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.

[harpseal]

I have read your comments and modified them as I deemed approporiate. In many other posts in the past I had number 5. stating the goal to cover the entire nation. I also at times brought in the fact that number 5 would have some ex3emptions from corporate regulation.

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.

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.

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).

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.

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. These economic development zones shall be eventually be expanded to include every bit of every state once the benefits are shown I would like them to be totally implemented immediately but I realize4 that may be overreaching.

6. Scale back unnecessary regulation.

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. The only reason any content for DOD purchase may come from non uS allies is that content is not available elsewhere and is essential.

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

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.

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.

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. Note that the loser in a frivolous lawsuit shall pay the attorney fees of the winner.

12. Deport all illegal aliens immediately and take measures that prevent the entry of any more illegal aliens. Fine all companies knowingly employing illegal aliens Criminal sanctions should be imposed on anyone helping an illegal alien stay in the USA in violation of our laws.

13. Decrease the punishing levels of taxation on companies and eliminate the double taxation on Corporate dividends. See effects of item 5 for how minimal this will be if item 5 covers the entire USA

14. 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.

Now a couple of points need to be noted. I consoder 14 superfulous because with teh other points no inbe in the USA will be amking inly the minimum wage.

I note that my number 3 was reluctantly put in and reluctantly agreed to by you do you have a better option?

On 4 I did not desire to put the word only in due to the remote possibility that a general revenue tariff would be proposed instead of specific tariffs. said general revenue would be used to reduce individual income taxes. Remote possibility of enactment but not something I would wish to preclude out of hand.

regarding number 7 I have rewritten it so that it allows the DOD to get what might not be available anywhere else.

Regarding number ten thet reason provisions being what they are and the definition of enemy being what it is treason might be an excuse to not prosecute someone who say tranfered crytography information to say the PRC since we are not now in a declared state of war with them.

Regarding numbers 9 and 12 I am keeping them separtate becuasde I believe there are enough differences to jjustify separtaing them.

[harpseal]

Oh yes thank you for your input. I did not include evrything you stated for reasons stated. I am willing to discuss further.

[Those_Crazy_Liberals]

"Oh, please! Stop! You are calling Lazmatazz shrill? You should listen to yourself. Now that's shrill."

6 posts from you in the past 4 years? I'm honored. Laz, is that you in drag?

[William Terrell]

Why do you hate blacks and/or Muslims?

I feel the need to bust this stupid tactic once and for all.

Hatred is not a basic emotion; neither is anger. Both are expressions of fear. However, fear is not mosty expressed as either anger or hatred, but just as. . .fear.

As far as I'm concerned, I fear blacks and Muslims. I fear blacks because the greatest majority of them support liberal socialist programs that raid the wealth I have worked over my life to produce, and are led as a near monolith voting bloc by those who have neither their, or anyone else's, interests at heart using manipulation techniques that would turn Uncle Joe green with envy.

I fear Muslims because I read their holy works and see a communist-like mass led by those whose goal is to take away any government system that is not Muslim and turn it into a Muslim theocracy. Where you see misery and oppression, war and poverty, you will likely see Muslim rule. Their tactics have been truly advertised and obvious and their book of guidance condones lying to fool the "infidel" so that their goals can be achieved.

I fear rattlesnakes and coral snakes, tigers and black widow spiders. I don't hate them. I respect their agendas and the internal integrity that allows them to tirelessly work toward the fulfilling thereof. But I also respectfully decline any participation in the that fulflilment, and yes, even dedicate myself to their failure, the fear motivating me toward that end.

My appologies to those blacks and Muslims, some of who I know personally, that have enough intelligence, integrity and foresight to oppose those agendas. However demonized "stereotypes" are, human beings have used them as rules of thumb to great success for survival over the millennia, and need not include 100% of a population, but just enough to form a threat and execute it.

You, my friend, seek to pull this pistol from your pocket when the conversation is getting the better of you.

But it ain't loaded, except with blanks and duds, which I hope is not a reflection of your ability to see beyond your own personal interests.

[Baseballguy]

George W Bush has nothing to do with this. It was Clinton that allowed this.

Though one thing should be made clear these companies should not try and program seperately from upper management. I think management should go where the programming is being done. Otherwise you are spending more for rewrites and modifications thus losing the economies of scale.

One last thing I wonder if there is national security involved here. No programming contract should be given to those that out source which might infring on american citizens! Where is this test data coming from??????????? Could you imagine a code line that would scrape off a a few dollars here and there to a specified account. Trusting pgm is more important that paying them.

[harpseal]

I believe Mark Twain once said "Never try to argue with a pig. It wastes your time and anoys the pig."This may be relevant when dealing with posters that accuse ytou of hatred.

[Diva]

Everybody's got a cool screen name but me. :o(

Oh Laz I love your sceen name.

[the gillman@blacklagoon.com]

I always thought Laz was a Mister Creant?

[Tokhtamish]

Precisely.

In creative destruction a new, stronger industry arises from the ruins of the old to absorb the displaced people.

In outsourcing, NOTHING is created to absorb the displaced people. And it had nothing in the least to do with the quality of their work or the currency of their technical skills, so retraining is idiotic advice.

[mhking]

I believe Mark Twain once said "Never try to argue with a pig. It wastes your time and anoys the pig."

[rdb3]

My concerns are completely addressed. I stand behind these 14 planks for an economic platform.

[harpseal]

By the way i second the comments on your being a very well repected member of this board and have had the pleasure of exhanginbg comments and discussing issues in the past with you. I look forward to seeing your screenanme of future threads.

[Dominic Harr]

Lets do some math:

And it's worse than that.

Even if they did save a little money . . . it would have taken us about 4 to 6 months, beginning to end.

It looks like it's going to take them a year and a half or so.

Time-to-market in the software world is critical. If a product or tool takes an additional *year* using them, even if you do save a little money (and I don't think you do), is that really a 'success'?

[mhking]

If a product or tool takes an additional *year* using them, even if you do save a little money (and I don't think you do), is that really a 'success'?

Only to Microsoft.

[William Terrell]

Well, he didn't accuse me of hatred. He just used a tactic I loathe and dispise.

[Dominic Harr]

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

I've actually been told that will be a big part of my job, over then next few years.

What goes around *does* come around.

[MelBelle]

When sending my system administration job to India in June, the last thing anyone cared about was the security of data, or who was going to ensure audit procedures were carried on in a sufficient manner. I was only given 2 1/2 days to train my Indian counterpart to take my security admin job. For two years I worked under security procedures that were considered extremely important in regards to audit compliance and in the remaining last few hours of my job the manager in charge of transition to offshore called and said "Who's going to to the audit??" Duhhhhh, I told him they guy who just took my job - you know the one that just flew back to India...

I swear I thought I would get called back or extended for a month BUT our company was severly overbudget even BEFORE the offshore cutover date even started. So here I sit, unemployed after a 15 year IT career..42 years old..just kissed my $70,000 a year job goodbye.

[harpseal]

By the way I still would like further amplification on point 6 reduce unecessary regulations. additional specifics would be helpful. My original thinking was that 6 covered all that you mentioned except my specific disagreements noted in my response to you above. I invite nay Freeper who thinks they could improve upon these 14 points or add another point to pleae do so.

I have a particular dislike of 14 point programs because they remind me of Woodrow Wilson who IMHO is one of the worst presidnets in Americna History.

[harpseal]

I stand corrected but my quotation from Twain stands.