IT jobs on the rise — both offshore and in U.S.

It may seem counterintuitive, but the recession forced companies to put the brakes on outsourcing IT and other jobs. But with growth returning, outsourcing was hot again in 2011 — and it will be hotter this year, says Christopher Ford, a partner who runs the Morrison & Foerster law firm’s Global Sourcing Group. What’s more, most of the election-year rhetoric about keeping jobs in the United States is just that: rhetoric, or as Ford puts it, “a shell game.”

Ford’s law firm just published a report that shows changes in the outsourcing market. Although the group generally sees continued growth in the use of IT outsourcing, it’s not all going overseas (that is, being offshored). In some segments, the “send it abroad to save a buck” argument no longer holds water, and that’s meaning “insourcing” to providers in the U.S.

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For example, Ford says “labor arbitrage” — the difference in wage rates between the United States and other countries — is decreasing, particularly in the eastern region of China, where Foxconn and other giants crank out products for Apple and many other U.S. technology firms. Indeed, the Chinese themselves are well aware of that trend and are emphasizing advantages beyond cheaper labor costs. That’s an important issue in the manufacture of consumer electronics products like the iPad, which have labor costs that are a relatively small part of the overall price of goods sold.

Meanwhile, lower-wage areas of the United States are starting to see companies moving in, a phenomenon Ford calls “rural-sourcing.” Although many, and perhaps most, of the companies shifting to rural America are still small, large companies are also packing up and planting parts of their operations in places like North Dakota. For example, Microsoft has been in that state since 2007, and last year it opened a campus in Fargo that employs about 1,500 people. Not coincidentally, North Dakota has the lowest unemployment rate in the entire country: 3.3 percent at the end of 2011, compared to the national rate of 8.3 percent.

The key trends in outsourcing

With offices and associates on three continents — North America, Europe, and Asia — Morrison & Foerster is an important deal maker and adviser to companies that are outsourcing, and it has a global view that makes its report worth reading. “The U.S. outsourcing market is recovering, with the financial services segment leading the pack. For all industry sectors, however, 2011 activity was essentially at or above the five-year average, which we take as an indication of a broad-based increase in overall economic strength — and a rising tide that is lifting all boats,” the report says.

Why did outsourcing slow during the worst of the recession? Companies balked at the high upfront costs of outsourcing (you pay the outsourcer a big chunk of change to learn your processes and technology, hire people, train them, and then transfer the work), and they weren’t willing to wait the years it would taken to recover that initial outlay through subsequent savings, Ford says.

The report reveals other key findings.

• China is moving beyond manufacturing: Today, the Chinese outsourcing industry is roughly a $20 billion business, and the Chinese government is intent on growing that number. The country’s list of designated outsourcing “hub” cities was expanded from 10 to 21. Companies providing outsourcing services to other countries in these locations receive various tax breaks through 2013. The government is encouraging Chinese firms to proviide outsourcing services for a broad range of technologies. These include not only traditional services such as application development and maintenance but also animation and special effects for the television and videogame industries, as well as R&D services for the pharmaceutical industry.

• State governments are considering outsourcing: Despite public opposition, state governments — faced with the conflicting demands of shrinking budgets and the need to revamp aging IT infrastructures — are beginning to look at outsourcing as a solution. The once resolute “no” attitude is shifting toward a subtle “maybe,” and some states are tentatively moving forward.
• Privacy and data security are at issue: Liability over data and privacy issues has emerged as a key point of contention in outsourcing negotiations. Where once outsourcing vendors expressly limited their liability for breaches, 2011 was a watershed year for companies pushing vendors for greater accountability regarding data security. In many cases, the concerns over security and liability have trumped economic considerations when it comes to closing deals.

Is just the usual election-year shell game on labor issues?

Politicians know they can score points with voters by railing against companies that take away jobs from Americans by offshoring, Ford says. But the talk mostly peaks during presidential-election years, then fades away. One big reason: Politicians, for the obvious reasons of who pays for their campaigns, listen hard to businesses that want to outsource or keep the tax breaks they receive by earning profits overseas.

Still, a recently proposed bill, the U.S. Call Center Worker and Consumer Protection Act, may indicate whether political sentiment has shifted in employees’ favor. This bill would make it difficult for companies to get federal loan guarantees if they offshore call centers. If passed, the bill would also require companies with offshore call centers to register with the Labor Department — a move that would publicize those companies’ use of offshore resources. (The Morrison & Foerster doesn’t expect this bill to pass, calling it essentially election-year pandering.)

And President Barack Obama attacked offshoring in his recent State of the Union address, urging businesses to bring jobs back to the United States. He also renewed his appeal for visa reforms to keep foreign students from returning home after earning advanced degrees. While neither Ford nor I believe the president is merely posturing, I doubt that Congress will do anything about these matters.

Regardless, something seems to have changed in the public discourse. As an example, the report notes that not long ago you’d read in the Wall Street Journal companies boasting of big offshoring deals. Not anymore, Ford says. Now companies know that offshoring makes people mad, so they’re quiet about it.

IBM layoffs: 1,100 and rising as jobs go offshore

Coincidentally, the Morrison & Foerster report was published shortly before news surfaced of IBM’s layoffs. Alliance@IBM/CWA Local 1701, an IBM employee advocacy group, reports that 1,148 IBM workers have been let go this week, with more to follow. Most of the job cuts appear to be within the United States, with a high concentration in IBM’s Global Technology Services outsourcing unit.

John Paczkowski of All Things Digital was one of the first reporters to notice the layoffs, and he interviewed the labor group’s national director, Lee Conrad, who said offshoring is driving the reductions. “Those jobs are moving offshore, which seems to be the trend at IBM. … This is a further abandonment of the U.S. workforce. When IBM talks about rebalancing, what they really mean is moving jobs from the United States to overseas,” Conrad told AllThingD.

Need I say more?

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