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Offshoring by the Numbers

Results of our survey of 275 finance executives at a broad range of companies.

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?

Yes
18%
No, but we plan to
10%
No, but we used to
2%
No plans to outsource offshore
70%

If you use offshore outsourcing, how has the size of your U.S.-based workforce changed over the past three years?

Decreased by more than 5%
43%
Decreased by 5% or less
8%
No change
14%
Increased by 5% or less
16%
Increased by more than 5%
20%

If you are currently outsourcing offshore, how will your offshoring levels change over the next two years?

We plan to use more offshore workers
64%
No change
23%
We plan to use more offshore workers
3%
Unsure
10%

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?

% Salary > 50K % Respondents
0
23
1-24
21
25-49
9
50-74
13
75-99
15
100
19

If you already offshore, or plan to, what job functions are you sending overseas?

Job Function % Respondents
Information Technology
59
Manufacturing
36
Customer relations/call centers
31
Finance/accounting
21
Other
5
Human Resources
4
Legal 0

If you already offshore, or plan to, what savings on average have you realized from your offshoring initiatives?

% Savings % Respondents
Over 25
22
21-25
20
16-20
18
11-15
12
6-10
12
1-5
4
No savings
10

Going Concerns
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.

Rank
1. Need to remain competitive
2. Desire to improve profit margins
3. The impact on workers who will be displaced
4. Desire to reallocate resources to new opportunities
5. The impact on morale of remaining employees
6. Risk of negative publicity

How concerned are you about the following potential risks of offshore outsourcing?

Very Concerned
Weakness in third party’s internal controls
47%
Loss of intellectual property
45
Lack of direct control over vital processes
38
Political instability in offshore country
37
Loss of sensitive corporate information
34
Risk of negative publicity
13

Backlash?
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?

Until the economy improves
49%
Until the end of the election cycle
17
Until baby-boomer retirement
causes a worker shortage
in the U.S.
16
It is a long-term change in
public attitude
15
Other
3

If you already offshore, what effect, if any, will the backlash have on your plans?

No effect
72%
Unsure
13
We are less likely to consider future offshoring
9
We will reduce our use of offshoring
5
We will increase services/benefits for displaced workers
4

Over the next few years, what effect do you believe offshoring will have on the total level of employment in the U.S.?

Offshoring will lead to a net reduction in U.S. jobs
61%
Offshoring will have no effect on U.S. jobs
28
Offshoring will lead to a net increase in U.S. jobs
11

Hourly Wages
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.

U.S. India
Telephone operator $13 Less than $1
Medical transcriptionist $13 $2
Payroll clerk $15 $2
Legal assistant/paralegal $18 $7
Data-entry clerk $20 $2
Accountant $23 $11
Financial researcher/analyst $34 $11
Software developer $60 $6
Software engineer $120 $18
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.

United States India China
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%
Illiteracy rate 5% 35% 15%
*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
exports from:
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

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