Pros and Cons of Offshoring

Two workers look at a tablet in a manufacturing facility.
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Companies have been outsourcing work for many years. In outsourcing, specialized companies provide their services to client companies at a lower cost than the client companies would ultimately incur doing the work in-house.

Choosing to move work from an in-house department or a U.S. supplier is called offshoring. Offshoring can be divisive and is often blamed during periods of slow job growth in the U.S. But is offshoring all bad? To answer that, we need to explore the history of this practice.

Key Takeaways

  • Offshoring is a company's decision to outsource a service to a foreign company. Usually, the company offshoring is based in a country where labor is more expensive.
  • Offshoring became widespread in the early 2000s as advancements in telecommunications made it easier for companies and their partners to interact.
  • Proponents of offshoring say that the practice provides valuable goods and services at lower prices and makes way for more advanced jobs domestically.
  • Opponents think offshoring is taking U.S. jobs while harming the environment and violating human rights.

Offshoring Background

The advent of the internet and the increasing accessibility of personal computing power opened up offshoring opportunities across industries. The movement to offshoring picked up steam in the early 2000s as telecommunication between countries became more widely available to companies.

Businesses found they could shed functions by hiring them out to companies that could do them more efficiently and less expensively. Payroll processing was subcontracted; shipping was farmed out; so was manufacturing; companies were hired for collections, customer call centers, and employee benefits.

The average accountant in India made nearly 13 times less than their American counterpart, according to one estimate from the 2000s.

Offshoring made sense for American companies because their foreign partners could specialize in one service and provide it to many client companies at lower costs than the client companies would be able to do it in-house. Both companies profited from the arrangement.

Initially, mainly manufacturing jobs were outsourced. Other countries were able to manufacture goods more cheaply than in the U.S. because of lower standards of living and less restrictive laws and environmental regulations. But as technology has advanced, a number of IT, customer service, and administrative jobs have also been offshored.

However, supply chain snarls have hampered the global economy since the beginning of the COVID-19 pandemic, causing many companies to rethink their offshore manufacturing strategies. On the other hand, the pandemic and its accompanying lockdowns drove some companies to offshore more of their IT services.

Pros and Cons of Offshoring

Offshoring has been controversial since its outset, with supporters and naysayers on both sides. Here are some of the arguments for and against the practice:

Pros
  • Reduced labor costs

  • More sophisticated jobs in U.S.

  • Helps improve other economies

Cons
  • Drain on U.S. economy

  • Promotes corporate greed

  • Supports human rights violations and harmful environmental practices

Pros Explained

The arguments for offshoring mainly center around the benefits of free trade and globalization

Lower-priced goods: When a product or service can be produced more cheaply overseas, it makes more sense to import it than to produce it domestically, supporters of offshoring say.

It can be cheaper for the company to produce goods or provide services when they offshore them and often they can pass on those savings to the consumer.

Proponents also say companies have an obligation to do what's best for their investors and shareholders. It doesn't matter where the work is done as long as the U.S. companies earn the profit to return to their shareholders.

More sophisticated jobs in U.S.: New, more sophisticated jobs will be created in America to fill the void now that the less skilled jobs have been sent overseas. There is evidence to suggest that the reorganizing that comes with offshoring can open up research and development positions domestically.

Helps improve other economies: It will help improve the economies of poorer countries so they won't need so much financial aid from the U.S. The jobs that are often sent to other countries from the U.S. are undesirable to Americans but attractive in other countries, supporters say.

Cons Explained

The arguments against offshoring focus on impacts on the American consumer and the danger of a brain drain:

Drain on U.S. economy: Those against offshoring see it as a drag on the economy that takes jobs from U.S. workers, lowers wages, and decreases the tax base. However, the impacts on U.S. jobs may be minimal.

Some people cite World War II as an example of why American companies should not offshore manufacturing. The company was able to turn on a mighty economic engine that helped provide necessities for soldiers. Offshoring destroys the ability to do that again, they say.

Foreign workers do not contribute to U.S. Social Security or other taxes. The increased tax revenue from corporate profits does not equal the amount lost on U.S. workers' income taxes.

Promotes corporate greed: The considerable profits to be made from offshoring are retained by the rich, while the middle class pays higher taxes and loses purchasing power. Companies could save more by offshoring the CEO job. While the average U.S. worker may make 12 to 13 times their Indian counterpart, the U.S. CEOs get paid 351 times as much as the average worker.

Supports human rights violations and harmful environmental practices: Work is often outsourced to countries where laws are not as protective of workers and the environment as in the U.S. Opponents say we ultimately pay for those oversights in human rights abuses and further damage to the planet.

The Bottom Line

Offshoring is perceived as yet another way for the super-rich corporate executives to get richer at the expense of individual workers, but offshoring is neither a cure-all for business nor an economy-destroying monster.

Outsourcing work to companies that can do it more efficiently and less expensively can make sense, provided that it is actually less expensive in the long run, and done with mindfulness toward its impact on people and the planet.

Updated by Taylor Tompkins

Article Sources

  1. McKinsey Global Institute. "Offshoring: Is It a Win-Win Game?"

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  3. Boston Consulting Group. "Postpandemic Outsourcing Trends for CEOs."

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  5. Tuck School of Business at Dartmouth. "The Real Effect of Offshoring."

  6. Economic Policy Institute. "CEO pay has skyrocketed 1,322% since 1978."

  7. University of Michigan. "Offshore Outsourcing and Worker Rights."