Outsourcing backlash and whiplash

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There is a growing backlash against outsourcing -- sending domestic work to foreign businesses -- that erupted in the Senate last week: Anti-outsourcing legislation passed in a 70-26 vote. Outsourcing opponents cheered, but investors are becoming aware these actions threaten profits and stock prices.

There is very little real evidence outsourcing has caused significant job losses in the U.S. All the data showing job losses in the millions come from consulting firms like McKinsey & Co., Forrester Research and others, which make money by helping companies outsource. It is in their interest to make potential clients think all their competitors do it, so they must, too.

Of course, no one denies some jobs have been outsourced. But companies often find the gains don't match those claimed by consultants. There are many costs involved in outsourcing that can eat up much of the savings from hiring Indians at a fifth what it takes to hire Americans for the same job.

This phenomenon is detailed in a March 3 Wall Street Journal report on ValiCert, a software company based in California that outsourced many operations to India. It quickly found a massive and costly effort was required just to communicate with its Indian workers, due to time differences and the contrasting styles, methods and experiences of American and Indian software programmers. Moreover, the Indians just weren't as productive. It often took them a week to do projects that formerly could have been completed in two days here.

The story makes clear that ValiCert only ventured into outsourcing because it had no choice. The company was on the brink of bankruptcy. All its jobs would have been lost if it had been unable to cut development costs. Although some American jobs were lost in the process, the company was able to remain in business, eventually leading to rising employment in the U.S. in higher-level positions.

Unfortunately, in such cases, people tend to see only the jobs lost initially by outsourcing and ignore the jobs saved or later gained because of it. General Electric makes this point in its latest proxy statement, in response to criticism from a union pension-fund shareholder. Its overseas expansion "has helped keep GE competitive and growing and, in many cases, helped to create and preserve jobs in the United States," GE argues.

To the extent GE has outsourced, it is mainly for low-level operations. "Our outsourcing has largely consisted of obtaining commodity products and services from low-cost countries in order to remain competitive," GE states.

The GE notes that, despite outsourcing, its U.S.-based employment has remained stable. The cost savings have helped finance additional domestic investments in "high-tech, high-value jobs in areas such as healthcare, digital entertainment, energy and water technologies, renewable resources and research and development."

Another company, Genworth Financial, has warned its shareholders that restrictions on outsourcing could threaten profits. In a January filing with the Securities and Exchange Commission, it said, "The political climate in the U.S. also could change so that it would not be practical for us to use international operations centers, such as call centers. This could adversely affect our ability to maintain or create low-cost operations outside the U.S."