by Christopher Koch

The Politics Behind Offshore Outsourcing

Sep 01, 200317 mins

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?”

Jobs, Homes, Families

Inside an Elks Club lodge in an ugly strip mall in Wethersfield, Conn., a group of former IT workers are gathering. They have little in common besides the fact that they’re out of work, having recently been laid off by big Connecticut IT employers such as Cigna, GE, ING, Northeastern Utilities and United Technologies. The group at the meeting is a mix of male and female, young and old, though more have gray in their hair than not.

The aluminum-gated window that connects to the Veterans of Foreign Wars bar next door slams down, signaling the end of drink sales. Everyone squints with anticipation toward the front of the room, where John Bauman, president and cofounder of Toraw and himself an unemployed IT manager, shouts over the blasting air-conditioning system to bring the meeting to order.

“This is about our jobs, our homes, our families,” he tells the group.

His speech, and that of the other Toraw officials, rambles. Bauman admits that the group hasn’t quite found its direction yet. But on one point Bauman and the other leaders of Toraw are clear: While pointing out that their group does not oppose immigrants or immigration, they rip into the H-1B and L-1 visa laws, saying both programs are being abused and have created a rise in illegal immigration.

These foreign workers are the focal point of most Toraw members’ anger. Frustration boils over a few times at the meeting. “How active are you going to be?” demands an angry man in his early fifties. Another calls visas “a tool of the devil” and goes on to excoriate the “corporate greed of CEOs that is ruining this country.” A woman questions the strategy of going after H-1B and L-1 visas. “I see offshoring as more of a threat than H-1B or L-1,” she says. “Whole departments are going offshore. What do you propose? Taxes? Tariffs?”

“Taxes, tariffs and reporting every foreign nonimmigrant worker onsite in Connecticut companies,” promptly responds James Pace, Toraw’s vice president.

A man in the audience fumes that offshore outsourcing has the potential to wipe out the middle class. “Are our legislators aware of this?” he asks.

Of the three Connecticut legislators who have sent representatives to the meeting, only one representative speaks: Mark Stephanou, director of constituent services from U.S. Sen. Christopher Dodd’s office. He doesn’t have anything conclusive to say, either. “We are as concerned about jobs as you are,” he offers. (Later, Dodd became a sponsor of a bill in Congress to limit the L-1 and H-1B visas.)

Toraw describes itself as a grassroots movement, not a union. But some say that if the outsourcing trend continues, a white-collar labor movement could arise. This time, the structure would be completely different than the traditional blue-collar labor unions (think Internet rather than union hall).

“I believe that some sort of e-labor movement is going to rise in IT,” says Maria Schafer, program director for Meta Group. Indeed, the Internet is already the preferred meeting place for disaffected IT workers. Marcus Courtney, president of Washtech, one of a handful of unions that serve IT exclusively, says his membership is only about 250, but the number of subscribers to his e-mail newsletter went from 2,000 at the beginning of 2003 to 14,000 in June. Dozens of websites such as Toraw’s have sprung up on the Web, many with an anti-visa or deeper anti-immigration theme.

Opponents of offshore outsourcing ignore the large benefits that it brings to the U.S. economy, says Sunil Mehta, vice president of the National Association of Software and Service Companies (Nasscom) in India. Mehta estimates that U.S. companies will save up to $11 billion in 2004 by outsourcing to India and that India will purchase $3 billion in high-tech imports from the United States in that time. “I think it is really a two-way mutually beneficial argument,” he says. “If IBM is able to lower its cost structure, the U.S. economy benefits as a whole.”

Mehta argues that trade protectionism has not helped other American industries such as the steel industry, where employment has declined 80 percent since its peak, he says, nor has it helped steel consuming industries in the United States that were forced to pay high prices for steel. “At the individual U.S. IT employee level, I do not have any answers,” he says, “but if you look at it in a total economic perspective, it is mutually beneficial.”

Gone for Good

It’s tempting to write off the threats of offshore outsourcing. The economy will improve, IT workers will find new jobs, opposition to offshoring of U.S. jobs will melt, and all will be well. Or offshore outsourcing will never mature to the point where anything but the most basic development work and maintenance will go offshore. That’s what some economists like Robert Reich think. According to various analyst company predictions, only about 10 percent to 20 percent of IT jobs will go offshore.

Anyone who subscribes to this soothing theory risks getting blindsided. The trend will continue (unless the U.S. government intervenes) because the apparent cost advantages are simply too seductive. According to a May 2003 survey by CIO, 68 percent of the more than 100 IT executives who responded said their offshore contracts will increase this year. Only 30 percent foresaw no change.

“The primary benefit to moving IT offshore is cost, and the only thing that’s holding it back is building up the capabilities offshore to do the work,” says IEEE’s Hira. “So unless you could come up with a way that markedly advances U.S. workers productivity so that they could produce a higher-quality product faster than they do today, there is no economic incentive to keep the work here.”

In other words, this isn’t like the old days, when the local factory used to lay off workers during a lean spring and hire them back in the fall when demand picked up again. The IT jobs that are going offshore are going there for good. It’s what economists call a structural, as opposed to cyclical, change in the labor market. And if costs in India—the primary center of offshore IT work today—begin to rise, the work will move to other cheap offshore locations, such as China.

The trend toward offshore outsourcing has only just begun. Indeed, in the CIO survey, 67 percent of respondents did not begin offshore outsourcing until after 2000. Offshore outsourcing is just beginning to hit the mainstream, with 80 percent of companies saying they will discuss it in 2003, according to Gartner.

Until now, offshore outsourcing has been mostly limited to large companies that have big chunks of work to send offshore (the coordination expenses were too high to make small projects cost-effective). But as the offshore outsourcing companies have matured, so have their processes. “Many of our clients are now starting projects with five people,” says Peter Harrison, CEO of Induslogic, a global outsourcing company.

As more jobs move offshore, the work will move higher on the IT food chain. Indeed, it already has. The CIO survey found that 11 percent of the companies had outsourced system and architecture planning offshore, and 14 percent had outsourced research and development—two categories that analysts and chief information officers have predicted would never leave these shores. “When people say there is IT work that can’t be done offshore, I disagree; it just takes longer to move the more complex work offshore,” says Atul Vashistha, CEO of Neo-IT, an outsourcing advisory company.

The Dilemma for CIOs

When low-skilled manufacturing work left these shores beginning in the 1970s, the U.S. economy reabsorbed those workers into other areas of the economy—primarily in the services sector, says Dartmouth’s Slaughter. It’s this reabsorption effect that leads the majority of economists to believe that global competition is ultimately good for the U.S. economy. Manufacturing companies in the United States are now more productive than they were before they faced international competition. Higher productivity per worker means more corporate profits and higher salaries on average, as long as the workers being displaced can be reabsorbed into the economy somewhere else.

Even if workers are reabsorbed, however, it doesn’t necessarily mean they will be better off. Low-skilled workers make less in real dollars today than they did in 1973. Now that white-collar jobs are coming under the same global competitive pressure, the same effect on wages may be felt at the managerial level. “In the past, the distributional impacts from global competition were pretty clear,” says Slaughter. “The more-skilled guys are going to benefit from more global engagement, and the low-skilled guys aren’t. Now it’s more of a grab bag.”

Experts don’t see a “white knight” industry that will come along to do for IT workers what the services sector did for displaced manufacturing workers. Other high-skilled fields are also under pressure from international competition—accounting, engineering and architecture are already feeling the same kind of pressure as IT. As competition for skilled service jobs in the United States increases and low-cost options increase offshore, white-collar wages could begin to drop across the board. Economic statistics show that when people change jobs because of global competition, it usually involves a decline in wages, at least initially.

Even so, many CIOs see the move offshore as inevitable.

“You can fight global trade with tariffs, but long term it just doesn’t work,” says Jeff Campbell, vice president of technology services and CIO of Burlington Northern Sante Fe Railway. The company has outsourced 40 percent of its development work to the Indian company Infosys. Campbell says that he was able to achieve the employment shifts without layoffs, mostly through attrition.

“You have to meet cost challenges or you won’t provide shareholder returns,” Campbell adds. “We are intertwined with the global economy now, so the question is how to embrace that and move it forward.”

This is not to say that CIOs don’t have ethical qualms about what they see going on inside their departments. The CIO from the previously mentioned Fortune 100 manufacturer sounds as angry as the displaced workers at the Toraw meeting when the discussion turns to temporary work visas. He says Indian contractors consistently abuse the requirement that they first look for a suitable American to fill the job before bringing in an Indian on a visa. “Every now and then one of the big [Indian] companies comes to me and says, ’Before you sign the contract, we need you to sign an affidavit that says you looked for Americans to do the work and you didn’t find them,’” he says. “And I say, ’Get out of here. That’s a lie. I won’t do it.’ And they say, ’OK, OK,’ and somehow it becomes a nonissue.”

That CIO feels guilty, but he is insulated from the ethical and legal implications of the visa issue, indeed from the entire transition to offshore—as is his company. Its executives simply are not involved, except to make the decision in the first place. They hire an outsourcing company, and the outsourcing company takes care of all the messy immigration and work transition issues. Nor is there the kind of visible drama to the IT move offshore that there was during the manufacturing transition, when major plant closings made the news. The movement of IT jobs offshore is happening quietly, almost imperceptibly. And if the economy continues in the doldrums, few new jobs will be created to replace them.

The government is not prepared to deal with the prospect of millions of highly educated, well-paid white-collar workers hitting the unemployment rolls for extended periods of time. Universities are focused on educating young people, not older workers who need to retrain themselves for a new white-collar occupation after years in the workforce. Even economists who support globalization agree that the transition for white-collar workers in the coming years will be difficult until new industries arise to take the place of ones with jobs being sent overseas. Dartmouth’s Slaughter, for one, advocates that the government focus on easing job transitions for white-collar workers by making pensions and insurance more portable across jobs, and offering tax credits for older employees who want to relocate to find a new job or go back to college for retraining.

If IT employees want to stay employed in this new era, they must be willing to accept lower wages, change jobs more frequently, relocate when necessary and consider going back to school to gain new skills.

“I don’t have a ready answer for what we do in IT after we send these jobs offshore,” says TRW Automotive’s Drouin. Even so, he feels he has no choice but to continue with the offshore strategy—it saves his company a great deal of money.

However, the Fortune 100 CIO who has that recurring nightmare is worried that it’s too easy for companies like his to outsource overseas today. “Look, I can’t wake up tomorrow and decide I’m going to move to Italy and get a job,” he says. “So why should someone from another country be able to come here on a temporary visa and take jobs from Americans? There are people who say open everything up. That’s one world view. Another view is you bring people in to the extent that you can assimilate them, and that they build on the society rather than disrupt the society.

“I don’t want to wake up one day and find that American IT has disappeared.”