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.

but I want to find something they can't outsource, whatever the hell that turns out to be

That seems to be the general consensus. But, I have to say what is going to happen to the wages of these fields when there are so many qualified people to fill the positions?

Everyone can't be a lawyer, doctor, nurse, truck driver or dentist. As it is, we have a new dentist office opening on every corner. It is getting so competetive, I have finally broken down and had a $2500 procedure done this summer. ($2500 is what all my previous estimates were). My dentist offered to do it for $925, if I did it before September 1.

I think it's spelled Satyam. How do I know ? I had to train them for what I do (I didn't train them for what I know). Had I been an employee, I would have quit rather than train them, however, I work for a consulting firm. We have other clients and we have products...so I'm safe for today. ( In consulting, it's here today gone today).

Interesting thing......the 2nd in command for Satyam on this particluar client's site opined that they weren't ready to take over. He was summarily fired..then rehired as a programmer.

Near as I can figure, the difference between us(we designed and developed the system)and Satyam... is the difference between a teacher and a baby sitter.

The only thing I see here, is an opportunity to make big bucks cleaning up their mess.

My President is an honorable man. Maybe someday we'll be able to say the same thing about you.

How can one be a liar and honorable at the same time? He is first and foremost, a politician, and hence, a liar. My proof of this? His "Islam is a religion of peace" statement. Can anything be farther from the truth? He told a lie that he knew was a lie to simply pander to the muslim/black vote in this country.

When he seeks the middle ground of appeasement he alienates those of us who have the ability to see through his BS.

Hat-Trick

My response was based upon your statements of all or nothing if one just wants a list of problems which also need addressing we could include the ednagered species act and the damily leave act etc. However you were the one who wanted to drop a nuke on the problem who did not wish to chase down individual enemies with an M-16. Please I sometimes have a hard time undertanding where you stand.

In short I am asking questions to determine axactly what you are saying.

Who cares about the southern border?

I do and millions of other Americans who've seen their quality of life decimated by the flood of individuals who do not believe in the American Constitution, or keeping the ideals of our founding fathers alive. My town has suffered from it mightily, as have towns and cities all over the nation.

Did you know there are more than 100,000 gang members in LA alone? Thats an army! Most of them are immigrants(legal or otherwise) from Mexico. Most would not be here if we had border security. What would happen to us if they organized?

Urban sprawl, congestion, school overcrowding and soaring prices for homes in the 1990s are all byproducts of "record levels of mass immigration," according to a new report issued by a group favoring tighter borders.

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...

Now you're talking. The government seriously needs to look into:
a) how it is going to fund itself
b) why would anyone think of starting up a business in the US?
c) why would anyone get a higher education degree when those jobs are going overseas?
d) what's the net effect if everyone is one some government dole of one kind or another (ie welfare, "child credit" tax rebates, retraining programs, etc)
e) what's going to happen to the middle class when they're highly unemployed or underemployed?

You hit it right on the head: we've had it easy for a number of years so the government can creep in with its myriad of legislation as they were the boom times. That's no longer.

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.

OK...let's talk for a second about those who were part of the 9/11 conspiracy, and you can begin by explaining our President's comment that "Islam is a religion of peace". Go no further with me until you've spun that bald-faced lie for the man you'd follow blindly over the cliff.

If the failure rate was 100% and they've been sending it out there for the past 3 years, don't you think someone would have noticed it?????? Someone in the higher echelons of business?

While one might hope so from experience at a number of places as a consultan noticing such things is not a good policy for a senior manager. The person who originally decided to outsource may well have enough power to punsih anyone who challenges him while tha same person may not be an effective challenger to others at the same level seking advancement so it is not in anyone's personal interest to call attention to the unpleasent reality. just what I have seen of corprate politics in action of some places.

"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.

Good luck Harp but dont hold your breath. It's more likely pigs'll fly out of my butt.

It does not have to be this way. All of the apparati are in place for GWB to put an end to this:

1. Kill the H1-B and L-1 visa program
2. Ban the export of certain jobs in the same way we ban certain dual use technologies.
3. Erect tarriffs that level the playing field for US IT workers a bit. I'm not arguing that the dot com boom inflated IT salaries beyond what may have been reasonable, but the main reason why you can hire 8 Indians for one US IT worker is that you don't have the tax, benefit or regulatory burden with the Indians that you would with the US worker.
4. Ban the processing of certain types of personal data by other countries under existing privacy laws.
5. Stop US indemnity of US investments in foreign countries. If HP builds something in India, and it gets firebombed, you and I pay. Why?
6. Remove the tax incentives on foreign investment and job displacement. It's one thing that Indians make less. It's another that tax incentives are provided to encourage it.
7. If you want to base your call center in India, then my caller ID better come up with 'New Dehli Call Center' and not Verizon Everett.

So far, we are still the biggest market in the world. Time to put that to work while we can. If you want to sell your products here, then participate in this economy. Even the Japanese and Germans get this. I have two Nissans, both assembled in Smyrna, TX. BMW and Mercedes both have plants here. Hyundai is building three.

4. Ban the processing of certain types of personal data by other countries under existing privacy laws.

As much as it kills me to say this: I think trial lawyers might save us from this practice going much further. I'm just itching to hear about a case of someone's medical records being strewn across India and East Asia and that person sueing the hospital he went to, the insurance company, and the offshore processor of this account.
If I were younger I would consider going to law school just for this opportunity.

Good luck Harp but dont hold your breath. It's more likely pigs'll fly out of my butt.

I know. I do admit to sometimes being a bit harsh to some who repeatedly engagein the same tactics. But when I see people continually misrepresenting facts that they have been informed about before I lose my patience.

A dark thought. What if the CIO is here on a visa or a Greencard? Possible conflict of interest, eh? It would be intersting if, for example, the US Attorney's office, or for that matter even the CIA or DIA were to audit the firms with the 10 largest volumes of outsourcing as follows:

1. List the nationality of your CIO and other executives involved in outsourcing decisions.

2. Supply us with a copy of your procedure for doing background checks of non US Citizens whom you employ.

3. Do background checks include?:

a. Property held in foreign countries, shares held in foreign companies and other assets and financial interests outside of the USA?

b. Past and current standing vis a vis foreign military and intelligence organizatons?

c. History of any anti American activities, membership in anti American political groups, and other activities which have threatened or continue to threaten US security?

That's about as far as I'll go here... they'll have to pay me for anything more...

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

My son the historian says, "It doesn't matter since history almost 100% of the time has shown that industry 'big wigs' don't truely understand the significance of success v. failure. Regardless of the nature of the industry they have shown themselves to be more concerned with money in the short term. A rule of thumb is that they will always go with what they consider 'cheaper.' This seems to be one commonality between leaders of industry throughout history. The pointy haired boss at least goes back to ancient Babylon, probably farther!"

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