closely supervised and responsible outsourcing will only serve to bolster the business of firms offering legal and auditing services (some of which are off-shore operations themselves)– and a slight increase in transaction costs is not likely to deter the majority of companies who have already observed the benefits of outsourcing reflected in their annual accounts.

It should also be pointed out that all sensibly run businesses should attempt to guard against the risks inherent in adopting new practices or forming new relationships by taking out insurance. Many insurers and underwriters are gearing up to assess and cover the costs of a collapse in the relationship between a businesses and an outsourcing partner.

If the worst happens and a company is forced to pull out of an offshoring agreement, it will be able to use the money that it receives from its insurer to bring troubled back-office operations or subcontracted tasks back in-house.

Increased competition within the outsourcing market, from both offshore and domestic businesses, will have the effect of forcing outsourcing firms to increase the quality and reliability of their services above the standard offered by their rivals[i]. Competition is likely to result in a net improvement of the standard or service available throughout the outsourcing industry.

[i] Drezner, W D. 26 July 2007. http://www.danieldrezner.com/archives/003414.html

Investment in offshore outsourcing can easily develop into a form of economic and cultural imperialism. Offshoring encourages first-world governments and businesses to perceive underdeveloped countries as little more than cheap sources of labour and support for developed economies. The discourse that outsourcing creates does not focus on development strategies or the strengthening of weak economies, but on exploitation of the flaws and gaps inherent in the labour markets of developing nations[i].

Moreover, wide-scale exporting of roles dependent on specific forms of linguistic and cultural knowledge forces workers to adopt alien and over-simplified cultural practises – directly echoing the relationships between colonial-era employers and native service providers.

[i] “The new masters of management.” The Economist, 15 April 2010. http://www.economist.com/node/15894358

It must be remembered that the offshore manufacturing and service sectors are relatively young. Workers have not yet had the opportunity to develop coherent collective bargaining strategies. It takes time for those involved in an industry to learn how to act as advocates for their own and their colleagues’ interests. Once these skills have become commonplace throughout the offshoring industry, workers will be better equipped to form unions and to hold their own governments to account over the lacunae and lax policy making identified by side opposition.

Side opposition have adopted a somewhat orientalist line of argument by suggesting that developing economies are inherently weak and easy to subvert. In jurisdictions such as India quite the opposition is true; governments eager to control the effect of globalisation on domestic markets have adopted policies that inhibit the involvement of foreign firms in their economies. Businesses and politicians- both local and foreign- expend a great deal of political capital in order to make developing states accessible to the offshoring industry – often on terms that require workers’ welfare to be strictly monitored.