Posted on 12/14/2003 12:30:22 PM PST by Huber
Huddled in their 16th-floor office uptown two years ago, Frances Queen and her management team voiced the unthinkable: Was the Charlotte computer-services firm doomed?
In one week after the 9-11 attacks, Queen Associates had lost five long-term contracts worth $600,000 in sales. But a bigger threat loomed, one an economic rebound couldn't fix. Customers increasingly sought lower-paid software programmers overseas instead of hiring the company.
Queen lay awake nights.
"Then I decided, we're not going to sit around and feel sorry for ourselves. We're going to start an offshore division."
She lined up a team of programmers in Russia and plans a Philippines operation.
"Offshore is becoming expected," said Queen, 53, the firm's CEO. "You have to offer it to be competitive."
In the Carolinas and nationwide, more companies are reaching that conclusion.
Nearly two-thirds of the Fortune 1000 companies headquartered in the Carolinas -- 17 of 27 -- say they have sent computer tasks abroad, mostly to India, according to an Observer survey. Among 100 of the Carolinas' largest public companies, the survey found that a total of 25 say they have used the strategy.
Big-name Carolinas players include Bank of America, which eventually expects to employ about 1,000 people at the center it plans in India. Matthews discounter Family Dollar has programmers in India modifying sales software. S.C. utility SCANA has done software work in India since 1996. Wrangler-maker VF has an Indian help desk for workers with computer problems.
The white-collar exodus could put more than 10 percent of the nation's work force at risk of losing jobs to foreign workers, according to a University of California, Berkeley study. That's more than 14 million Americans, although the study's authors say all those jobs won't be lost.
The move abroad -- often called offshoring or foreign outsourcing -- echoes the loss of manufacturing jobs to low-wage countries. After decades of textile losses, that's a trauma the Carolinas know well. But it's a new reality for service workers, long immune to the global wage battle.
With the Internet, many computer jobs can now be done anywhere, often for a lot less money. Workers abroad also process mortgage applications, read X-rays, prepare tax returns and staff customer call centers.
The job shift will continue, and it is reshaping the nation's economy. But experts don't agree on the impact or how the economy will adapt. Amid uncertainty and fear, there have been protests, congressional hearings and states proposing anti-outsourcing legislation, including an N.C. bill.
Supporters say the move abroad saves billions, gets work done faster, resolves labor shortages and frees U.S. employees for more creative work. Critics say it's eroding the middle class and wiping out America's future.
"Everything is up for grabs, and the low-cost bidder wins," said Marcus Courtney, president of WashTech, a union for white-collar workers. "Where are you going to be able to get a job and build a secure economic future?"
The Y2K effect
In the 1980s, U.S. companies began tapping tech talent in India, but it was Y2K that taught Corporate America it could move more than factory jobs overseas.In the late '90s, companies here and around the world raced to fix software for the change of the century. Experts feared a meltdown when computers, often using two-digit date codes, couldn't tell 1900 from 2000.
That also was the height of the U.S. tech boom. Information technology workers were in short supply, and wages were high.
India offered a huge pool of low-cost programmers for the rote work of Y2K fixes. The Observer survey found Charlotte-based Duke Energy and Raleigh-based Progress Energy were among the companies sending the tasks abroad. Both say they have done no more foreign outsourcing.
As the economy staggered, the low-wage lure of India and other nations became more apparent. Shipping data around the world grew cheaper and easier with falling long-distance costs and growing webs of undersea communication cables. Outsourcing -- a well-established practice within the United States -- was moving abroad. Among the benefits:
• Wages up to 90 percent lower for educated, English-speaking professionals.
• Savings of at least 20 percent, often more, on total project costs.
• Round-the-clock production due to time-zone differences.
American outsourcers, such as giant EDS, are also abroad competing for business.
"Offshore picked up a lot of momentum because it was a recession," said Dean Davison, who leads outsourcing research at Meta Group, a Connecticut IT consulting firm. "If they could cut 20 percent, they would do it because they were desperate."
Front-runner in outsourcing
SCANA, owner of Gastonia's PSNC Energy and S.C. Electric & Gas, was a Carolinas front-runner in outsourcing abroad.
The company, based in Columbia, typically turned to computer services contractors so it didn't have to hire and fire as workload fluctuated. In 1996, a contractor bidding on a complex project said the company could save money and turn the job in half the time by using workers in India.
Randy Senn, SCANA's chief information officer, was skeptical that Michigan-based Covansys could deliver. But he couldn't ignore the potential benefits, so he took a chance.
Covansys had added an Indian operation in 1991, making it one of the first U.S. outsourcers to set up there. Today, one-half of the firm's 4,800 workers are in India.
Covansys did an outstanding job overseas for SCANA, Senn said, and the two firms have worked together since. Their current project is to improve the utility's customer-information system. Senn says the company saves about 40 percent over the cost of doing the work in-house.
"I didn't think it would work. It's part of our strategy now."
So far, big companies in the Carolinas and nationwide dominate offshoring.
At the Fortune 500 level, 80 percent of Carolinas companies -- 12 of 15 -- have used offshoring. In the broader Fortune 1000 universe, 63 percent of Carolinas companies outsource abroad.
Among its biggest companies, Carolinas outsourcing outpaces world estimates. By the end of next year, 40 percent of Global Fortune 1000 companies -- the world's largest -- will have tested offshore outsourcing or will be using the strategy, according to Connecticut researchers Gartner.
In addition to publicly held Carolinas companies, The Observer surveyed 20 other large Carolinas employers.
Those doing work abroad include Springs Industries in Fort Mill, S.C. The textile maker, with 16,000 workers, said it has 19 programmers at a firm in India working with its S.C. teams to modify software. US Airways, based in Arlington, Va., has programming done in Brazil through EDS. And Charlotte's Presbyterian Healthcare hired an Indian firm in Bangalore late last year to help redesign its intranet.
Bank of America project
The Carolinas' biggest company, Bank of America, began outsourcing to India early last year with a few test projects, including building prototypes for Web sites.The move grew from the bank's increased focus on how it operates after more than a decade of acquisitions.
"We got interested first because we heard that there were significant cost savings," said Tim Arnoult, the bank's technology and operations executive. "This is basically true. However ... we also found that the quality of work was very good, we could gain speed-to-market advantages, and it was a very effective way to staff special projects."
Typical offshore work now includes developing, testing and modernizing software. The Charlotte bank gets about 20 percent of its software work done offshore and expects to continue at that level, said Mary Waller, senior vice president of media relations.
The bank, which would be the nation's second largest by assets after the pending FleetBoston merger, says offshore outsourcing has saved it $10 million. Now it is expanding in India. A subsidiary, set to open in Hyderabad in April, will handle a wider range of work than software projects, which will continue going to outsourcers.
Called Continuum, the center could, for example, work with Charlotte staff to develop a product more quickly. The bank won't give specifics about work intended for the center. Bank executives said they expect the Indian unit will employ less than 1 percent of their 133,000-member work force.
The bank has been cutting technology and operations staff for about two years as part of its focus on how work gets done. Outsourcing to India accounted for some cuts, including jobs at Charlotte's Gateway Village, a hub of the bank's IT work.
But the bank can't quantify offshore-related job losses because it doesn't track the reason for job cuts, Waller said. Losses may continue.
"It's possible that some jobs are eliminated as certain processes are performed through the subsidiary," Waller said. "It's also possible that other jobs will be created by other initiatives at Bank of America."
The bank's Indian unit makes it one of the first Carolinas companies to take the next step in moving work abroad by setting up its own shop.
SAS, the world's largest privately held software maker, shares that distinction. The Cary company opened its subsidiary, SAS India, three years ago in Pune and has 50 software developers at the site.
SAS didn't outsource through an Indian firm because it wanted direct control. The firm also wanted workers abroad to be part of its culture and learn its quality expectations. This month, a crew of 14 SAS workers met with colleagues in India for three days.
"We're trying to tightly integrate the two staffs, trying to get to the point that it doesn't matter if they're in India or they're here," Fritz Lehman, the SAS project manager in Cary for Indian work, said before leaving.
SAS, with its data-analysis software running at 90 percent of Fortune 500 companies, said it turned to India because of the tight U.S. tech labor pool in the late 1990s. Lower costs enable SAS to put more people to work on new projects, so their software gets to customers sooner.
The company, with 9,100 employees worldwide, doesn't plan layoffs among its 1,200 developers in Cary, near Raleigh, because of foreign expansions, said Chief Technology Officer Keith Collins. But he expects growth will be largely overseas for several years.
SAS plans to double its Indian programming staff in the next year. It also is eyeing Eastern Europe, Ireland and China.
The job churn
Sometimes outsourcing means layoffs, but it's also about jobs not created.
VF, the world's largest clothing maker, laid off 17 people this year at its Greensboro headquarters when it hired an Indian firm to staff its computer help desk in Noida.
When VF started a software project about two years ago, it also turned to India rather than hiring in Greensboro. The company didn't want to add employees for short-term stints, said Eric Anthony, VF's vice president of IT services. Offshore staffing on the project peaked at 70 people but has been far lower at times.
This year, another Indian firm, Quinnox, won VF programming work using as many as 12 people.
"I was meeting with everybody from India, getting to understand the players, the capabilities," Anthony said. "One of the big things you ... learn is all these guys can do it. It's who you like working with."
At Family Dollar, a test project in India this year meant a little less work for U.S. programmers.
Come January, cash registers will record sales in the discounter's 5,100 stores using software modified by Indian outsourcer Satyam in Hyderabad. The offshore software project is small compared with the growing chain's other IT work, said Chief Financial Officer Jim Kelly.
The Matthews chain, with nearly $5 billion in annual sales, is on target to open an average of about 50 stores a month through August. The company's IT staff of more than 250 has doubled in the past four years, and Kelly said it will keep growing.
But when Family Dollar has extra IT demands, it also turns to contractors, and more of that work may go overseas. The savings from working abroad propels growth, which produces U.S. jobs, Kelly said.
"Technology enables you to contract long-distance," he said. "But working eyeball-to-eyeball still has advantages."
White-collar worries
Just how worried should white-collar workers be?There is no tally that separates jobs eroded by offshore outsourcing from those that vanished because of the weak economy and the bursting of the dot-com bubble. There also is no way to measure jobs not created when companies send work abroad.
But white-collar workers have been hard hit by this economic downturn, making up a greater portion of the unemployed than in the past.
Professionals and managers, a group that includes IT workers, accounted for nearly one in five unemployed people in November, according to the Bureau of Labor Statistics. These workers accounted for slightly less than one in 10 unemployed people in November 1992, a comparable point in recovering from an economic downturn.
The trend is jarring. Just a few years ago, white-collar jobs held the promise of a secure employment future. Service jobs, especially in the tech sector, were touted as offsetting factory losses.
Now the jobs of as many as 14 million Americans could be at risk, according to the UC Berkeley study, released in October.
"Even in the worst case, we don't think all those jobs will go, but that's all the jobs that could possibly be outsourced," said Cynthia Kroll, a senior economist and the report's co-author. "Anything that involves sitting at a desk, talking on the phone and working at a computer is vulnerable."
Kroll and co-author Ashok Bardhan say last year's heavily cited estimate of 3.3 million jobs lost to offshore outsourcing by 2015 "already seems conservative." That projection, by Forrester Research, also called for a drain of $136 billion in wages.
Forrester's estimate includes nearly 473,000 computer jobs lost by 2015. In the broader pool of all IT jobs, another firm, Gartner, estimates 500,000 jobs could be lost by the end of 2004.
Charlotte's banking hub could be especially vulnerable. Based on its survey of 100 U.S. financial services firms, consultant AT Kearney estimates the industry will move the work of 500,000 people -- 8 percent of its current work force -- abroad by 2008.
Bank of America and Wachovia are the only Carolinas banks of 18 in The Observer's survey that said they are sending work abroad. Wachovia does IT development and testing overseas but won't describe specific projects.
"We consider outsourcing on a case-by-case basis," said Wachovia spokeswoman Christy Phillips. "It's not a key business activity for Wachovia at this time."
Keenly felt losses
The white-collar exodus is often not as obvious as the shuttering of a textile mill, but the economic ripples could be harsher.
"It's worrisome because these people are generally more educated, tend to vote more and make more money, so the loss of their incomes is felt more keenly by the economy than the blue-collar types," said Irwin Kellner, an economist with Hofstra University in New York.
And these losses are likely to be permanent, like the mill jobs before them. An economic uptick won't reverse the move abroad, just as the economic boom of the '90s didn't halt the loss of textile and apparel jobs.
Economists and researchers compare the move to past job shifts such as the migration from farm to factory. Textile jobs relocated from the Northeast to the Southeast and then to low-wage nations. Half the Carolinas' textile jobs -- 136,000 -- disappeared in the past decade.
"The cost to individuals and communities is clear," said Erica Groshen, an economist with the Federal Reserve Bank of New York. "Workers lose earnings while out of work and, on average, don't get jobs that pay as well as the jobs they're displaced from."
Yet historically, the nation has weathered such changes and created jobs -- an average of nearly 2 million a year for the past 20 years.
"We specialize in innovation," Groshen said. "Outsourcing ... gives us the opportunity to move on to the next big thing, whatever that will be, and I don't know what it is."
Talk of the next wave includes wireless, biotech and nanotechnology, all of interest to the Indian tech sector as well.
Outsourcing supporters say the money saved allows companies to invest in creating jobs. By one estimate, two-thirds of every dollar outsourced to India comes back to America, and, with new jobs and investment, grows to $1.12-$1.14, according to the McKinsey Global Institute, the research arm of international consultants McKinsey & Co.
India's global exports of software and IT services hit $9.5 billion last year, and are expected to top $12 billion this year, according to the National Association of Software and Service Companies, the Indian IT industry's trade group. Outsourcing is a partnership that benefits the economies and workers of both nations, said NASSCOM President Kiran Karnik.
NASSCOM Vice Chairman Jerry Rao, CEO of Indian outsourcer MphasiS, added: "Innovative companies win, and innovative employees land on their feet."
Trying to stem the tide
Fears of political or consumer backlash, especially in an election year, could slow the trend.Offshore outsourcing isn't going away, but "you've got a push-back, a buy-American attitude coming into play," said Alan Pelz-Sharpe, a vice president with Ovum, a London-based technology research and consulting firm.
Members of Connecticut-based The Organization for the Rights of American Workers, or TORAW -- mostly laid-off IT workers -- joined similar groups this year protesting at outsourcing conferences in New York and Connecticut.
"Our goal is to put our American people back to work and to stop this nonsensical offshoring," said TORAW President John Bauman, a laid-off programmer who took a holiday job driving for Federal Express. "We can't as a country afford this. There will be no middle class."
N.C. Sen. Eric Reeves, D-Wake, introduced legislation in April to ban foreign call centers on state contracts, saying the work of states shouldn't be done overseas. The proposal from Reeves, co-chair of the Senate's information technology committee, passed the Senate and awaits House consideration.
At least five other states have had anti-outsourcing proposals.
In August, Gov. Mike Easley ordered a review of many state contracts to determine whether work is done abroad. The order followed an Observer report that food-stamp recipients in 40 states, including the Carolinas, rely on help desks in India. On Nov. 6, Easley's office said the review found two contracts, totaling $687,000, with a Canadian firm.
At the federal level, the General Accounting Office is studying the impact of offshore outsourcing.
"It's a very important, strategic, emerging issue," said Randy Hite, the GAO spokesman on IT.
Despite the outcry, Gartner researcher Diane Morello doesn't expect much will change.
"There will be a lot of noise around this, but it will not stem the movement of work to lower-cost labor markets," she said.
Divided loyalties
Frances Queen, founder of the Charlotte computer-services firm, had planned to work with an outsourcing firm in the Philippines, homeland of her partners in the offshore venture. Then they found a Russian company charging $10 an hour less for programmers. If there's enough demand for offshore, they plan a foreign shop of their own, which will further cut costs. They see the Philippines as the best location.
Business is picking up with the economy, and potential clients are interested in the offshore option. As a business owner, Queen is pleased.
But after more than 25 years in Charlotte's IT world, she has a lot of longtime tech friends -- some out of work. She worries about them as she and others turn to foreign help.
"There's a little part of me that almost hopes none of this is successful because there are so many people out of work here in the Carolinas," Queen said. She will hire locally "if we have the option."
But now she's also optimistic that money saved by working abroad will generate new jobs. She's sleeping easier.
"IT is still a great place to be," she said. "It's just different."
"Business will never be the same."
So 20% tarrif will preserve 90% of income for the American professionals. Looks like a good deal.
• Round-the-clock production due to time-zone differences.
This is where it will be worth to pay 20% tarrif. Fair market at work.
Governments lose substantial tax revenue while benefit demand goes up. Why is this never mentioned? And because of progressive tax rates, when the workers find new work making 1/3rd less, the government makes 2/3rds less. The government gets reamed more by this trend than the individual. When will they start rewarding American tax payer creation? All they do is pass more laws for lawyers, more taxes, and more regulation making American taxpayer creation even less attractive.
My neighbor here in NC owns a company in Dayton which used to be an intermediary between companies with a need for powdered metallurgy parts, castings, etc., and American companies that produced such parts.
They almost went out of business last year.
To save the business, they now have become an intermediary between those same "principals", and Chinese manufacturers.
He told me a story last week about obtaining a contract with a company that advertises "Made in America". He was instructed NOT to tell the management where the parts were really coming from.
Hey...I'm all for tarrifs! (Even though I'd be one of the tariff-payers in this case).
I guess there is a lot of overhead including the profit for the foreign middlemen.
The only one I'm really familiar with is Dell. It would be helpful if I had a list - I will be more than happy to not buy products from these companies. Also, is there an ongoing, organized effort to boycott these places?
I'll do my small part if I know who deserves my business and who does not.
my neighbor is graduating with an IT degree come january. says he'll start in mid-60's. does have a small criminal history with 3 year probation just ended.
should i make a short term loan to him based on his confidence he'll get hired?
thanks.
Most offshore work in banking tends to be around call center support, IT operations, etc. I can't comment on B of A, but I'm fairly certain that Wachovia has no offshore workers handling domestic consumer accounts.
(If, however, you are doing international banking transactions, wiring funds to Hong Kong and such, than of course your funds will be handled offshore, by definition!)
should i make a short term loan to him based on his confidence he'll get hired?
Dr. Laura says; "Never lend money to friends." If you want to give a grant as an outright gift, that is fine, but lending will destroy the friendship.
While that is a very nice sentiment, the truth is that There IS NOT one major corporation in the US of A that HAS NOT fired people (or SUPPLIERS) in order to get cheaper help/products from overseas. Not one.
I hope you like hunting & fishing.... (and farming...)
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