Saturday, June 23, 2012

Outsourcing and offshoring

One of Obama's favorite attacks on Mitt Romney is that Romney "outsourced" jobs while he was in the private equity business at Bain Capital. That may be true, and in fact, it's pretty damned likely that it's true. But let's not confuse "outsourcing" with "offshoring".

If you decide to hire a plumber to fix your sink instead of fixing it yourself, you've outsourced that job. If a company reassigns a business function to an outside contractor, that's also outsourcing. It doesn't matter whether that outside contractor operates inside our outside the United States, it's outsourcing. If that contractor does operate outside the US, then it's offshoring, as well as outsourcing.

Let's take the example of two fictitious banks...Security First Trust, and Fred's Bank. Both banks have decided they can save money by focusing on their core competencies - banking - and letting someone else handle the IT business.

Fred's Bank is a regional bank headquartered in the Southeast United States. They own a single data center in Columbia, South Carolina supporting all of their operations but have entered into an agreement with Joe's Global Systems under which all of Fred's IT employees will transfer to Joe, and Joe will operate Fred's Columbia data center for a fee. Fred has outsourced his IT business.

Security First Trust is a global concern with subsidiaries all over the world, and they have a major data center in Mumbai, India. By consolidating all their IT functions in Mumbai, they can eliminate the bulk of their US-based IT staff and move all the US IT services to India. They've offshored their IT business, but because they own the Mumbai data center, they haven't really outsourced it.

There's a difference between "outsourcing" and "offshoring", and when Obama and his minions bring up the "outsourcing" charge, someone needs to make them explain exactly what they mean.