McKinsey champions offshoring "value add"

A recent McKinsey Institute report tackles head-on the question of the value of outsourcing to the health of the U.S. economy. The public debate over the loss of jobs "is misplaced," the authors of the report state, "because the problem is neither trade itself nor globalization more broadly, but rather the question of how the country should allocate the benefits of global trade."

The report, titled Exploding the Myths of Offshoring, stresses the challenges are significant—particularly around providing support for manufacturing workers—but the upside is too great and too critical to ignore. "For every dollar of corporate spending outsourced to India," for example, "the U.S. economy captures more than three-quarters of the benefit and gains as much as $1.14 in return." This savings gets translated into lower prices to consumers and bigger investment in new technologies and markets geared for growth—the real underlying issue we should be focusing on, the authors stress.

"Experience suggests that these [new] jobs will on average have higher value-add, as auto assemblers did when they replaced carriage makers and factory workers when they replaced farmers," the authors state.

The report cites research by the Institute for International Economics in Washington, which found "the global outsourcing of components has reduced the cost of IT hardware by up to 30 percent since 1995, boosting demand and adding as much as $230 billion to the U.S. GDP [gross domestic product] in that period." The report also cites the shift that Intel and Texas Instruments were forced to make in abandoning the DRAM market due to Japanese competition in the 1990s, which prompted them to retool and invest more heavily in the production of microprocessors and digital signal processors, and ride the next growth wave in semiconductors to greater profitability.

The key message: policy makers need to focus on assisting the transition, not blocking it. For example, companies also could use as little as 4 percent or 5 percent of the savings from outsourcing to purchase workers' insurance against job and wage losses incurred as a result of offshoring.