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March 2018 – Well-meaning government officials occasionally recommend regulations that tax or otherwise restrict outsourcing. Exporting labor overseas, they might say, is bad for US workers. But is this true? While perhaps counter-intuitive, outsourcing actually benefits US workers, and improves the US economy as a whole. Here’s why:
Outsourcing is a term that refers to obtaining a good or service from an outside or foreign supplier. In many cases, outsourcing refers to contracting work out to an international provider who can provide the service at a lower cost because labor is cheaper in a foreign country. Outsourcing is also known as BPO, or “Business Process Outsourcing,” the most common of which are known as “call centers” where the typical business process that is outsourced is receiving inbound telephone calls from customers. Other BPO tasks include data entry, medical billing, website development, and any task that can be performed by a remote employee with a good internet connection.
The top countries for outsourcing include many Asian countries, but the Philippines has become known as the “Call center capital of the world” and the “World’s Premier Outsourcing Destination.” The Philippines is unique because its labor force is not only well educated and committed to high quality, but also since English is one of their national languages, their English language fluency is very strong. Tremendous resources such as OutsourceAccelerator.com and The Source are available to simplify the journey and provide support to companies seeking to outsource.
A US-based employer faces a daunting set of costs when hiring a US-based employee. These costs include the following: Recruiting, office space, computer equipment, office furniture, supervision/training, quality assurance, wage/salary, FICA, Medicare, unemployment insurance, workman’s comp, benefits, retirement plan, vacation, paid holidays, sick days, payroll processing to pay employees, employee turnover, office supplies, human resources department and government regulations compliance oversight.
In contrast, employers can avoid these daunting costs and responsibilities by outsourcing them. The process is simple – they just provide their expectations to their BPO company, pay a small hourly fee, and the employer saves up to 60 percent on overall labor costs.
The US Government should encourage outsourcing for three main reasons:
- Outsourcing increases US GDP and therefore overall wealth
- Outsourcing allows Americans to improve their career growth opportunities
- Outsourcing is an appropriate allocation of resources
Greater US Growth, GDP, Wealth
Critics of outsourcing will argue that managers who outsource jobs, will allocate fewer overall budget dollars to labor since they can cut labor costs through outsourcing. While this will not always be the case, this is not a bad outcome. Saving money is never bad, because it improves US GDP, and ultimately the wealth of the economy.
Standards of corporate governance dictate that corporations exist to serve the shareholders. While groups such as employees, customers, and community members are often mentioned as important constituents of a corporation, it is ultimately the shareholders whose interests must be paramount. If a corporation is not thriving and profitable, then it will fail and nobody is served. Therefore, the shareholders elect a board of directors, and the board hires managers to run the company. The purpose of the company and the role of all is to serve the best interests of the shareholders – to increase revenues, cut costs, and improve profits.
So if outsourcing improves profits of a corporation, the shareholders benefit. Critics of outsourcing may attempt to argue that American shareholders are the few, the greedy, and the rich elite. However this is not the case. Corporate shareholders include any retirement fund that is at least partially invested in equities – and these include teachers unions, police and firemen pension funds, and literally any American with a retirement or pension fund of any sort, and who wants to be able to enjoy retirement and have a legacy with their heirs.
For those corporate managers who allocate the same labor dollars but include outsourcing in their labor pool, they will get a bigger ‘bang for the buck’ for those same labor dollars since outsourced labor often costs 60 percent less. Such corporations benefit from a better allocation of labor resources, because the more important tasks associated with growth are accomplished and the corporation benefits tremendously.
On a microeconomic level within a work team (whether as part of a corporation, non-profit, or government organization), just about all Americans want to advance their careers. However, there are always “grunt work” tasks that must be done such as data entry, managing customer service, or other tasks that must be attended to, but do not provide highly sought-after career advancement opportunities. Employers often believe that they have no choice but to allocate their limited labor dollars to these grunt work tasks and that they must hire costly American employees to perform these menial tasks.
This is a common impediment to career advancement, and the result is that many more important tasks are overlooked, such as marketing, research and development, and other things that will result in pursuing growth opportunities.
Savvy employers who outsource the grunt work, are able to train their American employees to manage more important responsibilities. The US-based employees, therefore, benefit by gaining training and career advancement opportunities appropriate to their motivation and capabilities.
Better Allocation of Resources
As an economist, I enjoy hearing healthy debate regarding the merits of capitalism. There are many entertaining public figures who attempt to argue that a capitalistic society is somehow evil, selfish and full of greed, and therefore unhealthy to the greater good of an economy. However, the preponderance of evidence over the history of mankind shows very clearly that a free market, capitalistic economy is completely unmatched in its effectiveness in generating maximum wealth for the greatest number of participants. Indeed, no other economic system has come close to producing the success of capitalism.
In late eighteenth century, Adam Smith proposed his theory of the invisible hand, which states that in a free and unregulated market, where anybody can become a producer or a consumer, the supply and demand of different goods will become equal. Further, the allocation of resources for production and consumption of different goods and services will be optimal for the welfare of society.
This theory has proven itself unfailingly true over the last 200 years. The idea of an invisible hand guiding the market to the best social outcome has created a recipe for tremendous wealth-building for any society. It is the proof justifying free markets, and has been the standard argument against governments controlling production or consumption in any form that interferes with the free market.
As I have studied economics at the feet of some of the most brilliant economists, including Nobel Laureates at the University of Chicago where I obtained a Master’s degree, I often used the following “Bananas” example to demonstrate this concept:
In the United States, the banana industry is mostly unregulated and constitutes a “Free Market”. However, the weather climate in the US is not acceptable for growing bananas. Therefore, the US imports bananas. Approximately 94 percent of its banana demand is imported from Central American countries whose hot and humid climates are ideal for growing bananas. Costa Rica and Honduras for example can grow bananas for a pennies per pound, and ship those bananas to the US in bulk. At the grocery store, the average banana price per pound in the US in 2017 was $0.56/lb. At this low price, demand for this healthy fruit was $2.3 billion.
Now let’s imagine a US government that succumbs to the demands of a (fictitious) banana farmer lobby and decides that banana imports should be taxed and regulated. They say that “The US-based banana farmers are harmed by cheap foreign imports of bananas!” This sounds like a logical argument that we should protect our fellow Americans whose business is harmed by “cheap foreign imports”.
However, consider the following realities: US banana farmers must grow their bananas in greenhouses! They must burn expensive fossil fuels in their greenhouses to keep the banana trees warm during six months of the year. Is this an appropriate allocation of our energy resources? The cost to produce a pound of bananas in such greenhouses is not pennies per pound, but rather over two dollars per pound. And at this raw goods price, the retail price of bananas would be approximately $4.00 per pound in the grocery store. At this price, the demand for this healthy fruit would drop to only $100 million – less than five percent of its current demand. The investment of infrastructure to ship and handle bananas would be reallocated to other fruits and vegetables. Shelf space in grocery stores reserved for bananas would be converted to display other fruits. US banana farmers would experience a slight increase in sales revenue initially, but consumer demand for bananas would flow to other fruits including Asian plantain varieties that are not covered by the regulation, and ultimately US banana farmers’ revenues and profits would plummet.
Ultimately, as a result of government regulation, all banana farmers close their businesses, and the free market of this healthy food is decimated. Ultimately, all US consumers and producers are the losers as a result of government regulation. Forcing banana farmers to grow bananas in greenhouses is not an appropriate “allocation of resources” when bananas can be grown in the ideal climates of Central America.
The “resource” in question here is the weather climate of Central America, where bananas grow easily in the abundant heat, humidity and sunshine. By interjecting government regulations, the requirement to grow bananas in US-based greenhouses heated by fossil fuels demonstrates how these ridiculous regulations disrupt, and ultimately kill this free and efficient banana market. In the end, all Americans lose – not only the producers, but especially the American consumers.
Likewise, the relevant “resource” when discussing outsourcing is labor. The cost of labor from locations such as India and the Philippines is 60-80 percent less than in the US. This article does not address the causes for that inequality, but rather simply points to the reality of the stark difference in cost. Given the speed of the internet and the strong reliability of technologies that enable an employee on the other side of the planet to effectively provide services to US companies, a significant cost-savings opportunity exists for US companies to outsource certain tasks.
Related to this is the fact that some argue that outsourcing adds to the US trade deficit as if trade deficits have been proven to be bad for an economy. But no evidence exists to support this, only that it is politically expedient to take a stand against “evil trade deficits”. Simply put, foreign countries send us their goods and services, and we send them little pieces of paper with George Washington’s photo on them. This seems like a good trade for the US. The empirical evidence available in modern history has yet to prove that trade deficits (or surpluses) cause great harm to an economy.
Parenthetically, this cost-savings opportunity does not create a social ethical dilemma. Outsourced labor is not being provided by children or other exploited workers. Outsourced jobs are filled by highly educated men and women who are able to feed their families, and enjoy career growth opportunities otherwise entirely unavailable to them.
Walmart is one of the largest corporations in America. Roughly 70-80 percent of Walmart’s $460 billion annual revenues are from the sale of goods manufactured in China. Walmart has a fleet of giant ships, each longer than a US Aircraft Carrier that hold an incredible 15,000 containers each. These ships are designed with one strict objective – to ship Chinese-made Walmart products on the China-to-California run for Walmart in FOUR days.
These ships are unloaded by a command bridge that is higher than a 10-story building with 11 cargo crane rigs that operate simultaneously and can unload the ship in less than two hours.
The ships then return to China EMPTY.
Why is this a good thing?
Walmart has effectively “outsourced” the jobs associated with making these products to China, and by so doing, Walmart has allocated their resources to their most efficient use. Walmart is allowing American consumers to benefit from cheap Chinese labor – this benefits Walmart shareholders, but more importantly, it benefits Americans who are able to purchase more goods with each paycheck. If Walmart were forced to purchase these products only from US suppliers (or if an import tax were imposed on Walmart’s outsourcing these manufacturing jobs), then these products would cost approximately 300-500 percent more. American consumers would lose, US GDP would drop, and the standard of living in the US would suffer.
If the US government were to regulate the use of outsourced labor, this would harm American employee career growth opportunities, it would reduce US GDP and overall shareholder wealth, and it would prevent the efficient allocation of resources in the labor market. Further, if the US government were to consider such regulations, a salient argument could be made that it should first prevent corporations such as Walmart from outsourcing US manufacturing jobs, which would cause the bankruptcy of hundreds of US corporations, eliminate at least 40 percent of the value of the US stock market, and dramatically reduce the standard of living for almost every American citizen. Outsourcing is an excellent allocation of resources and provides a great opportunity for US GDP growth, and for American corporations to improve profitability and employee career growth opportunities.
About the author: Mr. Warren Walborn is the President and CEO of Pentwater Group, a BPO company located in Mindanao, Philippines where he lives part of the year with his Filipina wife and two children. He is the former CEO of two other start-up companies – a renewable energy company and a medical device company. Mr. Walborn received his BA in Economics from Brigham Young University, and his MBA in Finance with Honors at the University of Chicago Booth School of Business. He can be reached at Warren@PentwaterGroup.com.