	Background

Services purchased from foreigners are considered U.S. imports: a U.S.  import occurs when a U.S.-based company pays for a service produced  abroad and supplied to the United States (either to the company or directly  to its customers, as in the case of the call center). Services  offshoring has been facilitated by improvements in information technology,  decreasing data transmission costs, and expanded infrastructure in  developing countries. In particular, recent  developments in the telecommunications industry, such as technology  improvements, infrastructure growth in developing countries, and  decreasing data transmission costs, have facilitated the use of offshoring. Although offshoring can be beneficial, organizations also face risks that are  relevant to decisions about whether or not to offshore services. Services Trade Data Cover Some Transactions Associated with Offshoring

U.S. government data provide some insight into the trends in offshore  sourcing of services by the private sector, but they do not provide a  complete picture of offshoring of the business transactions that the term  offshoring can encompass. The Department of Commerce’s trade data show that imports of services  associated with offshoring are growing. For example, U.S. imports of BPT  services grew from $21.2 billion in 1997 to about $37.5 billion in 2002, an  increase of 76.9 percent. 8.) U.S. Foreign Investment Captures Other Aspects of Offshoring

U.S. government data on direct investment abroad by U.S. multinational  companies producing services abroad provide information on aspects of  offshoring, such as supplier countries and the distribution of labor between  parent companies and affiliates. However, FPDS has limitations and may  understate the total amount of IT and other services that are offshored by  the federal government. MLS identifies only a portion of total layoffs  because it does not include small establishments or layoffs involving fewer  than 50 employees. The data  also indicate that layoffs associated with “overseas relocation” reported by  MLS peaked in 2002 (after rising sharply in 2001) but declined in 2003. Federal statistics provide some clues as to the extent of  this activity and show that relative to imports of other services, offshoring  is a small but growing trend in the U.S. economy. Scope and Methodology

We were asked to (1) describe the nature of the offshoring of IT and other  services, (2) discuss what the data show about the extent of this practice,  and (3) discuss what available data show about the effects of services  offshoring on the U.S. economy, including labor and business. Using FPDS data, we calculated for  each fiscal year in the 5-year period (1) the total dollar value of IT and other  services contracting actions in which an agency reported a foreign country  as the principal place of performance or manufacture and (2) the  percentage of total dollars associated with foreign performance or  manufacture locations relative to the total dollar value of all services  contracts performed in all locations (U.S. and foreign countries). To determine the effects of services offshoring on the U.S. economy, we  examined available federal data as well as private sector studies on  offshoring. Definitions of Offshoring

No commonly accepted definition of offshoring currently exists, and the  term has been used in the literature on the subject to include a wide range  of business activities. The services that companies  produce offshore may be used to supply imports to the U.S. market or to  supply foreign markets.
Why GAO Did This Study

Much attention has focused on the topic of "offshoring" of information technology (IT) and other services to lower-wage locations abroad. "Offshoring" of services generally refers to an organization's purchase from other countries of services that it previously produced or purchased domestically, such as software programming or telephone call centers. GAO was asked to (1) describe the nature of offshoring activities and the factors that encourage offshoring, (2) discuss what U.S. government data show about the extent of this practice by the private sector and federal and state governments, and (3) discuss available data on the potential effects of services offshoring on the U.S. economy.

What GAO Found

No commonly accepted definition of "offshoring" exists, and the term has been used to include various international trade and foreign investment activities. Services that U.S.-based organizations purchase from abroad are considered imports. They may also be linked to U.S. firms' investments overseas--for example, U.S. firms may invest in overseas affiliates as a replacement for, or as an alternative to, domestic production. In recent years, services offshoring has been facilitated by factors, such as the Internet, infrastructure growth in developing countries, and decreasing data transmission costs. Organizations' decisions to offshore services are influenced by potential benefits such as the availability of cheaper skilled labor and access to foreign markets, and by risks, such as geopolitical issues and infrastructure instability in countries that supply the services. U.S. government data provide some insight into the extent of services offshoring by the private sector, but they do not provide a complete picture of the business transactions that the term offshoring can encompass. Department of Commerce data show that private sector imports of some services are growing. For example, imports of business, professional, and technical services increased by 76.8 percent from $21.2 billion in 1997 to $37.5 billion in 2002. From another perspective, Commerce's data also show that in 2002 U.S. investments in developing countries that supply offshore services were small compared to those in developed countries and that most services produced abroad are sold primarily to non-U.S. markets. Regarding public sector offshoring, the total dollar value of the federal government's offshore services contracts increased from 1999 through 2003, but the trend in the dollar value shows little change relative to all federal services contracts. No comprehensive data or studies show the extent of services offshoring by state governments. Government data provide limited information about the effects of services offshoring on U.S. employment levels and the U.S. economy. The Department of Labor's Mass Layoff Survey data show that layoffs attributable to overseas relocation represent a small fraction of overall total mass layoffs. However, the survey identifies only a portion of total layoffs because the survey does not cover establishments with fewer than 50 employees. Other government data show greater than average job declines since 2001 in occupations and industries commonly associated with offshoring, but other factors, such as the recent recession, may contribute to these declines. Some private researchers predict that offshoring may eliminate 100,000 to 500,000 IT jobs within the next few years, while others note that offshoring can also generate benefits, such as lower prices, productivity improvements, and overall economic growth.