Outsourcing Services

Transcription

1 Outsourcing Services Myriam Quispe-Agnoli Federal Reserve Bank of Atlanta Georgia Council for International Visitors February 10, 2005 Disclaimor: The views expressed in this presentation are those of the author and do not reflect the views of the Federal Reserve Bank of Atlanta or the Federal Reserve Systems

2 Outline: Definitions: Outsourcing or Offshoring? Economic Impact of Outsourcing: What does the theory tell us? What do the numbers tell us? Conclusions

3 Definition: Outsourcing and off-shoring No commonly accepted definition. Are the terms off-shoring and outsourcing synonymous? Under off-shoring, firms import services from foreign suppliers, or from their foreign affiliates. Under outsourcing, firms purchase services from other companies, either domestic or foreign. Then, what are we talking about?

4 Definition: Off-shoring and Outsourcing Location of service supplier Domestic Offshore Ownership of service supplier In-house Outsourced Domestic in-house production Example: Company produces its products domestically without any outside contracts Domestic Outsourcing Example: Company uses services supplied by another domestically-based company Offshore in-house sourcing Example: Company uses services supplied by its own foreign-based affiliate (subsidiary) Offshore Outsourcing Example: Company uses services supplied by an unaffiliated foreignbased company Source: GAO International Trade, p.58.

5 What activities and jobs are vulnerable to outsourcing? Activities that have: high information content and can be standardized and digitized. Job processes that can be separated and documented step-bystep. No face-to-face customer services requirements. Jobs that are: predominantly in the IT sector, and IT-enabled activities such as business and financial operations, office and administrative support, medical transcriptionists, paralegals and legal assistants, among others.

6 Economic Impact of Outsourcing: What does economic theory tell us? Background In perfect competitive markets, firms will minimize costs in order to produce output efficiently. The development of internet, infrastructure growth in developing countries, and decreasing data transmission costs are important facilitating factors to imports of services.

7 Economic Impact of Outsourcing: What does economic theory tell us? Firms decisions about outsourcing or offshoring services will be influenced by Potential benefits availability of cheap skilled labor access to foreign markets Risks Geopolitical issues, unforeseen expenses, cultural differences, and weak infrastructure in supplier countries.

8 Economic Impact of Outsourcing: If the firm decides to outsource services from foreign companies In the short run, the firm will reduce its costs, resulting in: A decline in prices of the good, increasing the purchasing power of the buyer s income. An increase in the firm s profits, which could be reinvested, generating an increase in the demand for other products and employment. Is there a displacement of production and employment due to outsourcing of services? It depends

9 Economic Impact of Outsourcing Is there a displacement of production and employment due to outsourcing of services? It depends In the long run, higher demand of U.S. firms for more services from abroad will translate into an increase in the demand for skilled workers in other countries, pushing up their salaries, increasing the price of these services.

10 India: Average Annual Salaries Entry-Level Software Writer 4,082 4,213 4,496 5,852 6,628 Project Manager 13,585 14,653 16,319 25,822 31,131 Source: Business Week, February 14, 2005

11 Economic Impact of Outsourcing What do the numbers tell us? The U.S. Economy in 2004 Gross Domestic Product = $ Trillion (2000 Dollars) Economic Growth in 2004 = 4.4% Total Population = Millions Total Labor Force = Millions Total Employed = Millions Total Unemployed = 8.2 Millions Unemployment Rate = 5.5%

12 U.S.Private Sector GDP, 2004 (U.S.$ Billions) 23% Goods Producing Industries Services Providing Industries 77% U.S. Private Sector GDP = 9.1 Trillions 2000 US Dollars Source: Bureau of Economic Analysis

13 Share of Services in US Imports and Exports, 2004, US$ 2000 Billions Exports % Imports % Goods Services Total Source: Bureau of Economic Analysis

14 Total Private Services Imports, % 2004 % Travel Passenger Fares Other transportation Royalties and License Fees Other Private Services Total Source: Bureau of Economic Analysis

15 Other Private Services Imports, % 1997 % Total (Affiliated + Unaffiliated) Total Unaffiliated Education Financial services Insurance Telecommunications Business, professional, and technical services Other services Source: Bureau of Economic Analysis

16 IT Employment Trends, Sectors Computer Hardware Employment ( 000) Annual Average % Change Software & Computer Services Communications Equipment Communications Services IT Manufacturing IT Services All IT-Producing Industries All Private Industries

17 Employment : Relocation of work, 2004 Action Total Private Non Farm Sector (excl. seasonal and vacation events) Out of the country Within Company Different Company Domestic Relocations Unable to assign Source: Bureau of Labor Statistics, BLS Layoff events Workers affected 53,923 16,073 12,781 3,292 35,171 2,679

18 Total separations, excluding seasonal factors and vacations 250, ,000 Mass Layoffs, Total Separations Layoffs Unrelated to Movement of Work Overseas Relocations within Company Overseas Relocations Different Company Domestic Relocations within Company Domestic Relocations Different Company Not Reported/Unknown 150, ,000 50,000 0 Source: BLS. Q1 Q2 Q3 Q4

19 Total separations, excluding seasonal factors and vacations 25,000 20,000 Mass Layoffs, Separations Because of Movement of Work Overseas Relocations within Company Overseas Relocations Different Company Domestic Relocations within Company Domestic Relocations Different Company Not Reported/Unknown 15,000 10,000 5,000 0 Q1 Q2 Q3 Q4 Source: BLS.

20 Conclusions Is there a displacement of production and employment due to outsourcing of services? More information and studies on off-shoring and outsourcing are necessary to have a broad picture of their impact in the U.S. economy. However, given the composition and structure of the U.S. economy, outsourcing of services will not cripple service employment and production.