Focusing offshore
Kogod professor Erran Carmel has been studying the business practice of offshoring for a decade
BY MIKE UNGER
If you’ve ever picked up the phone and dialed your credit card company to ask for a tiny little bump in your limit, or an electronics manufacturer to try and figure out how to work your new digital camera, there’s a chance your call was routed halfway around the world.
Aiming to reduce costs and increase productivity, many companies in the United States and Europe now import services from foreign countries. India and the Philippines, for example, are world leaders in call centers, meaning the customer service representative to whom you’re talking is just as likely to be sitting in a nondescript office building in Delhi or Manila as Dallas or Minneapolis.
Kogod School of Business professor Erran Carmel has been studying this practice, known as offshoring, since the mid-1990s, well before its 2000 explosion caused the business world to take notice and elicited predictions of a titanic global economic shift.
Offshoring and its better known cousin, outsourcing, are like “two circles that overlap,” Carmel says.
“Outsourcing is when you do anything outside your company,” he says. “As individuals we actually outsource a great deal of what we do. For example, you outsource cutting your hair. Companies have traditionally done a lot of things inside the company. These days the business ethos is to outsource as much as you possibly can.”
Outsourcing a job to a company or plant outside your borders is called offshoring, the nature of which has changed in the new millennium.
“Up until roughly 2000, the offshoring [in the U.S.] was food, minerals, oil, for example,” Carmel says. “We offshored our manufacturing of cars from Mexico and Japan, toys from China. All of these things are things we can touch. Services are different, we can’t touch them. Until recently it was very difficult to import services. You can’t have a Filipino hairdresser cut your hair, but you can have a Filipino programmer write a program for you, and that’s fairly new. That’s what’s creating such a tremor in the economic marketplace of the world.”
Carmel has explored this topic in two books, the most recent of which, Offshoring Information Technology, was published last year.
“The Internet began to take off in the mid-’90s,” he says. “The first instances of services that were offshored were information technology. What’s rising now very quickly is all kinds of other services that businesses need. Accounting, research, legal issues, medical services are now being offshored. The classic one is radiology. After you take a series of X-rays, then your X-rays are analyzed in India. It can be shipped in zeros and ones by the Internet and someone in India or Israel can examine it within just a few seconds.”
The reason for this is as simple as it is predictable: money. By shipping these jobs and tasks overseas, Western companies save a ton on labor costs, while simultaneously increasing productivity. Take for example the call center model.
“If you go to India or the Philippines, working in a call center is considered respectable,” Carmel says. “You have people who have a good level of education. Here in the United States that’s not the case, as we know. A call center is a job that people take when they’re young, just to fill in a gap, and they don’t last there.
“Why did we begin to import toys from China? Did the Chinese make better toys, smarter toys? By and large the answer is no. They make them less expensive. Same thing holds true for offshoring. The first reason, beyond any others, is because it’s cheaper.”
The overall affect offshoring has had on the U.S. economy is not yet definitively known, Carmel says, but consumers have benefited.
“Some of the things that you are purchasing are cheaper as a result. The toys that you buy at Wal-Mart are quite cheap because of the huge productivity gains at Wal-Mart, its supply chain, its distribution, and the manufacturing that’s done in China. There have been huge rises in oil prices in the last year, and yet you haven’t seen that as much in other prices. Why isn’t that rippling through other prices? One explanation is that other components of what we’re paying for are becoming cheaper, and one of them is IT services we’re getting offshore.”
Some economists have sounded the alarm over offshoring, concerned that too many U.S. jobs are being shipped away. Carmel believes the verdict is still out.
“There are many people who are involved in this issue who take a position on this,” he says. “The position tends to be that it is catastrophic, that it is a serious threat. It can be, but I think it’s too early to tell. The U.S. has always been on the next wave. First we began offshoring some of the low-skilled manufacturing areas like apparel. In the meantime we moved up to the next wave, so we moved to higher-value manufacturing. Then some of our more sophisticated ones like computers and automobiles left so we moved to the next phase, software and IT. Now high tech is being offshored, so which wave do we move to?
“It’s too early to tell the right one to take; that’s what worries many people in America and western Europe,” he says. “There are some who say there is nothing to worry about. I am worried; on the other hand, it’s not evident yet that we are the frog that is sitting in the water that’s heating up and we will soon die. I don’t think that’s clear.”
What is, Carmel says, is that this new economic model is here to stay.
“There’s no going back,” he says. “History shows us that once an industry has gone offshore, it doesn’t come back. That said, there’s no industry that has gone [completely] offshore. Despite all the press, if we look at the percentage of IT that has gone offshore, it’s still fairly small. It’s in the 5 to 15 percent range. I see it going up, but the question is how quickly it goes up.
“This is a phenomenon,” he says. “Every decade or so there’s an important new development. In the ’90s it was clearly the Internet. In this decade, it’s clearly offshoring. This is already having a huge impact and will continue to have a huge impact, so we all need to understand it from a lot of different disciplines. My discipline is management, but certainly a number of people need to understand this new phenomenon [is] being driven a little bit too much by fairly superficial media coverage. We need to pay closer attention to what’s really happening with this.”
Reprinted from American Weekly, March 28, 2006.
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