The Politics Behind Offshore Outsourcing

A CIO at a famous Fortune 100 manufacturer has a recurring nightmare: As he continues to lay off American IT workers and move their jobs offshore to places such as India, never to return, American public opinion suddenly swings violently against globalization. He and his company are demonized, and Americans boycott his company’s products. "Public perception isn’t always accurate, but it counts for a lot of things," he says, after insisting on anonymity. "We don’t want a situation where the public sees us as a malevolent force and takes it out on our products."

Other CIOs are becoming similarly cautious about publically endorsing offshore outsourcing. Of the dozen CIOs contacted for this article, only two agreed to talk completely on the record. Though all believe that the offshore outsourcing trend will continue, some are privately worrying about carrying out the inevitable in a sick economy and wondering if it isn’t happening too quickly.

It’s not hard to find reasons for CIOs to worry. "Do you want to do business with companies that take away jobs for U.S. citizens by outsourcing work to foreign countries?" asks The Organization for the Rights of American Workers (Toraw), a group of displaced, angry American workers laid off by Connecticut insurance and financial services companies. In June 2002, dozens from Toraw and similar groups from across the country held a two-day demonstration outside the Strategic Outsourcing Conference at the Waldorf Astoria hotel in New York City. The same month, other laid-off workers demonstrated outside an outsourcing conference at the Hynes Convention Center in Boston.

Organized labor protests at IT conferences in the United States? Even two years ago the idea would have seemed absurd. But as IT employees see many of their jobs moving overseas in a bad economy, opposition to globalization in the United States, hidden during the good economic times of the ’90s, could reemerge more strongly than ever. IT companies—such as Accenture, IBM Global Services, Microsoft and Oracle—and mainstream Fortune 500 companies—such as American Express, Citibank, Bank of America, DaimlerChrysler, General Electric, Procter & Gamble, Prudential and United Technologies—are outsourcing to offshore IT companies or expanding their own development centers out of the country.

Some CIOs, like Joe Drouin of TRW Automotive, have experienced backlash against outsourcing inside their own companies. TRW began moving IT development work offshore to India four years ago, mostly through attrition and shifting contract work overseas. Drouin, who became vice president and CIO after the move began, says he didn’t do enough to clarify which jobs were going to stay in the United States and which ones would go. "We talked around that issue, and we didn’t talk in black and white," he says. "I think it was because we anticipated a negative reaction." He got it. Morale plummeted, and there was a lot of grumbling and dissatisfaction among the staff. "It was like a dark cloud hanging over everything we did," Drouin says.

Technology jobs are following a path well-trodden by the manufacturing industry, which sent millions of jobs offshore or simply eliminated them in the past 30 years, contributing to a drop in the average wages of low-skill workers. Technology professionals will face the same kind of wage drop, and the work could go offshore much faster than manufacturing did, according to Matthew Slaughter, Dartmouth College’s associate professor of business administration. "[IT work] will move faster because it’s easier to ship work across phone lines and put consultants on airplanes than it is to ship bulky raw materials across borders and build factories and deal with tariffs and transportation." Indeed, by the end of 2004, research company Gartner estimates, one in 10 IT jobs at U.S. IT companies and one in 20 at non-IT companies will move offshore.

Revving up the speed even more are temporary worker visa programs that allow foreign companies to relocate employees here in the United States to coordinate the offshore work. Opposition to these visas is growing; currently under consideration at the national and state level are a number of bills designed to limit them. Their passage would slow the movement of jobs offshore and perhaps force U.S. companies to bring some work back onshore (see "The Visa War," this page).

Even if such legislation is passed, many observers expect the offshore trend to continue. And its long-term implications for the U.S. IT industry have some deeply concerned. As the bulk of technology work moves offshore, the deep, experiential knowledge that comes from coding applications and solving technology problems—the soil of technology innovation—could move offshore with it. U.S. IT services companies don’t spend much on R&D, but they are still innovative because they build the U.S. technology infrastructure, says Ron Hira, chairman of the R&D policy committee with the U.S. branch of the Institute of Electrical and Electronics Engineers (IEEE), a nonprofit research and advocacy group.

"The reason [U.S. companies] can innovate without spending much on R&D is that they are learning each time they do an implementation," he says. "You build up that knowledge in those workers, and there’s spillover as they move into other sectors, start new software companies or take a permanent job with a client. If we don’t have that knowledge base here, we will lose out on that innovation and spillover."

TRW Automotive’s Drouin wonders where he will find his next rising stars in IT if he isn’t growing them internally. "It isn’t clear what the new entry-level job in IT will be," he says. "We haven’t eliminated all our developer jobs, but a good portion is gone. So where do you look for that superstar who is doing a great job and has a rapport with the customer and understands your business?"

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