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.

[Dane]

You have just touched on the one good thing about my home state of NJ! I want to be forever denied the privilege of pumping my own gas!

Oh so people shouldn't have the choice of pumping their own gas.

LOL! And I'm the one called the marxist on this thread.

[dfwgator]

To put it in perspective, before the year 1900 there were over 2000 companies in business to make cars. We all know how many were left when all was said and done.

[Those_Crazy_Liberals]

"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."

Listen, I'll dictate the terms of the debate. We're talking about the southern border, not your hate of a particular religion. Is your mind normally so, um, disconnected?

[GatekeeperBookman]

Oh don't apologize to me. It's your ownself that is most hurt. You sound like the idiot.

[Those_Crazy_Liberals]

"Most would not be here if we had border security."

Gangs are not a result of immigration, legal or otherwise. A most silly position for you to maintain. I suppose you're still bitter about the slave trade that resulted in those Bloods and Crips.

[Those_Crazy_Liberals]

"He told a lie that he knew was a lie to simply pander to the muslim/black vote in this country."

Why do you hate blacks and/or Muslims?

[GOP_1900AD]

Right on!

[Those_Crazy_Liberals]

"The Animal Farm problem with our current leadership is obvious."

If you don't mind me pointing out to the other readers on this thread, YOUR problem is you live your life with a fiction book mentality. Wake up to reality my friend. There's a great world out here waiting for you.

[mhking]

Why do you hate blacks and/or Muslims?

I didn't take his statement that way - where did that leap of logic come from?

[Hat-Trick]

Nice evasion. Have you considered politics as a career? You are very adept at avoiding the discussion. Come on and defend your president's own words. I'm betting you won't.

[Those_Crazy_Liberals]

"I didn't take his statement that way - where did that leap of logic come from?"

Trust me, very few on this site consider you any type of judge of logic. Move along.

[superloser]

People said the same thing about Japan in the 80's.

Lemme see if I get this right. Japanese companies built a better mousetrap in Japan using Japanese capital and Japanese knowledge and Japanese workers and beat the pants off of us. Am I correct in how I'm looking at this?

Well look what happened.

Weren't they the ones who first started investing in China?

JMO, the dot com bubble burst and now IT profesionals aren't in as much demand and now they also have competition. Just like the auto and steel workers found out in the late 70's.

Slight difference here. American companies didn't finance the Japanese in the 1970s that I recall whatsoever. The Japanese built themselves up and built a better mousetrap. Right now, its American companies leaving the fold.

Seems pretty obvious. Comparing what is going on nowadays to Japan in the 70s and 80s is like comparing apples and oranges.

[mhking]

Trust me

Sorry, I'm not about to make that mistake.

Move along.

You are certainly not in a position to have me move anywhere.

[Hat-Trick]

Why do you presume to know what I hate? Let's follow your logic. I make a statement consistent with the position that Islam IS NOT a religion of peace. That's tough to argue with from a factual point of view - not that you'll ever understand this concept. Based on my statement and position, you infer that I automatically hate blacks and muslims. The russian judge gives you a perfect 10.0 score for your demonstration of mental gymnastics in jumping to that ill-founded conclusion. You are a citizen (assuming so since you called GWB "my president") of a nation that gives you the opportunity to be a free thinker. Try not to waste it.

[Cronos]

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.

That's bs. The 100% failure rate figure is impossible. The success rate will be the same or else it's not profitable. By diluting the argument with these silly excuses that the quality is lower, we lose the entire point. And the point is that you can get similar quality goods/services at a lower price. And why is that? Because these countries have currency controls (which they won't lift no matter what pressure we brign on them, and which they can't lift because otherwise 2 billion people will languish in poverty, which would mean 2 billion Osama recruits). Why are we so expensive? Because we've got too many lawyers jacking up the sue rates so everyone needs tons of insurance thereby pushing us out of business.

[harpseal]

Weren't they the ones who first started investing in China?

They were one of the first and the removal of some of the restrictions on imports of finished goods into Japan immediately preceded their financial problems. Now I am not at this point asserting a direct connection because I have nbot researched theissue well enough but cetainly the coincidence should not be cavalierly dismissed. I note this has been pointed out to Dane previously (since he is being mentioned in this post he is being flagged as a courtesy).

As for the rest of your comments there are on point and factual.

[hchutch]

I'll take the talk a little further - tariffs are ONLY supported IF the other measures have been enacted AND if te situation is still deteriorating.

I am NOT going to support anything that gives politicians an easy out to avoid dealing with the present problems we face - the legislative and regulatory barriers, the out-of-control lawsuit culture, the excessive tax burden, and the fact that success is considered a dirty word. Right now, passing a tariff only gives the politicians an easy out - so they can AVOID the heavy lifting that has to be done. I'm not a conservative because I support easy outs for politicians. I want them to do the heavy lifting when they have to do it, and it's about time they did that.

* Eliminate the corporate income tax
* Cost-benefit analysis for all regulations
* Tort Reform
* Eliminate the Sherman Anti-Trust Act
* Stop treating achievers and the successful as social lepers.

Do that - and if the problem still persists, I'll be willing to consider tariffs. Not until then.

[the gillman@blacklagoon.com]

Ha!

You argue just like ol Texas_Hawg!
No wonder we never see you too together.

Pretty much everybody respects the logic of MHKING.

Unlike you, he is also a gentleman.

[Hat-Trick]

Why do you hate blacks and/or Muslims?

I'll remind you with your own words from post 84 this thread:

"I think you need to be held accountable for running your mouth and making these insulting, outragous claims."

I stand ready to accept your apology for implying that I hate blacks and/or muslims.

[rdb3]

1. Get rid of government subsidies for offshore investment of US companies. OPIC is the first such program which should go but support of World Bank programs that subsidize the outflow of Capital would be another.

Agreed.

2. Use tariffs on those nations which are engaged in unfair trade practices such as currency manipulation (China and India for example), those nations which refuse to open their markets to US products (China for example with its 50% tariffs on US consumer goods and non tariff barriers), those nations that subsidize competition to American Industry (airbus for example) and those nations which have slave conditions for their workers.

Agreed, but I'd insert the word "only" before the word "on."

3. Use tariffs and other means to prevent the relocation of jobs offshore that are essential to the national defense. If necessary take control of the company seeking to export vital technology or industry by means of eminent domain (No I do not like this last option and I will only defend its use as an absolute last resort like say in the case of rare earth magnets essential to smart bomb technology).

Reluctantly agreed (eminent domain).

4. An immediate end to guest worker programs. If people wish to come to the USA to work and make a life let them immigrate according to the rules.

Agreed.

5 Provide economic development zones where the corporate income tax is zero for operations within these zones. In order to operate in this zone a company must agree to only purchase American components if available and employ only American citizens or legal immigrants in these operations.

Hmmm... I agree with what you are saying, but I'd remove the "zone" and say "individual States" and let them compete for existing companies/corporations to relocate or stay there. Also, I'd make it your tax plan provided that your criteria is met.

6. Scale back unnecessary regulation.

Agreed.

7. Increase the domestic content in purchases by the Department of defense and give absolute preference in non-domestic content to proven allies of the USA over say the French or Germans.

Disagreed. Rewrite it to where no content used by our DoD can come from Germany or France.

8. Do not allow expense involved in moving operations overseas to be included in business expenses under the IRS code.

Agreed.

9. Prosecute for perjury anyone who has made a false statement in order to employ an H1B or L1 visa worker. I will be lenient on the actual perjurer if he/she was ordered to make this false statement and he/she provides testimony to aid in the conviction of the person ordering the perjury. Just because a person is a CEO does not give them a pass on criminal behavior.

Agreed. I'll add an addendum later.

10. Prosecute anyone who orders the transfer of vital defense technology overseas except to strong allies of the USA. The UK and Australia come to mind as meeting these criteria first.

Agreed with a catch: Provide the provision for trial under treason for those who do the ordering.

11. Institute a cap on punitive damages, limits on class action suits, and limits on liability to the actual percentage of liability with no plaintiff able to collect if said plaintiff was involved in the commission of a felony at the time of the alleged tort or was more than 49% negligent in the alleged tort.

Agreed, and add to that a provision of "loser pays" for frivilous lawsuits that slip through.

12. Deport all illegal aliens immediately and take measures that prevent the entry of any more illegal aliens

This goes back to what I said regarding your point #9. In fact, I think you could combine your point 9 with 12 by adding to 9 a provision stating punative fines to companies who employ illegal aliens. I think that this would assist the deportation process because the money incentive will be removed. Since this is not about social services, I'll leave that part out.

ADDITIONS:

-- Decrease the punishing levels of taxation on companies (including the double taxation regarding corporate earnings) which the consumer ultimately pays.

-- Eliminate the minimum wage so that the worker can be paid based on productivity. Overtime compensation will remain the same but instead of 150% of the "wage" the worker would receive 150% of the production pay.

I really don't have anything else to add.

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