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

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.

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.

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.

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).

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

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:

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.

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/

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?

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

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.

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.

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.

We're not talking about jobs being eliminated due to better technology. We're talking about high tech (i.e. "jobs of the future") being eliminated and sent overseas.

If all of our computers are made overseas. If all of a company's development is made overseas and none of it is being done by Americans, doesn't that bode ill for America's future?

Sometimes, I think some people on this forum would be more than happy if every job that could be outsources were outsources, American unemployment sored to 20%, and India became the world's superpower. They'd smile and say, "Aw, the power of free markets."

If we cut everybody down to minimum wage, there's still no way we could compete with India where companies can pay them 80 cents an hour. If we were to eliminate the minimum wage and pay our techs the same thing, there's no way people can live on $32.00 a week here.

As automation comes more into vogue and we export all the technology jobs offshore, where does that leave us? Are we not planning our own obselescence?

"So far, everything I have seen from you has been disgusting, so why wouldn't you sic your pack on people?"

This is rick - coming from a guy who uses the F word when he posts! Try again, but with a bit more sincerity.

Comparing entry level non-skilled jobs to jobs that require skill and continuous education is flip. There is no shortage of other entry level jobs that these poor, displaced grocery checkers can get.

Oh, YES THERE IS!!

Have you tried to get one of these jobs lately? I have!!

The supermarket up the street from me is on a hiring freeze, and all part timers are limited to 15 hours per week?!

I NEVER heard of a large supemarket doing that, and they are doing it because there is less money being spent IN A SUPERMARKET in SUMMER, Barbecue season!

What a contribution. Is the Smoky Backroom a place for this.

This dweeb actually said that honest criticism of the President brands one an enemy of the state. That *is* f***ing disgusting behavior. I'm sorry if manner of delivery bothers you, but the substance of my post stands.

Do you know any American brand name clothes we can buy?

Seriously, your idea is a good one, but must be implimented nationwide to work, but in the mean time...what brand name clothing is made here exclusively?

>>This article points out good news.

>How so, exactly?

In that when demand goes back up supply will be short and it will be a buyers market for US developers..

Meanwhile work on small companies such as supermarkets and local hospitals until things change. If you're unable to find a customer to document experience in a new technology, then do a free project or two for your local church or little league organization.

And don't commit suicide..

If all of our ~~computers~~ cars are made overseas. If all of a company's development is made overseas and none of it is being done by Americans, doesn't that bode ill for America's future?

Replace one word and it's back to the late 70's and the world didn't end in 1979, did it.

This is rick - coming from a guy who uses the F word when he posts! Try again, but with a bit more sincerity.

This is your second poor dodge in as many hours. I asterisked out the word.

Now, back to YOU: You state that honest criticism of the President makes you an enemy of the state. Would you like to elaborate on what punishments you would levy on these enemies? Gitmo? Execution? What would you do to those who disagree with you, Messr. Stalin?

In that when demand goes back up supply will be short and it will be a buyers market for US developers.. Meanwhile work on small companies such as supermarkets and local hospitals until things change. If you're unable to find a customer to document experience in a new technology, then do a free project or two for your local church or little league organization.

You may have an interesting point. It is my opinion that outsourcing is a fad, not a trend. I started as quite concerned about outsourcing, but I've talked to a few people who are quite in-the-know, and they reinforced some thoughts that lessened my concern about it.

There is no way to avoid chinese goods, that would have been a good idea in the eighties.

That's definately not his fault but he is president and therefore inherited the responsibility of running the country from those who created this mess. It's time for him to set an agenda and make sure congress follows through. In the past his tax cuts would have had a much more significant impact on spurring the economy. He needs to follow up with something that will encourage businesses to invest capital domestically instead of overseas.

Yes. There are still clothes made in America. They may be cut somewhere else. But it's harder and harder to find them because people don't want to buy them. That's not Bush's fault. That's OUR fault

I would like to see just one of these people, make an inventory of all their clothes, appliances, tv's, and such and throw out everything made in another country.

They probably wouldn't have that much left.

You are correct, people will always look at price when buying goods and services.

You pissant brain dead Marxist totalitarian. F**king disgusting is for you a compliment. When and if you ever discuss issues you willbe answered on issues but the ONLY THINGS YOU HAVE POSTED HAVE BEEN FLAMES LIES AND INSULTS

Careful. Now that you have disagreed with "T_C_L", you are an enemy of the state. You can expect to be picked up for questioning and subsequent torture.

Every country in which man tortures and kills his fellow man, is flush with people who think like that person does.

My opinion is that corporations are heartless and cruel bastards. They've got no loyalty to their country or their employees. They would help terrorists design software to plant a Nuclear bomb if they made enough money on the deal.

Knowing that, my goal is to start my own small business. I may work for someone again, but it's going to be temporary, until I can get some certifications and education. Then, my goal is to open my own computer repair shop.

OK, we will stand by and cheer the free market.

What will this country produce to sell to the Chinese and Indian consumer who now has all our money?

“protectionism and mercantilism gaining ground among some conservatives”

Maybe I’m missing something here. At the current rate of offshoring, we won’t be able to produce a single item to export. But that’s OK; I hear the Communist party in China is very Conservative.

Cars are not tools of creation, computers are. Your analogy is flawed.

Whew you really have an elitist computer bias. If it wasn't for the invention of the automobile, you would be going to your IT job with the whiff of horse manure in the air and buying a new buggy whip every year or so.

Perhaps. But that is beside his point. His point is that computers are tools you can create with, whereas cars are not. Therefore, he asserts, your analogy is flawed.

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