Global Outsourcing Is the Strategic Term Paper

To be sure, serious obstacles still remain in Europe -- most notably, the rigid labor laws that make relocating jobs a long and costly process. For example, while it's relatively easy for companies in the U.S. To fire employees whose jobs they want to outsource, to lay off an employee in Germany, a company first has to justify its decision to the union and then give its worker a notice period of four weeks to seven months.

The difference in attitudes goes back to the way both regions developed, says Richard Hill, an intercultural consultant with Europublic, a Brussels-based agency that advises companies in international business. "America was based on a can-do mentality, which is a reflection of the first Europeans who got to a huge, open, immensely rich country and were able to exploit it without any inhibitions," Mr. Hill says. On the other hand, Germany became a nation from the unification of many small principalities, where life was carried out on a local scale, with people less willing to break the rules or stand out, he says.

German firms send roughly 60% of their "offshore" work to eastern Europe, and only 40% to India. American firms steer much more of their offshore work to the subcontinent, which is cheaper. While firms in both Germany and America are able to cut costs steeply by offshoring, the Americans save 20% more. Moreover, says the study, America's economy is more likely to benefit from all those Indian body-shops buying American products, ranging from Dell computers to the Coca-Cola that fuels programmers' late nights. German products are less enticing. And American shareholders are more likely than German investors to have a stake in an Indian offshoring company, further increasing America's gains. Yet all of this still only explains a small part of America's offshoring advantage.

The biggest difference emerges when workers who have been fired in the offshoring process look for new work. In America, McKinsey Global Institute estimates that around 70% of workers ousted in favor of offshore alternatives find new work within six months. In Germany, however, the re-employment rate is only around 40%. The reason? Above all, Germany's thicket of labor laws, which discourages firms from hiring workers who may prove a hard-to-shed liability. Admittedly, these same laws -- which are increasingly under fire (see page 34) -- also make it harder for German firms to shed workers to take advantage of efficiency enhancing offshoring. The lesson: offshoring may be an easy target for politicians, but if they have flexible labor markets it may actually be a good thing, not just for big firms, but for everyone.

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Wild, J., Wild, K.…