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U.S. Offshore Outsourcing Leads to Structural Changes and Big Impact
cio.com ^ | August 13, 2003 | Diane Morello

Posted on 08/13/2003 8:20:37 PM PDT by thimios

U.S. Offshore Outsourcing Leads to Structural Changes and Big Impact Gartner

By Diane Morello Vice President & Research Director

As offshore outsourcing ramps up, the dislocation of IT jobs in the United States is becoming real. CIOs must anticipate the potential loss of talent, knowledge and performance.

Many Ramifications With an Outsourcing Decision

In the first half of 2003, the application development manager of a well-known company was frantic. Her staff was near mutiny. A day earlier, the CIO had called an "all hands" meeting and announced that he could save the company $30 million during the next few years. How did he propose to do that? By moving application development offshore to outsourcing vendors. The application developers in the room were stunned. Immediately, they crowded into the office of their manager, all asking similar questions: What does this mean for me? Is my job safe? Will I become unemployed?

That scene is occurring in company after company around the United States, from midsize to large companies, with each decision affecting between 150 and 1,000 people. The movement of IT-related work from the United States and other developed countries to vendors and offshore sites in emerging markets is an irreversible mega trend. Although the United States may feel the biggest effect from this movement, other developed economies, including Australia and the United Kingdom, feel disoriented, too.

The workforce changes that accompany the trend toward offshore delivery - whether offshore outsourcing or offshore insourcing - are structural in nature, not fleeting or temporal. The effect of IT offshore outsourcing on the United States is a harbinger of changes in other countries that pursue global sourcing models. The workforce and labor-market consequences will be substantial.

Three CIO Issues

Three overarching issues shape CIOs' obligations around offshore outsourcing:

As long as new investment in IT remains low in North America and Western Europe, IT offshore outsourcing will yield a displacement of IT professionals and IT-related jobs. CIOs who make ill-informed decisions today will be unable to find or acquire the requisite local knowledge and competencies when IT investment resumes.

Few enterprises would deliberately choose to cede intellectual assets to offshore outsourcing vendors, but some executives fail to envision today which skills, knowledge or processes will generate business innovation tomorrow. Vision, leadership and an understanding of how technology fuels competitive advantage will help CIOs and business counterparts retain core knowledge.

CIOs and other business leaders must be clear about their plans, timing and transition phases for the offshore outsourcing transition. They must develop milestones, timelines and accountability. Moreover, they must communicate honestly and respectfully to keep performance high and defuse employee anger.

Not a Pretty Picture for the IT Workforce

Since 2001, according to the U.S. Bureau of Labor Statistics, more than 500,000 people in IT professions in the United States have lost their jobs. Some were caught in the dot-com bust. Others were laid off by cost cuts, shrinking budgets, a poor economy and a desire to satisfy shareholders quarter by quarter. Now, a growing number of IT professionals and practitioners are having their jobs displaced as IT work moves to offshore venues.

Without a "shot of adrenaline" to the U.S. IT profession - such as an investment boom, a "white knight" industry, new IT-led innovation or new ways of competing globally - the scenario for the IT workforce in the United States and other developed nations looks bleak.

Large U.S. enterprises, vendors and service providers aggressively are investigating or pursuing offshore markets for IT delivery. Combining that interest with minimal new investment, preliminary Gartner analysis - based on the IT Association of America's count of 10.3 million IT practitioners in the United States in 2003 - indicates that another 500,000 IT jobs plausibly may disappear by year-end 2004.

By year-end 2004, one out of every 10 jobs within U.S.-based IT vendors and IT service providers will move to emerging markets, as will one out of every 20 IT jobs within user enterprises (0.8 probability).

Through 2005, fewer than 40 percent of people whose jobs are moved to emerging markets will be re-deployed by their current employers (0.8 probability).

Likely Implications of IT Offshoring

To many CIOs and business executives, the decision to outsource activities offshore is fiscally sound:

The cost, quality, value and process advantages are well proven.

Moreover, at a time when IS organizations are struggling with poor credibility and IT is being scrutinized, offshore outsourcing is becoming a tool for improving service delivery and a source of highly qualified talent in greater numbers.

Finally, the extensive use of quality methodologies among offshore vendors - such as Software Capability Maturity Model (CMM), People CMM and ISO 9000 - enables a degree of assurance that many in-house organizations lack.

Gartner urges CIOs and other business executives not to trivialize the impact of offshore outsourcing on their business strategies, their organizations or their employees. Three areas of concern arise:

Loss of future talent;

Loss of intellectual assets;

Loss of organizational performance.

Loss of Future Talent

Many IT applications and services that are being considered for movement offshore are now run and maintained by seasoned IT professionals in user companies, technology vendors and IT service providers. Offshore movement of that technical work implies a significant displacement of IT professionals who possess organizational memory around IT investments. At the same time, college students in the United States, the United Kingdom and other developed countries see technical work moving to emerging markets, and see family and friends losing technical jobs. Interest in pursuing technical careers will wane.

Why should CIOs care? Because they cannot afford to have domestic IT talent "dry up." When investment resumes and the economy rebounds, CIOs will need a cadre of seasoned IT professionals and eager recruits to "turbocharge" new ideas, new investments and new programs.

Loss of Intellectual Assets

CIOs and enterprise executives must ask: If everything can theoretically be outsourced, what kind of knowledge must we retain or develop? At Gartner's Outsourcing Summit in Los Angeles in June 2003, 39 percent of attendees at the session "Managing Workforce-Related Risk in Outsourcing" cited the loss of critical knowledge as the greatest source of workforce-related risk around outsourcing. Identifying, capturing and measuring core enterprise knowledge is daunting, especially when critical knowledge is often subordinate to technical skill sets.

For now, most enterprises send straightforward technical activities and routine business processes offshore, but the ease with which they can move those activities may numb decision-makers to the need to maintain and protect essential knowledge/

Six areas of core knowledge that are worth protecting include:

Enterprise Knowledge: How do our products, services and systems blend together?

Cultural Knowledge: How do we do things here? What are our beliefs? Who really makes decisions?

Social Network Knowledge: Which roles and which people form critical connective tissue?

Strategic Knowledge: What are our objectives and competitive advantages?

Industry and Process Knowledge: How do our industry, competitors, and customers operate?

Activity Knowledge: Do we know which people are doing what today?

Loss of Organizational Performance

Offshore outsourcing weakens the already-fragile relationships between employees and employers. Whether CIOs are considering, investigating or actively pursuing offshore outsourcing, they should prepare for a bumpy ride. Beneath the sound business reasons for outsourcing lie thornier issues associated with people.

Decisions to outsource - whether offshore or domestic - bring upheaval to IS organizational competencies, roles and makeup. More than 40 percent of attendees at the workforce-related risk presentation at Gartner's Outsourcing Summit considered their organizations to be ill-prepared for the new roles, competencies and skills that accompany an outsourcing delivery model.

Are Enterprises Prepared for Outsourcing? Not Really

The situation worsens with offshore outsourcing, because fewer than 40 percent of the people affected will be re-deployed. During the offshore transition, the degree of uncertainty is so high that it can severely disrupt organizational performance. CIOs and other business executives should hold themselves accountable for sustaining and improving organizational performance levels during the transition. To do so, they should coordinate along several lines:

Identify competencies, roles, people and knowledge that will be retained. To prevent organizational paralysis, CIOs must define the future role and shape of their IS organizations as certain day-to-day activities move overseas. Gartner research reveals that many enterprises retain such critical functions as application design, application integration, client-facing process management, enterprise architecture, information management and high-investment competency centers. In addition, they develop new competencies in service management, vendor relationship management, process management and business integration.

Create a meaningful transition plan. Provide clear timelines and milestones to help people prepare for the changes that offshore outsourcing brings (for example, Milestone A will be reached in six months, Milestone B six months later and Milestone C 12 months after that). At each milestone, certain segments of work or applications will complete their offshore transfer, and the affected people will be terminated or re-deployed. Companies that have a lasting commitment to their people will generally spend time arranging redeployment of their affected employees.

Outline employees' options. Define the options available for affected employees: re-skilling, re-deployment, termination or outplacement. The way in which enterprises deal with employees during the offshore transition will be a lasting testament to the perception of leadership and the reputation of the company as an employer. Executives must hold themselves accountable for communicating clearly, quickly and meaningfully. "I don't know" is an unacceptable answer when the organization's performance and people's livelihood are at stake.

Bottom Line

CIOs and business leaders in the United States and other developed countries should move carefully as they pursue offshore outsourcing.

Until IT investment resumes, IT offshore outsourcing will yield a displacement of IT professionals and IT-related jobs.

CIOs who make ill-informed decisions will be unable to find or develop qualified talent when they need it.

Additionally, CIOs and other business leaders must be clear about envisioning what knowledge, roles, people and skills will fuel competitive advantage in the future - otherwise, they risk losing core knowledge.

Finally, CIOs must communicate clearly, honestly and respectfully about the transition plan, and about the options available to affected employees.


TOPICS: Business/Economy; Extended News; News/Current Events
KEYWORDS: freetrade; outsourcing
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To: Edison
Don't bother learning a trade. In my state in the N.E., all entry level trade positions in Heating / HVAC, Plumbing, Carpentry (framing, sheet-rocking, trim), auto body repair, automotive repair.....are being over run by illegal trespassers. The legit landscaping businesses in my state have been decimated by truckloads of beaners with an army of push mowers. Fifty feet away from me is a body shop with a half a dozen illegals working for the owner. When I talk to young kids who graduate from trade high chools, they all tell me the same thing, they cant get jobs in their chosen trades. All the jobs are glommed up by illegals.

Now, if you try to follow the law and hire American citizens, you'll simply be priced out of business. If you think this can't or won't happen in your state, you're dead wrong. Are these the people we want to give a guest worker card to? Are these the people we want to give "amnesty" in the new bill Kolbe and Mcain are pushing for?

Something seems wrong when American kids can't get jobs in their chosen trades and illegals are still swarming over our borders (between 4000 -6000 every 24 hours).

Yup, El Presedente' Jorge Bush is my man.

NOT.
81 posted on 08/14/2003 4:16:47 AM PDT by taxed2death (A few billion here, a few trillion there...we're all friends right?)
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To: RinaseaofDs
...regarding post 45....very well put.
82 posted on 08/14/2003 4:18:14 AM PDT by taxed2death (A few billion here, a few trillion there...we're all friends right?)
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To: thimios
Bump for later!
83 posted on 08/14/2003 4:25:51 AM PDT by Alas Babylon!
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To: thimios; Howlin
"Hurry the sheep are heading over the cliff. Yes that's GWB leading the way."

You say a lot of evil things about our President. I think you need to be held accountable for running your mouth and making these insulting, outragous claims. Like President Bush said, you're either with us or against us. I can only presume you're an enemy of this nation.
84 posted on 08/14/2003 4:41:03 AM PDT by Those_Crazy_Liberals (Ronaldus Magnus he's our man . . . If he can't do it, no one can.)
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To: RinaseaofDs
But they could, and it would sound pretty reasonable to a right-leaning IT worker, wouldn't it? It might sound pretty good to a hard right guy as well.

About half the IT guys I work with who voted for Bush have told me they will not vote for him next time because of this issue (admittedly this is a small sample). Do they think anyone else is better on this subject? No. But they are pissed and their vote will reflect that disaffection. I think many people underestimate the anger in IT and Engineering right now because those professions don't have professional Union mouthpieces flapping their gums on the news programs. But the Republican party better wake up and realize that some of their base is being quietly eroded. I don't know what the Free Traders think is going to happen. Their Capitalist Randian Nirvanna will never materialize because long before we get there, the electorate will swing to the the left to FDR-esque, New Deal proportions. If one lives in a Representative Republic, one better realize that pissed-off voters usually control the country's destiny, not economic religions.

85 posted on 08/14/2003 4:51:59 AM PDT by RogueIsland
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To: Willie Green; Wolfie; ex-snook; Cacophonous; Poohbah; Jhoffa_; FITZ; arete; FreedomPoster; ...
Moreover, at a time when IS organizations are struggling with poor credibility and IT is being scrutinized, offshore outsourcing is becoming a tool for improving service delivery and a source of highly qualified talent in greater numbers.

Free trade benefits?

86 posted on 08/14/2003 4:52:59 AM PDT by A. Pole
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To: jimkress
HAve these people stopped to consider that, after a point, every job 'outsourced' to another country is one less consumer to purchase their products? What are they going to do when no one is left to buy their goods?

They will comfortably retire.

87 posted on 08/14/2003 4:58:13 AM PDT by A. Pole
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To: thimios
Offshore outsourcing weakens the already-fragile relationships between employees and employers...

Perhaps the understatement of the year.

88 posted on 08/14/2003 5:05:20 AM PDT by gcraig
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To: .cnI redruM
There are a large number of variables at work here that are beyond our national government's ability to control.

Are you saying that the government is not free to decide when it is abolishing tariffs, making new "free" trade agreements and providing insurance for moving jobs abroad?

If you value The Bill of Rights as anything other than a scrap of toilet paper, you don't want the US government to control who this company hires and fires.

Corporations are persons only in an artificial legal sense. Bill of Rights is for the REAL people.

89 posted on 08/14/2003 5:07:26 AM PDT by A. Pole
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To: Those_Crazy_Liberals
I can only presume you're an enemy of this nation. or a 'rat. Same difference...
90 posted on 08/14/2003 5:10:07 AM PDT by Cronos (Bush 2004)
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To: Those_Crazy_Liberals
Dean loving Luddite.

You are confused. Luddites were opposing the development of the new industries in their own country. Outsourcing and buildup of national debt is something else.

If you like Argentinian model, why don't you move there?

91 posted on 08/14/2003 5:12:21 AM PDT by A. Pole
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To: thimios
Being a CFO, I know the pressures for attaining short-term bottom line results. But, the true value of an enterprise is not the short term, but rather longterm. It is also important to consider the impact of seemingly financial only decisions on the community in which you live.
The debacles of Enron & Global Crossing, et al, were more a failure of ethics (business & personal) than poor financial management.
92 posted on 08/14/2003 5:13:29 AM PDT by familyofman
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To: thimios
WE USED TO HAVE DUMPING LAWS to stop companies from producing things cheaply and dumping them on our market to deflate prices and cost jobs. Now dumping happens by throwing us workers out of work at the outset in favor of lower production costs overseas so that american companies can dump and reap the difference as profit. No price change, the dumping is in profit now.
93 posted on 08/14/2003 5:16:15 AM PDT by Havoc (If you can't be frank all the time are you lying the rest of the time?)
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To: familyofman
more a failure of ethics

And so is offshoring

94 posted on 08/14/2003 5:21:14 AM PDT by clamper1797 (Conservative by nature ... Republican in Spirit ... Patriot by Heart ... and Anti Liberal BY GOD)
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To: lelio
Just a note.

>> How about "you can employ prisoners in communist China for $1/hr, should you be allowed to?" <<

99.999999% of workers doing manufacturing production in China are not prisoners. These workers voluntarily work for 8-10RMB a day. That's right about $1.25, if they work for a US corporation. They make 6-8RMB a day if they work for a Chinese corporation.

They eat lunch for 2RMB and have their lodgings provided for free. I spent the last two weeks in Mainland China helping my company set up some of our manufacturing assets in our new facility.(you can check my posting history for a link to some pictures)

Suprisingly perphaps to some people is that it's not labor costs per se that drive the offshoring, it's overhead and regulation here in the US.

There are significant barriers and tariffs and VATs to selling American goods in China. Free Trade with China is a one way street heading straight into Main street USA. The other direction is a mire of impassable roadblocks.

The only upside to this whole equation is the following. The real wealth attached to any product is not gained in China. The product made for pennies lands in the USA at a cost to the USA for pennies. It's then sold for dollars or tens of dollars. The real wealth earned on a product doesn't flow back to China. It stays right here.

The major downside however is that all of the money isn't staying in the USA. Since there is no free trade occuring on this planet, the USA runs up a huge trade deficit with just about everyone. Free trade only exists for the other guy, not for the US.



95 posted on 08/14/2003 5:23:26 AM PDT by Malsua
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To: clamper1797; sarcasm; BrooklynGOP; A. Pole; Zorrito; GiovannaNicoletta; Caipirabob; Paul Ross; ...
ping

on or off let me know
96 posted on 08/14/2003 5:23:57 AM PDT by harpseal (Stay well - Stay safe - Stay armed - Yorktown)
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To: Dane
Oh BTW, if you owned a business and tried to cut costs of doing business, how would you feel if a government beureaucrat said you couldn't.

If you are moving your business to Indonesia and saying goodbye to the American workers, you should move there in person, deal with Indonesian government and pay tariffs if you want to access American market.

97 posted on 08/14/2003 5:28:28 AM PDT by A. Pole
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To: Koblenz
If the government was serious about stopping the loss of jobs, it would stop companies from implementing Enterprise Resource Planning, Supply Chain Management, Business Process Management and Customer Relationship Management software, no matter where it was written. Enterprise software makes companies more efficient and allows them to eliminate jobs. For instance, some companies produce software that allows companies to automatically process travel and entertainment expenses. The number of people required in HR and Accounting will be much less. Yet these people need jobs too. Where are they going to work now, with all these companies installing automated software? Other companies are installing software that will allow them to closely track the efficiency of their salesforce, and will allow them to target their salesforce. This will result in them hiring fewer sales people. Companies can now bar code all their inventory parts, and with a barcode scanner reduce the number of people taking inventory. Finally, the Plumtree portal will allow companies to severely reduce their paperwork, which will result in fewer document clerks. Don't these companies realize that becoming more efficient and profitable, they're actually keeping less people employed, and that these now unemployed people can't possibly buy stuff and contribute to the economy? Why are these companies so damned selfish?

There is a major difference between investment that increases productivity and investing offshore. This has been documented on these threads for quite a while. When and if you wish to discuss the actual issues facing the USA and the structural problems the current Clinton trade envirornment is inflicting on the United States economy let me know until then equating investment in the USA which helps the American economy with the results of predatory trade practices is merely a repitiuon of someone's propaganda.

98 posted on 08/14/2003 5:28:41 AM PDT by harpseal (Stay well - Stay safe - Stay armed - Yorktown)
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To: a_Turk
This article points out good news.

How so, exactly?

So far, the only good news I can see is that will the mass suicides in America as breadwinners lose their jobs, the traffic on the highways will lessen a bit.

99 posted on 08/14/2003 5:30:07 AM PDT by Lazamataz (PROUDLY POSTING WITHOUT READING THE ARTICLE SINCE 1999!)
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To: thimios
Only Hillary can save W. She will. Tha, & only that, will compell us to vote.
100 posted on 08/14/2003 5:31:19 AM PDT by GatekeeperBookman ("impossible and radically idealist notions" * pending approval from Chancellor Palpetine, owner.)
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