October 2, 2006 By Andy Opsahl
The question set off a firestorm of legislative attempts to ban the practice in 2004. Indiana canceled a contract that might have sent some government work overseas in 2003. During 2004 alone, 40 states introduced more than 200 bills restricting offshore outsourcing, according to the National Association of State Procurement Officials.
All but five bills failed because states didn't want to sour relations with foreign countries, said Michael Kerr, director of the Enterprise Solutions Division for the Information Technology Association of America (ITAA).
Kerr said legislators now try to guard against offshore outsourcing in more subtle ways, like passing laws requiring vendors to disclose upfront in contracts where they will perform services.
Most private-sector contracts now include some offshore outsourcing -- a fact repeatedly pointed to by those advocating that governments follow suit. Many economists and organizations like the U.S. Chamber of Commerce say offshore outsourcing and the resulting global economy ultimately increase employment in the United States. Some supporters argue that government offshore outsourcing would advance the rising trend of privatizing government functions and providing taxpayers more for their money.
At the other end of the spectrum, critics say offshore outsourcing contradicts one of governments' primary goals -- promoting citizen employment. And several prominent state CIOs say they can save money and produce better results by using internal staff or domestic labor.
Too Cheap to Pass Up?
Sid Pai, a partner at TPI, a group that advises governments and the private sector on procurement matters, said state and local governments should think of themselves as businesses and their citizens as shareholders when considering offshore outsourcing. Pai runs TPI's India office.
"Governments cannot really afford to rule out such a successful approach as [offshore] outsourcing. They would be giving their shareholders -- the citizens -- a bad deal. They would not be considered good stewards of their stakeholders' interests," Pai said. "I am a U.S. citizen who has worked around the globe. I have learned that allowing the best talent to rise to the top by following free market norms is the best way to go -- whether in the U.S., India, or elsewhere."
Pai argues that offshore outsourcing frees up sections of the American work force to perform new and more useful services. That process grows the domestic economy further, generating more jobs in the United States, he said.
Thomas Siems, senior economist and policy adviser for the Federal Reserve Bank of Dallas, calls that process "creative destruction." He said private-sector firms outsource functions like human resources, payroll, recruiting and IT so they can focus on their areas of expertise.
"Outsourcing is not new," Siems said. "What is new is the fact that today we can outsource more and more white-collar work because we can share information in real time over the Internet and other telecommunications devices. Suddenly it's not just manufacturing jobs or low-skill jobs."
A 2004 Forrester Research study claims that the U.S. economy gained 390,000 jobs for the 300,000 that recently went overseas.
"It is true that there may be a short-term redistribution of jobs while the outsourcing nation's work force moves on to better things, but this redistribution of jobs that may take place is in fact a net positive to the nation that outsources," Pai said, citing the study.
Furthermore, the McKinsey Global Institute estimates that for every dollar spent offshore, the United States gains $1.12 to $1.14 back.
The U.S. Chamber of Commerce also contends that outsourcing fears are overblown. The organization cites a
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