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Results of our survey of 275 finance executives at a broad range of companies.
Kate O'Sullivan and Don Durfee, CFO Magazine
June 1, 2004
Pick a Number, Any Number...
Just how many nonmanufacturing jobs are heading overseas? It depends who you ask. Goldman Sachs estimates U.S. companies have sent 400,000 service jobs overseas since 2000, and the Information Technology Association of America (ITAA) says that 104,000 tech jobs moved abroad in that period.
Two years ago, Forrester Research Inc. predicted that 3.3 million U.S. service jobs would be sent offshore by 2015, but that analysis is now called conservative by experts like Cynthia Kroll, senior regional economist at the Haas School of Business at the University of California, Berkeley. Kroll estimates that as many as 14 million U.S. jobs — ranging from investment research to tax preparation — are at risk of being sent offshore, because they are easily standardized and don't involve face-to-face interaction.
Rafiq Dossani of Stanford University's Asia Pacific Research Center also calls the Forrester number a "gross underestimate," and says he expects 1 million jobs to be sent to India alone by the end of next year. "For every skilled worker, there are several less-skilled workers in support positions. That's where job loss is going to be large," he says. AFL-CIO president John Sweeney declares that outsourcing will move 1 million jobs overseas every year for the foreseeable future.
Still, the real story seems to be the increasing number of highly skilled, nonunion jobs affected. Our own survey (on the following two pages) shows a remarkable percentage of companies now shipping finance and accounting jobs overseas.
Despite all the variations in the base figure, just about everyone seems to agree that more jobs will move overseas. But is that really so terrible? The ITAA argues that offshore outsourcing also will create jobs in the United States (some 317,000 by 2008), thanks to the economic boost companies get from the move. And in a recent speech, Federal Reserve Board governor Ben S. Bernanke argued that the number of jobs lost to offshore outsourcing constitute little more than 1 percent of those regularly lost in the United States as the result of normal economic churn.
Is Everybody Doing It?
Offshoring isn't quite as common as the hype would suggest: according to CFO's survey of 275 finance executives at a broad range of companies, only 18 percent currently use offshore outsourcing. Those companies have moved an average of 6 percent of their workforce overseas during the past three years, although some companies sent as much as 27 percent.
Clearly, offshore outsourcing is growing. Sixty-four percent of those already outsourcing plan to use more overseas workers in the next two years.
Note: Figures may not add up to 100 percent due to rounding. All data is from the CFO survey unless otherwise indicated.
|Does your company currently use offshore outsourcing?|
|If you use offshore outsourcing, how has the size of your U.S.-based workforce changed over the past three years?|
|If you are currently outsourcing offshore, how will your offshoring levels change over the next two years?|
Beyond Call Centers
Offshoring increasingly affects high-paying jobs. Forty-seven percent of survey respondents say most of the jobs that moved overseas paid $50,000 or more before being outsourced.
Information technology is the most common job sent offshore, followed by manufacturing and call-center positions. Twenty-one percent report sending finance activities offshore. At the same time, our survey suggests that dramatically lower labor costs overseas don't automatically translate into dramatic savings. While 42 percent of those using offshore outsourcing report savings of more than 20 percent, almost as many—38 percent—see savings of less than 15 percent, with 10 percent of respondents reporting no savings at all.
|Of U.S. positions eliminated by offshore outsourcing in the past three years, what percent commanded salary levels of $50,000 or higher before they were outsourced?|
|If you already offshore, or plan to, what job functions are you sending overseas?|
|If you already offshore, or plan to, what savings on average have you realized from your offshoring initiatives?|
When it comes to reasons for outsourcing offshore, finance executives are more concerned about staying competitive and improving profits than about the possibility of negative publicity or poor work morale. Negative publicity also ranked last on the list of potential outsourcing risks. Our survey respondents are far more worried about possible weaknesses in internal controls at their outsourced location (a concern that reflects the wide-ranging impact of Sarbanes-Oxley Act of 2002) and loss of intellectual property. (Among the smaller sample of those currently outsourcing or planning to, loss of intellectual property narrowly passed internal-control weaknesses as the top concern.)
|Please rank the top factors you would consider when deciding whether or not to outsource offshore.|
|How concerned are you about the following potential risks of offshore outsourcing?|
Perhaps one reason finance executives don't consider negative publicity to be a serious risk is that very few (15 percent) think the backlash against offshoring will last long. Only 5 percent of those who are offshoring will last long. Only 5 percent of those whoa re offshoring, today say public disapproval will cause them to cut back. At the same time, few CFOs—even those who are offshoring—appear to accept the argument of some economists that offshoring will lead to new jobs in the United States by allowing companies to reallocate capital to new opportunities. Only 11 percent think offshoring will lead to a net increase in U.S. jobs over the next few years, and 61 percent think it will create a new job loss.
|How long do you think the current backlash against offshoring will last?|
|If you already offshore, what effect, if any, will the backlash have on your plans?|
|Over the next few years, what effect do you believe offshoring will have on the total level of employment in the U.S.?|
Although the hourly wages an Indian worker can earn for commonly outsourced job categories seem low, a software engineer making almost $20 an hour could hire a full-time housekeeper.
|Telephone operator||$13||Less than $1|
|Note: Numbers are rounded. Where ranges were given, the average is given above.|
Sources: University of California, Berkeley; and McKinsey Global Institute
Workers of the World
Even as the U.S. population ages, the number of workers in India and China continues to grow rapidly. But both of those countries still face development hurdles.
|Total population||0.29 billion||1.07 billion||1.30 billion|
|Civilian labor force||147 million||470 million||744 million|
|Percent of population under age 25||35%||53%||41%|
|Number of college graduates per year||1.3 million||3.1 million||2.8 million|
|Number of computer-science graduates per year||53,000||75,000||50,000|
|As percentage of population||0.02%||0.007%||0.0004%|
|Cost of a cup of coffee at a gourmet coffee bar||$1.68||$0.50||$1|
|Percent of country with electricity||100%||60%||98%|
|Percent of population living below the "poverty line"*||12%||25%||10%|
|*Definition of "poverty line" varies substantially by country.|
Sources: U.S. Census Bureau, U.S. Bureau of Labor Statistics, U.S. DoE, The Economist, Economic Times of India, Software Outsourcing Research, CNBC, the National Center for Education Statistics, the International Energy Agency, and CFO research
A Two-Way Street
Foreign direct investment in the United States still dwarfs the amount of dollars flowing to offshore-outsourcing beneficiaries like India and China.
|Foreign direct investment in:||Commercial-services|
|United States: $82.0 billion||United States: $282.5 billion|
|India: $4.7 billion||India: $24.9 billion|
|China: $53.5 billion||China: $44.5 billion|
|Sources: Organization for International Investment, The Economist, U.S. Federal Reserve, World Trade Organization|