Published: Mar 08, 2006 in Knowledge@Emory
In January 2004, press reports disclosed that IBM planned to cut costs by $168 million a year by transferring 3,000 U.S.-based jobs overseas. The revelations sparked an uproar inside and outside of the company, according to trade reports. But faculty from Emory University’s Goizueta Business School and other observers note that offshoring is only one small part of the reconfiguration of the corporate structure. Just as the steam engine and the Industrial Revolution set the stage for the rise of the corporation, other forces, including economics, demographics and the knowledge revolution, are reshaping the very structure of businesses and the way that employees relate to their employers.
Demographics, Economics Drive Changes in Commerce
It’s tempting to point to the Internet as a primary influence behind the overhaul of the business model. After all, the low-cost knowledge-transfer abilities of the Internet pipeline have brought about enormous changes in the way companies do business and, by extension, in the companies themselves.
But Jagdish Sheth, a professor of marketing and corporate strategist at Emory University’s Goizueta Business School notes that structural changes in corporations predate the Internet. Indeed, the first hints of what were to come could be seen in the 1960s when U.S. factories, in search of cheaper labor, began sending their work to overseas companies.
They were able to do this, in part, because of trade agreements that steadily reduced barriers to international commerce—exposing more companies to international competition while enabling them to procure goods and services on an international basis at reduced rates.
In some segments of the workforce—like the automotive industry where General Motors Corp. has announced plans to lay off some 30,000 employees while it builds new plants in China—offshoring is a growing market.
Further, some studies note that IT offshoring alone is experiencing annual growth rate of 14.4% and is expected to almost double to $14.7 billion by 2009. Another category, business process outsourcing—under which an outside provider takes over responsibility for accounting, human resources, and other back office and front office functions typically performed by white collar and clerical workers—is likely to grow by 10% a year from $140 billion in 2005 to more than $220 billion by 2010
Companies Respond With Offshoring and Other Strategies
Sheth says that despite those numbers, the impact of offshoring on the wider U.S. economy is not very significant. Instead, he notes that other issues are driving long-term changes in the workforce.
“The number one change we’re seeing is demographics,” explains Sheth. “An aging population will have profound effects on the country, from the way people work to the immigration policies the U.S. adopts.”
For example, as more people retire, a shortage of workers is already being seen in such industries as accounting and nursing. In the construction industry, a shortage of help has led to the widespread use of undocumented workers. And as an aging population moves into assisted living facilities, Sheth expects the shortage of health-care workers to grow.
As these trends develop, entire industries will seek ways to attract replacement workers. Sheth says the answer will involve rebalancing the workforce, bringing in more women and other minorities into jobs that were formerly dominated by males and other segments of the population.
“The U.S. is likely to reduce barriers to immigration,” says Sheth. “Instead of simply exporting jobs, the country is going to need to import new workers.”
Richard Metters, a professor of decision and information analysis at Goizueta, also notes that offshoring has its limits, and says that a lot of jobs are staying in the U.S. Part of the reason is that some activities require a physical presence, such as repair and maintenance for machinery and equipment, or medical procedures, which must be performed in person—although the analysis of pre-procedure and post-procedure data can be outsourced to a lower-cost region.
Metters also points out that offshoring may work for a company that’s positioned as a low-cost producer, but it might not fit for a firm that differentiates itself through customer relationships and or customized products and services.
“Local operations are essential for certain kinds of value-added goods and services,” he says. “This kind of trade-off can be seen in the steel manufacturing industry, where customers that want commodity steel tend to go to foreign manufacturers, which are not bound by U.S. steelmakers’ expensive labor contracts and other legacy costs. But customers that need speedy delivery of specialty steel are turning to local mini-mills that use a flexible workforce and high-tech machines to deliver a customized product in a timely manner.”
In fact some questions have arisen about the actual cost savings associated with offshoring strategies. Using India as an example, Metters has pointed out in previous interviews the unintended effects that arise in low-wage locations.
“You can get a worker for a tenth of the wages in the U.S., but somebody who makes $3,000 a year can’t afford a car, so they can’t get to work,” he says. This means the employer may have to hire drivers to pick them up and bring them to work. “And somebody who makes $3,000 a year can’t go out to lunch, so you have to have a subsidized employee cafeteria that feeds them.”
Metters also points to the relatively weak infrastructures in low-wage emerging nations, explaining that companies there need to spend more on telephone lines and backup generators. Finally, in industries like call centers, extra costs are incurred for training in such areas as accent neutralization and training in American geography.
These and other requirements can limit a company’s savings to about 25%, he estimates. Although that’s significant, it may not always represent the magic bullet that some companies are hoping to get.
Long-Term Changes in the Business Model Are Emerging
Meanwhile, says Sheth, more people are rejecting the traditional employment model. Instead of even attempting to stay with one company for life, more workers are going out on their own either as independent contractors or in temporary work arrangements.
In a paper titled The 21st Century at Work: Forces Shaping the Future Workforce and Workplace in the United States, the Washington, D.C.-based think tank RAND Corporation has also pointed out similar changes. Prepared for the U.S. Department of Labor, the paper notes that the “forces driving the reorganization of production are expected to decrease the fraction of workers in such traditional arrangements and increase the fraction in such nonstandard arrangements as self employment, contract work, and temporary help.” Already, RAND notes, approximately one out of every four U.S. workers is in some kind of nontraditional employment relationship.
“By 2020 the biggest employer will be workers themselves, or a Self, Inc. model,” says Sheth. “We’ve already seen huge growth in temporary staffing services like Manpower Inc., and we’ve also noted an increase in the type of temporary jobs offered. At one time, temporary staffing primarily consisted of back-office and secretarial functions. Increasingly though, staffing firms are offering executive functions right up to CEOs.”
At one time, he adds, people sought temporary positions because they were out of a job. Today, says Sheth, more individuals are temporary workers by choice. “The average workweek in a company has steadily crept up, from 40 hours a week to 60, 70 or more,” he says. “In response, an increasing number of people are opting out, seeking more control of their lives so they can establish a different balance between work and life. Instead of joining an IT department, they’ll become an IT consultant, where they can bill out the extra hours they’re working. Instead of remaining with one company for a long period of time, they’re comfortable with moving from one firm to another.”