GE Outsourcing and its Impact of US Economy
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Outsourcing frees valuable resources, allowing firms to concentrate on core competencies and the development of new market opportunities. This in return is producing new job opportunities for American workers. However, there have been some concerns about the benefits of outsourcing for the US economy, especially, the decline in job opportunities for the native population. Thus, the current policies may require review and analysis. If these policies provide unfair advantage or are determined to e detrimental to the economy, they may need to be changed to support efficiency, stability and growth.
In the following sections, the outsourcing of General Electric (GE) as a case study has been analyzed in the context of global outsourcing and its advantages and disadvantages. The analysis shows that the US companies that invest in foreign markets report they create a rich environment for economic growth. Their investments benefit the entire host country and give them the ability to increase their level of importing and exporting goods.
In today’s world, most successful companies have begun not only to outsource unskilled manual labour tasks but also white-collar tasks. Companies like Dell Computers and Cisco Systems rely on their suppliers to do their development work. Dell Computers focuses on the few aspects it performs well and out-sources the rest of its responsibilities. Also corporations are beginning to outsource more highly skilled positions such as financial services, human resource services and information technology services. Typical Outsourcing services can include, Data Entry, Forms Processing, Back Office Operations, Insurance Claims Processing, Medical Transcription, Data Conversion, Web-Designing and Web Promotion, Call Centre, Security services, and Payroll administration etc.
The drive for greater efficiency and cost reduction has forced many organizations to increasingly specialize in a limited number of key areas. For example, Unilever, with a portfolio of 1,600 food, household, and toiletries products, decided that in order to increase sales and profitability, it would focus on a smaller number of “power brands” – core products – that have global reach, thereby reducing costs and exploiting new distribution channels (Willman, 1999, pp. 18-21). In the past, organizations may have performed a range of activities internally based upon cultural, historical, or political reasons rather than on the basis of enhancing the needs of customers or achieving competitive advantage. However, now many organizations have begun to challenge these assumptions and are restructuring their organizations in order to reflect changes in the business environment. This has led organizations to outsource goods and services traditionally carried out in-house.
In spite of obvious benefits and advantages, there are also some concerns that outsourcing may inversely the job opportunities for the native population and also the capital flow may be concentrated in the host country. To analyze any possible disadvantages of outsourcing and what impact it might have on the US economy in the following section the same question has been answer as to what are the advantages and disadvantages of outsourcing for the US economy.
The process of outsourcing of GE to India was started as early as September 1989 when Jack Welch, then General Electric Co.’s chairman, flew to India for a sales call. He hoped to sell products like airplane engines and plastics to the Indian government. During his meeting with Sam Pitroda, chief technology adviser to the late Indian Premier Rajiv Gandhi, he was told that India wanted to sell software in order to seek business opportunities for its emerging high-tech sector. India earns more than $17 billion from corporations world-wide seeking low-cost overseas talent to do everything from write software to collect debts to design semiconductors. GE in large measure stoked the phenomenon, playing an unheralded role as the Johnny Appleseed of India Inc. and reaping billions in savings for itself along the way.
General Electric (GE) was the one major company in the United States to embrace outsourcing and employ IT staff in low-cost countries such as India in order to access low-cost labor and efficient IT and business-process services. By the late 1990s, GE began turning its attention from simply buying software from India to using the country as a base for data entry, processing credit-card applications and other clerical tasks. Last year, GE spun off its India-based business process-outsourcing arm, General Electric Capital International Services, for about $500 million to private investors. The company also last year sold to Affiliated Computer Services Inc. a number of other BPO facilities, which that company now operates on behalf of GE under a 10-year outsourcing contract (McDougall, 2005).
Besides the IT outsourcing, GE has also established an in-house legal office in India in order to handle issues relating to its plastics and consumer finance divisions. This step has helped GE to save over two million dollars (Krishnan, 2007).
Outsoaring foster further economic growth within foreign nations as this process occurs. This results in deponent of expanded markets and creation of goods paying, “high tech” jobs. According to Debrah and Smith, “Recent evidence from cross-sectional household data for Argentina, Chile, Costa Rica, Colombia, Mexico, and Uruguay shows that [trade] liberalization was accompanied by rising relative wages and demand for skilled workers” (Debrah et al. (2002).
Publicly, GE has been reluctant to take credit for its singular role. Shipping white-collar jobs overseas has proved controversial in the U.S. In spite of all benefits and advantages of cost savings, efficiencies and quality, the outsourcing venture of GE has received continued resistance in the U.S. as the executives of the company were worried about replacing American workers with overseas labor and managers at GE Capital’s credit-card operations feared U.S. clients might take offense at being called by foreigners. Demoralized American workers have had to train their foreign replacements. During the 2004 presidential campaign, Democrats threatened to impose tax penalties on companies that move jobs overseas.
But the strategy has been pivotal for GE. In 2000, it inaugurated a Jack F. Welch Technology Centre in Bangalore that employs thousands of researchers working on everything from new refrigerators to jet engines. Later, the conglomerate spent about $600 million on computer-software development from Indian companies. The company estimates that similar products would cost it as much as $1.2 billion in the U.S.
The outsourcing in India has clear economic advantages for the GE as an Indian call-center worker earns around $3,000 annually, compared with more than $27,000 in U.S. After the positive results of call center outsourcing, GE has allocated more than $10 million to expand the operation, as well as other processes. About 48 per cent of GE’s software is developed in India; GE Medical Systems’ network management is largely controlled from India and GE has an Dollars 80m research and development site in Bangalore whose work feeds into the 13 business sections of the conglomerate.
Partly in response, GE has taken outsourcing another step forward and opened a call centre in the northern tourist city of Jaipur, where wages are much lower than in New Delhi or Hyderabad, where GE staff process invoices scanned and entered by colleagues in Mexico and Florida.
At the level of operations, two issues take up a large amount of GE bosses’ time: managing a young work force, and training. Many recruits are in their first job and the combination of a distinct US work culture and night shifts is too big a shock. One vital issue at call centres is to make staff more responsive to the high expectations of US customers. That is difficult in a country where the culture of customer service is still shallow; the fact that employees are typically from middle-class homes accustomed to being served, rather than serving, is often a hurdle.
In the middle of the value chain is the challenge of building up new expertise, such as insurance actuarial, medical underwriting and analytics. These are expensive skills to develop.
At the top end of the chain is the challenge of managing early signs of a reverse brain drain of US-trained scientists. Many of these are homesick bachelors who solicit GE because they want to work on innovative projects in world-class conditions near their family home. Their more entrepreneurial approach to research, a legacy of time spent in the US, happily gels with the GE Way.
Outsourcing is directly related to job losses in the US manufacturing sector. No one disputes that there is a correlation between the practice of outsourcing and the decline in employment. However, it is also demonstrated that while outsourcing is causing a contraction in manufacturing employment there are other factors which are having an equal or greater impact. According to Brian Schimmoller, “Roughly 2.3 million jobs have been lost in the past three years. Only a fraction of those can be traced to overseas outsourcing” (Schimmoller, 2004). Advances in technology, innovation, and productivity also result in the need for fewer workers.
Manufacturing jobs have been in steady decline since 1970 (US Department of Commerce, 2004). Manufacturing employment accounts for approximately 12% of total US employment which is down from 22% in 1977. During this same period, the total growth in employment for all sectors outstripped the losses experienced in manufacturing (US Department of Commerce, 2004). This demonstrates that any jobs eliminated as a result of outsourcing are being created at a faster rate in other areas of the economy.
The economy does not appear significantly affected by the decline in manufacturing employment. Between the year 1970 and 2002, gross domestic product (GDP) increased 167%, per capita income rose 82% and service jobs climbed 127% (Corbett, 2004). Corbett says:
Not only did the U.S. economy not falter, it powered ahead in dramatic fashion. While the number of service jobs more than doubled over that period (with manufacturing jobs declining on both a percentage of employment and in real terms), the U.S.’s GDP almost tripled. Spending on research and development went up two and one-half times, and per capita income rose by more than 80 percent. While some may argue that the offshore migration of manufacturing jobs was bad for the U.S. economy, the data simply doesn’t support the argument. (Corbett, 2004).
Interestingly, the US is faring better than many other industrialized nations when it comes to manufacturing employment. The US Department of Commerce reports, “In the 1990s, manufacturing’s share of employment fell at least as fast, if not faster, in Western Europe than in the United States” (US Department of Commerce, 2004).
The service sector is showing the highest level of growth as the number of manufacturing jobs is declining. Workers displaced from production jobs move to different sectors of the economy and find work. According to Greenhouse, “In decades past, millions of American manufacturing jobs moved oversees, but in recent years the movement has also shifted to the service sector” (Greenhouse, 2003).
Typically, manufacturing jobs pay a higher wage than do service sector positions. The quality of positions created to replace those lost as the manufacturing sector contracts is a cause for concern. “As for creation of high-value jobs, the numbers speak for themselves, and they are not encouraging. When the Bureau of Labor Statistics released its ten-year projections for American job growth in February 2004, seven of the ten biggest areas of job growth were in menial or low paying service jobs [#1 –waiters and waitresses, #2-janitors and cleaners]” (Dobbs, 2004). The wage scale is substantially lower for these newly generated positions hurting American workers in the long run. According to Hira and Hira, “it is important to note that many of the jobs being outsourced are very high paying jobs, and they are not being replenished with better jobs” (Hira and Hira, 2005).
As far as the impact of technology and innovation on US manufacturing employment is concerned, there is no dispute that outsourcing is affecting the employment level within the US manufacturing sector. However, production jobs are affected to an equal or greater extent by technological advancement and innovation. The US Department of Commerce reports, “In manufacturing, technological innovation comes in two forms. First, new inventions provide a leap forward in technology. The other form of innovation comes from the steady improvement in products and manufacturing processes within major technology life cycles” (US Department of Commerce, 2004).
The US is only competitive in the global market through continued technological advancement and innovation. Nowhere is this more evident than in the manufacturing sector. America is no longer the only significant economic power and has to be innovative in its actions to remain competitive due to global competition (Gnuschke, 2004). Both major and incremental innovations improve the competitiveness of the manifesting sector and the US economy as a whole” (US Department of Commerce, 2004).
Harry Stonecipher says, “We have to embrace the continuing need for change and improvement. If I may borrow a quote from an old colleague: The only way to protect your technology is to move very, very fast” (Stonecipher, 2004).
As technology and innovation continue to progress, fewer workers are required to perform the same level of effort. Advances in technology and innovation give birth to new market sector which in turn foster new employment opportunities. Displaced workers are transferred to other areas of the manufacturing sector or leave manufacturing altogether and take on new roles within other industries.
Technology and innovation have in some respects accelerated the decline of the US manufacturing sector allowing US firms to more easily move jobs to oversees locations. “Technology has played the central role in outsourcing oversees. The so-called death of distance means that it now takes less time to move goods, services, capital, people, and information from one place to another” (Dobbs, 2004).
The technology and innovative revolution is not merely confined to the US but is rapidly transforming many developing nations. Interestingly, US corporations are aiding this transforming. According to Alan Tonelson:
In fact a veritable revolution in technology development is occurring in low-income countries, and it shows no signs of petering out. Quite the contrary – these countries and their workers are likely to continue closing the technology gap with most of the workforce in the industrialized world, thanks to their own ongoing efforts and to major investment in their laboratories and universities made by US and other foreign companies. Moreover, even though developing countries will continue to lag the United States in the sectors at the very top of the technology ladder, their ongoing progress is certain to sop up many of the job opportunities created near the top. (Tonelson, 2002, p. 101).
US firms are actively aiding developing nations through technologies advancements which in order to strengthen outsourcing activities already underway. By modernizing the production facilities in foreign countries, US corporations increase profits by outsourcing even more to low cost locations. This further reduces their higher cost domestic facilities. Tonelson confirmed this when he stated:
American multinational companies have greatly accelerated the developing countries’ technological revolution. Indeed, the output of these companies in the developing world reads like a What’s What of advanced, high-wage goods and services, including not only manufacturing but engineering, design, and research and development…. US multinationals, in other words, stand to profit enormously if emerging markets do indeed take off. US workers, however, will largely be left out of the picture” (Tonelson, 2002).
Technological advancement and innovation are serving to reduce the amount of labor required to perform manufacturing functions domestically. Additionally, as technology spreads worldwide, outsourcing activities to developing nations are accelerated. Technological advancement and innovation independently impact manufacturing employment in the US also reinforcing the affects of outsourcings impact on domestic job levels.
Technological advancement and innovation ultimately result in an increase in productivity. Productivity, in combination with technological advancement and innovation, complete the elements that are causing the decline in employment in the US manufacturing sector. The US Department of Commerce reports:
The manufacturing sector’s rapidly rising productivity is its greatest strength and a major contributor to the growth of the US economy. Higher productivity offers multiple benefits: stronger competitiveness in manufacturing and other sectors of economy, higher real wages, and a rising standard of living. That same productivity growth, however, has also been largely responsible for the gradual decline in employment in manufacturing: manufacturing employment has decline even as US manufacturing has become more efficient both in absolute terms and relative to other sectors in the economy. (US Department of Commerce, 2004).
High level of productivity is an essential component of the US economy and one that is steadily growing. This allows the economy to maintain its fiscal health. “Rising productivity is the key to maintaining US competitiveness in manufacturing, but the benefits of rising manufacturing productivity extend to the economy as a whole.”
The US is the most productive country in the world and continues to increase levels of output each year. There is no dispute that continuous technological advancement is contributing to this high level of productivity. Stonecipher says of productivity, “it is all kinds of technological advances. Think of the amazing shrinkage in machine tools. There are fewer and fewer of them on the top floor, and they keep getting smaller and smaller, yet more and more powerful” Stenecipher, 2004). The technological cycle keeps progressing with each successive wave moving productivity ever higher. “So, the machine tool industry of the very machines that were designed to replace them” (Stonecipher, 2004).
Productivity, however, is a double-edged sword for workers. It is a vital part of the economy and needs to steadily grow. However, as productivity increases, the demand for workers falls as goods are produced with fewer employees. The US Department of Commerce reports, “Because productivity gains in manufacturing have outstripped the growth in demand for manufactured goods, manufacturing employment has been falling for the past three decades. Manufacturing employment was significantly lower in 2002 than in 1977, falling from 22 percent of the non-farm economy to under 12 percent” (US Department of Commerce,2004). Given that manufacturing represents a stable part of the economy while enjoying outsize productivity gains, the gradual decline in manufacturing employment is not surprising.
Productivity, as is the case with technological advancement and innovation are serving to reduce the manufacturing labor levels. Productivity, therefore, impacts employment independently of outsourcing.
Globalization and the resulting outsourcing activities it spawns provide economic improvements both domestically and globally. According to Corbett, “Outsourcing is critical to the growth and success of the United States and other Western economies. Harvard Business Review lists it as one of the most important new management ideas and practices and the 20th century” (Corbett,2004). Steven Greenhouse says, “Executives at IBM and many other companies argue that creating more jobs in lower cost locations overseas keeps their industries competitive, holds costs down for American consumers, helps to develop poorer nations while supporting overall employment in the United States by improving productivity and the nations’ global reach” (Greenhouse ).
Outsourcing improves the standard of living in developing nations through the influx of work. US companies that invest in foreign markets report they create a rich environment for economic growth. Their investments benefit the entire host country and give them the ability to increase their level of importing and exporting goods.