GAO September 2001 INTERNATIONAL TRADE Current Government Data Provide Limited
Insight into Offshoring
of Services
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& GAO
Highlights ae ot A002 ep
Why GAO Did This Study Much attention has focused onthe tople of ollshorig” of tortion teehnology (7) ana other services to lower swage locations aoa
co refers oan organization's parehase fron other countries of services thái previously produeed or Duretaed domestically sich as $oforarepograrning or
GAO was asked to (1) describe the nature of offshoring atities sd the actos tha encoarage shoring, 2) discuss what US goverment data sow about ie fxten of this pratice by the Private sector federal ad state Bovernments, and () discuss Svalale data on the poteatial fffects of services offshoring on
GAO Observations While we make no
recommendations at this ie, we sen tat the reasons forthe frown in offshoring are relatively wrell understood, bless known hou the exten and the poiey naequence ofthis Atty To sees charges which oceur ‘manic economy, feders
Sistine and other researchers sea snes modi exiting, fata serie and develop new measures to prosde furor insight Into the extent ofthe penomena ‘at well the longererm
implications GAO wl eotinge to monitor the statistics and ether Alenia offshoring order
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INTERNATIONAL TRADE
Current Government Data Provide Limited Insight into Offshoring of
Services
What GAO Found
No comaonly accepted deiition of “offshoring” exist, al the ter hat ‘been sed to Include various Intemational trade and foreign investment activities Services that US-based organizations purchase from abroad are ‘considered imports They may also be inked to US firms’ investments ‘overseas—for example, U.S ims may invest in overseas afiates asa replacement for, or as an altemative to, domestic production In recent
ears, services offshoring has been facitated by factors, such as the Inmet infrastructure growth in developing countries, and decreasing data ‘uanamission costs Organization’ decisions to offshore services are influenced by potential benefits such asthe avalsbilty of cheaper skilled
labor and access to foreign markets, ad by risks, such as geopolitical issues and infrastructure nstabilty in countries that supply the services
US government data provide some insight into the extent of services ‘offshoring by the private sector, but they do not provide a complete pietre ‘of the business transactions thatthe term offshoring can eneorpiss, Departinen of Commerce data show thal private sector imports of some
services are growing For example, Imports of busines, professional, and ‘echnical services increased by 768 percent from $21.2 billion in 1907 to {75 ilion 2002, From another perspective, Corameree's data also show ‘that in 2002 US ineestments in developing countries that supply offshore
services were small compared to those in developed countries and that most services produced abroad are sold primary to now-U.S markets Regarding [public sector offshoring, te total dolla value ofthe federal goverameat’s bffshore services contracts increased from 1990 throngh 20, bụt the tend Inthe dollar value shows ite change relative to al federal services contracts No comprehensive data or studies show the extent of services offshoring by state governments
Government data provide linited information about the effects of services offshoring on US employment levels and the US economy The
Departinen of Labor's Mass Leyoff Survey data show that lofts
attributable to overseas relocation representa small faction of overall ota ‘nus layoffs However, the survey identifies only a portion af total lays ‘eeause the survey docs not caver establishments with fewer than 5D ‘employees Other governwent data show greater than average job decines ‘Since 2001 in occupations and indusiries commonly associate with
‘offshoring, but her factor, sch asthe recent recession, may’ contribute to ‘these declines, Sonne private researchers predict tht offshoring may ‘erate 100,000 to 500,000 TE jobs within the next few years, while others ‘ote that offshoring can also generate benefits, sch as lower prices, productivity improvements, and overall economie growth
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Contents Letter Results in Brief ai 1 Background 4 Offshoring’ of Mand Other Services Includes Several Types of ‘Business Activities and ls Facilitated by Telecommunications Improvements
Federal Sutstcs Provide Limited Insight into Offshoring Trends Federal Statistics and Private Sector Research Provide [imited Information about the Effects of Offshoring onthe U.S Workforce
and the Broader Economy
Observations [Agency Comments and Our Evaluation 8
Appendixes
Appendix I: Scope and Methodology a
Appendix It: Definitions of Oftehoring 55 Appendix (II: Data on U.S Importa and Exports of Services and Their Limitations sò Appendix IV: Data on U8, Direct Investment Abroad, Multinational Company Operations, and their Limitations B4 Appendix Vt Comments from the Department of Commerce n Appendix VI: GAO Contacte and Staff Acknowledgments Ga0 Contact m 2
Staff Aclomledgments 1
Tables ‘Table i: Rvamples of Offshoring Business Acuviies and Potential Data Sources ụ ‘Table 2: Selected Destinations for US Foreign Direct Investment
(DI) Abroad: Total by Country, 2003 Share of Total UI,
2000; and Percentage Change from I889 3 ‘Table3:_ Employment in US Multinational Companies inthe Unite States and Abroad, 201 28 ‘Table 4: Change in Employment Industries, Quarterly Averages, 2001-2001 of Total Nonfarm and Selected a7 ‘Table 6: Average Hourly Wages and Employment Levels for ‘Occupational Categories Associated with Offshoring,
2008 30
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Figures
“Table & Percentage Employment Change in Seected Occupations, 2001-0008 ‘Table 7 Private Sector Estimates of Offshoring and Ts Potential Beets ‘Table & Unaffiliated Business, Professional, and Technical (BPT) Services Exports and Imports by Selected Country, 2002 Table 9 Share of Tutat Unaffiliated Business, Professional, and Technical (HPT) Services Exports and Imports by Selected Country, 2002 ‘Table 10:U.S, Foreign Direct Investment (FDI) Abroad, 2002 Share bby Country, 2002; Change from 1998; and Share by Industry, 200 ‘Table 11: Value and Share of Intermediate Purchases (Outsourcing) in US Multinational Companies’ US-based Operations, 1W892001
Figure 1: US Private Sector Gross Domestic Product, 2002 Figure 2: Share of Services in T-S Imports and Exports, 2002 Figure: Worldwide Commercial Sorvices Importers, 2002 Figure d: Total Private Services and Other Private Services, 2002, = : Figure 5:_ Growth in Unaffiliated US, Imports of Selected Components of Business, Professional, ar Tecloical
Services, U22002
Figure 6: US, Uraffliated Imports and Exports of Busines, Professional, and Technical Services, by Country of Origin, 2002
Figure 7:_U.S Unaffiliated Imports from india of Selected Business, Professional, and Techical Services Figure: ‘Total US Services Trade and Unaffiliated Business, Professional, and Techical Services Trade, 1882-2002 Figure 9: Share of U.S Majority-Owned Nonbank Foreign Allate’s Total Sales of Services Exported (othe United
States, 2001 es
Figure 10: Change in Dollar Value of the Federal Governments Procurement of and Other Services by Performance Kocation between Fiscal Years 1989-2008
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Figure 12: Change in Private Sector Finploytnent in Selected PRelstedIndoxies, Aqnual Averages, 1880.2001 Figure 18: Offshoring Activities, Related Data Sources, and Employment Impacts Figure 14: Offshoring versus Outsourcing: a Company's Sourcing ‘Options
8
AhbreviaHone
Bureau of Economic Analysis ‘Business Feaployment Dynamics ‘Bureau of Lahor Statistics
business, professional, and technical Current Employment Suatisties reign direct investrient
Federal Procurement Data Systern Government Accountability Office ross domestic product
‘General Services Administration {information technology
International Transactions Accounts Mass Layoff Survey
multinational company
‘North American Industry Classification Systert Occupational Employment Statistics
Office of Management and Budget
Organization ofthe Petroleum Exporting Countries Quarterly Census of Employment and Wages Standard Industrial Classifieation
Office ofthe US Trade Representative
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i f= GAO_ Ste sates Government Acsountailty Ge Warhington, Dc 3648 September 22,2004
‘The Honorable Ike Skelton Ranking Minority Member Committee on Armed Services House of Representatives ‘The Honorable John D Dingelt Ranking Minority Member
Committee on Energy and Commerce House of Representatives
The Honorable Tammy Baldwin House of Representatives “The Honorable Jay Inslee House of Representatives
‘The Honorable Adam Sith House of Representatives
Although attention has long focused on offshoring inthe manufacturing sector of the US, economy, more recently concers have been raised about the nature and extent of offshoring inthe serices sector and its effects on the US workforce Offshoring generally refers to the practice, by either U.S companies or government entities, of replacing services prociced domestically with imported services Atvances in information technology (7) and communications, coupled with a large pool of edueated workers in some developing countries, allow organizations to move services jobs ‘overseas as part ofa larger trend towards globalization, Organizations move services jobs, suchas those involved in software programming Or telephone call centers, to lower-wage locations, such as India, the Philippines, and Easter Europe Offshoring causes controversy because some jobs are lost immediately ancl visibly, while other potential impacts such as lower costs, job creation in other sectors, and economic growth are
less visible, more diffuse, and typically delayed
You requested that we examine the available data to provide mare information about the offshoring of information technology and other services As agreed with your staffs, we (1) describe offshoring activities and describe factors that encourage offshoring, 2) discuss what US
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‘sector and federal and state governments, and (2) discuss what the data show about the effects of offshoring IT and other services on the US, ‘economy
‘Todo so, we analyzed avalable US government data and private sector studies on international trade-in-services and foreign investatent We also Interviewed goverment officials familar with the rade-in-services and ‘employment data that provide the bases for most analyses of offshoring We also met with private sector experts who have published analyses of services offshoring, We assessed the reliability ofthe federal government ata discussed inthis report and found it tobe sufficiently reliable for the unposes of this report We also provide information from private sector studies on offshoring and discuss the imitations of these studies However, ‘we did not assess the overall reliability ofthese studies We conducted our
analysis in accordance with generally accepted government auditing standards from January to August 2004, A detailed description of our scope and methodology appears in appendix L This report is one of a series of, reports that GAO plans to issue on offshoring
Results in Brief “Ontshoring” of services generally refers to an organization's purchases {rom abroad (imports) of services that it previously produced in-house oF purchased from another domtestc source, Examples of such services include software programming and desig, call center operations,
accounting and payroll operations, medical records transcription, paralegal services, and software research and testing The term offshoring has also ‘been used inthe public debate to include several other types of
interational trade and foreign investment activities, and no commonly accepted definition of offshoring exists For example, US-based firms may ‘expand by investing in affiliates overseas rather than expanding their domestic operations, thus creating new jobs overseas while maintaining US job levels These activites may also affect profits, prices, and other ‘economnie factors in diferent ways Information technology improvements, infrastructure growth in developing countries, and decreasing data
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ES government data provide some insight into the trends i offshoring of services by the private sector, but they do not provide a complete picture of the business transactions thatthe term offshoring can encompass In
particular, they do not identify US imports of services previously produced by U.S employees The Department of Commerce's trade data Show that imports of services associated with offshoring are growing, For example, US imports of services associated with offshoring—business, professional, and technical (BPT) services—grew from $21.2 biion in 1997 toabout $375 billion in 2002, an increase of 76.9 percent During the sare period, US exports of BPT services increased 48.6 percent, wit the United States maintaining a trade surplus in this eategory Another approach to analyzing offshoring is to assess te extent to which US companies have invested in foreign countries and are exporting services back to the United States Commerce's data on direct investment abroad show that, as of 2002, U.S investments in developing countries that supply offshore services (e, India and the Philippines) were relatively small about 4 percent or less, for each country, of total US direct investments abroad, These investments were primarily concentrated inthe
manufacturing sector In addition, most services produced abroad by U.S, majority-owned foreign affiliates are sold to foreign markets rather than to the United States Regarding public sector offshoring the total dollar value of the federal govemsment’s services contracts with offshore performance ‘or manufacturing locations has increased over the past 5 years; however, relative to all federal contracts fr services, the trend in the dollar value of|
offshoring shows litle change In addition, although there are aneedotal accounts of state goveruments using offshore sources, no comprehensive ata or studies of the extent to which state governments use these sources are available
Federal statistics provide limited information about the effects of offshoring TT and other services on the U.S labor force and the economy ‘overall, The Department of Labor's Mass Layoff Survey (MLS) shows that layofls artributable to overseas relocation these layofts representa small fraction of workers lad off—of L million have increased since 1999, but layofs reported in the 2009 MLS, 13,000 (0.9 percent) were reportedly due to overseas relocation, The dala also show that most ofthese layofls were in the manufacturing sector, However, the survey identifies only a portion of total layoffs, because it covers relatively lange establishments (60 oF more employees) and relatively large layoff (atleast 50 in a S-week period) Occupational Employment Statistics and Current Bmployment Statistics data series indicate that occupations and industries commonly associated with offshoring have experienced greater than average job
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Background
declines ince 2001 However, the reasons for these declines cant be ‘specifically linked to offshoring because other factors, such as the collapse of the dot.com bubble, Ukely contributed to thase job declines Some private researchers have estimated the effets of offshoring on employment and other economic activity For example, some predict that
offshoring may eliminate 100,000 to 500,000 Tr jobs within the next few years However, some also predict economic benefits from offshoring, Including lower prices, productivity improvements, job creation in sectors
using offshored services, and overall higher growth forthe U.S economy
Although we make no recommendations at this time, we observe thatthe reasons forthe growth in offshoring are relatively well understood, but less {s known about the extent and the policy implications ofthis activity, Discussion ofthis issu is similar in many ways to discussions of other changes that oceur in a dynamic economy In these cases, federal
statisticians and other researchers attempt io use and modify existing ‘series and develop new measures ‘As more recent data are collected and additional studies are completed, ‘some questions about the extent of offshoring will be addressed to provide insight into the phenomena
Policymakers, analysts, and others inside and outside the government combine those statistics with theory and models ofthe economy to define the indirect and longer-term implications of the particular changes that are ‘of policy interest Bo some extent, te policy decisions are dependent upon the resuls ofthe ongoing research on the exten ofthe activity and a better understanding of the indirect effects of this activity onthe U.S workforce and the economy
Services purchased from foreigners are considered U.S imports: a US Import occurs when a US-based company pays for aservice produced broad and supplied to the United States (ether to the company or direetly to its customers, as in the case ofthe call center) Although the service (ea, acomputer program, a database, or telephone call) may be supplied digitally through telecommunication lines, rather than physically erossing the border ike a good (e.g, an automobile import, it sill is supplied by foreign-based producer and paid for by a US-based importer
Most U.S domestic output consists of services In 2002, services-producing industries accounted for about 78 percent of the US, private sector
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{022 percent for goods producing industries (See fg 1.) Similarly, US private sector employment is concentrated in service producing industries (79 percent) compared to goods producing industries (21 percent)
However, itis important to note that goods producing industries may also ‘employ workers n “services” occupations (€,
accountants)
79%
————— services prose indus “oa prate-sector GOP = $92 ston
ethan Yr he Brot Econo Aras Suey Cnet
Services area relatively small share of U.S, imports, compared with their share of the U.S economy Services make up about 16 percent of total US, imports, compared with & percent of imports covered by goods (See fig 2) Services make up a greater share of U.S, exports but sll account for ‘only 30 percent of the total Services trade may be relatively small relative to the size of services output in the US economy partly because some services (eg, haircuts, housing, and hospitals) are difficult or impossible "Bataan wom domes product ae ava Yr 20, ba taf sme ihren reported nth ction ween Gres drei pro ta for 20 show ilar shares (toercen nd ode producti i 2002
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‘wo trade internationally: Overall, U.S imports of services accounted for only about 3 percent of U.S, consumption of services in 2002*
‘Figure 2: Share of Services in US Imports and Export, 2002
US exports of goods and services (2002) US Import of goods ad services (2002)
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According to the World Trade Organization, the United States is the world’s largest importer of commercial services, with 13:3 percent ofthe world’s share (See fig 3.) The United States isthe worlds largest exporter of| commercial services, as well Overall te United States exports more services than it imports andl therefore maintains a surplus n services trade,
Trang 13Figure : Worldwide Commercial Servis importer, 2002 — 26% gang 27% Canad 3.0% han 3.6% 40% lay 44% UnledKegdom chen 'Gamam, Unio Sister Rest of ha wor oe The Wap Tae Organaaion scorer vreus Sens fat wns Ye Bros ben sec “Offshoring” of IT and Other Services Includes Several Types of Business Activities and Is Facilitated by Telecommunications Improvements
‘The term “offshoring” generally refers to an organization replacing services produced domestically with imported services However, no commonly accepted definition for offshoring exists, and the term has been used in public debate to include several other types of business activities Services| offshoring has been facttated by improvements in information technologs; ‘decreasing data transmission costs and expanded infrastructure in
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Trang 15Table 1: Examples of tthoring Business Aches 7 Polen! Data Sources
Bugnass sony otal data ures
1 AUS-tased company Seroorerg,pyrol, axel cara sor rne house saps producing ts Sc stead purcaas hen Wome otegbased coneary
‘AUS based company moves fa aecouing, pal ‘ec cal ster sonsous fom is domectc orators {on nem frogs bosed aite st up procase
‘US dasod company expand proaieto by pening nen alts ovroeas, but mans es (Seetngpreducton he Unto Sates
"AUS ba arpa a ala domesioay ana ‘rgora foreign marats move ts produeson oan ‘tance oc
‘AUS based company organizes fe Gbal Produton operations by cocaine gramming ne reg” alte one coun ts ‘into eoies operations na ign aise reer county, and ping ts roducton operations etveen he Unto Sts and fs torogn atin
Yetancthe county Te nal oducts tre moArexdi, eine Unted Sten and abroad and ek lobar,
* Inport sss capi he US company pyran oo ood + Empayiran satis capture the numberof US employees who wore
‘sepaces ee
* imaor stasis tt fx hn ofthored src cari te US companys payer ios ips « Ênggn dien ivesent stasis capture fe value of he US ompa’s veces he alate, ae Wel Bs operat tration
oremplonran and asia a he ite
+ Empyrean đegseeo eases capture the nar of US, amplysos who wore + Nuttin! tho alae and exports on te US-based company ois aa company data cpr eparatoa pots an naam rom
7 Foregn dec ivesirent lattice capure fe value ofthe US Compas iecmntn fhe afte, Se we as opoateraliermalon ‘romp and aso he aia
Production varus, or wl ey entre he prosucon ana mpm tat might have occa he company expand Sfomoscay rar than ofc
+ Metin! company asta capture repabatd croft and income em tho aaa pers fo the US-based company to saa ~ Expo latses wil canis the dine n US exports fempary ening proaucron dus othe US
ngạt cạiete capture to incense due tthe new imports proved trom afore oe domeste manat + Fog ces msoamort statin capture the vauo of he US
cemeanys mmasbveninne 0e se vi s2 opsrstoralfiamalon nnpbimen a4 einsof tha a0iuie
+ Erpogmant sages capt the numer of U.S employees who were ngesee + Nefinatons! company si aplưt oparata rts ans ome tom the alae and xsl rom the USbaseg company tos ait port sae cat the U.S corpus payrnent tom reign
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+ Foreign cect ivestant statics capuro tn vauo of th US ‘aga’ mresonartin he fasts au wells apoatana emmaten ‘nemplopmont ang als ae alate
+ Erplogman nose capture Soh the rane of US employes who ‘nee deplaced for prodaton athe cary mowed ares 2 Wel asthe number of ow US empoyecs hat eel am oxpandad procction nthe Una Sat,
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(Canara From Preneus Poe)
Business activity “iii ea songs
1 A siato government agen sowaci out is sofware ‘rogenmng fra parce program oa lregn + Sulvl posure aut Tented, woud cape evalue he ng nong + Empioment states capt he numb of US enplyeas who wore ‘conact
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All the activities listed in table 1 also have the potential to impact a variety ‘of economic measures These impacts are typically identified throug ‘economic modeling and not through direct data reporting This is because
tither the impacts are difficult to eapture directly or because they are one ‘of many impacts on broad, aggregate measures of economic activity These measures can include, bu are not limited to, consumer and producer
prices, productivity, profits, jo creation, and economic growth
Information Technology Offshoring of services has heen encouraged by information technology (IT) Advances and Business improvements and expected business benefits In particular, recent
Benefits Encourage developments limprovements, infrastructure growth in developing countries, and in the telecommunications industry, such as technology “decreasing data transmission costs, have facilitated the use of offshoring, Fint, according capabilities, such as advances in routing and switching technologies that to several studies, improvements in telecommunications
tenable the distribution of voice and data services, have nereased the reliability and service quality of global voice, data, and Intemet communications.‘ Second, the growth ofthe lobal teleconumunica infrastructure has provided developing countries cost effective
infrastructure options, such 2s wired lane and satellite communication services to comminicate across national borders Third, global data traffic has substantially increased since the early 10s, while the cost of
Offshoring
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‘transporting data has declined, thereby making the offshoring of services that rely on the transmission of data more cost effective."
Other T advances, such as greater standardization of business applications and network protocols have increased system interopersbilty and thus further facilitated offshore sourcing Among others, universal computing standards and protocols, such asthe Transmission Control
ProtocoVnternet Protocol, have enabled businesses to communicate ‘worldwide through the use of e-mail and collaborative tools, such as video conferencing, instant messaging, and shared whiteboard technologies ‘Additionally, the worldwide use ofthe personal computer in conjunction ‘withthe global availabilty ofthe Internet have enabled organizations 10 digitally share and transmit documents over private networks using ‘encryption applications for added security According to a technology research firm's forecast, the use of private networks will continue (0
Increase due to widely available network-based solutions that support Increased access options, security, and new applications.”
In addition to technological factors tat allow services tobe conducted offshore, an organization may choose this option because it expects to realize various benefits According to several business studies, the primary reason organizations engage in offshore sourcing is to reduce costs."
Specifically dve to competitive pressures and increasing customer demand {or innovative products, businesses are using offshoring as a way to reduce their internal costs structures, such as sales, general, and administrative costs The labor cost differential between the United States and developing nations can be significant According to a technology research fim, ‘organizations that offshore accounting and customer service to China ean potentially save 30 to 80 percent in labor costs compared to keeping those ‘Te heat Research Corporation, TP Tepony, SeniceRevenae md OSS pons for Vc Over Packet Sete 000207 (Octet 500),
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‘processes in Tokyo, London, or Chicago” Moreover, the hourly wage rate {or programmers in the U.S can be up to three times that of programmers in India.” For example, a leading e-business software company reportedly
was able o achieve 40-45 percent lower costs per overseas employee ‘compared to hiring equivalent senior developers in the United States."
Other expected benefits of offshoring include access to skilled workers and providers that use disciplined processes and the facilitation of a round-the- clock work schedule For example, according tothe National Association of Software and Service Companies, India’s chamber of commerce forthe TP services and software industy, approximately 140,000 students
graduated in an ITrelated engineering field from degree and diplomat colleges and universities n India during the 2008-2004 academic yea According to one study, a media and publishing company incorporated highty skilled overseas senior developers, architects, and project managers
Into its Web site development project, which reportedly led to an accelerated delivery schedule, reduced costs, and increased customer service." In adaiton, that have been certified at the highest rating in the Capability Maturity Model Integration model created by the Software Engineering Insitute at as of July 14,2004, ofthe 74 worldwide organizations
Camegie Mellon University,” 4 are headquartered outside the United States" This s important because ou work and other best practices research have shown thatthe application of rigorous practices to the acquisition or development of FT systems or the acquisition of IT services
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Improves the likelihood of success." Moreover, offshoring ean faclitate ‘operating on a 21-hour, 7-day schedule across numerous time zones, thereby allowing companies to meet worldwide customer needs For ‘example, according to one study, a financial services unit of a Fortane 60 ‘company has operations in overseas countries that provide around.the- lock in-bound and outbound call centers, accounting services, TT help ‘desks, document storage, and software implementation."
Although offshoring can be berefical, organizations also face risks that are relevant to decisions about whether or not to offshore services, Commonly ted offshore sourcing risks inchude unrealized cost savings due to
‘unforeseen expenses, geopolitical concems, cultural differences, and Infrastructure instability, For example, organizations that engage in ‘offshoring can incur additional coss in conducting overseas business ‘operations in order to for instance, establish high-speed
twlecommunications links, acquire new software licenses, and pay for travel expenses." According to one study, expectations in cost reduction are not always met because outsourcing contracts can be developed with a oor understanding of current costs and litle insight into how costs wail ‘change as the environment changes.” In addition, iis important to ‘consider the destination country’s stability, legal system, and contract enforcement in making offshoring decisions For example, one factor in assessing the legal system is whether adequate intellectual property protections, sich as laws and regulations, are in place to ensure that sensitive company data ae protected from unauthorized disclosure or se, ‘Cultural differences ean also pose a potential risk because business attitudes, including timeliness and punctuality, country accents, and holiday schedules, may be diferent than those inthe United States For ‘example, overseas call center and customer service employees have reportedly sometimes found it aificult wo establish a rapport with ‘consumers due to alack of understanding of language accents, A leading
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‘nancial services company reportedly requires its application managers (0 so through a cultural exchange program designed to foster abetter
understanding of domestic and overseas business norms." Lastly, despite Public utility infrastructure improvements, some countries’ businesses till face infrastructure risks, such as the reliance on enengy, telephone, and networks that may be susceptible to intermittent disruptions and outages Our prior work indicates the importance of organizations considering both ‘the benefits and risks associated with sourcing decisions hefore adopting ‘any particular approach, such as offshoring, into their business strategies and plans”
Services Offshoring Affects Various ‘Types of Business
Functions and Occupations
Business functions and service occupations associated with offshoring, combined with other distinguishing process features, provide addtional ‘detail on offshoring of services Business functions associated with
offshoring tend to be those that are digitized, capable of being performed at ‘distance, andl whose product delivery can be managed using relatively ‘new forms of advanced telecommunications Examples ofthese business Functions include software programing and design, call center ‘operations, accounting and payroll operations, medical records
‘transcription, paralegal services, and software research and testing
‘According to some studies, the criteria for successful offshoring of services include business functions that involve 1) a high information content that ‘can be standardized and digitized, 2) Job processes that can be separated ‘and documented step-by-step, and 3) no face-to-face customer service requirements though occupations associated with services offshoring ‘were predominantly inthe If sector, T-erabled jobs ae also vulnerable to offshoring and span several occupational classifications, These categories include business and financial operations, office and administrative ‘suppor, medica transcriptionists, paralegals and legal assistants, and architecture and engineering In comparing services offshoring to the parallel offshoring dynamic in the manufacturing sector, one recent study ‘states that services offshoring is structurally simpler in terms of resources
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"GAO, Daeg Outsourcing, Posto Results Reporte, but Analyses Could Be Srouphoned GAO 420 Wangion DC Mar 2 202),
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‘and space and equipment requirements, The authors conclude that offshoring of services may therefore proceed more quickly
US goverument data provide some insight into the trends in offshoring of
Federal Statistics services by the private sector, but they do not provide a complete picture of
Provide Limited Insight hc pusines wansnctions thatthe tom offshoring ean encompass, Ie
into Offshoring Trends _ parca, thes do not identify US imports of sevice previowsiy Produced y US employecs Siar federal recaremert dat on Purchases of and other services provide some alg, but it can be Uitielrto determine where such work I perfarned Tic avalabe data India that te tend inoshoring show ite changeover te past a
Services Trade Data Cover US goverment data provide some night int the ends notre eran soaring of services bythe private sector, but tey do not provide a An mủ OifShoring — mbt ptr of sory ote haies ansactonsthat he em offshoring can encompass The Department of Commerce's Bure of
economic Analysis (BEA) collects data on trade (imports and exports) in private services between the U.S, and foreign entities ® BEA includes in “Total Private Services” trade five subcategories: travel, passenger fares, ‘other transportation eg, freight and shipping), royalties and license fees, and “Other Private Services." The category “Other Private Services" {includes many ofthe services that are generally associated with offshoring Imports in this eategory have grown from $23.9 billion in 1902 to $68.4 Dillion in 2002." These imports represent about a third of 2002 services| imports
‘The category "Other Private Services” s further divided into six subcategories: education; financial services; insurance services;
‘Real tat an tan Economie, vent of Cao Bere (Pal 205)
BBA refersto thse ents as “persons” which can nce ihr or
ceemeatev D.riel đưa tục pte sxaly Soe append ifr more information oa ‘he dae
Serie rae data for 205 ae aval, ut rns at an agregat evel otal pivate sericea seategonce sich a er prvie sre) Sine data a COUNTY ee
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‘elecommunications; business, professional and technical services; and other services Services eaptured in the subcategory of “Business, Professional, and Technical" (BPT) services are those that are generally -associated with offshoring, such as accounting and bookkeeping and ‘computer prograznming services BEA publishes detailed data annually for ‘more than 20 types of BPT services In 2002, total BPT services accounted
{for $37.5 billion, or 84 percent of “Other Private Services.” (See fig 4.)
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‘The Department of Commerce's trade data show that imports of services associated with ofshoring are growing." For example, US, imports of BPT ‘services grew from $21.2 bilin in 1997 to about $97.5 billion in 2002, aa
increase of 769 percent US exports of BPT services increased 48.6 percent during this same period, Iti important to note that these import data show that U.S entities have heen purchasing these services offshore, ‘but they do not indicate whether these entities had previously been urehasing these services from domestic US sources
Im addition, BEA data differentiate between affliated and unaffiliated trade, where affliated trade occurs between foreign afliates and their ‘parent companies In 2002, affliated trade accounted for 826 billion, or 7L percent ofall BPT services imports Data for affliated trade in BPT
services are not broken down by country of BPT services discussed belove: Data for unafilated trade do provide this or by the particular subcategories ‘detall and show that US imports of BPT unaffiliated services grew from ‘$6.4 billion in 1997 to $10.7 billion in 2002, an increase of 67.2 percent
‘This partial ist of subcategories under BPT services include the following, offshored services:
+ accounting audting and bookkeeping: + architectural, engineering, and other technica; + computer and data processing:
+ database and other information; + lạnh
+ management, consulting, and public relations and + research, development, nd testing
Certain unaffiliated BT sericesimmports—mest notably accounting and auditing services; computer and data processing services and research,
development and testing services—have grown rapidly in recent years For ‘example, imports of computer and data processing services have grown,
baled dion US services ae covering BS wi be reese in OCaber OE
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‘steal from 8635 milion in 1997 to 81.5 ilion in 2000 and declining to $1.1 billion in 2002 for an overall increase of 68.2 percent between 1907 and 2002 The increase in 2000 may be due in par to the Year 2000 date change crisis U.S firms, in response toa tight supply of computer programmers in the late 1900s, turned to companies principally located in India to make the code fixes needed to avert problems with computer systems when the year 2000 arrived (See fig 5)
—— Figure : Growth In Unatliated U.S Import of Selected Components of Busines, Profeslonal, and Techleal Services, 1982-2002, nrg tn an agg ree ———
‘yas tannin! ‘Bek one net eves pe roma ha Seated we tars Wes tat posta charges nes eg Hebllbraose Although much attention is currently focused on developing countries that are increasingly exporting services tothe United States, Canal, and the ‘United Kingdom, nevertheless these three countries remain the leading ‘exporters of services, both for Total Private Services and the subcategory ‘unaffilated BPT services In 2002, Canada and the United Kingdom
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accounted for 42.6 percent of allimpors of wiaffliated BPT series tothe United States, and they were also major destinations for US exports of these services (See fig 6.) Figure 6: US, Unatfilsied imports and Exports of Busines, Professional, and Techical Savlcs, by Country of Origin, 2002 US exports ot busines, profesional, ond technleat Us imports of busines, protsslona and tchnial saris, 2002 services 2002 1.6% 20% Hong Kong Republic of Korea 7) 1.9% 25% i 28% Cina 3.4% Ba 38% Moco 3.9% France ‘cermany span “Wal exports = $28.8 bill
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‘available by country In some BPT services’ subcategories, imports from India have increased In particular, imports of India’s computer and data processing services rose from $8.0 million in 1987 to $139.0 milion in 2000, but then declined to $76.0 million in 2002, for an overall increase of 850,
percent from 1997 to 2002." (See i, 7.)
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‘tas ether to ara or the aa ou even Uv operation of nia ns a terete required tobe uppressed "inn atonal Association f Software and Service Companies report ugerdolac ‘ale for nals compte a daa proces expos tothe United Sates a omar tO Indian US hoe frm ini) bese aden he vale eee api ‘ed Stare it ieroimalsemiees tannins
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Figure 7: US Unatilited import trom Indi of Selected niness, Professional, and Techical Services
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ee i tr Wa et a nti ram nore 6, i) tice BEA oe mat prose pce sass tac of ca
Besides importing services provided offshore, the United States is also a supplier of services tothe rest ofthe world, These US, services exports Include some services that can be characterized as “inshoring." While we
did not examine US services exports in detail, some of these exports ‘would contribute to domestic U.S employment In addition, the United States maintains a trade surplus in private services and most subcategories of services trade BEA estimates that in 2002, the United States exported, £2795 billion and imported $206.2 bilion in Total Private Services, for a surplus of $74.3 billion (down from a high of $87.9 billion in 1907) The average annual growth rate for US, Total Private Services from 1992 to 2002 was 5.6 percent for exports and 7.3 percent for impors (See fig 8.)
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ot Vale renal We dd ot aut onal changes nas 0.9 Pn) ‘Shes BEA done no pocca on eens abd ea co
See appendix Il foratable on US imports and exports by country of trade in business, professional, and technical services and for further details on ‘the limitations of hat data for analysis of offshoring,
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US Foreign Investment, Captures Other Aspects of
Offshoring TES, government data on direct investment abroad by U.S, multinational companies producing services abroad provide information on aspects of offshoring, such as supplier countries parent companies and afliates” U.S direct investment in developing and the distribution of labor between
‘countries that are frequently cited as suppliers of offshore services (eg, Indi, the Philippines, and Malaysia) is relatively small—about 4 percent or Jess of total US direct investments in each case US, direct investment in these countries tends to be concentrated in the manufacturing sector and, toa more limited extent, in certain services industries associated with offshoring, such as the professional, selentific, and technical industry, and the information industry" However, the majority of U.S, direct investment, 's concentrated in other developed countries For example, 60 percent of| US direct investment abroad in 2002 was accounted for by the European Union, Canada, and Japan Table 2 lists selected developed and developing countries and ther share of total U.S, direct investment abroad in 2002 (the most recent year available), as well as these countries’ share of investment in different industries.” See appendix IV for atable on U.S foreign direct Investment and further details of te limitations of that data for analysis of offshoring
When seasng Yorig vevend we ze orga neste o ave alasing ‘omer sakes foreign aia Set eaten bond) desi ax onene> ‘tat ean 10 percent af he etn sects na ney uses ra uae
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US fore alates tas as nautactuing se some services intel projncdoa ‘roses tn in pre soe serves are wal ely export Ds ‘ecupatins of enpees of OS trig alse are ct aaa on De
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“Table 2: Selected Destinations for U5 Forelgn Direct investment (FD) Abroad: Total by Country, 202; Share of Total DI,2002; and Percentage Change trom 1808
‘Us FoI2002 {olilons US Shereoftota! _Peroantage “ollars)_ U.S FOL 2002 change 1095 2002 at countion ‘Srse1 100% 2% Devolopedcounties Ewepeen Uneo 05) 700 we 2 Unie Kingdom 258 1675 1= Tang, = 274 6 — 758 mm 28 asa Shospo ci 8 432 03 ia 19 ost 36 sạn 3 Heng Kong 36 235 a Developing counties Mai = am % Chin Maia 16 s 088 056 a 3 Pot 5 031 rc Pappas món + + oz 026 s= 16 South ea nga 2 2 583 016 4 2 Coser Ropible fl TT] ”= Rusa r 206 =
et: na ae font Brn fore Ara Sif are Ben Noein
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Data on US multinational companies’ operations also provide information ‘on the distribution of labor and asvets between the U.S-tased parent ‘companies and their foreigh-based affiliates These data show that the share of these companies’ employment inthe United States has declined somewhat over the past decade, although about 71 percent of their ‘employment is stil based in the United States aad only 10 percent of thelr ‘overseas employment is located in developing countries, (See table 3) However, according to BEA, the labor force in low-wage countries is ‘rowing a a slightly faster rate (7 percent per year) than the labor force in high-wage countries (8 percent) from 1991 to 200 Similarly, the great ‘majority of U.S companies’ assets are located in the United States (70
Trang 33(Contnved From Previous Page) ‘Eimployinet in ousands) NT ae BỌ 3H 1T ~~ a
Nome: Cover war sctedtecie ya ae srs ofS dct nasa ey are tensed uppins onre sos cnn in Snveuedcoures re ose ‘Ss: cass dae peor wcenorea by a Vet Br, Cero coures ose Bice Stee Svcs econ hh periment earner es
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Data on operations of majority-owned foreign affiliates of US ruitinational companies indicate that they are primarily investing in ‘overseas markets to produce services for those markets, rather tan ‘supplying services back to the United States As figure shows, except for afew countries (eg, Israel, Bermuda, and Barbados) less than 15 percent ‘of the sales of US companies’ majority owned-foreign affiliates’ services are exported to the United States Rather, most of the services sales take
place inthe foreign market in which the affiliate operates orn another foreign market According to BEA, the avallable data on U.S multinational companies’ operations do not show whether multinational companies’ new Investments are replacing their US-based operations oF substituting for ‘exports to foreign markets that would have been supplied by their US based operations However, the data curently available do not show any ‘significant shifts or sizable investment in developing countries that may be tused as a platform for offshoring As mote recent data become availabe,
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‘Figure 9: Share of U5 Mjorty-Owned Nonbank Foreign Affliate Total Sales of ‘Services Exported tothe Uniod States, 2001
——
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(te Ufed Se Seas al sne Oe ws ata ks acon vế"
Recent Trends in Federal Government Offshoring Show Mixed Results, While Comprehensive State Data Do Not Exist
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‘services purchased, and information on principal place of performance” and country of manufacture However, FPDS has limitations and may ‘understate the total amount ofTT and other services that are offshored by the federal government For example, some agencies are not required to report their procurement activities to FPDS,* and the system exchudes ‘detailed information on contract actions of $25,000 or less and purchase ‘card data Moreover, as we have previously reported, because FPDS relies ‘on federal agencies for procurement information, these data are only 2 reliable, accurate, and complete as the information provided by the agencies, and not all agency data are reliable.” In particular, the principal place of performance for the service can be difficult to determine,
‘especially when work is performed at multiple contractor and/or
subcontractor locations According to a GSA official responsible for this system, agencies may report company billing or home office addresses if the place of performance cannot be determined
Although a reliable total amount of the federal governments offshoring ‘Activites isnot availabe from FPDS, the FPDS data over the last 5 years is ‘sufficiently complete and consistent tobe used to ilustrate trends As shovenin figure 10, from fiscal years 1999 through 2003, the total dolar value of al services contracting actions increased about 40 percent ‘Moreover, during the same period, the total dollar value of al services ‘contracts with performance or manufacture locations in foreign countries “spl place of perfomance fers ot state Treign coin: or governed instalation where the service wil be probed if oe tan neocon edhe teeny incr lo repr the oan ring the ee dolar re ofthe cent ‘There no atc the analy of te persona Who perfor goverent Service! ‘contac workin the Sand otsoreloeston:
‘The FPDS conan procurement da fom approximately G0 executive branch agencies ‘The Feder Avationhsnatalon te US Pesta Serve the gate ard jel ‘anehes and several other govenanent emis ae vege ore et ‘procure cso FOS
GAO, Rady of Patera Procerment Data, GAD-4286R (Waseem, DC Dee 200), Our work and that of afencynapectrm general ket a arya ne ror iề [Fes are de to dựa entry masakes by agency contracting personel Welae
eomspened eps help irove da reat nthe planed acces to FEDS, ead notindependenty very he information nthe database but wed pc) chetronc nef reir fide Porenenpl, we tented for competenens cheng xey ‘els fring dta and ound sg ue eases wee | prente ess
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Increased by about 64 percent,” from 86.4 bilion in fiscal year 1909 billion in fiscal year 2008 However, the percentage of total dollars to $10.6, associated with foreign performance or manufacture locations relative to the total dollar value ofall services contract performed in allocations (US and foreign) remained relatively stable, witha range of5 percent to 7 percent over te Syear period Similarly, inthe ease of T services alone, the percentage of total dollars associated with foreign performance or
‘manufacture locations was relatively stable throughout the period, ranging from Ito 3 percent of the total value of IT services contracts In addition, there were large dollar value fluctuations (both increases and decreases) from year to year
‘5h gia percentage erase contac Gala wih peranants or amare — toeons in foreign cuneies occured teemec Real eas 290 ar 200 (approsamatly Aperce cree) Mowe of thinerese an bested tothe US war on rors, ‘ine conten such as reg an Alans aecounte for ve half oe ease, Oe ‘Scuries tht showed a re increas nthe oie mae senses contract rn Oct ‘ht September 200) were Baran Gena aly Kawa Ba Saat Ara nd
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Figur 10: Change in Doar Value ofthe Federal Governments Procurement of T tnd Otter Service by Performance Location between Fiscal Years 1900-2003
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‘With respect to state governments’ procurement of services from offshore sources, comprehensive data depicting the extent to which offshoring is used do not exist, However, there are anecdotal accounts of the use of offshoring by state governments, For example, in response toa legislative request, one state asked alts cabinet agencies, statewide elected officals, and institutions of higher education whether they had knowledge of any contracts awarded by their respective organizations in which all or part of the work was being performed overseas Responses showed that 29 of 42 ‘organizations reported knowledge of some contract awards that involved ‘overseas work, such as contracs for software development performed by an Indian subsidiary ofa USS firm Nevertheless, organizations
representing state executive and legislative officials, chief information officers, and procurement officials told us that they had no comprehensive data, studies, or research that indicated hows much state govemments were using ofishore sourcing in procuring IT and other services
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estes atSany Pe se mage ene Eve Offshoring
sployment Projections BLS uses projections of the labor force and economic growth, as well as expert judgments about future trends in Afferent occupations to develop an occupational projection model Because itis hased on interviews with employers, MLS provides a vehicle for collecting iret, timely data on offshoring Due to the MLSs coverage limitations, however, its data should be viewed as an imperfect indicator of offshoring-eaused job losses MLS identifies only a portion of total lavofts because it doesnot inctide small establishments oF layoffs involving fewer than 50 employees For example, n 2003, the survey covered 46 percent of allUS establishments and 56.7 percent of all U.S workers In addition, some employers may be unwilling to provide information when
Interviewed about ressons for layolts For the frst quarter of 2004, 7.2 percent of firms with mass layoff events refused to participate in the ‘survey Pre-2004 MLS data had adeltional limitations regarding reasons for leyoffS According to BLS officals, in surveys prior to 2004, offshoring may have been involved in some instanees when reasons such a8 “financial, ‘lificuliy,” “business ownership change,” or “reorganization within the ‘company’ were provided by MLS respondents,
‘Bven with these limitations, MIS data provide some information that is ‘Useful for understanding services offshoring For example the data show ‘that “overseas relocation” was given as a reason for mass layo job loss for small fraction of workers laid off during the 1996-2008 period—of 5 inion layofs reported in the 2003 MIS, 13,000 (0.9 percent) were
reportedly dv to overseas relocation The data also indicate that almost all layotfs (about 96 percent) occurred in the manufacturing sector The data also indicate that layoffs associated with “oversess relocation" reported by ‘MIS peaked in 2002 (after ising sharply in 2001) but declined in 2003, Preliminary data forthe first quarter of 2004 show that of a total of 289,361 separations, 4,633 (or 1.9 percent) were attributable to offshoring
Domestic work relocation accounted for 9,985 separations (4.2 percent) ‘pe a recon ovina te period 302012 wer reenedin Ferny 2 and provide nated 2019 erplopmen ves or ove W oceans
Trang 39Current Employment Statistics Show Overall Trends in Offshoring-Associated Industries Job losses attributable to any specific causes, they can provide some “Although general employment data such as CBS are not designed to isolate ‘contextual information relevant to understanding Indicate that overall employment, including industries associated with job losses CES data
offshoring, began to decline after peaking in 2001, Figure 11 shows,
‘percentage changes in employment between March 2001 (the beginning of| ‘the recession) and June 2004 for selected industries associated with offshoring ® Job declines after March 2001 varied widely among industries associated with offshoring and generally were more severe than declines in the overall privatesector economy For example, the average annual rate of ‘decline over this period was 57 percent in computer systems design and
related services industries and 7.9 percent for accounting and
bookkeeping, while the decline in the business support services was about 112 pereent During this period, total nonfarm employment increased by 0.2
percent
“ie Nia geo rk Ran eT a ceson bon he sled teas inten sed may on Dita Eeoomy 2009 ty {he US Deparaent of Cuore ‘Qusourcg Fier Coe for Weal Exe at Uban Beonorn Unionty of Calor, and Asbo Bardhan and Cyn Kal “The New Wave of
‘ankle Pa 200)
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ses ae 204 ergart ne nnn Patan sree Te pert egy a8 Noe 3 masreny onary ts bane os cen ae ns (CES data show recent signs of improvement in employment After falling in ‘each ofthe fist cree quarters of 2005, total nonfarm emplosment edged up Inthe fourth quarter (See table 4.) From the last quarter of 213 unt the second quarter of 2904, the overall economy (209 percent increase) By comparison, selected industries associated gained about 11 rilion job's
‘with offshoring saw deeper job loses Jot loss for these industries began to grarlually ease in the srcond quarter and slower, more volatile recovery £205 Overall employment in the selected industries has increased by about 21.000 jobs between the second quarter of 2003 and the first quarter Sf 20 (a0) percent increase) Ina few of these industries, job losses spear to have reversed The employment level in the architectural engineering services industry began to nse inthe second half of 2003 Other and
Industries, such as legal services, computer systems design and related ‘sersces, business support services and Intemet service providers, search, ips and daa processing experienced job guns inte second quarter