IT Outsourcing

The subject of jobs withdrawal abroad is becoming more and more popular. Politicians talk about it from the stands, journalists write editorials in national and local media, and Americans themselves think more about this problem. The developed list of topics reflects the following ideas:

  1. To hire or to outsource?
  2. What makes outsourcing popular?
  3. IT Outsourcing world centers.
  4. Globalization moves outsourcing ahead.
  5. Outsourcing outcomes – is it always profitable?
  6. Investments made for the U.S.A. and by the U.S.A.
  7. Political issues upon outsourcing.
  8. Outsourcing evolution may turn to devolution.

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Seven articles and reports were reviewed; these are:

  1. “Outsource, Outsource, and Outsource Some More.” The article presents the very beginning, bright and really profitable, of outsourcing that was due to the global computerizing. It also reveals the numbers the outsourcing of that time had to affect the reader letting them know this tendency is extremely implemented and becomes one of the must-haves in modern business jungles.
  2. “The Innovation Edge: Meeting the Global Competitive Challenge.”
  3. “Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data.”
  4. “The Offshore Outsourcing of Information Technology Jobs in New York State.”
  5. “Globalization and Worldwide Development.”
  6. “Indian Information Technology Industry: Past, Present and Future & a Tool for National Development.” Here, the author analyzes IT Indian market, the role it played and the role it supposes to play. This report underlines the outsourcing importance to local business authorities. The history, telling why and what companies raised, also shows the current issues this market faces.
  7. “Outsourcing Booms, Although Quietly amid Political Heat.” The article, containing the numbers the author prepared, insists that outsourcing goes on, picking up the wealthiest U.S. companies with their further settling down somewhere in India (there are lots of examples) or China. At that time, the author already argued the pure outsourcing’s miracle effectiveness telling the process could grow up the limits where it could bring complications that may replace the profits this process had had.
  8. “Imperialism & the Globalization of Production.”

Having personal experience, though it was rather small, and making deep analysis of the scientific and commercial articles listed above, all together this flew to the next list of topics to be presented. These are:

  1. American reality that outsourcing builds.

The number of jobs in the country is growing slowly since international competition increases. However, whereas it was mainly about jobs in the industry – for decades U.S. companies are moving their production facilities to lower-cost countries (from Mexico to China), and now has become the main outsourcing – the transfer of jobs in the service sector employs 74.5% of Americans and 80% of GDP. Americans perceive the transfer of manufacturing jobs with difficulty, but they still allow it as the share of industry in GDP falls from the forties. The experts state that the outflow of the same jobs in key sectors of the service industry is perceived as much more painful since it is the most dynamic part of the economy, which employs the vast majority of Americans (Elijah, 2007).

Indeed, more and more jobs, in the previously untouched by the globalization services, migrate from the U.S.A. to other countries – India, the Philippines, Eastern Europe, Russia, Malaysia, and Brazil. The leader, however, is India, where there are tens of millions of high-class English-speaking professionals willing to work for 8-12 thousand dollars a year. Salaries in India are 10-15% of the cost of a similar job in the U.S.A. or in Europe, which makes the country highly attractive for U.S. companies concerned about cost reduction. By outsourcing, which is expanding in India by 50% per year, a high-tech sector of the Indian economy is growing rapidly – by 30% a year – and now stands at $3 billion (Mathur, n.d.).

According to the consulting firm Datamonitor, the volume of the global market of offshore outsourcing in the information technology sector increased by 14% last year (Informa, 2012). The trend towards the transfer of jobs in the service sector is not limited to the high-tech sector. Thanks to the development of communications – laying high-speed fiber-optic cables – outsourcing covered almost every sphere of services. In this way, India’s IT accounts for only a quarter of the total outsourcing market (India managed to capture almost half of the global outsourcing market – of the total turnover of 25 billion in 2003, India accounted for 12 billion dollars) (Mathur, n.d.).

In countries with cheaper but skilled labor force, the transferred work includes not only software development, but also the processing of financial documentation, research and development in the industry, the development of architectural projects, call centers, insurance companies, banks and even the analysis of fluoroscopy. U.S. investment banks have experienced hard times because of the stagnation of 2001-2002, and moved about 100 thousand jobs to India – mostly in the back-office processing of financial documents. Another problematic sector of the economy – airline – is also trying to reduce costs by outsourcing. In February 2004, the U.S. Delta airline announced the opening of a call center for booking tickets in India, where 1,200 people work, though the company faced difficulties related to the language gap between American English and British English commonly used in India (Huettel, 2004).

Government organizations more and more resort to outsourcing. Over the last years, the growth market of IT-outsourcing has been largely fueled by increases in the number of state orders (New York State Department of Labor and Empire State Development, 2010). The largest contract, which was signed in 2003 with the U.K. tax office Cap Gemini Ernst & Young, was worth $5.1 billion (the main part of the contract was then transferred for execution in India).

The outflow of U.S. jobs to other countries has led many analysts to express concerns about the future of high-tech sectors of the American economy. U.S. leaders in this sector, mainly due to the production of software, are American industries with a turnover of 200 billion dollars a year. It has traditionally been used by both the American and foreign labor, but jobs were created in the United States – in the Silicon Valley of California, in the branches of such companies as Microsoft and IBM, and all over the country in technological departments of industry giants and financial institutions.

Competition with cheap foreign programmers and engineers not only leads to a decrease in the number of jobs in developed countries, but also to a decrease in salaries of those who manage to keep a job. For example, in the United States over the past two years, salaries for programmers declined by about 15%, and the number of jobs decreased by 12%. The research firm Forrester predicts an additional 18% of the programmers’ jobs that can migrate abroad (The McGraw?Hill Companies, 2005). Salaries of U.S. programmers could fall by another 10% (currently it is at the level of 50-80 thousand dollars per year).

  1. Industrial policy in the United States.

Measures of industrial policy in the United States include a number of subsidy programs, production of manufactured goods, in particular some motor vehicles, where the United States provide reports to the WTO on a regular basis. The program of energy savings in the transport sector aims to develop energy-efficient and environmentally friendly vehicle technologies for cars and trucks.

Assistance is provided in the form of grants, and, for example, in the 2009 fiscal year, the program allocated 3.063 billion U.S. program production of modern vehicles is aimed at modernizing and expanding the production of motor vehicles and their components. Assistance is provided in the form of loan guarantees. In the 2009 fiscal year, the program allocated $7.5 billion to promote shipbuilding plant aims to increase the competitiveness of domestic production on small shipyards (Committee on Subsidies and Countervailing Measures, 2011, p. 52).

Authorities are taking measures to improve access to funding industrial companies. In September 2010, the U.S. Small Business Administration increased the maximum amount of credit for small businesses by $2-5 million. In April 2012, they adopted a law to support start-up companies, providing, in particular, permits for small businesses to raise funds of up to $1 million annually through a specially created platform in the Internet network. These are self-regulatory organizations registered and monitored by the U.S. securities and Exchange Commission (hitherto start-up companies could only be financed by a small group of investors, especially banks and wealthy individual parties).

An important area of industrial policy is to encourage the federal government investment in the industry of the country. Of particular importance, these measures were taken because Americans rank last when looking at the ratio between industrial investment and GDP among OECD countries. Moreover, investment growth stagnated – in the 2000s, the annual increase in investment in the industry in the U.S.A. was 1.5%, while in the 1950s the 1990s, it exceeded 2% (Atkinson, Stewart, Andes & Ezell, 2012, p. 47).

Among the measures taken in this area is the introduction of accelerated depreciation in the value of purchased machinery and equipment and approval in June 2011, the initiative SelectUSA, designed to stimulate domestic and foreign investment in the U.S. economy, especially in the industry. The main functions of the initiatives include the provision of information from national and foreign business investment climate in the United States, the regulation of various aspects of economic activity, federal, state and local programs, and preferential treatment for investors.

  1. Where does unemployment come from?

Unemployment in the United States is relatively high for two reasons. The first reason is the outsourcing. This word means that U.S. companies transferred their production to countries with cheaper labor, such as China, India, Mexico, etc. The absolute champion of outsourcing is China. If a company brings its production to China, where workers can be paid 5 times less, it is clear that corporate profits will rise sharply. It is also clear that the corporation, having a similar plant in the U.S., will close it down, and the workers will be fired. Below a graph released by the Congressional Research Service is provided (Jackson, 2013, p. 9).

This is an employment index graph. The red dotted line represents the index of employment in companies in the U.S., and the blue line represents the employment index in foreign branches of the same companies. Please note that the sharp divergence of the two lines began after 2002, which roughly coincides with the time of a sharp increase in profits of U.S. companies. It is not a coincidence since in December 2001 the WTO adopted China, and then a massive transfer of manufacturing from the U.S. to China began. This is the first reason. The second reason is scientific and technical progress. If a company employs 1,000 people, then invents a robot that does the same job faster, better and cheaper as a robot does not need to be paid, the owners of such a company lay off 1,000 people. The company’s profits are increasing; however, unemployment increases as well. Similar processes have occurred in the U.S. over the last few years.

Furthermore, recently in the United States, a process called “revival of production” has been taking place. This process means that the United States create new industries and transfer many productions from China and other countries with cheap labor back to the U.S. This happens because many of the processes are getting automated, and, therefore, they do not need many workers. That is the reason why the company that was once transferred to production in these countries has disappeared. Renowned economist and Nobel laureate, Paul Krugman, in his column in the New York Times, wrote that there is no doubt about the fact that some high technology industries are reducing the number of all or almost all working professions (Smith, 2010).

For example, one of the reasons why some high-tech industries have moved to the United States in recent years is that the most valuable parts of a computer motherboard are mostly done by robots these days, so cheap Asian labor force is no longer the reason for their production abroad. For example, in December 2012, it was only 3.9% while among workers with lower education unemployment was 11.7%, among workers with a high school degree – 8.0%, and the average unemployment rate in the country was 7.8%. So it turns out that corporate profits are growing with an expanding production while the number of jobs does not increase, or its increases are not significant. That is why the U.S. has developed a service sector and small and medium enterprises; as only this sector can compensate for the loss of manufacturing jobs. It is called “a post-industrial economy.”