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.

I'll support your tariffs only if you tie it into a bill which eliminates the myriad legislative barriers

Don't forget getting rid of the Americans with Disabilities act and it's myriad bat-guano provisions...

As a favor to me and every other FR IT guy.... can you put them down and submit them as a message?

Boy, that would take a novel.

I'll give you the current one we're battling now. We outsourced our Lotus Notes development to a group called 'Satiam' in India. They were given a project, writing a 'log tracking' app. Our folks estimated it would take our people 1500 hours, beginning to end. The indians estimated 2000 hours, so that's what we budgeted for.

The indian folks have now burned thru the entire budget, and have not yet had a design doc approved. They're asking for 1500 more hours to finish the 'requirements gathering'.

If you want this to end, get to a reporter somewhere and just have him look into the results from all this. I've not been able to find one single success story. As far as I can tell, it's a 100% failure rate.

Sure, the indians *fail* cheaper than we do, but is that really a good thing?

Automations main goal is to eliminate tedious tasks in an effort to create more advanced products and services. The automation cycle gave us the dot-com boom. First came CGI then ASAPI/NSAPI, then JSP/ASP, then J2EE/.NET, now SOAP/WSDL/XML/XSL, and who knows what is next. The progression of technology has built wealth for corporations and IT personel alike.

I agree with everything you say except "automation cycle gave us the dot-com boom”. The dot-com boom was based on two factors: Y2K technology spending (misinterpreted as part of the dot-com miracle) and pure foo-foo dust investor ignorance/insanity.

Believe me, I understand. I've managed to stay one step ahead of layoffs, but many, many of my friends have fallen in the past few years.

But this is all just a massive mistake by the Dilbert pointy-haried bosses.

These same folks told us:

The internet bubble was real.
The Y2K threat was real.

And now, they say the cost savings from outsourcing are real.

I largely blame the idiot media. All these reporters writing stories about outsourcing, and not one anywhere actually asks the question, "did it succeed?"

Would you reject a tort reform bill that gave you 90% of what you wanted?

Of course not! And your response was the precise response that I wanted.

In the hack world of IT, you can attack a vulnerable system that allows buffer overruns. My list of things is like that attack. I wanted to throw so much at it that at least 50% of it hits home.

Then I'll gear up for my next attack.

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

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'd love to implement this. But, as harpseal said, politics is the art of the possible. It has taken decades to get us here; it will take decades to roll back these items, with the CommieLibs screaming bloody murder each step of the way.

In the meantime -- TODAY -- we are losing jobs. However, after hearing some of Dominic Harr's stuff, we might be better off than we presume.

Don't forget getting rid of the Americans with Disabilities act and it's myriad bat-guano provisions...

Say it, suh! Preach on.

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

The Y2K threat was real.

By this I presume you are not alleging that there would have been no problems whatsover had remdiation not been done on the dates that were is six digit format. I did not say bites because I have seen dates stored in packed format.

See #306, then get back to me.

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

I have a meeting in 10 mins, and I'm busy the rest of the day.

I'll throw out one other quickie:

About 4 months ago, our director of QA noticed that the data in her Status Reports database had been changed by an Indian resource.

Upon asking questions, it turned out the Indian developer thought she was poking around in development and was randomly changing things, trying to get a feel for the system.

But, of course, she was actually in the production instance . . .

I'll holler at you later. I'd be interested in helping get this info to the press. When the truth comes out about this, there will be a very, very interesting few years, I think.

In the meantime -- TODAY -- we are losing jobs. However, after hearing some of Dominic Harr's stuff, we might be better off than we presume.

That presumes the managers can figure it out that they are costing more by sending the stuff overseas. Managers having that much intellect has yet to be proven

I'm sorry, I should have been more specific.

I'm referring to the Y2k panic.

Certainly systems needed to be patched. But the world was never in danger of ending . . .

Lets do some math:

Your folks estimated it would take our people 1500 hours, beginning to end. The indians estimated 2000 hours. They have now burned thru the entire budget, and have not yet had a design doc approved. They're asking for 1500 more hours to finish the 'requirements gathering'.

Your folks would have done it -- front to finish -- in 1500 hours at 75,000/annum or $36/hr, at a total of $54,086.

The Indians work cheaper, at 15,000/annum, or $7.21/hr. They have already asked for 3500, JUST ON REQUIREMENTS GATHERING. Call coding another 3000 and support/deployment/bug fixes another 3500. Thats 10000 at $7.21, or $72,100.

Let's see: Americans get it done at $54,086. Indians get it done at $72,100.

Oh, yes, we must select the Indians.

In Orwell's Animal Farm, the animals who took control of the farm started off with a set of rules, and one of their Commandments was, "All animals are equal." Over time, however, the power-hungry pigs started behaving like their former oppressors and they eliminated all of the Commandments except for the one about equality, which they changed to "All animals are equal. But some animals are more equal than others." Also, If anyone questioned Napoleon, the lead pig on the farm, the sheep were sure to silence him with a tremendous bleating of "Four legs good, two legs bad!" The bleating would continue until all questions were forgotten or dissenters were too intimidated to raise them again. The Animal Farm problem with our current leadership is obvious.

After all, this honorable man has said he will no "What ever it takes" to protect the USA from terror attacks.

If that's the case, wouldn't you want to protect the Southern and Northern borders?

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

"...CIOs will need a cadre of seasoned IT professionals and eager recruits to "turbocharge" new ideas..."

Im too familiar with what this means. This is where "old" white guys are contracted to teach the young female minorities who were hired what they should have learned in school.

I saw the IT trainwreck coming and jumped. I wonder how many will ride it all the way and then complain.

Your figures for the Indians do not factor in the same reliability of the original estimates in the new numbers. You are actually understaing the Indian outsourcing cost by an unknown number maybe an order of magnitude as they still have finished the requirements phase.

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