In-Depth

Who Benefits From Outsourcing?

A new report says CEOs do, and disproportionately at that

• By Stephen Swoyer
• 09/07/2004

According to Sarah Anderson and John Cavanaugh at the Institute for Policy Studies (IPS), and Chris Hartman, Scott Klinger, and Stacey Chan at United for a Fair Economy (UFE), compensation for CEOs at the 50 largest outsourcers of service jobs shot up by 46 percent last year. That’s one heck of a cost of living adjustment—especially in light of the fact that executives at these companies also earn 28 percent more than their peers at other large companies.

“These 50 CEOs seem to be personally benefiting from a trend that has already cost hundreds of thousands of U.S. jobs and is projected to cost millions more over the next decade,” the report authors conclude.

Tellingly, researchers contrasted this result with a Business Week survey that found that CEOs at 365 large firms realized an average rise in compensation of 9 percent. According to the publication, the average CEO salary is $8.1 million, which is 56 times the pay of a U.S. Army general with 20 years of experience ($144,932) and 634 times the starting salary of a greenhorn soldier ($12,766). For the record, the average salary for a CEO at one of the 50 largest outsourcers was $10.45 million. That comes out to $5,022 per hour, per the estimates of the authors.

The report is the latest in a backlash against outsourcing, which, many economists argue, ends up creating more or less as many new jobs as are sent overseas. The authors contest this belief, however, arguing that there’s no evidence the savings derived from outsourcing has resulted in more—and, most importantly, better—American jobs.

“U.S. software-related jobs—which are among those most vulnerable to outsourcing—have been in steady decline, dropping 16 percent between 2001 and 2004,” the researchers write, building up to a potentially incendiary conclusion. “Firms appear to be channeling their outsourcing profits not into U.S. jobs, but rather into the pockets of chief executives.”

Recently, consultancy Forrester Research revised its estimate of the number of U.S. services jobs it believes will be sent offshore in the near term. Forrester had famously predicted that 3.3 million U.S. services jobs will be outsourced by 2015—a projection the research firm believes is still accurate. Nevertheless, Forrester cited a number of factors—including the prominence of outsourcing, which has encouraged many fence-sitting companies to go offshore to protect themselves competitively—that could lead to a near-term bump.

Why the rush to outsource? Cost-savings is the biggest driver: In one famous example, professional services firm McKinsey & Company estimated that offshore outsourcing can reduce an organization’s costs by anywhere from 45 to 55 percent.

Not surprisingly, several technology companies are prominent among the list of the 50 biggest outsourcers—including Cisco Systems Inc., Dell Inc., Electronic Data Systems Corp., IBM Corp., Hewlett-Packard Co., Intel Corp., Oracle Corp., and Unisys Corp. But that’s only half the story. After all, some of these companies are expanding their employment rolls here in the United States even as they’re sending jobs overseas. Big Blue, for example, announced plans this month to hire as many as 19,000 new employees. On the other hand, IBM has said it may shift 2,000 U.S. jobs oversees this year as well.

The technology companies listed above are all huge, multinational corporations with tens of thousands of employees. While one might infer that CEOs at leading outsourcers earn more than average CEOs because they run larger-than-average companies, researchers claim they controlled for this variance. “In fact, the 50 top outsourcers include firms that range substantially in size. Fifteen are not on the Fortune 100 list of largest U.S. companies, while an additional 11 failed to make the top 500,” they write.