6 reasons outsourcing can't be stopped

[VelMurugan]

6 reasons outsourcing can't be stopped

US seems to be witnessing a sudden surge in `economic nationalism'. In the country which preached the world benefits of free trade, the demand for protectionism is getting louder. The pains of turbulent economy is making many Americans target outsourcing.

Giving his first speech to a joint session of the US Congress, the county's president Barack H Obama said, "We will restore a sense of fairness and balance to our tax code by finally ending the tax breaks for corporations that ship our jobs overseas."

India Inc has expressed concern over Obama's populist statement. The Federation of Indian Chamber of Commerce and Industry (FICCI) expressed concern over the statement saying "protectionist measures could deteriorate the situation further".

However, the big question is that in this era of globalisation, is it possible for large corporations to compete globally without outsourcing. No, say experts. So, here's looking into six reasons that make analysts believe why outsourcing cannot be stopped.

Source : IndiaTimes

[VelMurugan]

Time-proven strategy

Due to the recession, there is immense pressure on organisations to sustain their margins and re-examine their cost structures. This has become imperative for the medium-term survival of many organisations. Offshoring is one of the most proven strategies to optimise costs.

US firms have been pioneers in offshoring both in the services and manufacturing space, resulting in enhanced competitiveness in the global arena.

Enhances competitiveness

The role of outsourcing in enhancing the competitiveness of American corporations is widely acknowledged. This, in turn, has replaced many of the jobs that outsourcing took away in the first place. A move to curtail outsourcing will adversely impact the competitiveness of organisations setting up operations in the US.

[VelMurugan]

Large scale

The impact of eliminating tax breaks for US companies will also depend on the scale of their outsourcing. Many companies have been outsourcing for decades and for them the cost-benefit of continued offshoring might outweigh the additional taxes payable.

Can be damaging to US leadership

Protecting jobs and creating disincentives for outsourcing are natural responses to the economic crisis that America is facing today. However, this simplistic solution may be detrimental to the leadership position of the US.

Studies by firms like McKinsey have shown that outsourcing has led to economic advantage to the US. The protectionist policies during the Depression of the 1930s actually delayed America's revival. A move that starts with protecting service jobs and possibly goes on to protecting manufacturing jobs with import tariffs and a `Buy American' campaign can only lead the world into similar reactions that will impact global demand for American products.

[VelMurugan]

No direct tax incentive

Several experts believe that this is all part of old Washington rhetoric as there is really no direct tax incentive awarded to US companies who transfer jobs to other countries.

According to them (as told to Philippine-based BusinessWorld), what the US tax code has is a decades-old provision that allows American companies to defer income tax payments on offshore profits until they are repatriated back home, and Obama wants to eliminate this.

Beyond taxes

According to Dina R Salonga, Philippine Software Industry Association director (as told to Philippine-based BusinessWorld) outsourcing growth would be difficult to stem.

He said that even if Obama's plan materialises, it will still be a matter of economics, like [opening in locations] where companies can save more.

He feels that there are several considerations for this business to stop, not just tax breaks.