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.

For what it's worth, this is from the OPIC website http://www.opic.gov/ :

The Overseas Private Investment Corporation (OPIC) was established as a development agency of the U.S. government in 1971. OPIC helps U.S. businesses invest overseas, fosters economic development in new and emerging markets, complements the private sector in managing the risks associated with foreign direct investment, and supports U.S. foreign policy. By expanding economic development in host countries, OPIC-supported projects can encourage political stability, free market reforms and U.S. best practices. OPIC projects also support American jobs and exports—over 280,000 new U.S. jobs and $65 billion in exports since 1971. Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers.

If you value The Bill of Rights as anything other than a scrap of toilet paper, you don't want the US government to control who this company hires and fires.

But that can be taken to an extreme too. Is it okay to hire slave labor to make your widgets as they are in a foreign country? Who is to tell companies that can't be done but the government? Certainly the market isn't as they'll have the cheapest goods.

What I think is missing is the "promote the general welfare" clause of the Constitution. The government should be working towards increasing the standard of living for all Americans, not just the CEOs that offshore all their work to foreign countries.

No, actually you deserve him. You are going to get him because this guy has a beef, and its real. The trend is bad for businesses, bad for national security, bad economically in ways you haven't even considered yet.

If you are the hater of liberals as you are, then you need this guys vote, and my vote too.

He's right, Bush is massively vulnerable on this topic. Anyone reasonable that comes out and says, "Why should my son or daughter go to school and get an engineering degree? This President thinks that ceding one of the only real advantages we still possess in the US, that of software engineering and development, to countries like China, India, Pakistan, and Indonesia is sound Homeland Security policy, and sound economic policy as well. This is the same party that wailed about the sale of sensitive satellite technology to China, but lifts nary a finger when a half a million, high paying, strategically critical jobs go to the ChiComs. By all means, Mr. President, let Bank of America outsource its back office operations to Beijing. Let Verizon outsource its billing to Israel. Let India handle all of our IO/IW software component development. When it comes to oil, you are all about domestic production, but when it comes to IT, its better that we rely on future generations of Chinese, Indians, Pakistanis, and Russians to develop new operating systems, switches, network technology, and application development - after all, we need more law school graduates here in the US, where during your administration, the only segment of the economy to grow was the litigation industry."

Now, I'm a republican, and that was pretty easy to write.

So, if you want Dean, then keep it up with the flip responses to people with Masters Degrees that have followed all the rules and got hammered with very little warning.

OPIC projects also support American jobs and exports—over 280,000 new U.S. jobs and $65 billion in exports since 1971. Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers.

Very informative.

In return for those 280,000 jobs over the last 34 years, OPIC has cost the US about five million jobs in the last three years.

And that $65 billion in exports over the last 34 years certainly helps offset the current half trillion per year trade deficit with China.

Minor details and such.

So, if you want Dean, then keep it up with the flip responses to people with Masters Degrees that have followed all the rules and got hammered with very little warning

What flip resopnses? It called economics. A grocery chain in my area has introduced self-serve checkout. The way it is set up, one checker now does the job four used to, thus effectively outsourcing 3 checker jobs.

Should this practice, according to you, be banned?

I'm still working in IT, but I have watched many of my code buddies tossed out on the street. Now I'm surrounded by people who don’t pay any taxes and could care less if this country become a third world country (in the end the joke will be on them. We won’t be able to buy the stuff they build)
I work with many people from India that have made America their home and they don’t like this movement because they don’t want to go back to India. They have tasted the good life. They know how bad it is to live in India.

The sales pitch on the OPIC is not worth much. Here are some facts that are documented.

http://www.worldnetdaily.com/news/article.asp?ARTICLE_ID=26159

"POWER FOR SALE
Huge Enron loans
expose taxpayers
Ex-Im Bank, OPIC backed 18 of firm's overseas projects to tune of $1.7 billion

By Paul Sperry
© 2002 WorldNetDaily.com

WASHINGTON – Federal overseas economic-development agencies have financed or underwritten 18 Enron Corp. projects, exposing U.S. taxpayers to a total of more than $1.73 billion in potential liability, according to agency officials."

http://www.opensecrets.org/alerts/v3/ALRTV3N26.asp
"Taxpayer groups, such as Americans for Tax Reform and the National Taxpayers Union, are lobbying to end OPIC because they contend that taxpayer money should not be put at risk to benefit wealthy corporations. They also contest the agency's claims that it makes money for the government because much of OPIC's income is derived from interest on Treasury bonds. Opponents of OPIC argue that American job opportunities are lost when businesses locate plants abroad rather than in the United States.
Many of OPIC's more than 250 clients are also generous contributors, donating a total of $27.4 million in PAC and soft money contributions to federal candidates and parties in the 1996 election cycle."

http://www.newsmax.com/archives/articles/2002/1/28/155951.shtml
"Between 1993 and 1994, 26 companies received support from the Overseas Private Investment Corp. and the Export-Import Bank totaling about $5 billion. According to the center's study, five corporations – Enron, U.S. West, GTE, McDonnell Douglas and Fluor – donated $563,000 to the Democrats and received at least $2.6 billion in contracts.

Moreover, the U.S. government was aware that insuring the false contracts inside Indonesia could push the Overseas Private Investment Corporation into bankruptcy.

"OPIC's combined exposure in Indonesia is close to USD 1 billion, or 5 percent of OPIC's global exposure, all in the electric power sector. As such, resolution of potential insurance claims and/or actions could result in 'an adverse material impact' on OPIC finances," notes a cable from the U.S. ambassador to Indonesia.

Yet, despite being faced with total financial failure due to huge losses, OPIC continued to back more power deals inside Indonesia. The Commerce documents note that during the Clinton years, Indonesian dictator Suharto contracted for 26 U.S. taxpayer-sponsored power projects while his impoverished nation could afford only one such plant."

When it comes to oil, you are all about domestic production, but when it comes to IT, its better that we rely on future generations of Chinese, Indians, Pakistanis, and Russians to develop new operating systems, switches, network technology, and application development - after all, we need more law school graduates here in the US, where during your administration, the only segment of the economy to grow was the litigation industry."

Oh sheesh, you ooze demo talking points.

Oh BTW, if you owned a business and tried to cut costs of doing business, how would you feel if a government beureaucrat said you couldn't. Or are you going to give another demo talking point on how all business owners are evil.

BTW, how come you just bash Bush and not the demos, who try to block tax cuts(which benefit American businesses and consumers) at every juncture.

>>>"Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers."

If they are so self-sustaining, then why does the government need to perform this service at all? Why aren't there zillions of competitors vying for this lucrative insurance business?

This is clearly a subsidy to corporations to move their jobs overseas. If a company decides to move their work offshore then they should at least be charged market rate for this work and it should be done by an American private enterprise company... NOT by the U.S. government.

This is a clearly a governmental subsidy. Insurance for overseas investments by OPIC can't stand the light of the day. We want FREE TRADE, not our tax dollars subidizing the export of U.S. jobs. If U.S. companies can't invest overseas without this subsidy, then they should stay at home.

Hoppy

So we have nothing to be worried about with everything being produced in communist China and a large majority of IT jobs in India? R&D moving to Tiawan and Singapore? Its all just economics that jobs are flying out of the country?

Do you own a business. If you did, would you compare different companies offering the same product and which gives you the most bang for your buck.

In your personal life do you make purchases based on price? Why do you want to deny that to business owners?

You do know the military uses high end, off the shelf, networking equipment manufactured by companies like Cisco and Juniper don't you. It's not a good idea to give China easy access to the latest and greatest hardware used to move logistical data. The Aegis system is built from COTS hardware and software and low-and-behold the ChiComs are announcing the development of a new Aegis class destroyer.

Let's not make their missles as accurate as ours. That was the advantage we held over the Soviets, we will have no such advantage over the Chinese.

"Globalization," as generally understood, does not consider the nation state of any importance, and presumes that political power holders have no influence upon economic activity. As a result the USA is exporting its manufacturing and research and development wholesale to national socialist and authoritarian states such as Red China. As I have posted elsewhere, I'm glad that no one had these bizarre ideas in the Thirties. Nazi Germany and Imperial Japan would have been nearly impossible to beat had today's ideas been implemented then.

Oh BTW, if you owned a business and tried to cut costs of doing business, how would you feel if a government beureaucrat said you couldn't.

If my way of cutting costs was dumping toxic waste into a river then I think the government has every right to step in. Government intervention in business is a matter of degrees. I think it should try and promote a healthy business climate and promote the general welfare of the US populace and weighing that against staying out of the market.

And be careful what you wish for: Hoover thought the same things about keeping the government out of the Depression and look what that got us.

What stops the Chi-coms from buying or smuggling the same "off the shelf" stuff. The difference is with the Clintons is that they sold them for campaign contributions from the Chi-Coms.

I agree with you that military secrets should be protected as much as it is humanly possible and not sold for campaign contributions, but what about normal day to day business operations such as the cost of doing business. Shouldn't a business owner have the right to go to the place where his/her dollar gets the most bang for the buck.

BTW, earlier on this thread I noted that self-serve check out lines now lets one checker do the job of four, thus outsourcing three checker jobs.

Should this practice be banned?

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