Are Layoffs Tied to Offshoring or Economic Crisis?

Would there be more outrage about the current increase in layoffs if it could be proven that job losses were occurring because of offshoring?

Based on IBM’s recent refusal to discuss approximately 4,000 job cuts in the U.S. since its fourth quarter results were announced, one could infer that the company is aware of the negative press it could receive if it specified that current cuts were bolstered by the ability to source cheaper offshore labour.

The Associated Press acquired the above stated job loss information from union organizations representing IBM workers.  The losses include jobs within the sales, software and hardware divisions. But while IBM’s U.S. head count drops, in India it’s climbing — specifically from 9,000 in 2003 to 74,000 in 2007, according to the article.

Those cuts and related head count stats make the issue of service offshoring more relevent in economic discussions.

To clarify terminology, outsourcing and offshoring are related, but the term outsourcing generally refers to an organization’s decision to shift internal business activities to an outside company within the same country rather than performing those activities internally.  With offshoring, those external suppliers are located abroad.

A further distinction between material and service offshoring lies in the fact that material offshoring is linked to manufacturing processes, while service offshoring focuses on business services such as accounting, engineering, customer service, and software and computer services.

Of course IBM is not the only company that uses discretion in discussing its layoffs, whether in the U.S. or abroad.  In Canada, Bell Canada has also denied accusations from the Communications Energy and Paperworkers (CEP) union that it is currently laying off a total of 250 clerical workers (in Ontario and Quebec) because of outsourcing.  However, what the union labels as outsourcing may include service offshoring, since few differentiate the two. Also supporting this take, is a letter published in the Hamilton Spectator in 2007, which states that Bell Canada was in fact offshoring service-type jobs (or back-office work) — in the same locations that are currently experiencing layoffs — to India.  It presents us with a chicken and egg scenario — which came first?

By refusing to openly discuss the practice of offshoring and its effects, companies and even governments, may hope to benefit from the lack of irrefutable data around the domestic impact of offshoring.  Without solid proof to the contrary, both entities can continue to claim that offshoring has limited domestic impact.

Measuring the Real Extent of Offshoring

According to a 2005 Government of Canada report by Philippe Le Goff, “The real extent of offshoring over a given period” because of limited data, “can be measured only by carefully combining macroeconomic aggregates (foreign direct investment, trade balance, industry production and employment) with microeconomic analyses of the causes and effects of foreign investments.”

If that information is necessary in order to provide accurate reporting and appropriately influence policy making, some change in law may be the only way to gather it, if companies will not provide it freely.

Nevertheless, organizations such as the Centre for Outsourcing Research & Education (CORE) provide some insight into the outsourcing/offshoring trends.  It revealed in its January 2008 “State of Canadian Outsourcing Report” that by 2010 more than 70 per cent of the organizations it surveyed planned to increase outsourcing levels, with “nearly 70 per cent of large organizations outsourcing IT or business processes.”

CIBC, Bell Canada, and Canada Post topped the top ten outsourcing clients in deal value for the period between January 1, 2002 and June 30, 2007.  According to CORE, CIBC outsourced $7 billion in IT related services to Ontario-based Hewlett-Packard.

The outsource driver is easily understood, if not completely logical. Organizations and governments that outsource and/or offshore work expect benefits such as lower production and labour costs, which translates into lower priced goods for consumers, and increased profitability.  The Canadian government, for example, might claim that offshoring financial services (such as income tax processing, which a friend who works in government explained is off-shored) equals prudent use of tax dollars.

The process is intricate and cyclical, for driven by clients to reduce costs, service suppliers such as Hewlett-Packard or IBM might therefore offshore these services to some degree.  Afterall, if IT staff costs $6 per hour in India and there is a large pool of qualified workers, why pay quadruple that rate for the same service in Canada?  Or why pay five times more for a lawyer here, when you can buy cheaper legal service abroad?

Offshoring and Local Employment

Yet, according to Le Goff, “While Western consumers appreciate the low prices of products made in China, India or elsewhere, there is a real uneasiness in some political and union circles as to the effects of offshoring on local employment.”

In Canadian politics, that uneasiness is difficult to spot. The NDP’s 2008 election platform included plans to “simplify the tax code by reviewing and eliminating outdated tax incentives and loopholes,” but isn’t specifically linked to fighting offshoring.  More recently, the Ignatieff Liberals demanded that the Harper Conservatives “protect the jobs of today” and “create jobs for tomorrow,” but that party neither provides a means of doing so nor suggests it’s attempting to fight offshoring.  At best, the Green Party’s Elizabeth May, while campaigning in 2008, did say that the Canadian military should continue to source its knives from Canada rather than China.  Still, no Canadian politician has gone as far as Barak Obama did while campaigning in Lorain Ohio last March.

USA Today reported that while campaigning, Obama suggested changing the tax rules to encourage domestic employment.  ‘We can end tax breaks for companies that ship our jobs overseas and give those breaks to companies that create good jobs with decent wages here in America,’ he said.

With yesterday’s announcement of 129,000 jobs lost in Canada for January, layoffs may be scrutinized even more as citizens demand action to stem the bleeding.  Some of those lost jobs disappeared not simply because of downsizing in this economic crisis, but can be disguised as such because of the opacity surrounding layoffs.

In their May 2008 Statistics Canada report on Outsourcing and Offshoring in Canada, John R. Baldwin and Wulong Gu, by analyzing aggregate data, found that “growth in material offshoring reduces the demand for more skilled workers.”  Yet curiously they also say that “material and services offshoring has no effect on employment in Canadian industries.”

In terms of wages, they indicated that service offshoring drove down wages in the service sector, although it had “little effect on wage growth in the good-producing sector.”

As suggested in Le Goff’s report, governments will have to consider unequal working conditions when negotiating trade deals to prevent unfair competition based on low labour costs alone.  “Developing countries might no longer have access to rich countries’ markets, unless they undertake to gradually establish social rights similar to those of the industrialized countries where they want to trade,” he wrote.

Others have also suggested that the consumer is to blame for constantly expecting lower prices, however unrealistic and self-serving.  Re-orienting consumer price expectations appears to be a long-term goal however, especially during a recession.  And since governments around the world are reported in the media encouraging consumer spending, it will also be up to those powers to change their message; but the principle of legitimizing oneself through spending flourishes in North America, so culturally, a profound transformation is required to change people’s mindset.

Also, if the consumer is to blame, then so is the corporation and its shareholders, for relentlessly pursuing profits.  Similarly, complacent politicians may be responsible for not actively preserving domestic jobs.

A Tangled Profit Web

In Britain, where the government has invested billions into the banking industry, unions insist that offshoring is unacceptable.  Karl Flinders, writing for Computer Weekly, reported that while the Lloyds TSB Group Union anticipated significant merger-related losses, it was against redeploying jobs overseas so the banks could save money.

Given the fact that tax-payers are underpinning the banking industry worldwide, there will be increasing pressure on banks to move away from offshoring.

However, for companies such as IBM that have not been propped up by government funding, but who layoff workers while reporting increased profits, as it did in December, the public has limited influence on their employment practices; unless of course they argue based on some other principle, such as patriotism, and use their spending power to send the message.

The situation also raises the question of whether companies have allegiance to anything but profits.  To that, shareholders might say that profitability is primary and good-will is secondary, and so regardless of industry, companies will have little incentive to be anything but opportunistic.

Moving towards solutions, we need accurate, timely data on outsourcing/offshoring so that government policy can be most responsive to the people’s needs and businesses will have accurate information on the effects of their procurement policies.  For the government, that might include stipulations on working conditions in trade agreements, and adjusting tax policies to reward domestic employers.

With or without increased regulation to force the issue, businesses also have an opportunity to live up to expectations of transparency and to demonstrate goodwill, especially during recessionary times.  Obscurantism may prevent immediate outrage, but if the truth is later revealed, it may prove to be a self-defeating practice.