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

cio.com ^ | August 13, 2003 | Diane Morello

[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.

[mhking]

And you think that Bush is to blame for this? What makes you think that any of the Dems will keep this from becoming your next job?

[RaceBannon]

I am going to assume that is ajoke.

Obviously, all technology improvements are capable of removing people from payroll as production can be improved through automation and computers, that is a universal reality.

That universal reality is applyable to all forms of business across the globe.

That is not the issue. What the issue is, is using foreign sources to run domestic technologies and intellectual properties, and leaving foreign sources in control of running these technologies and intellectual properties.

That is making us dependant on foreign intelligence and foreign ownerships of our own ideas and properties, intellectual or material!

[harpseal]

So what does this mean for American technological innovation in the future ? When that engine is offshored, when the American technical intelligentsia is decimated, the engine of American economic growth will stop so bean counters can show a good quarter

It is clearly being damaged more daily but there are solutions all it needs is the will to implement solutions.

[Tokhtamish]

I can’t believe the number of replies on this subject that dismiss this out of hand. They bitch and moan about the UN but they have no problem running $300B trade deficits with China.

Isn't that penny wise pound foolish mentality amazing ? Does it ever occur to free traitors that a nation suffering net downwards social mobility will not care about being a military superpower ? Aircraft carriers don't pay the rent.

[RockyMtnMan]

Bush was granted fast track trade negotiating authority. HIS party controls the house and senate and HE can set whatever agenda he wants HIS party to follow. This president has more power to affect meaningful change than just about every other president in our history.

Reduce government spending, eliminate restrictive regulations on corporations, cap settlements, etc. He can also impose a tariff on China until they allow their currently to be valued by the market instead of by the communist party. For India he can impose a flat tariff across the board on labor until we can reduce the gulf between economies. We would then be collecting a substitute tax for all the tax revenue we are losing by offshoring and would be leveling the playing field for laborers at the same time.

Once government spending has been fixed and the cost of doing business in the US has been reduced we can gradually lift the tariffs. The only reason companies offshore is to reduce their operating costs, government could easily reduce their costs through legislation.

[AppyPappy]

he will ask for either a revenue tariff of 50% on all imports

Congress would stomp a mudhole in that.

[RaceBannon]

You trivialize this issue to much. This is not just an 'IT' issue but will affect many other professions.

Right on!

Click to read an entirely too long but interesting screed

[AppyPappy]

Here's a better idea. Why don't American's quit buying Chinese goods? If the demand were to plummet, the problem would fix itself.

Face it, America wants cheap goods. That's not the President's fault.

[harpseal]

Congress would stomp a mudhole in that.

Well maybe so but then he would get reciprocity or perhaps a 30% revenue tariff. I for one think tariffs can be esily sold. By starting with OPIC and H1b's we could get a reasonable plan through Congress and Bush could guarantee his re-election.

[Keyes2000mt]

It's not President Bush's fault. This issues go back several administrations with NAFTA and GATT.

[harpseal]

Here's a better idea. Why don't American's quit buying Chinese goods? If the demand were to plummet, the problem would fix itself.

That is not a substitute for a reasonable trade policy.

[thimios]

Check out #118

[harpseal]

One other thing if Bush asks for such a revenue tariff to fund further tax cuts he will have traianulated the economy issue with Democrats.

[Lazamataz]

How does it feel to be in bed with HILLARY? You both seem to express your frustration with our honorable President in the same shrill manner.

Poor dodge. You called someone who expressed his first amendment rights -- namely, some fairly cogent and balanced criticism of the president -- an 'enemy of the nation'.

In your little reptillian brain, anyone who levies ANY criticism against the President is an enemy of the state. This goes beyond BushBotulism, straight to fascism. Perhaps you'd like a smart little military uniform, too, as you parade around deciding who is and who is not an enemy of the state?

Your attitude is from whence mass-purges of civilians in other countries, comes. You stand for everything I oppose.

[B.Bumbleberry]

You might as well save your breath. This is one of many threads that offer proof that there is a very strong current of protectionism and mercantilism gaining ground among some conservatives that is very disturbing. And I don't think it's limited to Buchanan's supporters. The last time it happened it helped ruin the Republican Party for 50 years. Sure hope history doesn't repeat itself. Much of this hand wringing is being spawned by unions, which you'd think would give conservatives their first clue.

[AppyPappy]

I thought our reasonable trade policy was freedom of trade. All those companies that wanted us to buy "Made in the USA" are now manufacturing outside the US. They know Americans want cheap goods and they don't care where they get them.

[AppyPappy]

And then Corporate America will howl because they will lose overseas markets.

[Dane]

BTW you never answered the guys question, why should we fight not to depend on forign oil but should depend on forign IT?

Well gee, you're new heroes, the democratic party, is the entity stopping domestic drilling, or did you just get back from Mars and hadn't heard about the congressional fight about ANWR.

[Lazamataz]

Does Howlin intimidate you? Where's your manhood?

Howlin and I are friends. But I do know about the Flash Mobs that people tend to call in to help howl and drown out their opponents. This pack behavior, that I have seen on Free Republic before, is sickening.

So far, everything I have seen from you has been disgusting, so why wouldn't you sic your pack on people? It fits with the total lack-of-character and lack-of-cogency in your arguments that I have seen in you up until now.

[the gillman@blacklagoon.com]

Not his fault but his job now.