itmWEB TechWeekly

April 4, 2005

The New Reality of Offshore Outsourcing

A critical and realistic look a the new reality of offshore outsourcing. Originally written by Russ Finney for CIO Magazine.

Back in 1992, famed IT guru Edward Yourdon published a book entitled the “Decline and Fall of the American Programmer”. At that time, this book really caught my attention because I was a programmer and because I very much wanted to stay employed. This book alerted me to the fact that someday technology firms in other countries may develop business strategies to either augment or outright supplant American technologists like myself at a lower cost.

Today’s renewed focus on outsourcing has kindled a new debate about Yourdon’s old issue. Is it inevitable that American technologists will be replaced with inexpensive foreign labor? Should today’s college students stay away from degrees in computers and IT? Will the CIOs of the future have the American talent and resources they need to operate their enterprises?

Having just gone through one of the most gut wrenching downturns many of us have ever seen, it is hard not to think the worst. But the sky is not falling. Yes, the worldwide technology labor pool is changing – it is on an irreversible march toward globalization, and this change is being accelerated by the growing ease of modern travel, communications, and the Internet. But I believe that future opportunities for American technologists will still continue to exist in abundance. American students are well positioned to take part in the incredible wave of technology innovation still to come. They will continue to hold challenging jobs, and IT support jobs at home will also remain plentiful.

I serve as the American CIO of Tokyo Electron Limited, one of the world’s largest manufacturers of semiconductor production equipment. TEL is a $5 billion dollar, multi-national Japanese technology company with operations all over Asia, Europe, and the United States. Our challenge is to find the right people, at the right price, and at the right location in order stay equally efficient as our other global competitors. This means that we employ an efficient decentralized strategy of IT staffing at the business unit level managed by three centralized IT support centers located in our three respective business regions. Our company currently uses a mix of in-house resources and outside service providers.

I remember only three years ago desperately advertising mid level open technology positions for several of our US operations and not receiving a single resume. US programming talent had been lured by stock option mania into the new dotcom start-ups, and many professionals and college graduates were avoiding traditional IT jobs. But after the dotcom bubble burst, companies rapidly implemented hiring freezes as the economic squeeze intensified.

Organizations also reduced employee counts in order to control costs and insure survival. Dotcom programmers found themselves on the street in a brutal downturn. With the resulting drop in technology jobs, university enrollments in IT studies understandably declined. In the meantime, offshore firms began to more aggressively pursue a bigger share of the worldwide IT workload. Positions involving help desks, computer programming, and mainframe remediation became viable candidates to be filled through outsourcing.

Today one billion people live in India, 1.2 billion people live in China, and only 285 million people live in the United States. US technology enterprises have been expending massive capital and resources to develop the transportation, the communications infrastructure, and the Internet connectivity required to reach all those far away people at a very low cost. Ironically, those same people can now reach the US market through these same new technology channels, giving them the means to provide us with services at their own domestic market rates, which in some cases can be five to ten times lower than in the United States.

Forrester Research has predicted that by the year 2015 about three million domestic jobs may be transferred to overseas employees. But this number has to be viewed in the overall context of the US economy. Domestically more than two million jobs are destroyed and created per month through a process called job churning. During the 1990s about 24 million new jobs were created out of the natural cycle of job churning. The potential outsourcing of three million jobs over a ten year period with a normal churn cycle of 240 million jobs is a very small number. Thus, the economic outlook is not really as dark as many current and future IT workers may be thinking.

Another fear is about the negative impact of the discrepancies in the pay for US versus offshore programmers. This concern may also not be well founded. As the high skill, high pay employment rates increase overseas, so will the associated overseas labor costs. Inevitably, higher standard of living increases will occur with this increased economic activity. Many outsourced foreign employees are already being paid considerably more than their own domestic firm’s compensation levels. This trend will continue to bring overseas technology pay scales closer to US levels. High skill programming jobs require huge education and time investments, unlike low skill manufacturing jobs that require quick, short-term training. Increasing pay incentives must exist in order to make the education investment worthwhile. This fact seems to be missing from the current debate.

For the foreseeable future, American firms will continue to be on the forefront of the majority of technology advances either as new technology creators, global outsourcers, or worldwide service providers. US firms will continue to have an insatiable appetite for IT talent both at home and throughout the world, and they will pay accordingly. Foreign firms like TEL will continue to be large employers of IT talent in the United States, and their needs will continue to increase in order to support their own manufacturing, development, and service activities within the US. Technology R&D in software development is as strong as ever here at home, and this activity is strengthening with the increased ability to augment specialized development talent in the US with off shore resources to cover the routine and mundane.

Local professionals will continue to be needed to provide the fundamental IT services within both domestic and foreign companies operating within the United States. IT folks will still find a steady IT job market whether they work directly for a company, or for a company’s service provider. I firmly believe that US companies will continue to employ at home IT experts to manage their on-site resources. After all, information technology is an increasing component of all business operations. But these IT jobs of the future will depend even more on advanced business skills, deeper technical skills, and increased cultural and world understanding. The students in today’s information technology university programs should be well positioned for high skilled IT employment as the inevitable entry-level job opportunities become available through the US economic recovery as well as the upward career advancement of the pre-crash wave of IT graduates.

Many new US technology companies will continue to be started up domestically and operated locally. These are the firms who also look for the most highly skilled people no matter the country of origin. Just three years ago because of a shortage of skilled labor, these companies were pushing for increases in H1B visas in order to obtain qualified people for US based positions. But qualified US college students, because of their proximity, will continue to have the first choice in working within these premium technology start-ups.

Traditional multinational companies are now positioning employees into strategic geographical areas in order to optimize their costs, supplement their skill bases, and improve their proximity to global markets. In order to remain competitive, US companies will have to employ similar strategies. As a result, CIOs everywhere are feeling the pressure from top management to outsource some of their resources. But this does not signal the end of good jobs in the US. Smart CIOs are keeping innovative, technically skilled, and business savvy IT employees inside their local operations to create and operate their infrastructures and manage their service providers. These jobs are difficult to do from a distance, especially from overseas.

Having the right people to create new technologies, to manage the IT resources, and to supply the big service providers such as IBM, HP, and others will require the US educational system to keep up its leading edge in fundamental business and computer science skills. Our universities and community colleges must continue to stay in the forefront of business and IT skills. This is critical in order to be competitive in an increasingly interconnected, globalized workforce. High quality local education and targeted retraining are the primary antidotes to fears of wholesale offshoring. The current student fears of outsourcing drying up their potential job opportunities will probably have a reverse effect for those remaining in IT educational programs since these graduates will soon fill a potential drought in entry-level IT talent. Already companies are preparing to refill their downturn diminished entry labor pool with a new wave of IT recruits. These companies need to get the word out to ensure an adequate supply of graduates. Bill Gates of Microsoft has been doing this already with a series of visits to US college campuses.

Similarly, the US economy can retain its enormous lead in innovation and job creation, but the task will require vigilance. At a governmental level we must manage our visa and taxation processes intelligently in order to keep a balance between H1B visa allocations and tax incentives compared to the skills and the availability of the local employment base. This also means striking a political balance between maintaining local employment levels and staying competitive by hiring cheaper talent overseas. US companies must remain rational in their use of foreign outsourcing in order to reap the appropriate operational efficiencies but also not to give away their competitive advantages by cutting their in-house innovators to too thinly.

Irresistible market forces are pushing many US companies toward offshore outsourcing, but companies must keep a talent base close to home to remain innovative. Educational institutions still need to meet the emerging requirements for skilled entry-level IT talent. Given such necessities, I would argue that the American technologist still remains well positioned to prosper in the relentless globalization of business, and with foresight and prudence we can still continue to postpone Yourdon’s fifteen year old prediction of the “Decline and Fall of the American Programmer”.