In Defense of Outsourcing in the Recession

When the spending bubble popped, it ushered in the era of the incredible shrinking consumer. Demand is weak, and companies are looking to do more with less by stretching their workforce and filling the gaps with cheap labor, even part-timers. Indeed of Brookings' 20 strongest cities have average or below average cost-of-living, and most of those cities have below average wages.

With the market for cheap work booming, outsourcing companies are thriving. We don't know how many jobs have been outsourced recently to other countries, because U.S. companies aren't required to keep track. Forrester, a Boston based consultancy group, estimated that more than 3 million jobs will have moved offshore by 2015.

I recently spoke with Michael Fraley, a partner at the outsourcing consultant Everest Group, which helps companies cut costs by "sourcing," or hiring other companies to do certain tasks, like take customer service phone calls. The vast majority of his sourced jobs go overseas. Here is an edited transcript of our conversation:

Most Americans consider "outsourcing" a dirty word. Why do you disagree?

The companies that do outsourcing are looking to stay competitive. Cheaper labor means a stronger bottom line, which means the company can spend more on strategy, more on research, more on high-quality jobs in the US. It's about survival and outsourcing is a viable strategy. Sometimes if a company cannot move 100 jobs, it could lose all 900.

Compare the outsourcing market today with a few years ago. How has it changed with the recession?

Since the recession, there's been an uptick. More companies are considering outsourcing. There are more deals, but fewer jobs moving overseas. A few years ago, you saw more full time equivalents [one person's worth of work] move to an offshore provider. It was not uncommon to have a thousand or many thousand FTEs moving in one deal.

I don't want to pick on the US workforce, but sometimes the outsourced job is given to somebody who might be more talented than the person whose job he's replacing. I outsourced 400 jobs to Bangalore from one company and when we helped them move those jobs, the providers got 4000 resumes. That means the outsource providers can be very very picky. It's a talented workforce.

Take me through a brief history of outsourced jobs. What kind of jobs were the first to go?

In the beginning of the real outsource boom, the early to mid 1990s, it was mostly IT infrastructure, people running and maintaining my IT backbone, and application development jobs. So if I want to develop a new application, or if I want my existing software to do something new, I'd move those tasks overseas.

Next on the list was customer call centers. When I call Bank of America who knows where that phone call is going. It could be Charlotte or Mumbai. Next on the evolutionary path was finance and accounting: accounts payable, accounts receivable, payroll, and billing.

What kind of jobs are only recently in danger of being outsourced?

The next wave is more value added. After a few years, outsource providers understand your business as well as you do. That means they can give you valuable input into budgeting and market planning. The jobs are moving up the value chain of finance.

Following up that chain, what is the next wave of "outsourceable" jobs?

We don't really know. Look at all the people shopping online today. We used to think you needed cashiers. Then you find out you don't need people in front of you to buy clothes and books. Me, I'll book every flight online. I'll buy my office supplies online. Look at online banking and retail. It's surprising to realize what kind of jobs we don't need.

The White House and Bureau of Labor Statistics both project that health care jobs will increase dramatically in the next decade, because you can't outsource a nurse, or home assistant, or well-trained doctor. What are other tasks that we can't send abroad?

It's interesting you use the example of doctors because a lot of diagnostic work can be done by overseas doctors. Let's say you screw up your knee and get an MRI. I have a friend who developed a company that sends MRIs around the world to be diagnosed, and Indian doctors are much cheaper.

But you hardly ever see a company outsource strategic planning. The people deciding the financial strategy of companies never go overseas. Those are the upper echelon jobs.

Who isn't outsourcing, but should be?

Government. And anybody who provides services to the government. There is no business reason why a state government shouldn't send its accounting department overseas. But the governor will have a hard time explaining that to his constituency.