• Technology
  • McKinsey & Co.

Exploding the Myths of Offshoring

Far from damaging the economy of the United States, offshoring should enable its companies to direct resources to next-generation technologies and ideas -- if public policy doesn't get in the way.

Corporate savings. The cost savings enjoyed by US companies are the most obvious source of value. For every dollar of corporate spending that moves offshore, US companies save 58 cents, and the quality of the services they buy is often higher: wages are lower, so companies can hire better-qualified people and spend more on supervision and training. Offshore workers are often more highly motivated than US workers and perform better, particularly in low-skilled jobs that lack prestige and suffer from high turnover in the United States. One British bank’s call-center agents in India not only process 20 percent more transactions than their counterparts in the United Kingdom but also do so 3 percent more accurately.

A better deal for consumers. Ultimately, in a competitive economy such as that of the United States, consumers benefit as companies pass on savings in the form of lower prices. New research by Catherine Mann, of the Institute for International Economics, in Washington, DC, found that the global sourcing of components has reduced the cost of IT hardware by up to 30 percent since 1995, boosting demand and adding as much as $230 billion to the US GDP in that period. (Catherine Mann, “Globalization of IT services and white-collar jobs: The next wave of productivity growth,” Policy Brief 03-11, Institute for International Economics, Washington, DC, December 2003.) Trade in services will have similar effects. A technician in India, for instance, can read a magnetic-resonance-imaging (MRI) scan for a fraction of what it would cost in the United States. Transferring that position to India might cause a US medical technician to be laid off, but lower prices for life-saving technologies mean that more sick people can receive them.

Additional exports. Indian companies that provide offshore services also buy goods and services ranging from computers and telecommunications equipment to legal, financial, and marketing expertise. Often, they buy these from US companies. A call center in Bangalore, for instance, could use HP computers, Microsoft software, and telephones from Lucent Technologies, and it may be audited by PricewaterhouseCoopers. We estimate that for every dollar of corporate spending that moves offshore, companies that provide the offshore services buy five cents of goods and services from the United States in return. On top of that, young Indian workers employed by outsourcing firms buy imported goods. Thanks to such corporate and individual buyers, exports from the United States to India stood at $5 billion in 2003, compared with $3.7 billion in 2000; they rose by 22 percent from 2002 to 2003 alone.

Repatriated profits. Many Indian outsourcing firms are owned in whole or in part by US companies, such as GE and EDS, and repatriate some of their earnings. Operations owned by foreign (mostly US) companies generate 30 percent of the Indian offshore industry’s revenues. In this way, an additional four cents of every dollar spent on offshoring returns to the US economy.

Productivity and new jobs. The direct benefits to the United States from corporate savings, new exports, and repatriated profits total 67 cents — twice the benefit to India. But the gains don’t end there. Corporate savings can be invested in new business opportunities, and this investment will boost productivity and create new jobs. Experience suggests that these jobs will on average have higher value added, as auto assemblers did when they replaced carriage makers and factory workers when they replaced farmers.

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