The Pros and Cons of Offshoring

Many businesses tout offshoring as the logical approach to global competition. In certain circumstances, it saves money and enhances profitability, and office and industrial markets succeed when the overall economy is growing.

However, there are numerous hidden costs and cultural and political problems. Just as the best and brightest commercial real estate executives have adapted to the technological and social changes of the past 60 years, so shall we adapt to offshoring and learn how to deal with its negative consequences and profit from its positive outcomes, both as an industry and as a nation.

The Cons

While many U.S. companies expected drastic savings from sending some jobs overseas, those expectations often haven't been realized. According to a recent McKinsey Global Institute survey of 216 top-level U.S. executives, businesses expected to save up to 70%, but the average savings was about 20%. Further, 50% of the respondents with overseas projects were likely to bring their work back to the U.S. because those anticipated cost savings were not achieved.

Still, offshoring is now a fact of life, so what happens to displaced U.S. workers? According to the McKinsey survey, 31% of those workers were not fully re-employed. Some workers found higher-paying jobs, while most did not. Thirty-six percent soon found jobs that matched or increased earnings, but 55% were, at best, working at 85% of their former wages. Twenty-five percent took pay cuts of 30% or more.

The survey also found three primary pitfalls: poor knowledge transfer, inferior work quality and lower morale among the respondents' U.S. workforce leading to poorer overall productivity. Shifting jobs overseas works for call center transactions that last one to five minutes and repeat 20 times an hour, but it's more difficult for projects that depend on teamwork and business nuances.

The Pros

So, offshoring will take some jobs from the U.S., but the U.S. still has history's most dynamic job-creating economic engine. A number of academic and government institutions project that by 2015, 3.3 million U.S. jobs will move overseas, but the U.S. economy is projected to create 22 million new jobs during that period. The changes driving jobs overseas are not significantly different from the changes that technologically evolving economies have experienced over the past few decades.

Over the past decade, the U.S. economy has created a total of 35 million new private-sector jobs for an average of 3.5 million new jobs per year. Based on this rate, the majority of displaced workers are re-employed within six months. Flexibility in the job market and the mobility of workers ensures that workers losing their jobs are quickly absorbed back into the economy.

Offshoring is another example of innovation driving a healthy, growing office market and has four primary benefits: First, reduced operating costs ensure that U.S. businesses remain competitive worldwide. Second, companies that move jobs overseas buy additional goods and services from other U.S. firms, creating export revenue. Third, U.S. companies that use foreign labor repatriate the earnings back to the U.S., which fund future business growth and are taxed at all levels. Fourth, U.S. workers engaged in low-value services are then able to pursue higher-level jobs.

Any attempt to limit offshoring will certainly lead to reciprocal action that retards the influx of jobs from foreign companies that currently employee 6.5 million U.S. workers.

How Do We Deal with It?

High school and college students are already adjusting their areas of study based on the assumption that routine jobs will be relocated. Routine office jobs are most susceptible, with four job types making up over 80% of the projected offshored jobs: office support, computer, management and sales.

To alleviate potential and realized problems, local and state governments across the U.S. are allocating more resources to train workers for higher-level jobs that are less likely to be transferred outside the country. Maintaining the U.S. standard of living also requires a combination of more innovative and even greater productivity gains including offshoring and/or increased immigration, especially the use of H-1B visas for foreign workers with unique skills.

Offshoring is a painful, yet necessary occurrence. Though the benefits of offshoring are difficult to quantify due to a paucity of information, it is a natural market shift to which we as an industry must adjust. Shifting jobs overseas will lead to an influx of jobs as companies better understand the process, thus gaining productivity and profitability.

Fred B. Sheats III is senior vice president for Colliers Cauble & Co. in Atlanta.

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