Offshore outsourcing IT: U.S. grapples with the challenge

While there is little disagreement in the IT industry that offshore outsourcing is likely to grow, there is little agreement on what to do about it.

Though some European workers associations have put pressure on legislators to re-examine labor policies, friction among politicians, labor leaders and IT industry insiders caused the controversy to flare especially brightly in the U.S., making it one of this year’s most public IT-related debates in the country. As more work gets outsourced abroad, the controversy is bound to grow in 2004.

Outsourcers themselves say that as they try to offer better and higher-end IT services, they run into more resistance from the U.S. than elsewhere.

“We have tried to add more value, but we are more successful in Europe. There is also this vocal movement against outsourcing there (in the U.S.) because they say we are stealing their jobs,” said Marian Hanganu, marketing manager for TotalSoft, a software company in Bucharest.

As U.S. politicians in state and federal legislatures attempt to deal with the issue by proposing laws that would restrict offshoring, most businesses reject this legislative approach.

Among efforts in Congress to curb offshore outsourcing is an amendment to the appropriations bill for independent agencies and the departments of transportation and treasury. The proposal would prohibit the offshoring of some private contracts with those agencies. The amendment, sponsored by Republican Senators Craig Thomas of Wyoming and George Voinovich of Ohio, could become law when Congress returns from its holiday break, and it’s similar to legislation introduced or debated this year in several states, including New Jersey, Maryland, North Carolina, Indiana and Michigan.

“The bills as they’re currently written are unworkable,” said Rolf Lundberg, senior vice president of congressional affairs for the U.S. Chamber of Commerce, a business alliance. “They place undue restrictions on trade.”

For IT vendors, offshoring is an opportunity to cut costs and maintain business agility, bringing development teams closer to various markets around the world, and to engage in 24-hour-per-day development and maintenance.

“We look to use selective outsourcing to help build a more variable cost structure. It has allowed us to maintain services levels and capabilities to make sure internal users can focus on strategic things rather than other internal functions,” said Drew Prarie a spokesman for financially ailing Advanced Micro Devices Inc. (AMD) .

The big question is, if legislation is not the answer to increased competition from abroad, what is?

Congress should work on cutting the cost of health care in the U.S. and on limiting lawsuits against U.S. companies; those changes would encourage U.S. companies to hire U.S. workers, the Chamber of Commerce’s Lundberg said.

U.S. legislators also should focus on improving the country’s education system and investing more money in IT research and development, said Doug Comer, director of legal affairs for Intel Corp., during a December forum in Washington, D.C., sponsored by the Center on the Global Information Economy.

However, while improving the U.S. education system and getting U.S. workers to work harder and be more productive may sound worthwhile, it’s unlikely that computer programmers with 20 years of experience will go back to college for in-demand occupations like nursing, said Ron Hira, chairman of the research and development committee for the Institute of Electrical and Electronics Engineers-USA (IEEE-USA).

“How do you make these people more agile?” Hira said. “How do you help the people who are 40 years old with tort reform or money for K to 12 (education)?”

Some companies do offer programs designed to ease displaced workers through a transition to another job.

Michael Stubbs, a 41-year-old father of four and a software quality assurance engineer who worked in Boxboro, Massachusetts, at the Development Test Group facility of Cisco Systems Inc.’s Content Networking Business Unit (CNBU), is generally pleased with the severance package and career transitioning services he was offered when the company fired him, he said. Management at the facility said the work he was doing would continue to be done by a team in India, Stubbs said.

He would have preferred his department try to avoid firing him, by moving him to another job or cutting his pay. “I basically begged and pleaded with them … I would have been more than willing to take a pay cut and more, but they had absolutely no response, they had made up their minds,” he said.

However, Cisco did allow him a 60-day period, from the time he was notified of his termination, to essentially continue as an employee. Though he was not required to do any work during this time, he could come in to the workplace or stay at home and use the company’s virtual private network, and meanwhile collect his salary every two weeks and accrue money in the company’s 401k retirement plan. During this time, he was free to apply for other jobs at Cisco.

He was also offered four months of pay in a one-time check after the 60-day window, and for a time can use the placement and training services of international consulting and training company Lee Hecht Harrison. Some other people, Stubbs said, were offered a “restructuring package,” essentially a choice of taking another job that was being offered, or of leaving the company.

Officials at Cisco said that the company does not have a policy of sending U.S. jobs offshore, and that CNBU staff were not fired in order to hire workers in India. The layoffs at CNBU were part of a continual process of tweaking operations to move resources into fast-growing areas, according to company spokeswoman Abby Smith. However, she acknowledged that there was no cut in the Indian operations. “We have some contractors in India, we always have and always will,” she said.

Nevertheless, Stubbs is concerned about the overall trend toward offshoring. “This is about more than any one individual. With so many jobs going offshore, you have to wonder about the U.S. ability to compete in the long run.”

The danger in IT jobs continuing to move offshore is that other countries will catch up with the U.S.’ technological edge, IEEE’s Hira said. “What (defenders of offshoring) are saying is it’s OK for that stuff to move offshore, and there are no consequences.”

Many offshore outsourcers say that U.S. IT workers should look for opportunities to work with outsourcing companies abroad.

“The work cannot be done all offshore. It is still necessary to have some IT guys onshore,” said Xu Xiaoyu, vice president of sales and marketing at Shinetech Software Development Inc. in Beijing and a former consultant at Accenture Japan.

IT professionals in the U.S. could establish consulting companies that specialize in managing outsourcing contracts with overseas companies. “Many of our customers are consulting companies,” Xu said.

Indeed, many industry insiders and analysts insist that IT outsourcing is not a “zero sum” game, where there is necessarily a loser for every winner. In the long term, demographics are such that there might not be enough young U.S. workers to replace the current middle-aged generation, and the country may need foreign labor to compensate, human resources experts point out. In the short term, outsourcing allows U.S. companies to cut costs in areas where, for example, profit margins are slipping, while focusing on new technology and development of skills in aspects of IT that make sense to keep at home.

“Some specific activities like actual deployment of systems and solutions on-site, tasks requiring access to highly sensitive information as well as parts of the project like process mapping, business analysis, process optimization design are some of the activities that need to be done on-site,” said Ravindra Datar, principal analyst for IT services and BPO at Mumbai-based Gartner India Research and Advisory Services Pvt. Ltd.

Jobs that are more likely to remain onshore in the US will be those concerned with the higher end of the systems and software development lifecycle, such as requirements specification, software design, architecture design and business process re-engineering, according to the Information Technology Association of America (ITAA), a Virginia-based organization of information technology companies.

“Companies will also prioritize based on the mission criticality of software applications, with those deemed ‘core’ to a business far less likely to be outsourced to overseas markets than those considered as more of an overhead function,” said Bob Cohen, senior vice president at the ITAA.

Even lower-end jobs, such as call centers, may remain onshore in the U.S. in large numbers because of factors outside of pure cost, such as the sensitivity of the information involved and the quality of service, according to Cohen.

“There are many jobs that entail close customer interaction for which physical proximity between the vendor and the client are required and hence such jobs will remain in U.S.,” said Kiran Karnik, president of the National Association of Software and Service Companies in Delhi.

“The U.S. has a strong eco-system that promotes and sustains innovation. Therefore, jobs related to research, development, innovation, etcetera, will generally stay in the U.S.”

At times, offshore IT executives appear to have more faith in U.S. workers’ ability to stay ahead of the innovation curve than U.S. workers themselves do.

(Sumner Lemon in Taipei, John Ribeiro in Bangalore, Peter Sayer in Paris and Tom Krazit in Boston contributed to this report.)