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Does Obama want the US to be the new India?
Comment: Presidential candidates battle it out on outsourcing

By Steve Boyle

Published: Tuesday 02 September 2008

US presidential candidate Barack Obama has vowed to discourage outsourcing, while John McCain supports the status quo. Who is more realistic? Steve Boyle offers his view.

For more than 35 years, the banking industry has used outsourcing to reduce its costs and improve customer service. Initially starting with IT processes, business process outsourcing (BPO) soon proved successful and has accounted for the majority of large-scale bank outsourcing in the past 10 years.

BPO requires outsourcing an entire business function, not just certain aspects. Good BPO candidates are key back-office processes such as items processing, call centres and even entire HR departments, such as the Bank of America's deal with Exult to run its human resources department.

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Locations such as China, Hungary, India, Israel, Russia and Singapore have all been targeted for outsourcing, with foreign employees helping to make many US corporations billions of dollars per year.

And it is a huge business. By 2015, Forrester Research estimates that as many as 3.3 million US jobs and $136bn in wages could be moved to such countries as China, India and Russia.

None of this has gone unnoticed by the two US presidential candidates - Barack Obama and John McCain. That is a lot of jobs and, of course, a lot of potential voters.

Obama has been clear about his take on the issue, highlighting the damage done to US workers by outsourcing. His solution? Protectionist tax policies and the renegotiation of trade agreements.

He recently told an audience in Unity, New Hampshire: "We can keep giving tax breaks to companies that ship jobs overseas, or we can give tax benefits to companies that invest right here in New Hampshire."

That is some tough talking. It seems to be based on the idea the US is losing jobs because it is faced with lower wages overseas, often supported by attractive tax incentives aimed at the large corporations responsible for those huge outsourcing projects.

But is this really the case?

Not according to John McCain. He is far from dogmatic about free trade and outsourcing, acknowledging that globalisation has changed the world forever and made it a more competitive place. His solution is to make US workers more competitive through education and fostering innovation. He suggests outsourcing and globalisation are good for the US economy because they force it to be more competitive.

Experience in the banking sector favours the McCain analysis.

The banks are not outsourcing purely to take advantage of lower wages and to enable them to collect attractive tax incentives. It is more complex than that. A recent survey of banks with outsourced data centres confirmed what many have known for some time - that improvements in performance and a higher quality of service from outsourced centres are more important than cost savings.

And these improvements in operational performance do not happen accidentally. Outsourcing locations such as China, India and Russia have something the US and other western economies have begun to lose - a motivated workforce. Employees often have a college education and are motivated through progressive career path opportunities and highly charged performance-related pay.

Contrast this with prospective employees in the US. They want glamour - and data centres are just not glamorous. The results are poor motivation, a poor quality work force and high staff turnover. All of which translates into poor performance and higher costs for the bank.

Politics and business do not always mix. What plays well to the electorate may be at odds with economic reality. No matter how much Obama would like it to be otherwise, globalisation is a power greater even than the President of the United States. Restructuring tax incentives and trade pressure is not going to halt the process of outsourcing.

Obama could not turn the US into a new India, even if he wanted to. McCain seems to appreciate this.

It is unlikely outsourcing is going to decide the US election one way or the other. And just as well. Even the next US President - whether it's Obama or McCain - cannot hope to become a totally immovable object. And outsourcing is most definitely an irresistible force.

Steve Boyle is chief executive of Sutherland Consulting