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Report| McKinsey Global Institute

Offshoring: Is it a win-win game?

August 2003 | byDiana Farrell, Martin N. Baily, Vivek Agrawal, Vivek Bansal, Tim Beacom, Noshir Kaka, Manish Kejriwal, Anil Kumar, Vincent Palmade, Jaana Remes, Thomas-Anton Heinzl

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Many businesses have turned to offshoring as a way to boost profits while many politicians believe that the gain is made only at the unacceptable cost of American jobs. MGI's latest research and analysis offer a new perspective: Offshoring is as beneficial to the US as it is to the destination country, probably more so.

The most obvious benefits of offshoring accrue to businesses and English-speaking destination countries. Lower wages in foreign countries translate into significant savings and, often, improved quality. A software developer in the US, for example, costs $60 an hour whereas one in India only costs $6 an hour. This and other benefits could translate to a net impact of a 50 percent increase in profits for American businesses.

Destination countries see increased investment and job creation through offshoring. India, for example, gains in net benefit at least 33 cents for every dollar of spend offshored to its country.

Impact on the United States

While Forrester, a technology research and trend analysis firm, predicts the loss of some 3.4 million jobs to offshoring in the US by 2015, MGI's analysis shows that the United States has much more to gain.

Offshoring will allow the US to capture economic value through multiple channels:

  • Reduced costs—Savings from reduced costs means more savings, which can be passed to consumers or to investors to reinvest.
  • New revenues—Offshoring creates demand in destination countries for US products, especially for high tech items.
  • Repatriated earnings—Several providers serving the US market are incorporated in America, which means they repatriate their earnings back into the US.
  • Redeployed labor—US workers who lose their jobs to offshoring will take up other jobs, which will in turn generate additional value for the economy.

Of the $1.45 – $1.47 of value MGI estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the US captures $1.12 – $1.14 while the receiving country captures on average 33 cents. In other words, the US captures 78 percent of the total value.

Addressing the disruption of displacement

Whatever the substantial benefits of offshoring, the short-term pain of job displacement must be addressed. Targeted insurance products managed by businesses could be one way to lessen the pain to workers. This approach could help provide wages for those who lose jobs because of offshoring for an acceptable period of time.

Given the large surpluses generated from offshoring, programs to address the impact on workers are feasible. This will help create win-win solutions and ensure that everyone benefits from a more competitive and healthier global economy.

McKinsey Global Institute

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About this research

This report draws on applied research carried out by McKinsey consultants. To learn more about our expertise please visit Mckinsey Global Institute, Business Technology Practice. Mckinsey Global Institute,