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.

[AppyPappy]

I actually tried to teach them to speak Southern so the mill women could understand them. "Whor's...that...spec...at?". It almost worked but they couldn't stop laughing.

[Lazamataz]

Another nice trick you picked up from the Clintons - Attacking our President and Commander in Chief while we have American sons and daughters fighting and dying for us on foreign soil. The depths of your disgusting behavior seems to know no bounds. How do you sleep at night?

Are you the President? Because my attacks seem to be largely confined to attacking your fascist fantasies.

Furthermore, does the fact we have troops abroad immunize the President against any criticism? If so, do you realize that you violated this dictum when you criticized Clinton for his impeachable behavior during the time when we had troops abroad?

Finally, how do you sleep at night when you write such things as "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."

Is it true that you believe that anyone who makes comments that you deem 'evil' or 'outrageous' or even 'insulting' must be 'held accountable' as an 'enemy of this nation'?

How would you hold them accountable? Would you torture them? Hold them at Gitmo? Deport them? Tell me your exact fascist plans for the 'enemies of the state'.

[Doohickey]

I didn't mean to push your buttons, Race - honestly. I can only speak for my particular area. Ukrops is always hiring, and the Food Lion down the street is looking for help.

Sorry again to have hit a nerve. I've read a lot of your posts and sympathize with your situation (though you're probably not the type that's interested in sympathy).

[mhking]

Who cares about the southern border? How many Mexicans were part of the conspiracy that used airplanes to kill on 9/11? Please don't let prejudice against people of a different skin color cloud your perception of the facts.

I'll remember that as untold numbers of people of unknown origin continue to stream across the Rio Grande unchecked. I'll remember that when one of those persons of unknown origin pull out a Stinger and take out a jet flying out of DFW or Hartsfield or O'Hare or Logan.

Who cares about the Southern border? You'd better care if you want to keep us safe at night.

[Lazamataz]

I rather disgust him than be considered honorable by him. You're having a lucky day.

Agreed. I've certainly exposed this individual to the forum. I'm not sure why I keep clubbing him at this point. Maybe I like easy targets.

Or maybe it's cuz Crazy_Liberal won't quit when he's WAAAAAAYYYYYYY behind..... ;^)

[the gillman@blacklagoon.com]

...Furthermore, does the fact we have troops abroad immunize the President against any criticism? ...

Oh, that's the answer to everything!
All the president has to do is keep troops overseas and we'll all have to shut up and vote for him.

Crazy Liberal is going to look sharp in his new black uniform with the crooked crosses. How bout a nice pair of high gloss black Magnum boots? Made in China of course.

[the gillman@blacklagoon.com]

...I'm not sure why I keep clubbing him at this point. Maybe I like easy targets...

Like a Newfie clubbing a dummy rubber baby seal.
But it feels good just the same.

[Lazamataz]

You know ANYONE can walk across that border, don't you?

[Crazy_Liberal mode ON]
No! Only Mexicans can cross the border! You're not questioning President Bush, are you? Because if you are, you are just like Hillary Clinton and you are an enemy of the state!
[Crazy_Liberal mode OFF]

[Lazamataz]

Like a Newfie clubbing a dummy rubber baby seal. But it feels good just the same.

LOL

[harpseal]

A bald faced lie, IMO, is stating that the American economy was going gangbusters in 1932

Since I did not make this first claim I am not certain why it is bbrought up.

and that the Smoot-Hawley tariffs had absolutely no effect in worsening the depression.

I asked you to prove this assertion or even justify it you have not done so. It did not initiate the tariff increases of teh 1920's and 1930's. Smoot-Hawley I will concede did not have the positive effect on the economy it should have had if itr were revenue neutral like Fordney-McCumber. But the allegation that Smoot Hawley was the primary cause of American exports falling throughout the Great depression is unproven. Even Milton Friedman does not contend that such an allegation is proven.

Now did the Smoot Hawley tariffs worsen the depression? I can not prove they did and I can not prove they did not such would require more hard data than was being collected at the time and is available at present from the existing records. now if you wish to make absolute statements expect to be called on them.

Dane I am very specific when I call something a lie or misrepresentation. Live with it you got caught. I furtehr do not like my position misrepresented. I expect either a retraction or a reference to a post where I stated that the American economy was going gangbusters in 1932 as I would never make that statement.

Beyond that the and logic implied that I both made the first statement and that the second statement was true. Now that you have been shown both clauses of yoru compoound statement are not true I trust you will not try to consider continuing to defend the indefensible. by the way even though your statements were false in this case I am not alleging lie because I am presuming yur emotions got the better of you.

[rdb3]

Unquestionably; however, tariffs were championed by our founding fathers. They recognized that the evil of government must manifest itself in some limited ways. This was a way they actually agreed was of the least harm.

Okay, let's talk turkey. I'll support your tariffs only if you tie it into a bill which eliminates the myriad legislative barriers that unjustly inflate the cost of entering a business market, the outrageous levels of taxation on business which come directly out of the pocket of the consumer, the elimination of all work related visas, lethal fines for employers of illegal immigrants, the elimination of the minimum wage, the abolishment of OSHA and all unelected regulatory agencies, tax incentives to the States which enact measures which makes said State business friendly, and tort reform. As far as the tariff, let it be placed on goods which come from countries which have tariffs on our goods and no one else.

I'm not in the business of chasing each individual enemy grunt and killing him with an M-16 round. I want to drop a nuke on the entire problem.

Deal?

I got a lotta livin' to do before I die, and I ain't got time to waste.

[MatthewViti]

Great point William.

[LibertyAndJusticeForAll]

For your enlightenment (maybe you can convince Bush, no one else seems to be getting through to him) -
Here are just 2 articles from a Conservative website about our southern border and terrorists:

http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=24987
"COMING TO AMERICA
'Arab terrorists'
crossing border
Middle Eastern illegals find easy entrance into U.S. from Mexico"

http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=26194
"Census: 100,000 Mideast illegals in U.S.
Analysts say failure of immigration control contributed to 9-11 attacks"

[vidbizz]

I just went to a local chamber meeting. In the area, we need 50 forklift operators, 34 electricians, 40+ assistant to said electricians, plus assorted other personnel. And that is just in our SMALL community! (But it is growing!)

[Diva]

Dominic

Please: As a favor to me and every other FR IT guy.... can you put them down and submit them as a message? Or even better -- as a new thread?

As the wife of an IT guy who is working himself to death and worrying about his future in the industry I would like to hear your stories too.

[MatthewViti]

Bushbot, you need to wake up. Why don't you read some good books... 1984, Animal Farm. Maybe then you will wake up from delusional state.

[harpseal]

Yes, by removing themselves completely out of the equation. That's the only acceptable premise to me.

Well one definition of politics is the art of the possible. One side never ever gets all it wants. In fact if one side tries to get all it wants the American peopelusually react against that stand.

You do manage to maintain your complete intellectual integrity at the loss of power to implement some of your plans. To me that is unacceptable and overly dogmatic but clearly you have that as your standard.

[RaceBannon]

well, sympathy is ok if your female...

[harpseal]

Nuclear weapons have their disadvantages. Would you reject a tort reform bill that gave you 90% of what you wanted?