Imported from the “Law Without Borders” blog

Outsourcing is a hot-button issue in the 2008 United States election campaign. Anyone involved in the outsourcing industry has now heard of the pledge by Presidential candidate Barack Obama to “take away tax breaks to companies that ship jobs overseas.” Other U.S. candidates have made similar statements. I was curious. Could the United States really be providing tax incentives to outsource U.S. jobs? What country would? Seriously, what tax breaks are they talking about? In actual fact, research shows that there are no U.S. tax breaks for sending jobs overseas. This tax break myth is just so much political rhetoric (et tu, Barack?), and the reality is far different.

While tax breaks for off-shoring of jobs do not exist, what does exist is a provision in the U.S. tax code that allows U.S. companies earning profits in a foreign country to defer payment of corporate tax in the United States until those profits are repatriated. If the profits remain abroad and are reinvested there, the company can more or less avoid the (very high) corporate taxes in the United States. And this is what many companies do when they set up operations overseas, regardless of whether this involves outsourcing of jobs. Although in many cases this does result in a loss of some blue collar manufacturing jobs in the United States and creates a lot of resentment among the voter pool, it also keeps U.S. companies competitive in countries where the corporate tax rate is much lower.

The above-mentioned U.S. provision has been in place for decades, and the setting up of overseas operations by American corporations is an economic reality that cannot be turned around merely by changing the tax code. Simply put, those American companies with manufacturing and service set-ups abroad haven't made these arrangements to take advantage of the tax deferral. They have done it because of lower operational costs, or because of the proximity to target markets, or for other reasons that may have nothing to do with tax breaks or outsourcing of jobs. Changing the tax code to remove the deferral will only create a barrier that will reduce the ability of U.S. companies to compete in today's global marketplace. If the U.S. government offers incentives and tax credits to companies that create more jobs for the American workforce, that might help a bit. But then again, those benefits would have to be enormous to outweigh the benefits of offshoring. Big news at the moment is how the television ratings giant, Neilsen Co., has actually given up local tax breaks in Florida after signing an outsourcing deal with Tata Consultancy Services in Mumbai.

If you Google “outsourcing” and “tax breaks,” what will you find? Page after page of references to Senator John Kerry. You don't remember John Kerry? He was the Democratic Presidential candidate in 2004. He laid out a firm plan to end the tax deferral system. He intended to change the tax code so that U.S. companies would have to pay taxes on profits earned overseas with no deferral. He then intended to use the increased tax revenue to reduce the U.S. corporate tax rate from 35% to 33.25%. The same Google search will also bring up page after page of expert opinions on how Kerry's plan would have done nothing to change the economic realities of setting up operations abroad. The benefits of a presence in foreign markets would far outweigh a marginal cut in the U.S. corporate tax rate. That reality still stands.

And what about companies that outsource only certain divisions -- like customer service, tech support, legal and IT -- to foreign companies by contract? U.S. companies that outsource in this way receive no tax breaks or tax deferrals. So eliminating these tax benefits will have no effect on this sort of “white collar outsourcing.”

The business lobby in Washington D.C. probably would succeed, as it has done before, in preventing any removal of the tax benefits discussed above. Also, neither the Democrats nor the Republicans have ever proposed any legislation that actually would abolish or even restrict outsourcing by private companies. Even if Obama and Biden prove to be the force for change that they seem to be (if they win!), the decisions on outsourcing will not rest in their hands. Businesses, large and small, will continue to do what they believe is best for survival and growth.

On the “law business” front, the recent American Bar Association ethics opinion on legal outsourcing is being quoted everywhere these days. Says the ABA: “The outsourcing trend is a salutary one for our globalized economy.” That's quite an affirmation. And it's quite true. The popular misconception is that outsourcing always means job loss and a windfall profit for the company doing the outsourcing. Although no one should discount the hardship and uncertainty faced by an individual who has lost his or her job, nothing is that black and white. A more accurate perspective is that for companies, it is often a matter of staying afloat or struggling to grow, not getting windfalls, and with regard to jobs – when economies are not stifled by protectionism – job losses and gains tend to balance out. If certain jobs are lost in the U.S., they are created in India or China, thereby creating new wealth in those countries and a huge new market for American goods and services – a market that is now even bigger than the market in the U.S. When those economies flourish, we also see Chinese and Indian companies setting-up shop in America – creating jobs. The United States economy no longer stops at that country's borders. Globalization – as ubiquitous and cheesy as the word has come to sound – is what it's all about. A corporation cannot remain competitive by keeping all its operations, markets and support in one country.

So is the anti-outsourcing crowd guilty of hypocrisy? If outsourcing is so bad, then, by their own logic, should they not also be opposed to outsourcing from foreign countries to the U.S.? According to the Council of American States in China, over thirty U.S. states have officers or representatives in China, trying to persuade Chinese companies to set up operations in the United States. And indeed, many Chinese entrepreneurs have set up operations in the U.S. and have hired Americans. So have Indians. Steel magnate Sunil Bharti Mittal told Hillary Clinton last year, when he led a delegation of the Confederation of Indian Industries CEO, about the new trend of “reverse-outsourcing.” Recently, we at SDD Global Solutions in India have seen this first-hand when we helped a large Indian company set up its operations in the United States. So it isn't all bad, is it? If you look at the big picture.

Just like the U.S. economy, law is without borders these days. A high-quality lawyer in almost any country in the world can handle legal work in almost any other country – given sufficient time and resources. Let's focus on the trend of sending legal work from the U.S., the U.K. and Canada to India, sometimes called "legal process outsourcing." Lawyers and paralegals in the U.S. and U.K. who feel that offshoring legal work only benefits BigLaw and corporate legal departments are mistaken. Large law firms and corporates definitely see lower costs, higher efficiency and improved productivity. Some large law firms also continue to charge their clients the exorbitant fees that offshoring is supposed to reduce, and corporations, as always, need to keep their eye on the bottom line. But small law firms and solo practitioners can benefit too. As noted by the ABA in its Opinion on legal outsourcing, specifically with regard to small firms and solo lawyers “who do not otherwise maintain the needed human resources on an ongoing basis,” outsourcing can allow them “to handle a large, discovery-intensive litigation” and otherwise “represent a client in such a matter effectively and efficiently.”

When the idea that legal work must always be expensive and time-consuming falls by the wayside, thanks to offshoring, more and more legal work will come in. In the news last month was the fact that the UK-based law firm, Eversheds, signed an outsourcing deal with an Indian legal service provider, which will handle the drafting of commercial contracts for deals that normally would be too expensive, legal-wise, to pursue. The Eversheds spokesman pointedly noted, referring to the outsourcing of these matters to India, that “[i]t’s not taking work away from anyone. It’s actually creating work out of contracts that would -otherwise sit in a metaphorical drawer.” And it’s work that will be supervised by Western lawyers, adding to their revenue.

At SDD Global we've seen, and in fact we’ve been one of the causes of, this creation-of-work phenomenon. A Fortune 100 client of our managing law firm, SmithDehn LLP, specifically requested that the legal research and analysis needed for a series of multi-million-dollar deals in the U.S. be done by Indian attorneys at SDD Global. This is yet another situation where, if not for a Western law firm’s outsourcing capabilities, no lawyers would have been hired, because typical Western legal fees would have made it prohibitive. The work would have been done either in-house, or not at all. As noted in other posts on the Law Without Borders blog, a similar thing has happened in litigation, where corporate clients have chosen to defend themselves against meritless lawsuits, using U.S. and Indian lawyers. Without legal outsourcing, there would be no lawyers hired for any significant work at all, because the cases simply would have been settled at the outset, just to avoid the usual U.S. litigation costs.

Indeed, when it comes to litigation, it would seem that offshoring of legal work will create a kind of automatic tort reform. Defendants facing bogus or inflated tort claims can choose to litigate instead of settle. This will discourage frivolous lawsuits, while maintaining the ability of legitimate plaintiffs to pursue their claims. After all, no sensible corporate defendant would refuse a reasonable settlement of a meritorious claim. Even if the costs of litigation are reduced, outsourcing still does not allow defendants to win cases when the plaintiffs are right. To the contrary, legal outsourcing can be used by lawyers for legitimate plaintiffs to pursue cases that have merit, without worrying as much about the cost, or about a lack of resources to support the litigation. As for the frivolous or weak plaintiff’s cases, all the money that otherwise would be spent by defendants on nuisance payouts can be plowed by corporations right back into the economy. And yes, some of that money will flow through the pockets of Western lawyers who are smart enough to use legal outsourcing to get work that otherwise would not exist.

Politics and the economy, the economy and business, business and cost-cutting, cost-cutting and lay-offs, lay-offs and politics. And somewhere in the middle of all that, the creation of new work and new jobs through outsourcing. One of the world's many circles – not vicious; not benign; just there. Come January 20, 2009, the campaign rhetoric will end, and the job will begin. We'll know whether Obama or McCain will be hired by the electorate to deal with the big picture, and we in India will hope for the best for our 'Murkin friends. In the meantime, and after, we’ll continue to work for our U.S., U.K. and Canadian clients. Because they will continue to outsource.