Application 1 – Analysis and Synthesis of Prior Research

Business and Society Review

109:2

153 –170

© 2004 Center for Business Ethics at Bentley College. Published by Blackwell Publishing, 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford OX4 2DQ, UK.

Blackwell Publishing LtdOxford, UKBASRBusiness and Society Review0045-3609© 2004 Center for Business Ethics at Bentley College200410921000Original ArticlesBUSINESS AND SOCIETY REVIEWCHRISTOPHER B. CLOTT

Perspectives on Global Outsourcing and the Changing

Nature of Work

CHRISTOPHER B. CLOTT

INTRODUCTION

G

lobal outsourcing is a fast-growing aspect of the world economy. Worldwide spending on outsourcing in 2001 was estimated to be $3.7 trillion and is expected to reach

$5.1 trillion by the end of 2003 (Corbett, 2002). Researchers estimate that over the next 12 years, 3.3 million jobs accounting for $136 billion in wages will move offshore (McCartney, 2003; Forrester, 2003). Numerous studies portray the strategic benefits of global outsourcing for firms as a means to reduce costs, improve asset efficiency, and increase profits (Quinn, 1997). Criticisms of outsourcing have been almost exclusively in the areas of changing employment patterns, globalization of the labor force, and its effects on individuals and organizations. Outsourcing has been called “one of the greatest organizational and industry structure shifts of the century,” with the potential to transform the way businesses operate (Drucker, 1998). Some proponents believe it will turn firms from vertically integrated structures into “virtual organizations” and transform existing fixed structures into variable-cost structures where expenses can move up or down as the business climate dictates (Garr, 2001). For employees, the trend toward outsourcing has been thought to result in a loss of fixed-employment opportunities as a consequence of firms seeking to use cheaper labor overseas.

Christopher B. Clott is associate professor of the Graham School of Management, Saint Xavier University, Chicago.

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As outsourcing increases within the United States, the portion of the employed workforce made up of part-time, temporary, freelance, or independent contractors is growing (Geiger, 1999; Neikirk, 2002). Continuation of this trend will have a profound effect on the makeup of organizations and the way work is performed.

Global outsourcing is not a new phenomenon, having been per- formed for centuries as a part of trade between nations and firms seeking to profit from price differences for essential products and services through the use of third-party suppliers. The basic busi- ness idea of outsourcing is that if a firm does not specialize in a certain function it will be beneficial to transfer control of the function to a specialist organization that will be able to offer better cost and quality. As worldwide markets have become less closed and more transparent, and with information technology (IT) advances such as the Internet allowing near-instant communication, the ability of firms to procure and source products and services from anywhere in the world has increased dramatically. Commonly outsourced functions include manufacturing, IT, facilities or applications within a firm (such as its communications equipment), and multiple other firm services (also known as business process outsourcing) in areas such as finance and accounting, human resources, marketing and sales, customer support centers, and other industry-specific processes.

Underpinning the move toward outsourcing has been a conflu- ence of structural and theoretical changes in the nature of business and organizations dating back approximately two decades. Numer- ous theorists have suggested that the changing nature of competi- tion has resulted from two factors: (a) globalization of commerce engendering worldwide competition, and (b) technology develop- ments that have changed basic business processes related to time and distance. Globalization and technology have placed enormous pressure on firms to cut costs and improve efficiency in the inter- ests of self-preservation. Theodore Levitt’s seminal article “The Glo- balization of Markets” (1983) suggests a convergence of developed consumer markets and products and a movement toward global brands. Concurrently, the work of management and strategy theor- ists such as Michael Porter, Gary Hamel, Peter Drucker, and others indicates the need for organizations to think in terms of core competencies or primary business activities. Areas outside of a

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business’s specialization, or its “noncore” activities, should be moved to external providers. This viewpoint had previously been argued, in slightly different language, by the proponents of total quality management (TQM)—such as Joseph Juran, Philip Crosby, and W. Edwards Deming—as the need for organizations to deliver quality, speed of performance, continuous service improvements, and cost savings to customers.

Shareholder value, as measured by the efficient use of capital invested in the business and the costs of servicing it, gained new acceptance in corporations through the development in the early 1980s of the economic value-added (EVA) formula by the consult- ing firm of Stern Stewart. Use of EVA put pressure on managers to increase profits and cover the cost of servicing the capital invested in a way that would exceed the minimum rates of return investors would receive by investing in other securities of compar- able risk. The logic of EVA use suggests getting as many noncore activities off your balance sheet as possible to increase short-term profitability.

The 1990s brought two additional strategic changes to the way that organizations viewed themselves. Business process reengineer- ing (BPR) was introduced to corporations seeking to reshape and redesign business processes “to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service and speed” (Hammer and Champy, 1993). To do this, the theorists argued that formerly hierarchal organizations had to become flatter to respond quickly to competition and customer demand. “Reengineering” and “restructuring” the organization to meet new needs was also known as “downsizing,” which involved the elimination of numerous positions, primarily in middle manage- ment, within areas not deemed as core to the firm. The adoption of supply chain management (SCM) principles incorporated cus- tomer information and data with product development, thus decreas- ing a firm’s response time to address customer needs. The advent of new communications technology and demands by customers for lower prices and better products and services spurred the recon- figuration of companies as specialized links along the chain. With fewer permanent employees remaining to perform essential work, companies had little choice but to trust outside vendors with large parts of the business.

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THE IMPACT OF GLOBAL OUTSOURCING

Although there is some dispute as to when global outsourcing began, the movement of basic manufacturing from developed nations such as the United States to less economically developed overseas loca- tions to take advantage of lower labor costs has been ongoing since the 1950s. Manufacturers of products as disparate as automobiles, toys, textiles, electronics, and semiconductors have been migrating offshore to remain price competitive. The 1980s and early ’90s saw the growth of “contract manufacturing,” particularly in the textile and electronics industries, as leading firms found that they could not manufacture to required price and quality levels in fast-moving consumer markets where product obsolescence could reduce the value of components quickly (Heywood, 2001). Contract equipment manufacturers (CEMs) like Flextronics, Solectron, and Celestica— who could subcontract manufacturing components such as com- puter chips, capacitors, resistors, liquid crystal displays, electronic equipment, and telecommunications material of all types worldwide— have substantially altered the making and manufacturing of elec- tronics goods by original equipment manufacturers (OEMs). In textiles, Hong Kong–based Li & Fung subcontracts garment manu- facturing for major textile brands in the United States and Europe. Contract manufacturers produce branded products in low-wage offshore factories ranging from simple assembly to more sophisti- cated higher-value activities. Goods are available upon demand, and companies are able to remove low-margin manufacturing and inventory assets from their balance sheets, thus improving their EVA and attractiveness for shareholders.

Global outsourcing has substantially altered the nature of work in companies. While such ancillary services as building security, food service, mail sorting, and janitorial services are considered periph- eral functions within firms, the growth of globalized sourcing in formerly core functions (such as final product assembly, customer service, legal and financial services, and design activities) transforms the very nature of organizational culture. Individuals with tenuous links to the underlying business communicate pieces of operations performed all over the world. Jobs with firms become more tempor- ary and force workers to remain adaptable as changing demand alters occupational knowledge and does away with stable career paths (Ansberry, 2003a; Skapinker, 2003).

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INFORMATION TECHNOLOGY

The industry most closely associated with outsourcing has been information technology. IT functions have been outsourced since the 1970s due to the expensive hardware and software required for state-of-the-art systems (Heywood, 2001). As the corporate world shifted to data storage and retrieval on computers, the need for qualified IT specialists who could implement and monitor these systems outstripped the available supply. Unable to hire skilled specialists, firms turned to contract workers, consulting firms, and specialist companies in Europe and the United States. Eastman Kodak Co. moved the bulk of its IT operations to three outsourc- ing partners in 1989, triggering a wave of IT outsourcing by other Fortune 500 corporations (Johnson, 1997). These contractor organ- izations sought experienced IT help from all over the world. The U.S. government raised the number of H-1B visas allowing foreign workers into the United States from 65,000 in 1998 to 115,000 for fiscal years 1999 and 2000. Many of these workers came from India, where the confluence of English language literacy, large numbers of engineering and IT graduates with advanced processing skills, and willingness to work for lower wages fueled the growth of the U.S. IT industry throughout the 1990s.

A governmental shift toward privatization and deregulation of the economy within India was begun in 1984, and spurred investment and modernization of the telecommunications and computer indus- tries. With the election of Prime Minister V. Narasimha Rao in 1991 and the continued strength of the Indian National Congress Party, the country embarked on a path of liberalizing trade, industrial, and foreign investment policies. As a result, India became a very attractive business and investment opportunity for foreign direct investment. Large U.S. firms such as General Electric, American Express, and Hewlett-Packard were the vanguard of a flood of investment into India in the last decade. The “New Silicon Valley” centered in and around the city of Bangalore, which became a major outsourcing provider for IT functions as a result of its lower costs and advanced processing skills. This led to the growth of large Indian outsourcing firms such as Infosys, Tata Consultancy, and Wipro. As of 2003, over 500,000 people were employed in the Indian IT industry (McCartney, 2003). Other countries seeking to replicate India’s growth as an IT center for U.S. firms were Ireland, Israel,

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and the Philippines. All of these countries had similar advantages of large numbers of skilled English-speaking workers willing to work for a fraction of the cost of their U.S. counterparts. The wage scale continues to promote competition as Vietnamese, Chinese, Russian, and former Soviet republics and East European providers vie for cross-border IT services. In response to rising wages in certain Indian cities such as New Delhi and Hyderabad, General Electric has opened a call center in the northern tourist city of Jaipur, where GE staff invoices are scanned and entered by colleagues in Mexico and Florida (Merchant, 2003).

BUSINESS PROCESS OUTSOURCING

At this writing, among the fastest-growing aspects of global out- sourcing is business process outsourcing (BPO). BPO began as “back-office” process arrangements to run finance and accounting operations such as payroll, accounts payable and receivable, finan- cial, insurance, and property accounting. Aside from a brief pause after the events of September 11, 2001, these services have expanded into new areas such as call centers, with staff trained to answer and transact basic service-related areas, including order entry and credit card processing. Analysts suggest that there may be as many as 35,000 outsourcing call centers by 2005 in India alone (Moran, 2003). More sophisticated customer service work involving credit collection, benefits administration, pension administration, insurance claims processing, and computer-aided tomography (CAT) scan reading is now being handled by offshore firms for U.S. busi- nesses. Tax accounting and securities research for Wall Street firms is likely to be performed offshore as well (Kirkpatrick, 2003). Recent data suggest that financial services firms spend a greater percentage of their outsourcing dollars with offshore vendors than other industries (Nyberg, 2003).

Facilities and application management have also grown through- out the United States and Europe as a means of transferring the management and day-to-day running of firms’ major operational systems, building management, and site maintenance to third-party specialists who can offer basic property management and land- scaping as well as maintain the complex hardware systems to run the facility. In addition, global corporations have transferred the

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transport and storage of goods to third-party or third-party logistics (3PL) providers who offer an array of services, including trans- portation, warehousing, inventory control, freight forwarding, and customs brokering. Increasingly, these 3PL providers also negotiate contracts with the offshore producers and handle packaging, instal- lation, and subassembly, thus acting as contract manufacturers and supply chain managers for the organizations they work for (Baldiwala, 2001; Hannon, 2002).

GLOBAL OUTSOURCING’S DEFENDERS

Proponents of global outsourcing far outnumber their detractors. Numerous consulting firms, business theorists, corporate cham- pions, economists, and influential opinion leaders have published materials arguing the merits of offshore outsourcing. Arguments in favor of outsourcing can be broken down to five areas: concentra- tion on core business development by firms, cost control, access to state of the art technology, market discipline through greater transparency, and added flexibility to respond to demand changes (Lakenan, Boyd, Frey, 2001).

Concentrations on the core business

—Management theorists have argued that firms must focus on those aspects where they are uniquely positioned and have the financial and human resources to excel (Hamel and Prahalad, 1994). For example, brand manage- ment firms such as Nike should concentrate on customer under- standing whereas firms with a core competence in research and development, such as Intel, ought to focus on product innovation and design. Firms involved in the routine processing of information (such as Citibank, for example) should concentrate on providing quality and uniformity to their offerings (Hagel, 2002).

The core competence argument suggests that specialist firms com- posed of highly skilled employees interacting with customers will allow for a “demand-pull environment” where the customer pulls product through the supply chain due to aggressive marketing and the entire organization falls into line around the orders as a means of securing performance improvement. Firms will be able to get to market faster with new offerings without the drag of “noncore” aspects that can be better managed and operated by equally skilled specialist firms.

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Cost control

—A major consideration by firms in global outsourc- ing is the desire to reduce operating costs (Corbett, 2003). Research suggests that global outsourcing reduces supervisory and adminis- trative expenses, lowers effective wage rates through the use of offshore workers, and eliminates payment for nonproductive time as well as for worker benefits (such as health insurance, liability insurance, and workers’ compensation) that must be provided to U.S. employees (Harrison, 1994). Firms that externalize the labor force are better able to determine the timing quantity and skill composition of their workers ( Wells, 1996). Contract overseas labor shifts the risks of overcapitalization and unstable demand from the core firm to the overseas contractor, ensuring a competitive labor market while buffering the core firm from market fluctuations and risks (Kusel et al., 2000). This puts firms that are not sourcing globally at a cost disadvantage, because their competitors can more aggressively price their products due to lower production costs gen- erated from globally procured components (Reese-McMahon, 2003).

Although disparities in manufacturing wage rates evolved over decades between developed and less-developed nations, the costs of doing business overseas were usually prohibitive for all but the largest firms. Changing communication technology and global market reform have made formerly remote locations attractive and have permitted small and medium firms, as well as larger busi- nesses, to work with global outsourcing contractors who range far and wide in their quest to locate facilities in areas where the cheapest skilled and unskilled labor is available. Facilities have been relocated, for example, from formerly low-cost areas such as Malaysia, where unskilled labor rates were $2.50 an hour, to China, where it is 60 cents ( Wonacott, 2002). A similar strategy could also be seen in service industries during the last decade; for example, call centers with wage rates of $1.50 to $2.00 an hour for recent college graduates in the Philippines and India provide substantial savings over positions that would pay from $10 to $18 an hour in the United States (Kirkpatrick, 2003). Sending IT work to India can reduce labor rates by as much as 65% compared with using a U.S. company (Khirallah, 2002).

Access to state-of-the-art technology

—Another benefit believed to result from global outsourcing is the access to a larger and more up-to-date pool of assets held by offshore contractors. Some

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suppliers in the IT industry, for example, have access to proprietary technology or other intellectual property that the company would otherwise not have access to or that would be beyond the reach of its core competencies. Business organizations lacking the capital to finance new equipment can access new technology without owning it and thus keep operational costs low. Theorists also argue that as work becomes more and more information intensive, it also becomes increasingly placeless. It no longer matters where software is written or a balance sheet is reconciled, or where a toll-free call is answered—as long as essential quality considerations are met. It’s irrelevant to the end user whether that activity is taking place down the hall or half a world away. With the investment in state-of-the- art technology so high, companies may evolve into complex enter- prises that operate as atomic universes in which core competencies are left in the nucleus and all other functions—from staffing to manufacturing—are performed by flexible part-time workers and specialized satellite suppliers (Corbett, 2003).

Market discipline and transparency

—Global outsourcing enables companies to expand choices for their customers by putting stan- dard business functions out to bid. Increased use of EVA modeling forces managers to focus on capital costs, thus quantifying operat- ing performance from a financial perspective and enhancing transparency and accountability of the firm. Innovation and rapid change are promoted through outsourcing as market-based contracts focus on outputs rather than inputs (Baxendale, 2004; Quinn, 1997). This enables firms to reduce overhead and improve shareholder value.

Flexibility

—Global outsourcing enables firms to respond to new challenges in volatile markets by redeploying labor where needed. External suppliers can be used as buffers to absorb production fluctuations and provide internal production stability, thus pro- moting workforce stability (Burt, 2003). Labor headcount can be adjusted quickly in the face of fluctuating demand without the associated costs of employee reduction or increased hiring inter- nally. Legal employee and labor contract negotiations are minimized or negated entirely through use of a global workforce. Firms can also seek to introduce performance-based pay incentives as part of its contracts with suppliers.

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GLOBAL OUTSOURCING’S DISSENTERS

Critics of global outsourcing are primarily grouped into two areas: (a) theorists examining the labor and ethical issues of outsourcing on workers, and (b) researchers looking at the effects of strategic outsourcing decisions on organizations. Very few empirical studies exist that examine the effects of global outsourcing on individual firms, perhaps due to the difficulty of procuring such information. More general dissent of global outsourcing has focused on the macroeconomic effects of globalization revealed in increased com- petition between economies that results in a “race to the bottom” of wage rates and the resultant job insecurity this engenders (Tonelson, 2000; Tomkins, 2001; Thompson, 2001).

LABOR AND ETHICAL ISSUES

Researchers argue that global outsourcing transfers work to countries where labor can be bought much more cheaply (Geewax, 2003). Prevailing wages far below the United States in economically developing countries in areas such as India, the Philippines, and China provide the financial rationale to reduce labor forces in highly developed economies. Research suggests that this depresses wage rates for remaining workers, creates fewer job opportunities in many occupations, reduces job stability, and often results in a loss of benefits, such as health insurance, among workers at affected companies (Ansberry, 2003b and 2003c; Harrison, 1994).

Global outsourcing also falls disproportionately upon older work- ers who are more highly paid but less mobile in terms of retraining options. Theorists argue that the overall macroeconomic benefits derived from outsourcing are often at the expense of the individual worker (Breslin, 1999). Outsourcing affects organized labor by intimidating the labor force, as the fear of jobs moving overseas may reduce the potential benefits in unionizing (Boudette, 2004; Fevre, 1986). The loss of well-paying positions has a ripple effect on the local economy, resulting in the disappearance of second- and third- tier supplier and service firms that must close or reorganize; this in turn means a loss of competitiveness. This effect has created a “political hot potato” as localities compete with one another through tax incentives to attract new industries as older ones depart. Some

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recent attempts at global outsourcing by government bodies (such as the attempt by the state of New Jersey to use offshore outsourc- ing for some basic social services) have resulted in new laws ban- ning the use of foreign workers for essential government services and for those firms that receive government contracts (Hayes and Chabrow, 2003). At this writing, the U.S. Senate and state legisla- tures in Indiana, North Carolina, and Washington, in addition to New Jersey, are working on bills to restrict or prohibit government contractors from outsourcing work overseas (

Chicago Tribune

, 2004). Global outsourcing has also contributed to the increasing numbers of part-time and contract workers typically earning less pay than permanent workers and without health, life, short- and long-term disability, and retirement benefits (Geiger, 1999).

There is a small body of criticism concerning the ethical impli- cations of the outsourcing movement. These researchers suggest that firms often withhold material information from employees, mis- represent future payoffs of outsourcing agreements, base choices on inaccurate and unfair information, and impose hardships on displaced employees without justification (Reid and Pascalev, 2002). They suggest that a Machiavellian “ends justify the means” model, in which reducing cost as an end is used to justify corporate strategy, violates ethical norms and comes at a high human cost (Breslin, 1999).

STRATEGIC GLOBAL OUTSOURCING

Many researchers call into question the perceived effectiveness of strategic global outsourcing on organizations. Although agreeing with the theory of outsourcing, these critiques are wide-ranging and often prescriptive in their identification of flaws in how out- sourcing is performed by firms. They can be grouped into the follow- ing areas:

Defining what global outsourcing is and is not

— Overlapping defi- nitions of global outsourcing serve to confuse and obfuscate the role it plays in organizations, leading to the mistaken conclusion that global outsourcing is a “cure-all” and will only improve perform- ance and reduce costs. Strategic considerations faced by firms in global make or buy decisions include such factors as technological

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innovation, customer demand, and financial factors (for example, international taxation policies). The mere offloading of inventory or services to a secondary overseas provider does not negate the risk that an investment may be subject to sudden changes in the industry and world socioeconomic environment. Numerous con- sulting firms and providers have “sold” global outsourcing as a strategy rather than just one of many means to service delivery (Cant and Jeynes, 1998). Many tactical decisions revolving around cost considerations, changing sales requirements, and product modifications and innovation can create a false sense that firms are no longer responsible for products under their brand names (Heywood, 2001).

Instability of demand

—Researchers argue that an underlying problem associated with global outsourcing is the instability of demand, and the failure to recognize and react to it in a timely manner. An outside contractor may not be able to respond quickly to problems and changing consumer needs. Previous commitments of inventory and capacity can create uncertainty about availability and cause a company to become less sensitive to real consumer demand. Agreements between firms and contract suppliers often start from different expectations: The company seeks to move inventory and other costly noncore services off its balance sheet while the contract supplier hopes to gain skills and strategic leverage from contracts and thus enjoy cost advantages with its own suppliers (McCartney, 2003).

Unexpected drops in demand can create buildups of outsourced inventory that rapidly depreciate in value, creating the need for markdowns (Lakenan, Boyd, Frey, 2001). Supply chain software developed to keep up with increasing demand has been less effec- tive in responding to sharp cutbacks by supply chain members.

Offshore supplier problems and loss of control

—Organizations involved in global outsourcing depend on others caring as much about the product as they do. If an outside company makes a vital com- ponent, the manufacturer can suffer a loss of control over the way the product evolves and form an unhealthy dependency on that third- party provider for key products and services. An outsourcer may attempt to generate additional profits by bringing in less well trained people or subcontracting work elsewhere, a practice known

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as

double outsourcing

(Burt, 2003). As call centers, help desks, and proprietary information crucial to the underlying business are sent abroad, concern is growing that offshore suppliers may not have effective safeguards in place, leaving the contracting firm, and its unsuspecting customers, in a vulnerable position (Nathan, 2001). The offshore provider may also provide similar outsourced functions for other competing organizations and possibly use key resources from one client firm to support other clients. A larger problem can emerge if outsourcers introduce their own brand at a much better value and begin competing with the brand or service they have contracted with. Strategy theorist Michael Porter has argued that “when you outsource something you tend to make it more generic. You tend to pass a lot of the technology particularly on the manufacturing or service delivery side to your suppliers. That creates strategic vulnerabilities and also tends to commoditize your products. You’re sourcing from people who are also your competitors” (qtd. in Byrne, 2001).

Importation and supply costs

—Outsourcing decisions made to lower overall costs often do not account for hidden costs, which might include product obsolescence, deterioration, spoilage, taxes, loss to damage or theft, longer delivery times, administrative costs in monitoring the contracted work, and business travel. Contracts can be renegotiated or “benchmarked” to prevailing prices, but in practice this is difficult to do (Nyberg, 2003). Bringing functions back in house, or “in-sourcing,” can be problematic due to the loss of skills and expertise and the need to maintain cost levels com- mensurate with what was done through outsourcing.

Political and economic risk

— Since the terrorist attacks of September 11, 2001, there has been an increased awareness of world instability. Threats of terrorism, religious strife, changing governments, and failing national economies make the general socioeconomic environment hardly risk free. Firms are diversifying their outsourcing into more than one area of the world to reduce risks. Global outsourcing, however, will continue to include difficulties related to geographical differences, cultural diversity, the orientation and social incentives of offshore employees, various interpretations of the English language and differing laws, regulations, and social customs governing the workplace.

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CONCLUSION

Any job that is English language based in markets such as the U.S., the U.K., and Australia can be done in India

Scott Bayman, CEO of GE India

Barring a collapse of the world economy, the scope of global out- sourcing can be expected to grow for firms seeking to remain competitive in world markets and deliver shareholder value. The impetus toward outsourcing to free up resources that will enable firms to focus on their core specializations is considered to be an inevitable function of growth and development. As companies choose to leave all “service” activities to outside suppliers, they are likely to seek economies of scale and scope within their own core activi- ties, leading to increased mergers and consolidation in a number of business sectors. A veritable avalanche of management theory and economic thinking underpins and buttresses the notion that this is a desired position for firms and contributes to the “creative destruc- tion” that is the nature of capitalism itself. Firms that are no longer competitive perform inefficiently and ultimately close down, to be replaced by firms that innovate to make better goods and services. Ignored in this movement, however, is the potential for decreasing, rather than increasing, the number of jobs within certain economic sectors due to greater overseas outsourcing. These lost jobs will no longer be merely lower-end manufacturing and service positions; we will see higher-paying skilled labor positions lost as well. As the location of a firm and where its products are made or serviced mat- ters less, and the labor to create the product or perform the service is thus commoditized, developed nations will face increasing wage gaps among workers in highly specific niche-oriented occupations. Occupations such as IT in the United States may be transformed beyond recognition as significant segments of work are performed overseas. Pressure may grow for governmental trade adjustment assistance in various sectors as workforces shrink and displaced workers seek new occupations. The workers remaining within the consolidated industries will be forced to adjust their compensation downward until demand once again rises.

A little over a decade ago, the trend toward globalization of prod- ucts and services in the United States was looked on as an inevit- ability that would portend an unequal distribution of wealth and

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result in a two-tiered society, with the once-solid middle-income tier of American jobs being undermined (Hendricks, 1992). But economic growth in the mid- to late 1990s brought record low unemployment in the United States even as global outsourcing surged. As economic growth has contracted in the current environ- ment, enormous pressure has been placed on firms to justify any increase in permanent employee headcount. We may see the major- ity of work performed in developed countries through a temporary or contract workforce. This workforce will have less of an affiliation with the locale they are employed in and contribute less to its greater economic well-being. An increasingly migratory and transient workforce will create challenges for public-service planning as growth and decline becomes less predictable. Global companies seeking to constantly lower prices will be caught in a vicious circle as fewer firms will have the profitable means to remain in each type of business. There will be increased calls for federal legislation to introduce new forms of market controls and regulations to slow down, or even halt, rapid changes to the workforce.

To take global outsourcing to its natural progression is to pre- sume at its most optimistic that it will create good jobs in poor countries, shrink the gap between rich and poor nations, and create smaller, more highly innovative firms with resources and skills in their core competencies of, say, marketing and design. We may see a small cadre of specialized professional agents who connect buyers and sellers in the global economy to monitor and manipulate the brand image of firms in specific occupations. Inventory-less virtual firms will put commodities out to bid, and roving subcontractors will perform activities offshore. As new products and services are developed, they will be quickly outsourced to manufacturers and service providers to perform the actual work. A contract workforce of salespeople and delivery workers will interact with the consumer. Economic theory suggests that this is in the best long-term macro- economic interests of developed nations and the world as a whole; it is, in fact, the very essence of comparative advantage. The problems with this scenario in the near term will be that it will exacerbate structural unemployment in developed nations and create an ever- larger “skills gap” between those fortunate to have skills in short supply and the many who do not.

As we enter this markedly different future, I suggest we will see the development of a far greater degree of protectionism and limits

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on globalization in the form of exclusive trade treaties, regional trade agreements, tariff and nontariff barriers, and the increased power of “gatekeeping” organizations, such as the International Standards Organization (ISO), to limit global outsourcing partners. Although direct government intervention in all facets of trade by the United States is unlikely at this writing, there will be much pres- sure to apply selective protection to economic sectors deemed to be in serious decline. Far greater pressure will fall on the European Union (EU) nations and Japan, among other developed nations, to restrict entry to their markets of outsourced products. Emerging nations and country regions that have benefited from previous outsourcing efforts will fight hard to keep business from leaving for even cheaper areas of service and production, and may well institute protections of their own as a means of limiting business movement. Paradoxically, the very success of offshore outsourcing may well prove to be its eventual undoing.

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