Cheap Labor at America's Expense

Insight On the NewsPosted May 19, 2003 By Kelly Patricia O Meara

The outsourcing of U.S. jobs via companies such as Outsource Partners International to Bombay, India, does little to revive the sputtering U.S. economy.

"Hey, it's good work if you can get it," says New Jersey state Sen. Shirley Turner about the outsourcing of the Garden State's welfare-processing contract. But neither New Jerseyans nor any other Americans are getting the work, so she has introduced legislation that she believes will keep those jobs at home.

Turner, a Democrat, filed her proposal after learning that the New Jersey Department of Human Services had contracted with an Arizona-based company to service paperwork for the state's welfare recipients at the "cost-saving" price of $326,000 a month. The Arizona company had established a call center in Green Bay, Wis., but once the New Jersey contract came through, the call center was relocated to Bombay, India.

"It seems like a race to the bottom," says Turner. "All these jobs are leaving the state and the country, and our unemployment rate continues to climb. We're in a recession and you have to wonder where it ends. The point of the contract was to save money - assuming that these people overseas can do it cheaper and more efficiently. But this is a ruse because we're supposed to help provide jobs to these [unemployed] people here."

The irate Turner continues, "Neither the people in India who have the jobs, nor the people who are unemployed here in the U.S., are giving anything back in the way of taxes or buying and consuming U.S. goods and services, which is what stimulates our economy. By outsourcing these jobs to other countries we're helping the poor remain poor in this country. We have a $5 billion deficit in New Jersey and outsourcing these jobs to foreign countries only adds to the burden that the state must pick up when our citizens need [welfare] services. When people lose their jobs, and their unemployment benefits run out, the state must step in and take up the burden to provide the services. That's not cost savings and it really just snowballs when jobs are taken offshore."

Turner's bill has made it through the New Jersey Senate but has run into stiff opposition in the General Assembly from lobbies representing companies taking advantage of the cheap offshore labor. And no wonder: Outsourcing to countries that exploit cheap labor appears to be the corporate wave of the future. Kishore Mirchandani, president of Outsource Partners International, a U.S.-based company specializing in outsourcing finance and accounting services, tells Insight, "There are a lot of companies in India handling the accounting and finance of major corporations. General Electric, American Express and Citibank all do business in India."

Mirchandani's company, although U.S.-based, handles the tax-return preparation for the business clients of the accounting firm Ernst & Young at Outsource Partners' facilities in India. "We get business from CPA [certified public accountant] firms in the U.S.," explains Mirchandani, "who then contract with us to get the processing of returns in India. We have about 700 people working for us between India and the United States. A lot of people have raised concerns about the privacy of information, but we have taken steps to ensure that all information is secure."

According to Mirchandani, "the cost savings are tremendous." He says, "The cost to process these returns is anywhere between $100 to $200, whereas in the U.S. the processing would cost $400 to $600. If they outsource it to us the CPA firm saves $300. We hire accountants at about 25 percent of what it costs here in the U.S. A lot of major corporations have already done the outsourcing on their own and our company is an alternative to the companies who don't want to handle the outsourcing directly. General Electric has 12,000 people in its office in India to do its processing of financial information, and these are mostly Indians working there."

To get a better idea of just how many corporations are exporting jobs to take advantage of cheap labor overseas, this magazine followed up on those Mirchandani leads. General Electric did not return Insight's calls. Ken Kerrigan, a spokesman for Ernst & Young, confirmed that his company outsources tax-return processing to India. "Ernst & Young," explained Kerrigan, has "an office in India and we send [tax] information through our networks so there is no physical paper that goes there. The people who work in our offices in India are locals but are trained by Americans who know tax law."

According to Kerrigan, just "2 percent of all U.S. tax returns done by Ernst & Young are processed in India. It's a tiny percentage that allows us to work faster and better. The labor is cheaper, but that's not an issue for anybody. For us it's more of a time factor."

Tim Connolly, a spokesman for the accounting firm KPMG, tells Insight that "we are not currently outsourcing returns to India. However, if we did proceed, we would ensure that it was a joint decision and that each client was consulted beforehand. Any firm involved in tax-preparation business is continuously seeking to provide the highest-quality service in the most efficient manner. As technological advances progress, we're considering all options to serving our clients."

Rob Black, a spokesman for the International Brotherhood of Teamsters, sees the current tidal wave of American jobs floating boats to foreign shores much in the same way as state Sen. Turner. "Essentially what you've got," says Black, "is a race to the bottom for the cheapest wages." Black explains: "First we saw corporations in the Northeast move to the Southern states where there were no strong unions. Then, in the 1990s with the unfair trade deals like the North American Free Trade Agreement [NAFTA], we saw corporations move to Mexico. Now these companies have been in Mexico awhile and the workers' standards are rising a little so, sure enough, the jobs are being moved to Guatemala, China and India. So really, these corporations are just chasing the globe for the cheapest labor rates possible."

According to the Teamsters spokesman, "The people with big business that are on the side of unfair trade love to talk about the markets this allegedly will open for U.S. products, but the fact is workers in Bangladesh aren't buying our personal computers and video games. And any cost benefits that are gained by shipping jobs overseas clearly are going to the top executives, not the consumers. It's hard to accept salary reductions and layoffs when the executives of these corporations aren't feeling the same pain. Slash and burn may be the overnight cure for shareholders' woes, but if you invest in workers you will build a stable citizenry that will buy your products."

The U.S. Department of Labor released figures for the last week in April that revealed U.S. employers had cut jobs for the third straight month. Unemployment rose to 6 percent, meaning that 448,000 people filed new claims for unemployment benefits the last week of April, which was only slightly down from the previous week's 461,000 claims. This is not good, even without outsourcing American jobs to India and elsewhere.

But, Insight found, trying to get solid figures about the level of outsourcing is about as difficult as finding Iraq's weapons of mass destruction. Corporations such as American Express, rather than identify the number of jobs that are being handled outside the United States either by Americans or foreigners, tells Insight that "we've built flexibility into our business model to better withstand external fluctuations in the marketplace. This includes outsourcing some work." Such as the IBM deal.

According to Susan Korchak, a spokeswoman for American Express, the "IBM deal" is a $4 billion, seven-year contract awarded to IBM to provide American Express with utilitylike access to its vast computing resources. Whether IBM is outsourcing any of those services to foreign countries is "unknown" to Korchak. However, IBM has acknowledged having such service centers in India, Mexico, Argentina, Brazil, Venezuela, Canada and China.

According to market-research firms Gartner Inc. and Forrester Research, as reported by Ed Frauenheim of CNET News, "More than 300 of the Fortune 500 firms do business with Indian information-technology-services companies." And it is predicted that "by 2004, more than 80 percent of U.S. companies will have considered using offshore IT services." Furthermore, Frauenheim reports that according to Forrester Research, "by 2015, some 3.3 million U.S. jobs and $136 billion in wages will transfer offshore to countries such as India, Russia, China and the Philippines."

These figures represent only outsourced information-technology services such as credit-card and bank financial transactions that are contracted by U.S. companies to be performed for miniscule wages by foreign citizens. The figures do not account for the $500 billion trade deficit the United States now is facing with its trading partners.

Kelly Patricia O'Meara is an investigative reporter for Insight magazine.