Recommendation by Jane Harding whether Global Information Systems, Inc. should outsource 3000 from USA or not
Case Facts & Analysis
Global Information Systems is a company with $90bn revenues & 315000 employees.
Global Services Division contributes half of its revenues & profits.
GSD’s business primarily comes from customers outsourcing their business process
GSD is operating in a highly competitive industry with global giants like Accenture,
Electronic Data systems Corp., Computer Science Corp. and Perot systems.
It won many of its contracts due to very competitive pricing, thus overall cost reduction, including man power cost, is a very crucial element for its success
This is the reason why they went to aggressive offshoring of their operations to
countries like China, India and Brazil.
And this is true for all other companies, and is visible in the 5-fold growth in Indian
exports of Software & IT services.
Jane Harding is the VP – HR of GSD and is mulling outsourcing 3000 jobs from
America to other company locations in India, China and Brazil.
This move will lead to an estimated savings of $168mn per annum This move is absolutely different from what company has been doing till now, it
marks a shift from “taking business growth offshore” to “moving existing jobs offshore”
Though there are some key concerns and issues that Jane Harding needs to be
Political sensitivity to off-shoring:
Foreign programmers to be trained by people who they would be
Growing clamor with in US against off shoring; Presidential candidates
View & “Benedict Arnold CEO’s”
Restriction policies being adopted by the US government & backlash –
e.g. New Jersey Call center contract cancellation to save 12 US jobs.
Unemployment & its Social impact:
Earlier Manufacturing had been the primary industry that faced issues
due to offshoring; after 1979 nearly 5 mn jobs have been lost to offshoring
As shown in Exhibit 5, the employment levels have gone down in all
the 6 areas.
The speed at which this is changing is only increasing.
In earlier offshoring, companies would go bankrupt and close
operations, but this time around they have just bought products/resources offshore. Not only have they survived but also thrived due to the cost benefits of offshoring.
Economic Impact & Structural Shift:
Industry Structure in terms of what can be outsourced is changing
Now it also includes white collar jobs and also some very well paid pai d
Quite in contrast with only blue collar jobs being outsourced earlier
Especially for the IT Services Sector, as Nandan Nilkeni said “Anything that can be send down the wire, is up for grabs”
Job creation slump & global economy
The people getting displaced due to offshoring are accustomed to a
high paying salary and highly trained/proficient
With new jobs not appearing in US economy in 2004, and Europe &
Japan in even worse condition then US – limited avenues for people to get reemployed at the same salary levels.
Thus new job creation in developed economies has to happen in
order to support the positive cycle of offshoring
The biggest argument in favor of the offshoring has been the cost benefits accruing to the offshoring company that gives them competitive edge. However, there is also another advantage that comes into play.
Economic advantages of Offshoring
It’s important to ascertain the economic benefit of who really won and
who lost between the countries that are offshoring and countries that are inshoring.
Mckinsey estimate “ A ‘win-win’ situation for ‘job transferor’ economy
and the ‘job- transferee’ economy.
Considering India and US as an example, Mckinsey calculated that for
every $1 spending by US on offshoring, a total of $1.47 was added to the Global economy. (Base is 2002 Dollars)
Thus $0.47 was the net gain, of which $0.14 went to US and $0.33
went to India.
Key assumption is that people unemployed in US during the off
shore process get re-employed.
This is supported by the data presented in Exhibit 8, which
presents that ~70% of people get reemployed.
The data in Exhibit 9 also suggest that most of people across all industries, barring manufacturing, who were reemployed had
salary levels higher then what they were earning before getting getti ng unemployed due to offshoring. The detail calculations for the exhibit 9 are mentioned below
However, the assumptions that were used to calculate the gains of offshoring needs to be looked into further details and also should be tested against other prevalent models.
David Ricardo, Comparative Advantage & Free Trade
Lets try and apply the Ricardian model to US & India for the Low Skill & High Skill services. Countries: US & India Services Being Outsourced/ off off shored: Low-skill service (call center) & High-skill service (complex coding/programming) Key factors of production: Labor ( assumption : equally skilled; skill ed; can't move across borders)
Now applying the comparative advantage & comparative advantage theory Before offshoring US:
Technical superiority & developed economy leads to it having an Absolute advantage
in producing both low-skill and high-skill service.
Thus US have a higher opportunity cost in producing low-skill services.
advantage in terms of producing cheaper low skill services. manpower makes it very aggressive and focused to Higher unemployment/ abundant manpower
Currently majority of jobs low level/low skills; hence less paid.
As high-level jobs would start moving to India, the working population would
need to be reemployed in available jobs.
Thus new job creation for the US economy is a must
Not only that the new job creation has to be in areas that require highly trained and proficient manpower else high level employees will be employed in low level jobs
Thus seeking upgrade of the job type availability
Hence creating positive pressure on US government and economy to create
value by upgrading
Moving up the ladder
Importing high level jobs, leading to
Higher levels of pay
Employable population looking to upgrade themselves – focus on quality of
Development of ecosystem to support this growth
Positive pressure in Indian economy to develop infrastructure & ecosystem to support the new trends.
Thus the offshoring can actually create value for the job-transferor job- transferor country as well as the job-transferee country, but this should accompany accompany with the creation of new jobs and also development of infrastructure/ecosystem to make it a sustainable proposition. Also the labour which is assumed to be equal and immobile, isn’t the case in todays
world, hence Indian people can come and work in US and Vice versa.
What should Jane Harding do?
Jane Harding should definitely consider going forward with the outsourcing proposal. Parallely she also needs to explore alternate plans for 3000 people. As of now he has done the calculations for the severance pay and other cost that he would need to incur. That is what most companies in US do, and its also mandated by the law. In my opinion, she should also explore the following possibilities : 1. What is the possible fallout if the new presidential candidate is anti-outsourcing? 2. Newer avenues with in GIS to employee as many as possible of the 3000 employees:
As mentioned earlier, if new job creation doesn’t take place then high-level
employees would end up doing low skill.
Considering moving up the ladder, GIS may look at getting into more evolved/
complex businesses which would need high level employees
This would also act as a great neutralizer to the political sensitivity If there are future plans, then Jane Harding can also doing the offshoring
activity in parts. 3. How many of these employees would be willing willi ng to shift to India, China and Brazil? As the existing jobs are likely to get transferred to new location, people familiar with the work supervising newly recruited people would be a great idea, and not only that it can also act as an opportunity for people to grow in their career by taking managerial jobs.
For her son Jason, she should advice him to aspire for the professional focus, as these jobs are well paid and as globalization/offshoring increases – these jobs in US will always be moving up the ladder.