Who Gains from Offshore Outsourcing?

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About a year ago, a group of a dozen IT workers in Connecticut that met for lunch every six weeks or so noticed a disturbing trend: only two of the 12 were actually working in IT.

Perhaps no part of the U.S. economy has felt the chill of the cool economy that came on the heels of the wild dot-com days harder than IT. It came, then, as no tremendous shock that members of the Connecticut group were losing their jobs. But what really got their blood boiling was where their jobs were going — either offshore or to IT workers on non-immigrant visas. In some cases, workers even had to train those who were taking their jobs.

What was a friendly lunch group rather quickly developed into a non-profit organization calling itself ”The Organization for the Rights of American Workers,” or TORAW for short. Its goal is to guarantee that U.S. citizens and immigrants with permanent green card status are gainfully employed before non-immigrant foreign workers are imported to fill positions, and it has set about lobbying for visa reform. In November 2002, 100 people wanted to join. The first meeting was Dec. 3, 2002. There are now 225 members representing 27 states.

”We were overwhelmed,” said John Bauman, one of TORAW’s co-founders. And it wasn’t just the interest in the group that shocked Bauman, it was the number of IT workers affected by offshore outsourcing and non-immigrant visas.

The numbers, in terms of jobs and dollars headed overseas from their former homes in the U.S. IT industry, are nothing short of astounding. To say nothing of the human affect in salaries, tuitions, homes and self-esteem potentially lost with each job.

According to Gartner, by year-end 2004 one out of every 10 jobs at U.S.-based IT vendors and IT service providers will move to emerging markets.

Gartner also found that by 2004, more than 80 percent of executive boardrooms in the United States will have discussed offshore outsourcing, and more than 40 percent of U.S. enterprises will have tried a pilot program or actual outsouring either offshore or nearshore (Canada, Mexico, South America, etc.).

Forrester Research predicts that $136 billion in wages, or 3.3 million jobs, will move offshore in the next 15 years.

On the surface, big business wins and American workers lose when IT jobs are outsourced overseas, but the economics are much more muddled than it first appears.

Ask any IT worker who follows the offshore trend closely who has the most to gain when U.S. organizations send work out of the country, and the first answer you’re likely to get is ”India.” Indeed, India is far and away the world’s largest market for outsourced IT work with about 18 percent of the market, but countries that could challenge India’s lead include Canada, China, Israel, Russia and South Africa.

It’s not surprising then that India’s National Association of Software and Services Companies commissioned a report by Evaluserve, which found that offshore outsourcing is important to maintaining growth in the U.S. economy. According to that report, for every $100 worth of work sent abroad by U.S. companies, $130 to $145 will be reinvested in the U.S. economy.

TORAW’s Bauman has heard it all before. ”In the economy, but not in the American worker,” he said. ”Any company has to look at the bottom line. They’re looking at the bottom line. They don’t care about the workers.”

And what of those bottom lines? After all, when a company takes advantage of vast wage differentials like moving a $60 an hour software development job to India where it costs only $6 an hour, the black ink must be flowing, right? Not exactly.

Are the Cost Savings There?

According to another Gartner survey, nearly 30 percent of companies saw no cost reductions or actually saw increased expenses as a result of outsourcing their IT work.

There are some organizations for whom offshore outsourcing is not the answer. The cost savings are very small when an outsourcing project is first implemented, and significant investment is required in infrastructure, time and travel to get things started.

”It is only in subsequent years, when you begin to leverage the relationship, that you begin to see cost savings,” said Debashish Sinha, managing director of global advisory services for neoIT, which offers offshore outsourcing consulting services.

Organizations that have very small requirements from their underlying IT organization, or those with a high need for control over their IT projects because of security or intellectual capital issues are also unlikely to have success in offshore outsourcing, according to Sinha.

While the offshore outsourcing industry is about 16 years old, Sinha said there is still quite a bit of educating that needs to be done on the demand side. You can expect some growing pains in the meantime.

When done right, and when the cost savings are examined in the proper timeframe, U.S. companies certainly gain from offshore outsourcing. And workers who lose their jobs certainly do not gain in the short-term.

As for the U.S. economy, a study in The McKinsey Quarterly found that if you are able to take the focus off the lost jobs (i.e., you haven’t lost yours), then the U.S. economy is helped in four ways: a) Cost savings, which create value in the U.S. economy; b) New revenues, from Indian outsourcing firms buying new equipment from American companies, for example; c) Repatriated earnings, because many Indian outsourcing firms are U.S. companies that repatriate earnings; d) Redeployed labor, where the money saved creates new jobs, which happened in the 20 years after U.S manufacturing jobs fled the country.

The problem for the American worker is finding work after the jobs leave. It’s what Sinha calls the ”balance between the growth of jobs and the transition of jobs” that U.S. companies are trying to find. And what it means is that the jobs created as IT jobs move offshore will increasingly not be the same IT jobs that left.

It’s something Bauman sees firsthand, as fellow TORAW members have taken almost any available job to stay afloat, including working at the grocery store. When asked if companies seem to care about negative publicity or the backlash that is developing around offshore outsourcing, Bauman answered quickly: ”No.”

But Sinha disagreed. He said companies are very focused on the impact of offshore outsourcing on the U.S. workforce, in terms of what a backlash can do to their brand, the affect on the morale and productivity of their people and the costs of severance, retention bonuses and retraining.

Reallocation of people, skills and resources on this side of the ocean seems to be the only way everyone can gain from offshore outsourcing, but it will take time — much as it did in the manufacturing sector — perhaps even a generation. Despite what workers may view as a cold-hearted approach, companies are not blind to this, according to Sinha.

”The top of mind issue for enterprises is the people issue,” he said.