Well-meaning government officials occasionally recommend regulations that tax or otherwise restrict outsourcing. Exporting labor overseas, they might say, is bad for US workers. But is this true? While perhaps counter-intuitive, outsourcing actually benefits US workers and improves the US economy as a whole.
Here’s why: Outsourcing is a term that refers to obtaining a good or service from an outside or foreign supplier. In many cases, outsourcing refers to contracting work out to an international provider who can provide the service at a lower cost because labor is cheaper in a foreign country.
Outsourcing is a term that refers to obtaining a good or service from an outside or foreign supplier. In many cases, outsourcing refers to contracting work out to an international provider who can provide the service at a lower cost because labor is cheaper in a foreign country. Outsourcing is also known as BPO, or “Business Process Outsourcing,” the most common of which is known as “call centers” where the typical business process that is outsourced is receiving inbound telephone calls from customers. Other BPO tasks include data entry, medical billing, website development, and any task that can be performed by a remote employee with a good internet connection.
The top countries for outsourcing include many Asian countries, but the Philippines has become known as the “Call center capital of the world” and the “World’s Premier Outsourcing Destination”. The Philippines is unique because its labor force is not only well educated and committed to high quality, but also since English is one of their national languages, their English language fluency is very strong.
Tremendous resources such as OutsourceAccelerator.com and The Source are available to simplify the journey and provide support to companies seeking to outsource.
A US-based employer faces a daunting set of costs when hiring a US-based employee. These costs include the following:
- office space, supplies, and furniture
- computer equipment
- supervision/training and quality assurance
- FICA, human resources department/employee turnover, government regulations compliance oversight, and payroll
- wage/salary, including but not limited to Medicare, unemployment insurance, workman’s comp, benefits, retirement plan, vacation, paid holidays, and sick days.
In contrast, employers can avoid these daunting costs and responsibilities by outsourcing them. The process is simple – they just provide their expectations to their BPO company, pay a small hourly fee, and the employer saves up to 60 percent on overall labor costs.
The US Government should encourage outsourcing for three main reasons:
- Outsourcing increases US GDP and therefore overall wealth
- Outsourcing allows Americans to improve their career growth opportunities
- Outsourcing is an appropriate allocation of resources
Greater US Growth, GDP, Wealth
Critics of outsourcing will argue that managers who outsource jobs, will allocate fewer overall budget dollars to labor since they can cut labor costs through outsourcing. While this will not always be the case, this is not a bad outcome. Saving money is never bad, because it improves US GDP, and ultimately the wealth of the economy.
Standards of corporate governance dictate that corporations exist to serve the shareholders. While groups such as employees, customers, and community members are often mentioned as important constituents of a corporation, it is ultimately the shareholders whose interests must be paramount.
If a corporation is not thriving and profitable, then it will fail and nobody is served. Therefore, the shareholders elect a board of directors, and the board hires managers to run the company. The purpose of the company and the role of all is to serve the best interests of the shareholders – to increase revenues, cut costs, and improve profits.
So if outsourcing improves the profits of a corporation, the shareholders benefit. Critics of outsourcing may attempt to argue that American shareholders are the few, the greedy, and the rich elite. However, this is not the case.
Corporate shareholders include any retirement fund that is at least partially invested in equities – and these include teachers unions, police and firemen pension funds, and literally any American with a retirement or pension fund of any sort, and who wants to be able to enjoy retirement and have a legacy with their heirs.
For those corporate managers who allocate the same labor dollars but include outsourcing in their labor pool, they will get a bigger ‘bang for the buck’ for those same labor dollars since outsourced labor often costs 60 percent less.
Such corporations benefit from a better allocation of labor resources because the more important tasks associated with growth are accomplished and the corporation benefits tremendously.
Walmart has effectively “outsourced” the jobs associated with making these products to China, and by doing so, the company has allocated its resources to their most efficient use. Walmart is allowing American consumers to benefit from cheap Chinese labor – this benefits Walmart shareholders.
More importantly, it benefits Americans who are able to purchase more goods with each paycheck. If Walmart were forced to purchase these products only from US suppliers (or if an import tax were imposed on Walmart’s outsourcing these manufacturing jobs), then these products would cost approximately 300-500 percent more, according to the Huffington Post. American consumers would lose, US GDP would drop, and the standard of living in the US would suffer.
If the US government were to regulate the use of outsourced labor, this would harm American employee career growth opportunities, it would reduce US GDP and overall shareholder wealth, and it would prevent the efficient allocation of resources in the labor market.
Further, if the US government were to consider such regulations, a salient argument could be made that it should first prevent corporations such as Walmart from outsourcing US manufacturing jobs. This would cause the bankruptcy of hundreds of US corporations, eliminate at least 40 percent of the value of the US stock market, and dramatically reduce the standard of living for almost every American citizen.
Why does the US outsource to India, China, Mexico, and the Philippines
One of the top reasons why US-based companies outsource to these developing countries is cost-cutting.
Most of the countries named have a workforce with high-quality credentials and are less expensive, as the cost of living in their respective countries is lower than in the US or Europe.
For instance, the minimum cost of living in Metro Manila is around $500, going around $1500 for those who lead a more comfortable lifestyle. That already covers rent, utilities, food, transportation, and some leeway for other expenses.
Comparing that to the extravagant cost of living in the major US and European cities, employees from the countries listed would settle for what other people would consider low pay.
Does outsourcing hurt the US economy?
Short answer: no.
Outsourcing actually gives US corporations a competitive advantage in a global market since it allows them to trade internationally while operating offices abroad. Whether the argument of outsourcing hurting the US economy is subjectively true for some people, the data says otherwise.
According to The Balance, in 2018, the U.S. overseas affiliates employed 14.4 million workers. Four industries often affected include technology, call centers, human resources, and manufacturing. The advantages also extend to the outsourcing destinations. Many of them have developed a part of their economy as a result of outsourced jobs from the United States.
Outsourcing is an excellent allocation of resources and provides a great opportunity for US GDP growth, and for American corporations to improve profitability and employee career growth opportunities.
About the author: Mr. Warren Walborn is the President and CEO of Pentwater Group, a BPO company located in Mindanao, Philippines where he lives part of the year with his Filipina wife and two children. He is the former CEO of two other start-up companies – a renewable energy company and a medical device company. Mr. Walborn received his BA in Economics from Brigham Young University, and his MBA in Finance with Honors at the University of Chicago Booth School of Business. He can be reached at [email protected].