Off Shoring – Management Essay and Analysis

The issues with off shoring are that there is not enough information as well as vagueness of the information presented. It is important to address both sides of the issue in order to get a better understanding of whether or not off shoring is a good

business decision. There are four areas which are taken into consideration when looking at the effects of offshoring on the U.S. economy that have two opposing sides. One issue is the average U.S. standard of living which is predicted to be beneficial in the long run with the use of offshoring, however some argue that offshoring could harm the standard of living by undermining U.S. technological leadership. Another issue is employment and job loss, some predict that offshoring will have little effect on overall employment levels, however there are still arguments that it may be a much larger impact on the white collar jobs that the U.S. offers. A third issue is the distribution of income, “some economists maintain that offshoring could increase income inequality in the U.S., while others argue that changes in the income distribution are driven primarily by factors other than offshoring.” (GAO, Overview of the Issues) A final issue is security and consumer privacy. Offshoring may actually be making our national defense system vulnerable as well as consumer’s financial and medical information. There are many resources for and against the use of offshoring, although there are negative effects of offshoring, the positive effects seem to outweigh them.

Globalization “has left many Americans disgruntled, jobless, and distrustful of corporations that practice it” ( Job loss and loss to U.S. income have seem to be the most prevailing of all issues against offshore outsourcing. Some feel that the potential damage to the labor market remains quite large and is heavily ignored by studies purporting to tally offshoring’s costs and benefits. (Economic Policy Institute) Although it may make sense for some firms to resort to offshore outsourcing, if the trend becomes too widespread, resulting in an increase in foreign productivity in sectors where the U.S. is a net exporter, it could actually result in a loss to U.S. income through terms of trade effects. “The terms of trade of the U.S. refer to the prices foreign purchasers pay for U.S. exports relative to the prices U.S. residents pay for imports. If U.S. exports fetch ever higher prices on world markets and/or U.S. import prices drop, the terms of trade for the United States improve- the United States is able to consume more goods given its current income and productivity. If instead U.S. exports fetch ever lower prices and/or imports become more expensive, U.S. terms of trade deteriorate and its residents are able to consume less given current income and productivity.” (Economic Policy Institute) Also if the U.S. economy reaps efficiency gains from offshoring, these are unlikely to accrue to American workers. Of all the net jobs predicted to be created in 2008 due to offshoring, 44% are in only two sectors: construction and transportation/utilities. Another point made about labor is that “software is a very labor intensive industry, and large price declines can be had in this sector only through a large reduction in labor costs. This means either large scale employment relocation to other nations, or significant wage cuts for software engineers, publishers, and programmers in the United States.” (Economic Policy Institute) The rising popularity of offshore outsourcing will continue to push down the prices of IT services for the next several years, this is a challenge for IT service providers.

A second major risk is data security. Most countries do not have the protective practices that the U.S. and Europe require. The channels are well beyond the control of the company or the provider. These channels often do not have end to end transaction encryption which leaves vulnerability throughout the communication path. Validating security in a multi-vendor, multi-client, mixed environment is extremely difficult. There are also gaps in personal security, many companies have weak personnel policies. Also offshore providers do not have very strict contractual agreements so when there is a security breach they are less likely to inform clients of it. This lack of offshore loyalty also leads to many viruses implemented by possible government intelligence or organized crime. By offshoring, a company gives up a certain amount of control of the business processes. “Also, language barriers, cultural barriers and the protection of intellectual property, or lack thereof, can increase the risk of miscommunication and consequent misinterpretation of legal commitments.” (