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May 08, 2004
Don’t Call It “Outsourcing.” Lately,
Don’t Call It “Outsourcing.”
Lately, “outsourcing” has fallen into disrepute. To say “outsourcing” today is to conjure a vision of data entry technicians in Iowa being handed pink slips as their lower cost replacements don headsets and boot up servers in Bangalore. The term has somehow become synonymous with “exporting jobs.” As such, it has made the short trip from hackneyed business buzzword to hackneyed political buzzword, and whatever information content it once carried has long since been replaced by more emotional freight. Beneath the emotion, however, lies an idea worth revisiting, if not rehabilitating.“Outsourcing,” the term, arrived in the late 1970s, closely linked to the rise of information technology. It was part of the same etymological class as “downsizing,” “reengineering,” and “leveraging.” The verb-izing of American business-speak coincided roughly with the demise of the great, vertically integrated industrial conglomerates of the early 20th century. Companies like General Motors, with vertiginous corporate hierarchies, found that it no longer paid to try to do everything themselves. In a world of computers, high speed communications, and ever greater competition, smaller, more focused companies proved more competitive. Thus emerged “outsourcing,” essentially the yuppie, service economy term for “sub-contracting.” No doubt, if Adam Smith were still around, he’d simply call it “division of labor.”
One shouldn’t be surprised, given this, to discover that “outsourcing” is everywhere. Those working in American corporations today hardly question the fact that their 401-K plans are managed by Fidelity or Vanguard, or that their health care benefits programs are run by the likes of Aetna, or that the food in the corporate cafeteria is served up by a food service company. On the “value chain” of modern corporate life, the lion’s share of links today are outsourced. Much the same is true for our personal lives. From ordering take-out for dinner to hiring a house cleaner, to say nothing of buying our milk in cartons as opposed to by the cow, we all make our own daily outsourcing decisions.
For both individuals and for companies, such decisions involve trade-offs -- trade-offs between time and money as well as other, less quantifiable, considerations. Some, like Henry David Thoreau, find in greater self-sufficiency a greater sense of well-being. Others prefer to shed “non-essential” activities to focus on their “core competencies.” Determining where on this spectrum they fall, companies must decide whether sub-contracting for a service will improve or hurt their long term corporate health. Sometimes they choose wisely sometimes not.
We can all be happy, one imagines, that General Motors long ago gave up trying to make car radios and passed the job along to Motorola. IBM shareholders, however, may still be seething that the company outsourced to Bill Gates the problem of an operating system for the first IBM PC. What’s obvious about the outsourcing dilemma is that it is complicated, and certainly does not admit a universal solution.
One small point, however, can and should be made now with great clarity: the current furor around “outsourcing” is not really about “outsourcing” at all. It is about American companies switching from domestic sub-contractors for a product or service to foreign sub-contractors for the same product or service. In other words, it’s not so much about “division of labor” as it is “comparative advantage” -- the specific advantage in this case being the low cost of foreign labor. This explains why those following the debate in India often replace the term “outsourcing” with the more appropriate term “offshoring.”
Bursting the bubble of politicized buzzwords, sadly, does little to solve the underlying problem of American job losses. Words matter, though, because politicized rhetoric obscures rational debate. Adam Smith’s great enthusiasm for the division of labor came of his recognition that specialization delivered great leaps in productivity. The benefit of lower labor costs alone, when not accompanied by an increase in specialization, is somewhat less compelling and may prove shorter lived -- particularly as the cost of living in places like India and China begins to rise with the arrival of new income.
As we proceed deeper into the heart of this campaign year, then, we should be careful to choose our words carefully. We would be wise to discuss the meaning of “comparative advantage” and to debate the risks and rewards of “offshoring,” but we should leave the benign concept of “division of labor” and its latest formulation, “outsourcing,” quite out of it.
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Posted by oliver at May 8, 2004 12:02 AM