US Senate approves curbs on outsourcing

Society Business and Career
1

This could make US companies think twice before they outsource more jobs abroad, but will it bring back jobs that have already gone?

http://search.ft.com/search/article.html?id=040305001150&query=senate&vsc_appId=totalSearch&state=Form

Senate approves curbs on outsourcing

The Senate yesterday passed the first sweeping restrictions on overseas outsourcing by barring companies from most federal contracts if they plan to carry out some or all of the work abroad. The move came as companies begin to warn investors that the political backlash against outsourcing poses a threat to future profits. General Electric led the way on Wednesday in filings with the Securities and Exchange Commission that alert investors to the reliance of its insurance division on back-office operations in India. In a 70 to 26 vote, the Senate approved a Democrat-sponsored amendment that would prevent companies from carrying out government work outside the US if those jobs were previously done inside the US. It included exceptions only for national security and for countries that are members of an international government procurement agreement. Neither China nor India are members of that World Trade Organisation agreement.

The bill still faces several legislative hurdles before it would become law but it highlights the threat to many US companies that have become reliant on outsourcing to keep costs down. Like many multinationals, GE rejects the analysis that a job outsourced is a job lost, pointing out that its US employee numbers have been constant for 10 years. However, it judges the backlash serious enough to warrant an extended SEC warning. “The political climate in the US could change so that it would not be practical for us to use international operations centres, such as call centres,” said an updated prospectus this week. In contrast to earlier filings, it also warns specifically of proposed bills that would require call centre employees to disclose their physical location at the start of each telephone call. “If enacted, this legislation could result in consumer pressure to curtail our use of low-cost operations outside the US, which could reduce the cost benefits we currently realise from using them,” added GE’s Genworth division in the filing.

Risk factors in SEC filings are notoriously cautious, allowing lawyers to warn of any number of apocalyptic events, ranging from nuclear war to global depression. But Gillette, the consumer products group, also warns in its 10k report that “trade protection measures” could hit its manufacturing facilities and suppliers outside the US. The rising tide of political criticism is also showing up in shareholder proposals. For the first time, GE’s annual meeting will debate a motion from union activists demanding a report into the effect of outsourcing on the company’s reputation. A number of business lobby groups in Washington plans to work more closely in the future to shift the debate on jobs away from outsourcing and towards ways of making US business more competitive.

2

Dang...! This sucks.

3

Re: US Senate approves curbs on outsourcing

[QUOTE]
*Originally posted by Malik73: *
This could make US companies think twice before they outsource more jobs abroad, but will it bring back jobs that have already gone?

[/QUOTE]

Doesn't that make u feel good... I mean this is bad news for India right...

4

Re: Re: US Senate approves curbs on outsourcing

[QUOTE]
*Originally posted by Some1: *

Doesn't that make u feel good... I mean this is bad news for India right...
[/QUOTE]

Actually I did not mention India at all, just posted it as it was a very news worthy story, that might affect quite a few countries. But you many construe what you want from it.

5

This is merely election year banter so sound bites can be made later touting how so-and-so is actively pursing the preservation of American jobs.

6

It seems the wonders of globalization have now come full circle. :-)

7

This is another of the gay-marriage issue which is going to be bipartisan but at the same time too polarizing.

In the long run, IMO it's a mistake to curb on such outsourcing. Free Trade and globalization is the future, you can't escape from it. Adapt or be ready to be swept away. One concern is that the European companies will be willing to outsource and so their products will be cheaper and in competition American products will be priced higher.

One thing to note is that this particular restriction is on companies that already have business case/jobs in the services sector here in the US. They can’t outsource their jobs. But there is no restriction on companies to start new/fresh in low income countries. I don’t know how it will be effective or even be beneficial?

I agree with the bill that asks for the call centers to disclose their location, just like all products have a 'Made in ABC' label, the consumer has the right to know. I also agree with the initiative that bars from sensitive information, like SSN# and credit histories to go in countries who's privacy laws are no way near US equivalent. It's common sense that no matter how 'profitable' it is, it's just not safe.

So far the most compelling solution to ‘outsourcing’ is the idea of giving companies incentive to create jobs in US. Tax breaks or other incentives.. so maybe they break even on their profit margins or at least a little better. But I disagree with panelizing those who outsource.. it might back fire.

Lastly, such restriction might hurt India in specific but on a large scale it will hurt the world economy.

8

Here is a good fresh article about it:

Outsourcing reality

There is a growing backlash against outsourcing–sending domestic work to foreign businesses–that erupted in the Senate last week, where anti-outsourcing legislation was adopted on a 70 to 26 vote. Opponents of outsourcing cheered, but investors are becoming aware that these actions threaten profits and stock prices.

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

Of course, no one denies that some jobs have been outsourced. But companies often find that the gains don’t match those sold them by the consultants. There are many costs involved with outsourcing that can eat up much of the savings from hiring Indians at one-fifth of 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 that it required massive and costly effort 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 of its jobs would have been lost if it hadn’t been able 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 that were lost initially from outsourcing and ignore the jobs that were 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,” the company argues.

To the extent that 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,” it states.

The GE statement goes on to note 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.”

This warning proved prescient. On March 4, the Senate adopted a measure that would bar federal contracts to companies that outsource any job previously done by an American. Additionally, it would prevent state and local governments from using federal funds for outsourcing.

While it is unlikely that this amendment will become law and is probably unenforceable even if it does, it sends a bad signal to the rest of the world. U.S. Trade Representative Bob Zoellick has warned that it will endanger relations with India and undermine world trade talks. It would also invite retaliation from other countries and reduce foreign investment in the U.S.

But even if the legislation is defeated this time around, undoubtedly it will be back in some other form shortly. Democrats have decided that pandering to the unemployed by railing against outsourcing is their ticket to success on Election Day. Although their proposals wouldn’t do much good–the Washington Post calls them “1 percent solutions”–they get people worked up and put the Bush Administration on the defensive.

The administration essentially brought this on itself by backing away from Council of Economic Advisers Chairman Greg Mankiw after he was attacked for defending outsourcing a few weeks ago. Its enemies immediately saw weakness and pounced on its “evident confusion,” as the Financial Times put it. It would have been better for the administration to stand behind Mr. Mankiw and make the case for free trade, as Bill Clinton was successfully able to do.

Bruce Bartlett is a senior fellow at the National Center for Policy Analysis, a Townhall.com member group.