[This article has been modified to correct an error. Selena incorrectly listed Accenture as having moved its headquarters overseas, when it in fact has always been headquartered overseas.]
Many American companies have moved their headquarters overseas in an attempt to save money by avoiding various U.S. taxes. Tool and machinery specialist Ingersoll-Rand
These kinds of moves may smell fishy, but there is another side of the issue to consider: If a company is truly saving money by moving, and is thereby increasing shareholder wealth, is the move such a bad thing? Is it even, given a company's presumed corporate governance mandate to do right by investors, sometimes the right thing to do?
That question can be hard to answer, but companies thinking of relocating should think hard before doing so, and should do more research than other expatriate firms seem to have done.
Costs along with benefits
A recent CNN/Money article pointed out some unexpected costs of offshoring, citing a Hewitt Associates
Here are some more Hewitt findings:
- About 45% of the companies surveyed have overseas operations, and 71% of the remaining firms plan to move some jobs abroad by 2005.
- Less than half of the firms analyzed the tax environments of the nations they considered moving to. Just three-fourths measured the impact on supply chain costs, and only 34% assessed the cost of plant or office shutdowns. "People-related expenses, including training needs and cultural issues" are also "not sufficiently examined."
- While 88% of firms evaluated labor costs and 79% analyzed potential returns on investment, less than 40% analyzed the local economic/political climate. Just 32% looked at "the impact of employee/union representation considerations at home or in the location to which they will be moving operations." Also noted: "Cultural barriers, labor pool quality, and backlash from home-country employees were also cited as key issues."
- The percentage of jobs being moved overseas is expected to just about double in the next three years, "with an average of 13% of jobs at each company currently relocated and an additional 12% being considered for relocation within the next three years."
- Finance companies favored the following nations for outsourcing: India (60%), China (36%), Mexico (32%), Canada (15%), and Ireland (14%). "The areas of greatest global sourcing expansion over the next three years will be Eastern Europe and Southeast Asia."
- The job area most frequently globally outsourced was information technology (67%), followed by customer relations (49%), manufacturing (42%), and supply chain (41%). In the next three years, expect to see more outsourcing of finance and accounting and human resources.
- Brand image and employee morale get both boosted and cut. Some 23% of respondents said that their global sourcing efforts had a positive impact on their brand, with 11% indicating a negative impact. About half of the companies reported no change in morale in a new sourcing location, while half also reported no change in the home country. Some 19% and 30%, respectively, reported negative changes in morale in the new and home countries. (I wonder how these firms are measuring morale, though -- I can imagine many employees not revealing to their employers how demoralized they are.)
(Interestingly, even Hewitt Associates has answered the call of offshore sirens, as it plans to hire several hundred Indians in New Delhi to answer customer calls.)
Is relocation really so bad?
In Fortune magazine, David Kirkpatrick recently detailed the level of anger among Americans at jobs being moved overseas, and also argued that it was overblown. As one example, he cited the governor of Indiana canceling a $15 million contract with an Indian company to process state unemployment claims, when the next-highest bidder, an American firm, was asking for $23 million to do the same job. He concluded that "When you're willing to pay a 50% premium -- well, that's real anger."
Then he pointed out that global outsourcing can bring benefits and make economic sense: "A recent study by the McKinsey Global Institute, an economics think tank, calculated that for every dollar spent on a business process that is outsourced to India, the U.S. economy gains at least $1.12. The largest chunk -- 58 cents -- goes back to the original employer. But there are many other benefits. For instance, 30% of Indian offshoring is performed by U.S. companies, so money returns home as earnings. Additional benefits accrue from freeing U.S. workers to do other tasks. A good example is the much-fretted-over idea of sending X-rays to India for analysis. Diana Farrell, the institute's director, says doing so reduces the cost of health care and can free up money for medical innovation."
A Bloomberg News article noted that "Delta Air Lines
Global trade has resulted in a loss of 2 million American jobs over the past 20 years, but has added 35 million new jobs in just the past decade. Often, what gets outsourced are jobs that would be eliminated eventually anyway, due to automation or other factors.
Fools on outsourcing
This controversial topic is not only being discussed in Congress and by presidential candidates and the media -- it's also being examined in Fooldom. For example:
- On our Fool discussion boards, RiverCityFool pointed out an article in The New York Times that described a customer call center in Bangalore: "All the computers are from Compaq. The basic software is from Microsoft
(NASDAQ:MSFT). The phones are from Lucent (NYSE:LU). The air-conditioning is by Carrier, and even the bottled water is by Coca-Cola (NYSE:KO)...."
- In another discussion, SeattlePioneer noted, "One of the risks of becoming uncompetitive is that you may lose control of entire industries. Britain was the world leader in producing iron, and the United States began offering effective competition to Britain, but then developed steelmaking on a large scale and became the world leader itself. The United States lost electronic assembly work to Japan, and then Japan took away the entire home electronics industry from the United States."
- Fool Rich Smith wrote A Passage to India, examining global outsourcing trends, particularly the outsourcing of legal work.
What do you think? Share your thoughts on our discussion boards -- or just drop in to see what others are saying. We're offering a free trial of our community discussion boards.
Selena Maranjian owns shares of Microsoft. Her job has not yet been outsourced to India -- yet . For more about Selena, view her bio and her profile . You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.