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your indian replacement thanks you... (Score:3, Insightful)
by the-build-chicken (644253) on Monday January 31, @05:02PM (#11533169)
...for your open source contributions that help him undercut your wage.
IBM understands it...you're not winning a war by IBM playing 'nice' with the opensource community. A company will do whatever is profitable. At the moment, IBM get's free code and great PR out of a few token gestures. They they outsource any actual development work to [insert current outsource country here] which use your freely given code to lower their development costs. RMS argues that there is enough money to be made in the service markets to sustain your wages...well, guess what...IBM has been making a pretty spectacular play for that service market for quite some time now...and it's taking your freely given software and using it to increase it's market penetration. Do you really think that 'small developer X' will be able to compete with IBM in the service market? But it's ok, RMS will be safe because he can always make a living on the tour circuit.
Brilliant strategy guys, see you in the soup kitchen line.
Outsourcing may save less money than you think. The hidden expenses include vendor evaluation, extra security, airline tickets and severance pay.
A headline may say that a company signed a $320 million IT outsourcing contract, but the actual costs will likely be much higher. Behind the scenes, the client spends big bucks on evaluating vendors, managing the contract, enhancing security, traveling to offshore sites and potentially paying severance packages for laid-off employees.
And that's only part of what can inflate the dollar figure quoted in a basic contract.
"Things change over time, and that inevitably leads to some form of cost-shifting," says John Hill, CIO at Praxair Inc., a Danbury, Conn.-based manufacturer of gases. He suggests that contracts be designed to accommodate some flexibility, such as changes in labor or computer and network hardware.
Other IT managers and outsourcing consultants point out that unexpected costs can arise during any phase of the project. Anyone considering outsourcing should take a close look at these potential costs or risk miscalculating the true benefits of outsourcing.
Many organizations overlook the costs associated with evaluating and selecting a contractor. The process typically can drag on for many months, depending on the project's complexity, and requires time commitments from senior executives in IT, human resources, finance, legal and other departments.
"It's a very complex [market], with many service providers that have changing terms and conditions," says Shawn McCray, a partner at TPI Inc., an outsourcing advisory firm in The Woodlands, Texas.
If the potential contractors are located offshore, organizations could incur extensive travel expenses for visits to evaluate services. "A lot of times, offshore service providers have very good sales and marketing abilities, but companies need to [scrutinize potential contractors] to see what their real capabilities are," McCray says.
In some cases, organizations will need to buy studies from independent research firms—at a cost of thousands of dollars—to evaluate outsourcing vendors, says Atul Vashistha, CEO of NeoIT.com Inc., an offshore outsourcing advisory firm in San Ramon, Calif.
IT and business leaders who haven't clearly defined the goals for the outsourcing project or communicated them to the managers negotiating the deal also slow down vendor selection and the contract-signing process. "The people negotiating the contract could be focusing on the wrong things," which will result in delays in getting the contract ironed out, McCray says.
All told, choosing the right vendor and writing the contract costs about 3% of the total outsourcing cost, according to a 2001 study of 50 IT outsourcing deals by French academic Jerome Barthelemy.
Unexpected costs can crop up during the early stages of the outsourcing relationship, when knowledge is transferred from people on staff to members of the outsourcing team. If the contractor is located offshore, that can mean extensive travel expenses and cultural or language training for employees who visit the contractor's site, possibly for months.
If the client and outsourcing vendor need to transfer data between their systems, that might require the deployment of additional network bandwidth and security technologies, says McCray. Companies using an offshore outsourcing service will also need to be aware of the communications and data encryption regulations and requirements in different countries in order to make the necessary network upgrades to comply with them. For example, compliance with U.S. regulations such as the Sarbanes-Oxley Act and the Health Insurance Portability and Accountability Act could lead to additional IT costs for some financial services and health care companies.
Organizations that are replacing employees with outsourced staffs through layoffs or attrition could face human resources costs for severance pay and employee benefits. Depending on how many people are involved, these expenses can run into hundreds of thousands of dollars. Vashistha notes that there may also be costs resulting from decreased productivity of workers who are slated to lose their jobs.
Some companies might have to pay retention bonuses to managers and staffers they want to keep on board during the transition and beyond, Vashistha says. "If the people you want to [retain do] leave, you're in trouble," he says, because the contractor often depends on the knowledge and experience of these people. "Companies have to use good HR practices to keep the people they need."
If the outsourcing arrangement involves moving U.S.-based people to overseas locations, Vashistha says, those costs could amount to $400,000 to $600,000 each year per employee, including travel, family relocation, taxes, training and other expenses.
For outsourcing projects that involve the transfer of IT and communications assets to the contractor, organizations could encounter unexpected costs if they haven't done a thorough, up-to-date accounting of assets. Textron Financial Corp. in Providence, R.I., learned this when it outsourced all of its telecommunications and data networking operations to AT&T Solutions in 1996. CIO David Raspallo says Textron underestimated the value of the assets, including servers and desktops, that it transferred to AT&T as part of its contract. The fact was discovered when the outsourcer did an audit, and Textron incurred unexpected accounting costs to fix the inconsistencies.
"If you don't have an asset management system that gives you an accurate and up-to-date accounting of all the assets in the organization, that's where the major surprise comes," Raspallo says. "You could have some serious miscounts."
Managing the Contract
After the contract is signed and the work begins, companies can expect to spend an average of $300,000 per year managing the IT outsourcing contractor, according to Barthelemy's study.
"People often underestimate the amount of effort and energy and the resources it takes to manage the relationship properly," including the transfer of in-house and outsourcing staffs, says Praxair's Hill. His company's South American facilities outsource some computer operations, and its U.S. sites outsource functions such as desktop support.
"There can be significant overhead costs in just managing the financial terms on an ongoing basis," Hill says. "If it's an offshore contract, there can be substantially more overhead just handling the coordination of work transfer between the offshore site and onshore analysts. I think that's often underestimated."
Another extra cost that may come up during the management phase is the hiring of an experienced contract manager. Companies may come to realize that no one on staff is capable of managing a complex project—or can devote sufficient time to it—and may instead turn to an outside expert for help.
Organizations that don't continuously manage and evaluate the contractor relationship could end up with additional costs or loss of benefits because they're not getting what they paid for. This is especially true for companies that have hired multiple outsourcing vendors for different functions.
McCray says it's wise to create an outsourcing management organization that oversees long-term service contracts and understands the objectives of each partnership. TPI recently helped a client with multiple outsourcing relationships save $200 million over the course of the contracts by developing such an organization.
"You can't abdicate management to the service provider, or you will pay the consequences," McCray says.
Nielsen Media Research Inc., which in 1995 began outsourcing select application development work to Cognizant Technology Solutions Corp., an outsourcer in India, created a U.S.-based employee "anchor team" responsible for project control and quality assurance. Nielsen has created similar teams for other outsourcing projects that typically include three or four Nielsen employees who devote all or most of their time to managing the outsourcing work, says Kim Ross, CIO at the New York-based company.
In addition, for each outsourced project, Nielsen relies on about three people from the outsourcing company to serve as U.S.-based liaisons and assist in project management. "This liaison team is more expensive per hour but is warranted to avoid extra time and effort losses due to project control and business knowledge issues," Ross says. In order to keep costs contained, it's important to have the correct number of people helping with contract management, he adds. Too many means higher-than-necessary fees; too few invites the risk of project failures.
With a strong U.S.-based anchor team and liaison group working with the offshore outsourcing staff, Ross says, "the quality and delivery time can match nonoutsourced development projects, so there is no hidden cost due to poor project quality or [late] delivery."
Unexpected costs are sure to arise in any outsourcing endeavor. But with thorough planning and close alignment between the outsourcing project and overall business goals, companies can minimize those costs.
"You need to think through the scenarios and the what-ifs long term as well as short term" to anticipate what costs might emerge and ensure that the outsourcing provider is delivering the expected services, says Hill. "At the end of the day, an outsourcing relationship is a task-based performance contract, not a partnership."
Outsourcing Transfer Costs
Transition costs can add up to 5% to 15% of the annual base cost of the contract. Here’s an example of an outsourced data center (mainframe, Unix and NT), for which the total deal size is $25 million over five years, equaling $5 million per year.
Item Estimated Cost Process (knowledge transfer) $50,000 People (employee severance plans) $100,000 Technology
Software license transfers
$100,000 Moving acquired hardware $150,000 Parallel processing for critical apps $50,000 New network connections $50,000 Subtotal $500,000 Other contingencies (10%) $50,000 Total $550,000 Annual Percentage of Deal 11%
Source: Gartner Inc., Stamford, Conn., 2003
Violino is a freelance writer in Massapequa Park, N.Y. He can be reached at email@example.com.
The current story in Jefferson is just one example of a trend of middle and working class economic hardship. Even after the recession purportedly ended in November 2001, the job situation has been bleak for many. In the article "The Vanishing Middle-Class Job" (9/20/04), WASHINGTON POST reporter Griff Witte cited a Federal Reserve Bank study: "Of the 2.7 million jobs lost during and after the recession in 2001, the vast majority have been restructured out of existence." More and more American workers are forced to turn to new jobs coming to town, and these new jobs aren't like the old ones.
The New Jobs
With the reported 96,000 new nonfarm jobs this past September, it would seem that the job market is improving. Yet the Bureau of Labor Statistics reports that the number of jobs being created, on average, has barely kept up with population growth. Officially, there were 821,000 fewer jobs in September 2004 than there were in January 2001. (Read more about the changing face of unemployment.)
The bad news about the new jobs, for those who are finding them, is that they pay significantly less than the old ones. In 48 of the 50 states, "jobs in higher-paying industries have given way to jobs in lower-paying industries." That statistic comes from a January 2004 EPI economic snapshot that goes on to explain:
Nationwide, industries that are gaining jobs relative to industries that are losing jobs pay 21% less annually. For the 30 states that have lost jobs since the recession purportedly ended, this is the other shoe dropping—not only have jobs been lost, but in 29 of them the losses have been concentrated in higher paying sectors. And for 19 of the 20 states that have seen some small gain in jobs since the end of the recession, the jobs gained have been disproportionately in lower-paying sectors.
The EPI has created a chart based on Bureau of Labor Statistics data which compares the November 2003 average wage in growing industries to that in contracting industries, state by state. Look up what the difference was in your state (PDF). (Learn more about low wage work and workers in a Q&A with Beth Shulman, author of THE BETRAYAL OF WORK: HOW LOW-WAGE JOBS FAIL 30 MILLION AMERICANS.)
In addition, part-time jobs now represent what economists are calling a "disproportionate share" of the overall job market. One reason specialists cite for this change is the increase in job-based health insurance premiums, making it more difficult for employers to provide benefits.
But better economic times may be ahead. A USA TODAY article in early October 2004 reported that economic forecasters now expect job creation to grow at a faster pace at the end of 2004 and throughout 2005 than had been previously expected.
Take a look at the figures of a year ago when NOW first went to Jefferson, Wisconsin in "Downward Mobility" or learn more about the economic issues in play in Election 2004.
Sources: The Bureau of Labor Statistics; The Economic Policy Institute; THE NEW YORK TIMES; THE WASHINGTON POST
MARCH 19, 2004 (COMPUTERWORLD) - NEW YORK -- Computerworld editor in chief Maryfran Johnson yesterday was honored with a national business journalism award in recognition of her steadfast adherence to the "goal of placing readers first and maintaining independent, honest, and ethical journalism."
The Timothy White Award was presented to Johnson at an American Business Media luncheon here. Johnson was the first recipient of the prestigious award, which made its debut at the 50th Annual Neal Awards ceremony held to recognize excellence in business journalism. The award was named for a longtime editor of Billboard magazine who was considered the conscience of that publication and who died of a heart attack in June 2002. It was presented to Johnson by White's widow, Judith Garlan White.
The award cited several demonstrations of Johnson's courage and integrity, including a June 2001 editorial on Oracle Corp.'s decision to cancel a large amount of advertising after Computerworld published a series of articles on Oracle's unfair pricing policies (see story). Also cited was an October 2003 editorial titled "Ethics and Influence," in which Johnson, prompted by a Computerworld story on ethical questions raised by a Microsoft Corp.-sponsored Forrester Research Inc. report, drew attention to the role played by the media itself and its "spotty record in asking enough of the right questions about the pedigree of the research we report on" (see story).
"Upholding the editorial integrity of the work Computerworld does is already a privilege for me, as is leading the outstanding group of journalists we have here," Johnson said. "This award is a great honor for us all, but it's also a wonderful reminder of how important it is to keep our readers foremost in everything we do."
"This is testimony to our editorial mission to be the voice of IT management," said Bob Carrigan, CEO of Computerworld Inc. "We want to be the most trusted source for IT management, and it's gratifying that such a prestigious organization feels that our editorial leader stands above all others in terms of trust and integrity in journalism."
Also at the Neal Awards ceremony, Computerworld was honored as a finalist in the category "Best single issue of a newspaper/news tabloid" for its July 7, 2003, issue.
Half of all outsourcing contracts fail due to the client's inability to manage their service provider or because the client's requirements have changed.
This is according to experts who also said at the Gartner Outsourcing Symposium in Dublin that the rate of failure in outsourcing arrangements is a major industry issue. The symposium was co-sponsored by William Fry Solicitors, Accenture, Data Electronics and Eircom.
"Outsourcing contracts often have a term of between seven and ten years," said Stuart McLaughlin, director at Accenture. "But the IT requirements of companies have changed radically in the past five years."
A new report indicates that outsourcing was never really that big of a threat to jobs.
The Dobbs Report Dereliction of duty Is the U.S. doing enough to discourage companies from expatriating and incorporating overseas?
Beyond tuition Paying for college. From lab fees to insurance to haircuts, college expenses add up
The Impact of Offshoring on the U.S. Economy Policy Perspectives - Center for American Progress
09-2003[PDF] IT Outsourcing: Placing our Nation at Risk
File Format: PDF/Adobe Acrobat - View as HTML
... Outsourcing Facilitates Cyber-Terrorism • Data Ownership, Identity Theft, and Commercial Espionage • We Must Fight Outsourcing to Preserve our Future ...
www.indyisaca.org/newsltr/2003/news0310/09-2003.pdf - Similar pages
India calls for allies
BW Online This is a story about two companies in two countries -- a story that may provide some idea of one of the unexpected directions the ongoing trend to overseas outsourcing could be taking. The first outfit is AM Communications, an American outfit, and the second, India-based NeST Group.
First, a little history. Late in the summer of 1998, a mutual contact hooked up Javad "Jay" Hassan, an Indian-born American who had worked for IBM and other outfits, with Alvin Hoffman, the largest shareholder of AM Communications (AM), a small, publicly-held company based in Quakertown, Pa., that developed and owned software used by cable-TV operators to monitor their systems. AM, which began in the mid-1970s installing lines for cable-TV systems, had seen its ups and downs -- and fiscal 1998 (ended March 31) was one of its down periods. Sales, which the previous year had been $16 million, came in at around $9 million, due to the loss of several key customers.
"The company was about broke at the time," recalls Hoffman, a stockbroker by profession, who invested what he estimates to have been around $8 million of his own money in AM Communications after becoming involved in 1987. By 1998, things were so grim he feared a distress sale or bankruptcy if he couldn't find a savior.
NEW GAME PLAN. That's when Hassan entered the picture, negotiating a deal in late 1998 to become CEO and assuming the voting rights for most of Hoffman's stock. The cost to Hassan for gaining control of an established public company? Nothing, according to SEC documents.
"He was a visionary," recalls Hoffman in explaining his willingness to turn over control to Hassan. That vision was to bring AM's costs down by outsourcing programming and other tasks to India while steering the company into high-margin services. Says Hoffman: "He was ahead of his time with outsourcing."
There also was another component to the deal. On the same day in November that Hassan became CEO and took over voting control, AM entered into a consulting agreement with "Network Systems & Technologies (NeST), an affiliate of Mr. Hassan, which is located in Trivandrum, India," according to documents AM filed with the SEC. In other words, Hassan would direct work to a company in which he had a stake and from which AM was to receive preferential rates.
That consulting agreement went into effect pronto, and by the end of the next month -- December, 1998 -- more than $200,000 of AM business had been sent to NeST. "He (Hassan) had this vision for a new kind of company, a virtual company, that would own a technology or customer base and outsource everything else," recalls Joe Rocci, at the time AM's vice-president of product technology. "Right from the beginning, the deal was that he [Hassan] would take AM's operating costs way down by taking everything, and I mean everything, to India," adds Rocci, who has since left the company. "In the course of two years, we had moved 50 to 60 engineering jobs and all of manufacturing, probably about 80 jobs, to India."
WELCOME PROFITS. In Hassan's view, outsourcing was the only way to save AM. "We needed $5 million worth of new R&D in software and hardware to turn the company around," he says. "No one was willing to give us $5 million. I said, 'Why not give the NeST people the business?'" He was convinced the $5 million worth of work could be done for $1 million by NeST.
For a while, it seemed as if AM and NeST were making out just fine. AM's revenues increased, and NeST's billings to AM increased as well. Hassan engineered a couple of acquisitions of service-related companies and AM's revenues headed up -- to $16 million in fiscal 2001 and $28.7 million in 2002. The outfit even made some money -- a bit over $1 million in 2001 and $700,000 in 2002.
Between the end of 1998 and the start of 2000, NeST billed more than $1.8 million of outsourcing charges to AM, for which it was paid in AM warrants convertible to stock -- an arrangement that reflected the American operation's weak financial position. Beginning in 2000, NeST began receiving cash for its outsourcing services -- collecting $10.1 million from AM between Apr. 1, 2000, and Mar. 30, 2002, for development and manufacturing services, according to documents AM filed with the SEC.
LABOR INTENSIVE. "The company was doing well," recalls Rocci. "We rebuilt it from the brink of bankruptcy." It seemed as if the outsourcing was doing what it was supposed to do: improve the profitability of software-products area, thus helping to finance the expansion into new services.
In retrospect, however, Rocci now attributes most of the gains to improved product sales. "There were productivity issues over there (in India)," he recalls. "Here, one guy might do the work of five or six in India." And there were cultural issues that presented major hurdles. "It was difficult to get one guy to run one project. They work in teams and it takes a minimum of two people to do anything. I remember I was over there once and I was walking by a metal-stamping press, and there were two people sitting shoulder-to-shoulder -- the whole mindset was to create jobs." Even so, Rocci notes that some administrative jobs couldn't be handled in India and were sent back to the home office.
Walt Wilszewski, vice-president of sales and marketing at AM, had the same feeling. "I felt we needed one-and-a-half times the Indian programmers to do the same amount of work as U.S. programmers," he says.
PICKING OVER THE WRECKAGE. Regardless of the role of outsourcing in AM's rising fortunes, during fiscal 2003, AM lost a major customer and, combined with serious cash-flow problems, "the bottom fell out" of the business, says Rocci. During the first nine months (the last period for which financial results were reported), losses nudged $2 million, and there was a mad scramble for cash. Banks extended a special $1.25 million loan over and above the existing credit line, Hoffman poured in about $1.4 million, and Hassan about $2 million. It was all to no avail. By June, Hassan had resigned as president and CEO to become chairman. Last August, with all other avenues of hope exhausted, AM sought protection from its creditors under Chapter 11 bankruptcy laws.
During the last three months of 2003, AM's assets were sold to repay the bankers. Two service companies AM had purchased were reacquired by their original owners. A third area -- the products area that represented the original core of AM's business -- was put up for sale. Hassan wanted NeST to acquire it, and the creditor's committee designated him the favorite, the "stalking horse," in bankruptcy lingo. His offer of $4.5 million to $5 million consisted primarily of a renegotiation of AM's bank's obligations and between $1 million and $1.5 million of cash, he says.
A competing group entered the bidding process at the end of 2003 -- a group of former AM employees that included Rocci and Wilczewski. Their offer of between $4.5 million and $5 million essentially matched what Hassan was offering, they say.
BRAIN DRAIN. Last December, however, as the former employees assembled at the courthouse to make their offer, the plan fell apart. "Our investor got spooked and walked out, based on what he heard about AM," says Rocci.
What upset the potential backer? In large part, it was the sense that not only were the manufacturing and development services based in India, but that the company's most important knowledge -- software and engineering savvy, not to mention its development expertise -- also had departed the U.S. Says Rocci: "All the knowledge about how to do things had moved over to India." The investor's withdrawal scuttled the former employees' proposed deal to acquire AM's products business did so because he saw that outsourcing had essentially stripped the concern of perhaps the most important asset of them all -- its knowledge.
The lesson of this story: We need to understand that, as we send jobs to foreign businesses, we also send critical knowledge about processes, procedures, and development. When business conditions change, a company can't just go to the other side of the world and reclaim those things. The new owners aren't likely to give them up.
When major oil companies report their quarterly profits next week, they're once again expected to post record numbers. With crude trading around $60 a barrel, the oil industry is enjoying one of the biggest windfalls in its history. But as the industry looks for places to put that cash, it's finding it harder and harder to put funds to work finding new deposits of oil and natural gas.
By just about any measure, the past three years have produced one of the biggest cash gushers in the oil industry’s history. Since January of 2002, the price of crude has tripled, leaving oil producers awash in profits. During that period, the top 10 major public oil companies have sold some $1.5 trillion worth of crude, pocketing profits of more than $125 billion.
“This is the mother of all booms,” said Oppenheimer & Co. oil analyst Fadel Gheit. “They have so much profit, it’s almost an embarrassment of riches. They don’t know what to do with it.
The reason for the boom is simple. Much of the investment in finding that oil -- and developing the wells and pipelines needed to produce it -- has already been made. So an oil field that was profitable with oil selling for $20 a barrel is much more profitable with oil trading around $60.
That’s left the industry with a happy problem -- what to do with enough cash to fill a supertanker. Many publicly traded oil companies have been busy buying back their own stock, which helps drive up the price of the rest of the shares left on the open market. Since January 2002, stocks of major oil companies have gained 88 percent; during that period the Standard and Poor’s 500 index has gained less than half as much.
Oil producers have also given investors a raise by gradually increasing the dividends paid out to shareholders. And they’ve paid down their debts to record low levels. ExxonMobil, for example, is virtually debt-free -– with a cash pile of more than $25 billion.
All of this industry good fortune has not escaped the notice of consumers, whose anger at higher gasoline prices has been rising in lock step with the price of crude. The energy bill recently enacted by both houses of Congress provides little relief for U.S. energy consumers. But a continued rise in prices could bring increased political pressure to find ways to lower the cost of energy, according to Tom Kloka at the Oil Price Information Service.
"This is something that Americans regard as their birth right," he said. "If gasoline prices are still north of $2.25 (a gallon) when we reach the midterm election, there's going to be an awful lot of outrage."
Even as their overall profits have soared, major oil companies are earning a relatively modest 8.7 percent profit margin -- the portion of the sale of each barrel that hits the bottom line. Major banks and drug makers, for example, enjoy profits margins that are twice as big.
Offshore Outsourcing Takes A Hit
Nearly half of the top 200 U.S. insurance carriers are using offshore services. But try to get an insurance executive to talk about outsourcing these days--especially offshore outsourcing--and you won't find many takers.
By Therese R. Rutkowski, Managing Editor
April 1, 2004 - Nearly half of the top 200 U.S. insurance carriers are using offshore services, according to Celent Communications Inc., Boston. Among the carriers working with outsourcing firms that provide at least some offshore services are: Guardian Life, Manulife, Sun Life, Fireman's Fund, Farmer's Insurance Group, Allmerica, PacifiCare Health Systems, Abbey Life and Royal & Sun Alliance.
But try to get an insurance executive to talk about outsourcing these days--especially offshore outsourcing--and you won't find many takers. Several large insurance carriers declined to be interviewed for this article. And, at a recent Insurance Networking News outsourcing conference in Tampa, Fla., several IT managers from smaller insurance companies said they did not want their employees to know they were attending.
That's because offshore outsourcing is taking a beating in the political arena in this election year. And, like any company in any industry, carriers that outsource-or are even thinking about it-are trying to avoid the bad publicity and employee demoralization that can go along with sending work overseas.
"I've never seen as much (concern) as I've seen (recently) where regions around the world are starting to buck this offshore outsourcing trend," according to Diane Morello, vice president, in the research division of Gartner Intelligence, Stamford, Conn. "This is going on worldwide. It's not just the U.S. that's being affected."
In the United States, however, those who are among the most affected by offshore outsourcing are IT professionals. They worry about the 3.3 million jobs--from all industries--that will move offshore over the next 15 years, as predicted by Cambridge, Mass.-based Forrester Research Inc. Will those jobs be theirs?
Not surprisingly, presidential and Congressional candidates have jumped on this issue to gain populist votes in the upcoming elections.
In particular, Senate Minority Leader Tom Daschle (D-S.D.) introduced a bill in February that would require companies that lay off 15 or more workers and send their jobs overseas to provide at least three months' notice. Daschle's bill followed comments made by Gregory Mankiw, chairman of the Council of Economic Advisors, in support of outsourcing, in a testimony before the Senate's Joint Economic Committee.
The "Jobs for America Act"-backed by Democratic presidential candidate Sen. John Kerry (D-Mass.)-would also require companies to notify the Department of Labor and state agencies responsible for helping laid-off employees, as well as local government officials.
State legislators are also entering the battle. Indiana, for example, cancelled a contract in November with Indian firm Tata Consultancy Services for processing unemployment claims. As of February, about 80 bills that would limit offshore outsourcing in some way had been introduced in more than 30 states, according to The Wall Street Journal.
"Clearly, the public relations aspect of offshoring is a major concern for carriers," says Celent senior analyst Craig Weber. "As a matter of fact, most carriers label that as one of their major concerns-not just external PR, but internal PR. Employees are justifiably concerned about their jobs going overseas, and the public is concerned about the economy taking a hit."
Futhermore, says Weber, public concern about the issue has not peaked. "We predict offshoring will continue to grow-and concern will mirror that growth." But the cost savings and strategic benefits are simply too compelling for carriers to ignore, he says.
"Carriers will have to deal with this problem, but most of them don't have the luxury of saying, 'We're not going to do this because the public and employees are concerned about it.'"
The primary reason
In fact, Celent predicts offshore outsourcing spending among U.S. carriers will grow from $869 million this year to $1.46 billion by 2006 (see "Insurance Offshore Spending," page 27). The primary reason for this growth is cost savings (see "Top Drivers for IT Outsourcing," page 28). For IT maintenance projects done by offshore firms, savings of 40% are typical, and for application development, savings of 25% to 30% are typical, according to Celent.
A case in point: Guardian Life Insurance Co. of America, the fourth-largest mutual insurance company in the United States, is saving $12.5 million per year with no identifiable loss in productivity due to outsourcing IT work to India, according to a 2004 industry report from New York-based consulting firm Deloitte. (At press time, Guardian had not confirmed this information.)
Indeed, when it comes to offshore IT outsourcing, salaries of U.S. workers dwarf their foreign counterparts. While the average annual salary of a U.S. programmer is $63,331, a programmer in India makes $5,880. Similarly, the average salary for a call center agent in India is one-tenth that of a U.S. agent's-or approximately $300 per month.
What's more, the quality of IT work by Indian firms-which currently dominate the offshore IT market-is high.
According to Jim Thomas, vice president of marketing for the North American arm of Tata Consultancy Services, TCS' technology scored the highest among the three final contendors for the Indiana unemployment claims contract, and its bid was the lowest-$10 million less than the next nearest bid.
More than 250 of the top 400 Indian IT services companies are ISO-9000 certified, according to India's National Association of Software Services Cos. (Nasscom). And, more than 40 have been certified at the Capability Maturity Model (CMM) Level 5-the Software Engineering Institute's highest level for measuring an organization's software development and maintenance processes.
Despite the current populist backlash, "I see offshore outsourcing growing," says Eric Miller, senior principal at Highpoint Partners Inc., a Charlotte, N.C.-based consulting firm.
"Companies are trying to get the best value: high-quality individuals at a reasonable cost-whether that's on the technology or service side," he says.
With the Internet and high-bandwidth telecommunications enabling the rapid movement and sharing of data anywhere in the world, insurers are weighing their global sourcing options.
"They're trying to take a very precise look at what makes sense," Miller says. "They're not saying, 'Yes, were doing it-or no, we're not.' Rather, they are becoming more selective as to the functions they'll send offshore. It's more of a blended concept," he says.
Insurers can take different approaches, Miller continues. They can retain internal people to maintain their old IT systems and go overseas to obtain state-of-the-art resources to handle new development. But this may breed discontent among employees. "Employees may ask, 'Why are you letting those people do all the fun stuff and we get stuck doing COBOL?,' " says Miller.
On the other hand, a carrier may send tedious or routine IT maintenance work offshore and use internal employees for their new development. "Ideally, that's the best-because IT development is the value-add," he says. "You're going to have people knocking down your door to work for you."
Indeed, it may make sense for U.S. carriers to consider sending IT maintenance to lower cost offshore destinations--not only to please U.S. employees--but because maintenance typically accounts for the lion's share of an insurer's total IT budget, sources say.
Although Celent research indicates that carriers spend more for new application development than for maintenance done by offshore providers ($382 million vs. $139 million in 2003), "one of the most promising strategies is to communicate very clearly with employees that the intellectual capital of the business will stay local," says Celent's Weber.
For that strategy to work, however, U.S. IT workers need to update their skills, Weber adds. "For example, IT requirements-development is a task that typically stays onshore. So employees who are accustomed to just coding may need to think about adding project management to their skill set."
In addition, keeping application development in-house also may protect a carrier's intellectual property, says Gartner's Morello.
"Insurers ought to be concerned about whether or not they adequately understand the future innovation they may lose as a result of turning over certain activities and processes to other parties-particularly because some areas of the globe have little or no patent or intellectual capital protection," she says.
Moreover, compliance issues are requiring insurers to be much smarter and methodical about their outsourcing decisions in general. Sarbanes-Oxley is forcing boards of directors to demand more insight into these arrangements, sources say. "They need to know what risk you're putting yourself in if you're dealing with companies that are not equally attuned to keeping data integrity in line," says Morello.
"It doesn't matter if your data is in a box in Illinois. If a person offshore is accessing that information, privacy and security issues remain," says Patrick Hatfield, partner at Lord Bissell & Brook LLP in Atlanta. "Privacy is a high-risk issue for insurance companies," he told attendees at the recent Insurance Networking News Outsourcing Forum.
"If you're a life and health institution (that has to comply with HIPAA), this is more significant than for personal lines. But privacy is a topic that keeps insurance executives awake at night. They're not confident that they have it nailedz-so they even have less confidence in vendors' abilities to protect their customers' privacy," says Hatfield.
Although the current backlash against offshore outsouring makes it appear as if the practice is widespread, less than one out of every eight companies across industries is outsourcing any application maintenance or development offshore, according to a 2003 survey conducted by Financial Executives International and Computer Sciences Corp., El Segundo, Calif.
Of those firms that are sending work offshore, only 9% had been using offshore providers for more than one year.
When asked how satisfied they were with offshore development and maintenance, 26% of these companies said they were highly satisfied and 44.2% were somewhat satisfied. Only 6.4% were somewhat or highly dissatisfied.
Generally, companies are satisfied with IT work at offshore firms, says Rebecca Scholl, principal analyst, business process outsourcing, at Gartner Inc. "But when it touches customer interaction, there's a lot more work to be done to ensure process consistency and compliance," she says. "And some companies are not good at managing the offshore relationship."
Communication is a huge issue when companies outsource anywhere, says Highpoint's Miller. "You have to be extremely precise about what you want the outsourcer to do for you," he says.
"We have enough trouble communicating when we sit in cubicles next to each other; getting people to write precise product and systems specifications is difficult. They say, 'This is going to take twice as long as it should.'"
From that perspective, along with costs associated with ensuring compliance, security and privacy, companies are questioning the hidden costs associated with outsourcing, sources say.
"I may be able to obtain a cost savings on per-hourly basis, but if it takes me twice as long, that's not the true cost," says Miller.
In addition, some companies that have sent customer-service work overseas are bringing it back onshore. Carmel, Ind.-based Conseco Inc. brought its call center operations back to the United States from India in 2002, for example.
"We learned we could deliver higher quality customer service here," says Jim Rosensteele, Conseco spokesperson. In 1999, Conseco had purchased exl-Service, an India call center operation, expecting to save $60 million per year.
"People aren't willing to put up with companies that move call center operations offshore," says Miller. "That's the part that the customer sees, and customers are not going to stand for it."
In fact, Round Rock, Texas-based Dell Inc. in November decided to shift corporate tech support for two of its computer lines back to U.S. call centers from India because the company had received complaints from corporate customers about language barriers and delays in getting issues resolved. But Dell's small-business customers and consumers will continue to be routed to India-based tech support.
In the consumer market, people fall into consumer segments, says Mike Hail, CEO of Yankelovich Partners, a Chapel Hill, N.C.-based marketing consulting firm. Some American consumers have a high demand for personalized service and are willing to pay a premium for it, while others are willing to go to a company's Web site, use e-mail, or bear with a scripted response from a call center representative and pay less.
"When you're dealing with that segment of the population that expects customization and a personal response, scripted responses from call center reps don't work," he says. "As a result, you'll see high levels of dissatisfaction."
Furthermore, he says, American consumers make their purchasing decisions based on price and quality. "If Toyota can build a better product, we're going to buy it," he says. "'Buy American' sentiment doesn't alter that scheme."
Offshoring good for the future of U.S. economy, supporters argue
Statements made in February by Gregory Mankiw, chairman of the Council of Economic Advisors, ignited the already-brewing debate over offshore outsourcing. "The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods," Mankiw said in his testimony before the Senate's Joint Economic Committee.
"Outsourcing of professional services is a prominent example of a new type of trade," he told the committee. "The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane."
Indeed, not only does offshore outsourcing help U.S. insurers reduce costs, convert fixed costs into variable costs, spread operational risk, and respond quickly to market opportunities, it may also enable them to establish "beachheads" in emerging markets that will foster their future growth, says Anupam Rajvanshi, a consultant with Andrus Consulting Services, a division of Dwight Andrus Insurance, Lafayette, La.
"Growth has slowed down in the Western world since Western countries have reached an advanced level of economic growth," Rajvanshi says, citing a report from Goldman Sachs & Co., New York, titled "Dreaming with the BRICs: The Path to 2050."
According to that report, over the next 50 years, Brazil, Russia, India and China-the BRIC economies-could become a much larger force in the world economy. In 2003, the Chinese economy grew at an annual rate of 9% and the Indian economy grew at a rate of 8%, compared with 3% to 4% growth in the Western world.
"BRIC nations represent future markets for just about any company in the West," Rajvanshi says.
"And businesses that have the foresight and vision to perceive this--and have ongoing and existing relationships with the BRIC nations--will be in the best position to reap the rewards."
As Corporate American struggles to compete in a shrinking economy, IT projects and high tech headcount continue to be a target. When top execs found that sending the programming work Offshore could save lots of money, they headed for the door and never looked back.
Any IT worker who's been in the trenches can tell you that outsourcing isn't optimal for anyone involved. There are language barriers to overcome, distances that challenge project timelines, and a basic lack of how the business works. More importantly, the knowledge of these critical business systems is with the offshore group who develop them, and not in the IT group inside the company where it is being used.
Needless to say, offshore outsourcing continues to be the direction many companies are heading. So not only are jobs opportunities tight because of the slow economy, whatever jobs may have been available are now headed offshore. This is a doubly whammy to American IT workers.
What to do, what to do. Well, besides searching the want ads and internet job sites, a group of programmers has decided to take the matter into their own hands. Might as well be productive if you've been laid off and don't have a job anyway.
According to The Gartner Group, a recent news media report states that a group of U.S. programmers, laid off due to offshore outsourcing, have filed a class-action lawsuit against the U.S. Department of Labor. The group seeks compensation and payments under the Trade Adjustment Assistance program, which protects workers who's jobs move overseas.
Unfortunately, the government may have established their policy without considering the high-tech industry. It is reported that software and other IT products do not meet the government's requirements, which means the programmers would not be eligible for assistance.
Programmers are a persistent group, and the fight goes on. Whatever follows in the form of findings or denial in this case may have a great impact on the future of IT workers in the U.S., but will not likely have much impact offshore outsourcing. Stay tuned for more.
IT news and Worker resources
Out of all the technology issues attracting attracting the attention of Washington's power brokers and lawmakers, outsourcing seems to be the one that truly earns the distinction of being labeled a "hot-button." Just look at recent surveys and findings from various technology trade groups that either
The Information Technology Association of America (ITAA) high-tech trade group is the latest to weigh in. Today, the Arlington, Va.-based association is releasing a fresh report that accentuates the positive. "Outsourcing white-collar jobs to low-wage countries such as India and China has thrown some Americans out of work, but a new report predicts that the trend will ultimately lower inflation, create jobs and boost productivity in the United States," The Associated Press reported.
The Wall Street Journal said the study, "one of the few that attaches detailed dollar values to offshore outsourcing's costs and benefits, was conducted for a coalition of business groups working to combat a growing backlash on Capitol Hill and in statehouses against the loss of U.S. jobs. Expected to be released today, the study's premise is that U.S. companies' use of foreign workers lowers costs, increases labor productivity and produces income that companies can use to expand both in the U.S. and abroad."
More from the Journal: "There is a debate among economists about whether productivity increases from the outsourcing of high-paying U.S. work abroad has translated into meaningful economic improvement in the current recovery, in which job growth has been slow. Noting that business investment has been lackluster as well, Lee Price, research director at the Economic Policy Institute, a liberal think tank in Washington, said, 'I'm dubious that the boost in corporate profitability from outsourcing has contributed much to creating new jobs.' But the study claims that twice the number of U.S. jobs are created than displaced, producing wage increases in various sectors. The report takes a rather narrow focus, tracking the outsourcing of computer-services jobs, but not other work increasingly being done abroad such as manufacturing, call centers or medical X-ray reading."
The AP piece noted that "ITAA leaders emphasized that outsourcing has damaged the job market far less than the dot-com meltdown of early 2000, when Internet startups, telecom companies and other companies eliminated as many as 268,000 positions. 'The myth is that we've started this long decline into the midnight of the technology work force,' ITAA president Harris Miller said. 'This report shows that, assuming the recovery continues, the number of IT jobs will actually increase.'"
• The Associated Press washingtonpost.com: Study: Outsourcing Tech Jobs Helps Economy (Registration required)
• The Wall Street Journal: Outsourcing May Create U.S. Jobs (Subscription required)
The ITAA's contentions were bolstered today by Treasury Secretary John Snow, who said that outsourcing ultimately will boost the America economy. "It's one aspect of trade, and there can't be any doubt about the fact that trade makes the economy stronger," Snow said, according to The Associated Press. "You can outsource a lot of activities and get them done just as well at a lower cost," Snow also said when asked about the issue in Cincinnati. "If we can keep the American economy strong and growing and expanding, we'll create lots of jobs."
The Associated Press via washingtonpost.com
ITAA president Miller will be online with me today at 11 a.m. ET for a Live Online interview about outsourcing and its impact on the IT sector. You can submit questions in advance or during the chat. I suspect the new study will stir lots of fresh debate around the issue.
Meanwhile, Ron Hira, chair of the career and workforce policy committee for IEEE-USA, the Washington policy unit of New York-based Institute of Electrical and Electronics Engineers Inc., will be online on Friday at 11 a.m. ET with me to field questions (and counter the ITAA and other outsourcing proponents). Stay tuned for details. Hira is also an assistant professor of public policy at Rochester Institute of Technology. The IEEE-USA's issue paper released on March 16 against outsourcing goes against the grain of the ITAA's findings. An excerpt: "The offshoring of high wage jobs from the United States to lower cost overseas locations is currently contributing to unprecedented levels of unemployment among American electrical, electronics and computer engineers. Offshoring also poses a very serious, long term challenge to the nation's leadership in technology and innovation, its economic prosperity, and its military and homeland security."
Outsourcing: Economies of Scale?
Washington Post columnist David Ignatius today touched on outsourcing in a column on the fear of job loss and unemployment, compared with statistics on actual job loss.
"But it's still a puzzle what's driving this intense workplace angst. People express a level of fear about jobs that isn't commensurate with what the actual data show. Take the basic employment numbers: The American economy may be creating new jobs at a sluggish rate, as [Sen. John] Kerry has argued. But U.S. unemployment in February was still just 5.6 percent -- down from the 5.9 percent rate of a year ago and far below the levels of major economic competitors. By comparison, the unemployment rate in France is 9.6 percent; in Germany, it's 10.3 percent; in Belgium, it's 12.8 percent. Even in Japan, where unemployment was once almost unknown, the jobless rate is running at 5 percent. By this measure, the vitality of the American economy remains undiminished," Ignatius said.
The end of his piece addresses outsourcing: "Kerry has found a powerful campaign issue in this job anxiety, and earlier this year he sounded almost demagogic with his talk about 'Benedict Arnold CEOs.' So it was reassuring last week to see that his first detailed proposal for dealing with the outsourcing of jobs abroad was relatively restrained. He called for modest changes in the tax code that would limit some benefits companies get for investing overseas. That's the kind of 'level playing field' proposal that even an economist could love. What's happening is that the world is becoming more American: Markets are freer; unions are less powerful; people are working harder to meet global competition. I agree with most economists that this benefits everyone. But there is the nagging question of whether a job-obsessed world will have the peace of mind to enjoy the fruits of its labor."
• The Washington Post: Adding Jobs And Anxiety (Registration required)
Mark Zandi, chief economist at economy.com in
, believes that companies are continuing to invest heavily in technology and to wring productivity gains out of it. “The peak in corporate hardware and software spending was the third quarter of 2000. In the fourth quarter of 2003, we rose above that level.” West Chester, Pa.
A few days ago, he notes, Rohm & Haas, a Philadelphia-based chemical maker, said that it may cut workers this year due to a new $300 million software system that links its worldwide operations. In 2003, the company cut 550 positions after deploying software to coordinate orders and shipping. Economic indicators suggest that announcements such as the one from Rohm & Haas will keep coming, says Zandi. “Labor costs are falling, but capital costs are falling faster, and that makes it more advantageous to invest rather than to hire.”
Offshoring has contributed to increased productivity, too, he adds. “Before, it was just manufacturing that got sent abroad, but now it’s call centers, customer-service operations and computer programming.” Radiology, financial analysis and architectural and engineering design jobs have moved offshore as well.
NEW YORK - On the evening of Feb. 17, the two leading U.S. Democratic presidential nominees derided the loss of U.S. jobs to foreign countries. They claimed that, if elected, they would implement ambitious plans to keep jobs in the United States. On the morning of Feb. 18, Bank of America announced, in its latest outsourcing move, that it is establishing a subsidiary in Bangalore, India, and will hire 1,000 workers there.
The Bank of America (nyse: BAC - news - people ) news comes in the same week as Germany-based Siemens (nyse: SI - news - people ) said it would hire thousands of technical staff in China, India and Eastern Europe. It's unclear whether Siemens' move will affect its U.S. operations, but it's clear that job growth--particularly in the tech sector--is happening everywhere but the U.S. Joseph M. Tucci, chief executive of EMC (nyse: EMC - news - people ), recently said the data storage company would step up its hiring of technical staff in India.
You can't put the genie back in the bottle. The jobs that have been lost will not return and, in fact, more white-collar jobs will leave the U.S. as companies continue to cut costs to remain competitive.
Outsourcing has become one of the hot-button political issues of this presidential election season. It's not surprising that Democrats are blaming President George W. Bush for the loss of U.S. jobs and what has been--so far--a jobless economic recovery, with gross domestic product having grown much faster than the unemployment rate has dropped.
The Democratic front-runners, Sen. John Kerry from Massachusetts and Sen. John Edwards from North Carolina, each propose tax incentives for companies that keep jobs in the U.S. Kerry also proposes a permanent tax credit on research and development spending, as well as the elimination of capital gains taxes for investments in small companies that are held for a minimum of four years.
The latter initiatives are a nod to the notion that job growth can only be achieved through technological innovation. Indeed, captains of industry have coalesced behind this idea and may have a better shot at making sure the U.S. does not lose its status as the world's leading technical innovator.
In October, IBM (nyse: IBM - news - people ) Chief Executive Samuel J. Palmisano announced the National Innovation Initiative, co-chaired by the president of Georgia Technical Institute. The NII is an offshoot of the Council on Competitiveness, which was formed 20 years ago as the U.S. was losing market share to foreign competitors.
TORONTO: Under attack from anti-outsourcing groups for alleged infractions ranging from stealing American jobs to avoiding paying US taxes, Indian infotech companies may be looking at neighbouring Canada to escape the toxic atmosphere being created by a small group of anti-outsourcers .
At least three IT majors – TCS, Wipro and Infosys -- have set up operations in the vastly more congenial environs of Canada, and going by the increasingly poisonous mood being whipped up in the US, others may follow suit.
Over the weekend, Infosys, a company that has set high ethical standards for itself, was target of a vicious attack in California where it was accused of "stealing" local jobs and tax payer money.
The startling comment came from a local official and a lawmaker who opposed Infosys seeking state tax relief under an alternative filing methodology permitted by the California tax code.
In the dispute, Infosys, which has its US headquarters in Fremont, California, argued that the standard tax formula computed by the state failed to take into account that two-thirds of Infosys project work was done offshore in India, and that there was a 9 to 1 differential in the wages between its staff in India and in California.
Because the differential inflated its California taxes, Infosys argued that it owed only around $ 180,000 instead of the $ 1.3 million it was taxed over a two year period using the standard method.
The California Franchise Tax Board rejected Infosys plea, but surprisingly, local lawmakers lashed out at Infosys even after the verdict.
"It takes a lot of nerve to ask that (tax relief), considering the context in which they operate," Lenny Goldberg, director of the California Tax Reform Association, told the San Jose Mercury News, which first reported the incident.
"They not only want to steal California jobs, they'd also steal the taxpayers' dollars," said state senator Joseph Dunn, a Democrat lawmaker who has submitted legislation to regulate outsourcing.
Such tone and language are increasingly being employed against Indian companies as the US gets caught in an anti-outsourcing frenzy being generated by a small group of unemployed techies, although experts acknowledge that the job crisis is far more serious in the manufacturing sector, where China and Mexico, rather than India, are the threats to U.S.
On Sunday, a columnist for the Sacromento Bee attacked the whole idea of offshore call centres in India on the basis of one contestable incident. Others have raised security concerns and breach of privacy fears with little or no basis.
In contrast to the hostile atmosphere being whipped up in the US, Canada is far more welcoming to Indian companies. Infosys and Wipro have both set up operations in Toronto and Windsor respectively.
TCS, one of the earliest movers into Canada, has offices in Ottawa, Montreal and Toronto, besides a research alliance with the University of Waterloo.
But just south of the border, a TCS office in Buffalo, upstate New York, and its alliance with the University of Buffalo, set up with encouragement of New York Senator Hillary Clinton is being attacked by anti-outsourcers.
After this newspaper reported last week that the Senator had publicly defended the TCS operation and argued that outsourcing was two-sided and also benefited the U.S, a worried staffer called up this correspondent after the anti-outsourcers attacked the Senator for "defending Tatas."
Canada on the other hand is ready to roll the red carpet. "This is a country which needs 20 million people over the next 20-30 years…the business prospects and atmosphere is excellent," says Kris Krishnan, a past president of the Indo-Canada Chamber of Commerce and President of Deccan Digital Inc, a company specialising in BPO outsourcing to South India.
Amid rising hostility towards India and Indian companies, Scott Kirwin, who leads an anti-outsourcing movement in the US, had this to say when asked what he would prefer if he had a choice between companies outsourcing some jobs from US while keeping the rest there, or pulling all of them out because of the anti-outsourcing heat: Don’t let the door hit you on the way out.
On the other side of the door, it seems, is waits Canada
When Gregory Mankiw, the head of the President's Council of Economic Advisers, remarked on February 9 that outsourcing "is probably a plus for the economy in the long run," he added heat to a debate that has been growing in ferocity as American job losses have mounted and as trade policy has developed into a key issue in the Democratic presidential primaries. In an effort to help develop a progressive position on outsourcing--one that reflects a concern about the well-being of American workers and those in the countries to which many US jobs have fled--we have solicited three views on the subject. We invite readers to respond. --The Editors
Sarah Andererson & John Cavanagh
"Don't worry; they'll get better jobs in the service sector." This used to be the mantra of free-trade supporters when confronted with the shift of auto or apparel jobs to Mexico or China. That line doesn't work anymore, since service jobs, including high-skill computer programming, financial analysis and X-ray reading, are going overseas as well.
Global outsourcing of service jobs is one of the most disturbing manifestations of the US government's corporate-friendly approach to globalization and requires a fundamental reorientation of policy that will aid workers at home and abroad.
Democrats have rightly seized on the issue. They are touting an array of anti-outsourcing proposals, mostly focusing on national measures, such as elimination of taxpayer subsidies. For example, John Kerry advocates banning foreign outsourcing of state and federal government contract work and would also eliminate tax breaks for firms that outsource, while giving tax credits to those that do not. Other US policies that encourage overseas investment could also be targeted. For example:
- The relatively weak requirements for US firms, compared with European counterparts, to pay severance or negotiate with unions over plans to move jobs overseas.
- Overseas Private Investment Corporation insurance for corporations investing abroad.
- Treaties that protect US investors against host-government actions--including public interest laws--that diminish profits.
Changes in these and other areas could help chip away at the incentive to outsource. However, such domestic remedies do not address the main driving force: the extreme gap in wage levels. For example, the average wage gap between the United States and India, the top outsourcing destination in the developing world, is more than 12:1 for telephone operators and about 9:1 for medical transcribers, according to a University of California, Berkeley, study. The next biggest developing-country draw for service work is China (which has rock-bottom wages but lacks India's English-speaking advantage), followed by Mexico, where the wage ratio with the United States is about 8:1.
Overall, global pay gaps result in cost savings for outsourcers of at least 45-55 percent (after accounting for higher infrastructure and other costs), according to the management consulting firm McKinsey and Company. If this is true, figures in the Berkeley study suggest, companies could save around $300 billion a year if they outsourced all of the estimated 14 million US service jobs considered vulnerable to being shipped overseas. Given these vast potential savings, it will be difficult to reduce outsourcing incentives substantially--unless the pay gaps are narrowed.
Of course, this is no easy task. Economists often claim that productivity growth is the key to boosting wages, but this has not been the experience of many developing-country workers. The key impediments to rising pay appear to be rampant unemployment, labor repression and increased employer power to play workers off against one another in a globalized economy. While national governments are not without responsibility for these problems, international financial institutions and trade agreements have also played a role.
For example, the Chinese government estimates that reforms required by the World Trade Organization will destroy the livelihoods of 20 million farmers. Mexico has lost 1.3 million agricultural jobs under the North American Free Trade Agreement, according to the Carnegie Endowment for International Peace. Urban workers have also been squeezed, as governments, cheered on by the World Bank, have shed workers through privatization. Nearly 26 million Chinese public-sector employees lost their jobs between 1998 and 2002. Rather than foster domestic demand for locally produced food, goods and services, these policies insure an almost bottomless pool of cheap labor.
In this context, it is understandable that workers in these countries line up in droves to apply for positions with US firms. But this doesn't mean these jobs will deliver a better tomorrow. The export jobs on the Mexican border and in southeast China are often dangerous and pay below a living wage. Chinese workers' efforts to win improvements are stymied by an official ban on basic union rights, while in Mexico repression of independent unions in the export factories is unofficial but nearly as effective.
In India, jobs in the international service industry, especially those that are more highly skilled, tend to pay well by national standards. However, labor unions have not gained a foothold in these firms either, and there is a nagging fear that these jobs will evaporate as soon as better deals can be found in the Philippines or elsewhere. Mexico offers a haunting lesson, as the country has hemorrhaged several hundred thousand export jobs in the past few years, many of them to China.
In addition to promoting changes in global trade and finance policies, the US government could learn from the European Union's experience in using targeted aid and common labor and social standards to lift up poorer countries in that region. Living standards in Portugal and other poorer European countries have risen so much that the EU has been able to lift barriers to free-labor movement among member states. They have committed to doing the same for new Eastern European entrants.
The goal should not be to completely eliminate the far greater gaps between the United States and countries, like China and India, that are magnets for American jobs. The point is that the US government should begin to adopt a long-range view and recognize that it is in our self-interest to respond to the outsourcing scare with an approach that goes beyond domestic measures to tackle the global policies that are widening the economic divide. It should offer mechanisms for transferring resources to poorer countries, through debt reduction where appropriate, or aid that benefits the poorest instead of the Halliburtons. And the United States should be a leader in collaborating with other rich nations to expand debt reduction and effective aid programs. Finally, the new approach should include supports for internationally recognized labor rights as well as punishments for corporations that violate them.
Narrowing the global pay gap cannot be accomplished in the course of one or even two presidential terms. But if we do not begin the struggle, the pivotal battle for long-term economic health will certainly be lost.
Sarah Anderson is the global economy project director and John Cavanagh is the director of the Institute for Policy Studies. They are the co-authors of a new report, "Lessons of European Integration for the Americas," available at www.ips-dc.org, and are among the authors of Alternatives to Economic Globalization (Berrett-Koehler).
Gregory Mankiw's comment that the outsourcing of jobs is good for the US economy properly reflects a few key tenets of broadly accepted trade theory. When a company contracts services or manufacturing to a lower-wage nation, it reduces costs and cuts the prices of its goods and services. This surplus amply benefits consumers, and in general allows the United States to make at home what it makes best.
In fact, it's hard to have taken even a couple of economics courses without essentially agreeing with Mankiw's point. I partly place myself in this camp. But the comments of the Bush Administration's chief economist were still infuriating. They oversimplified trade theory, for one thing. But more disturbing, they were issued by a member of an Administration that is presiding over a jobless recovery and showing only insensitivity to the considerable pain of massive job dislocation and slow wage growth that the theory itself predicts. Most important, the remarks, and most of the reaction to them, overlook the possibility that something new is occurring in the age of both the Internet and the rapidly growing low-wage economies in Asia and the Far East.
For evidence, take the current recovery. Job growth may yet arrive, but by historical standards, a million or two new jobs at least should already have been created. Manufacturing jobs in particular, the easiest to export, are being lost by the millions and are now down to a level first reached in 1958. Weak labor markets are showing up in poor wage growth. Josh Bivens of the Economic Policy Institute points out that labor compensation has gained less in the current economic recovery than in any other in the post-World War II period. The growth of Gross Domestic Product is flowing largely into profits.
No one really knows how many jobs are being outsourced these days, and odds are that the numbers are less alarming than those bandied about. But one survey found that more than 40 percent of US businesses say the weak job market is due to outsourcing of domestic jobs. And job outsourcing is now moving up the skills ladder, meaning America's high level of education may no longer protect workers. Even if we are not already outsourcing as many jobs as is feared, the nation may be on the verge of a far faster growth in the trend.
One of the infuriating ironies of Mankiw's comments is that the beneficent theory he alluded to, and that so much of the media defended him for, applies fully only when unemployment is low, a fact not mentioned by him or anyone I read. "Conditions of full employment are required to validate standard propositions in trade theory," said former Federal Reserve vice chairman and Princeton economist Alan Blinder years ago in a speech to the American Economics Association. "High unemployment calls many of these propositions into question." Without full employment, which is determined by other factors, such as fiscal and monetary policies and the normal machinations of the economy, it is theoretically possible that gains from trade will not outweigh the losses due to job dislocation and lower wages.
This Administration has surely not produced a full employment economy. To the contrary, it has cobbled together one of the most inefficient sets of economic policies imaginable--tax cuts mostly for the rich over ten years and rapid increases in military spending. At the same time, the Bush Administration refuses to address seriously the inevitable pain for large swaths of dislocated workers, and the likely dampening effect on wages as well, that free-trade theory routinely predicts. According to many studies, in fact, workers who have lost jobs in general during the past couple of decades have had to take a pay cut on average to get a new one. A newer study shows that workers who lose jobs specifically because of trade take a still bigger pay cut on average.
But should the Democrats be calling for legislation that raises tariffs or restricts outsourcing? Sparingly at best, I would argue. The reason is that even with the above concerns, there is so large a difference in wages and costs of production between rich and poor nations that the benefits of free trade and outsourcing--the so-called surplus--are potentially enormous. Even with some unemployment, these benefits will probably be considerably larger than even the properly measured costs of job dislocation. (Early pro-free trade studies seriously underestimated these costs, by the way.) In addition, if business cannot avail itself of overseas labor and lower-priced imports, it may simply lose world market share to other nations' businesses. Many companies will just close their doors. Finally, most forms of protectionism, such as tariffs, are crude and cannot be easily targeted at the firms and industries that warrant protection.
Still, where does that leave the workers who are hurt? What Democrats should be arguing is that if freer trade and outsourcing are inevitable, there is a clear and urgent policy choice for government. First, the best protection for jobs is full employment. In the high-employment late 1990s, for example, the wages of all income groups rose. Even the best policies might not have provided full employment in current conditions, but the Bush Administration's tax cuts for the rich over time delayed the expansion and created long-term nervousness about the federal budget deficit, which may already have affected hiring decisions. Far more effective would have been a sharp, front-loaded and temporary tax cut aimed at middle- and low-income workers, who would have spent it quickly. Better would have been direct government spending on education, healthcare and infrastructure and on bailing out strapped state governments.
Second, the government should provide ample protection for those who must pay the largest price for free trade. Workers lose jobs, cannot find equivalent ones and often lose their pension and healthcare benefits in the process, or see them reduced. They are typically inadequately educated for the new jobs available. But this Administration has resisted expanding unemployment benefits, it has not adequately funded its much-ballyhooed education program and it has made no serious effort to expand public healthcare coverage. In their hearts, I believe, Administration officials would like nothing more than to privatize Social Security and Medicare in a second Bush term, which would be particularly hard on low-wage American workers--the very workers mostly losing jobs because of trade. The Administration has certainly come up with no interesting new ideas to protect workers except ubiquitous tax cuts.
The Bush Administration apparently largely operates by the nineteenth-century principle that if you don't have a job it is your fault. But it stands by a set of trade principles--at least when it suits it--that will force job losses through no worker's fault. Such hypocrisy deserves the attention of the political opposition.
Innovative ideas that target aid for displaced workers are welcome, and are the best political weapons. Wage insurance might be one. It would pay displaced workers who found a new job a wage supplement to compensate for their lower pay over a year or two, enabling them ideally to learn new skills on a job.
There are other potential problems from outsourcing in addition to direct job losses and faltering wages. For one thing, lost jobs mean less demand for goods and services at home. Yet historically, thriving domestic demand has been a critical US advantage. In thinking about the theory of free trade, it's also hard to escape the fact that most rich nations today have a long history of high tariffs and quotas. Greater protectionism in the rich nations in my view would be damaging. But it is not necessarily the open-and-shut case many often arrogantly make it out to be.
Meantime, Bush Administration officials are oblivious to the implications of even their own traditional theoretical beliefs, and they should be required to explain themselves.
Jeff Madrick is editor of Challenge magazine and a contributing economics columnist to the New York Times. His latest book is Why Economies Grow (Basic).
Whatever happened to the once-touted Great American Jobs Machine? Lately it seems to have popped a gasket. More than 700,000 jobs disappeared between the official end of the recession in November 2001 and January 2004 (the latest month available), unprecedented behavior during a supposed economic recovery. Where'd they go?
Abroad, is the standard answer, to factories in China and call centers in Bangalore. "Outsourcing" and "offshoring" are the polite ways of putting it, the words preferred by consultants and pundits. In the cruder version, it's "foreigners are stealing our jobs." In the mainstream, the major difference of opinion is whether this is a good thing or not in the long term. The President's top economic adviser, Gregory Mankiw, got into some seriously hot water the other week for saying that the phenomenon represented only the "latest manifestation of the gains from trade that economists have talked about" since the days of Ricardo, two centuries ago. To Ralph Nader and the Democratic presidential candidates, it's a bad thing that explains much of the job market's ills, one of the issues they hope to ride into the White House. Most progressives accept the analysis. The problem is that it doesn't seem to be true.
Let's look at some hard numbers. Since the peak in employment in March 2001, the US economy has lost 2.4 million jobs. But that actually understates the jobs deficit. Historical averages for normal postrecession job growth indicate that employment should be some 8 million higher than it was in January. But estimates of outsourcing, while imprecise, are in the low- to mid-six figures, suggesting that it can explain no more than a twentieth of our jobs problem. And in a more "normal" economy, the US economy would generate half a million jobs every two months. Something else is clearly awry.
The most widely cited projections for offshoring come from Forrester Research, which estimated in a November 2002 report that 3.3 million service-industry jobs would go offshore by 2015. That looks like a big number, but it needs to be put in perspective. In January the United States had 108 million service jobs. According to the Bureau of Labor Statistics, the economy should add 22 million jobs between 2000 and 2010 (almost all of them in services); if we stretch that projection to account for the additional years in the Forrester study, that's 33 million. So the best estimates we have are that the outsourcing total equals about one in thirty of today's jobs, or one in ten of the next decade's new jobs.
Of course, these are headline-level statistics, aggregating sectors and occupations. Most of the job losses in the United States in recent years have not been in services, the main focus of offshoring worries, but in manufacturing. That sector has lost 3.3 million jobs over the past six years, or one in five--far more than during the early 1980s recession, the period that gave us the term Rust Belt.
Everyone knows where those went--Mexico first, then China, right? Maybe not. A study of twenty major economies done last fall by Joseph Carson, the chief economist at Alliance Capital, found that factory employment declined by 11 percent between 1995 and 2002. Brazil lost 20 percent of its manufacturing jobs, and China, rather stunningly, lost 15 percent (mainly because gains in the new private-sector enterprises weren't enough to offset losses in failing state enterprises). Factory employment rose in a handful of countries, but mostly by small amounts. The major reason for the shrinkage, Carson and other economists have explained, is the same as it's been for decades: Machines are doing more of the work, and people, less.
There once was a time when the service sector was expanding enough to offset losses in goods production. That hasn't been happening lately. Since the end of the recession, private service employment has expanded by just 619,000.
So what's up? We can never know for sure, but it's likely that this is what a postbubble economy looks like. After its bubble burst in 1989, Japan lived through more than a decade of economic stagnation, and it was years before people realized that the problem wasn't a matter of a short-term business cycle but something more profound. It's exaggerating only slightly to say that may be what a depression looks like in these days of big governments and indulgent central banks: no outright collapse, but no strong recovery either. But despite sustained low interest rates and bursts of public works spending, the Japanese economy just flatlined its way through the 1990s, and is only now showing signs of serious recovery.
Something similar may be happening here. Driven by exuberance and easy money, the bubble inspired firms to expand and hire aggressively; when the bust came, they were badly bruised. As a result, managers remain very wary about taking on new permanent staff. Worsening the problem is heavy pressure from Wall Street to get profits up; the easiest way to do that is to squeeze the existing work force harder. Almost every employed person you talk to has a tale of surviving workers' taking on the responsibilities of employees who leave voluntarily or are laid off. Pundits cite this as evidence of a continuing productivity miracle, but the reality of it is less glamorous--working harder and longer for no increase in pay. But it's much easier to look abroad for the source of our woes than it is to investigate the home-grown reasons.
Whatever the causes, though, our treatment of the unemployed and displaced is scandalously cruel. Fewer than half of the unemployed are drawing benefits. Public expenditure on retraining and job creation is risibly small. There's plenty that could and should be done here, from classic public works projects to less traditional ones like subsidized childcare. These should be the real issues; next to them, "offshoring" is a diversion.
Doug Henwood, a contributing editor at The Nation, edits the Left Business Observer (www.leftbusinessobserver.com). His latest book is After the New Economy (New Press).
March 5, 2004 | Los Angeles Times
"Free trade" is God's gift to modern economies, and for a politician to support "fair trade" is tantamount to worshiping graven images.
Dick Gephardt, who dared to touch the free-trade icon, was burned at the stake. John Edwards, who questioned free trade, failed as a candidate, while John F. Kerry, who dances around this issue as if it were gay marriage, now has beaten the Democratic pack. Moreover, when President Bush protected U.S. steel from ruinous competition, he was dumped on as if he were a labor Neanderthal.
But politics aside, is free trade really good economics? Free trade would be all that it was promised to be if we lived in a world in which not just jobs but also goods, people and capital freely flowed from one country to another. In such a never-never land, indeed, everyone would do what he was best at, and we all would be richer for it. Unfortunately, when one country lowers its trade barriers and other countries don't lower theirs as much — making for freer, but not free, trade — who gets what becomes extremely murky. And that is the world in which we find ourselves today.
U.S. corporations love to move their plants and our jobs to other countries — countries that sometimes block our products and services from entering. As we lowered our trade barriers, a good part of our car and television manufacturing was done in Japan. But for decades Japan prevented our financial institutions from serving its citizens, and its corporate culture of keiretsu (close business relationships) still hampers the work of these institutions. American construction companies can bid all they want for public works in the huge Japanese market, but a cabal of Japanese firms decides whose turn it is to submit the lowest bid this time, and somehow it very rarely turns out to be a foreign company. Scores of countries block the import of what we are best at producing: low-cost food.
Many free-market champions believe we should export lowbrow jobs but do the "creative" stuff ourselves, thus keeping our hands clean and our wages high. This notion assumes that God has anointed the United States to be the creator while the rest of the world has been chosen to do the menial work. Perhaps no one told the rest of the world. Israelis and Finns, for instance, are not exactly laggards. Indian engineers and Chinese computer programmers are rapidly bridging the creativity gap. Moreover, the U.S. has a range of talent distribution. What will our less-talented workers do if they are not gifted enough to make "Finding Nemo" or if there are not enough "creative" jobs to go around? Will they move — or be moved — to the nations where their jobs were outsourced, as free-trade theory calls for?
If Americans are not to follow their jobs to Third World countries, they will need to be retrained and relocated within our borders, a transition that, even when it works, generates high adjustment costs.
Every time we pare down an industry because its labor can be performed more cheaply overseas — say, most recently reading X-rays — those who used to work in it here either need to be retrained to do something else or live off unemployment or welfare. Such transitions also entail, as studies have shown, a significant increase in mental illness, suicides and family breakdowns, all hefty human and social costs. Economists tend to ignore all these public costs, which end up in the laps of taxpayers, when they tell people how wonderful it is that they can buy T-shirts at Wal-Mart at a discount.
Organized labor's claim that free trade involves a race to the bottom is valid. As flight attendants and grocery workers recently discovered, the pressure is on to reduce benefits, job security and the wages given to new employees and possibly to old ones.
Remaining competitive in a world in which billions of workers are paid about a dollar a day and have no benefits, and in which corporations need not worry about environmental costs, requires us to drastically lower our own standard of living.
Economists argue that eventually other countries will raise their living standards (as South Korea and Taiwan already are doing) and then we will all compete on equal footing. But there are two ways to get there: lower our standards until the rest of the world catches up or insist that we compete freely only with those countries where companies give their workers a basic basket of benefits and elementary environmental protection. This is what is referred to as "fair trade."
Americans should have the opportunity to vote in November on which form of trade they prefer: the mismanaged variety (masquerading as free trade) or fair trade. They will have this opportunity only if one of the political parties has the civic courage to lift the fog in which economists, big business and naive liberals have shrouded this whole sordid business. Then fair trade will not only be sound economics for America but also good politics.
Amitai Etzioni, a professor of sociology at the George Washington University, is the author most recently of "My Brother's Keeper: A Memoir and a Message" (Rowman & Littlefield, 2003).
Democrats have made it clear that the stagnant labor market in general -- and the offshoring of jobs in particular -- will be a central focus of the 2004 campaign season. The Bureau of Labor Statistics yesterday effectively gave them another month to hammer away, with a February jobs report that showed only 21,000 new jobs were added in a month when 392,000 job seekers gave up and left the labor market.
Some economists suspect that the outsourcing of jobs overseas may be playing a part in the job market's stagnation, helping companies increase profitability and productivity while keeping hiring and wages depressed. With an economic recovery nearly three years old, the economy should be producing 200,000 to 300,000 jobs a month, said Sung Won Sohn, chief economist of Wells Fargo & Co.
"Obviously, the relationship between economic growth and employment has broken down," Sohn said in his weekly commentary.
Most economists still believe innovation and growth will eventually replace jobs moving abroad with new ones that will be require higher skills and pay more money. But even the most optimistic economist concedes there will be a painful transition period, especially for the manufacturing sector. For now, just mentioning long-run optimism may be politically perilous.
"Whenever someone tells you the market will take care of things sooner or later, the one thing you know is they're talking about someone else's job," said Gene Sperling, a director of President Bill Clinton's National Economic Council, now advising Sen. John F. Kerry (Mass.), the presumptive Democratic nominee for president.
But, while offshoring-related protectionism may stifle economic development and unnecessarily force business closures, its biggest impact may be longer term. That's because, as the baby-boomers move into retirement, the size of the working population will decline precipitously, by 5 percent by 2015, according to the McKinsey report. [Idiotic statement] Without a readily available source of high-quality, young labor--i.e., the sort provided by offshore outsourcing--the country could find itself in a sort of economic sclerosis. Growth could be permanently hamstrung by the high labor costs and booming social spending that have turned Germany, where it's extraordinarily difficult for companies to lay off employees, from an economic engine into a plodding giant. As Carl Steidtmann, chief economist for Deloitte Research, wrote recently, "Restrictive employment laws in Europe go a long way toward explaining why Europe consistently runs a higher rate of unemployment when contrasted with the U.S. or Britain."
Dr. Gomory received his B.A. from Williams College in 1950, studied at Cambridge University and received his Ph.D. in mathematics from Princeton University in 1954. He served in the U.S. Navy from 1954 to 1957.
Dr. Gomory was Higgins Lecturer and Assistant Professor at Princeton University, 1957-59. He joined the Research Division of IBM in 1959, was named IBM Fellow in 1964, and became Director of the Mathematical Sciences Department in 1965. He was made IBM Director of Research in 1970 with line responsibility for IBM's Research Division. He held that position until 1986, becoming IBM Vice President in 1973 and Senior Vice President in 1985. In 1986 he became IBM Senior Vice President for Science and Technology. In 1989 he retired from IBM and became President of the Alfred P. Sloan Foundation.
He has served in many capacities in academic, industrial and governmental organizations, and is a member of the National Academy of Science, the National Academy of Engineering, and the American Philosophical Society. He was elected to the Councils of the three societies. He was a Trustee of Hampshire College from 1977-1986 and of Princeton University from 1985-1989. He served on the President's Council of Advisors on Science and Technology (PCAST) from 1984 to 1992, and is presently a member of PCAST and of COSEPUP, the National Academies' Committee on Science, Engineering and Public Policy.
Wednesday, February 18, 2004
By David Kirkpatrick
To rephrase my opening sentence of last week: Seldom have so many been so angry at a writer they felt understood so little. My column on the offshoring of jobs (online last week [www.fortune.com/fortune/fastforward/0,15704,
588382,00.html] and in the current issue of FORTUNE) elicited the biggest outpouring of letters ever. While a reasonable number of readers commended my view that the trend may not be damaging to the economy, far more called me an idiot or worse.
I've been given a sudden and bracing education in just how angry Americans are about what's happening with jobs. Regardless of whether they understand or agree with the economics, they are hurting and they wanted me to know it. Most of America's unemployed seem to think their situation is due to offshoring. I was disturbed to see a barely concealed racism embedded in some angry replies, directed at Indian workers in particular. And it's clear that the widespread corruption recently revealed in corporate executive suites and on Wall Street is taking its toll—people are getting fed up with business. In the letters I sense the rumblings of an incipient anti-corporate revolt. Here are excerpts from a few emails:
* "I don't give a hoot how much you and other pseudo-intellectuals write about paradigm shifts or globalization or offshoring or whatever tired clichй you're recycling this week: American white-collar workers are going to fight against offshoring with their votes. A jobless, highly educated, and angry voter doesn't give a rat's ass what you and the other windbags at consultancies like McKinsey or Gartner have to say...This is not an intellectual exercise, Dave: offshoring takes a real human toll...Who knows, FORTUNE might decide to quite paying for your boondoggles to Switzerland and offshore [your] column. Chances are, it'll be a better read."
* "I am a network engineer. I have worked as hard as I could to gain my education, and then earn my certifications. Now, due to outsourcing I have lost my job...What do you say to my family when their dad/husband has worked hard and achieved something not many people can attain, yet fails to provide for them?...I want you to think about us over here, waking up scared, living scared, searching for work terrified."
* This from a computer engineer laid off from a government agency in late 2002: "I want to find a political party or movement that will try to save American jobs. I am ready to vote for the Communist Party, the Nazi Party, or whatever it takes. The system we have now is a disaster. The system we have now is KILLING ME...If an enraged laid-off American engineer were to go up to his Indian replacement, and shoot him dead—if I were on the jury the verdict would be NOT GUILTY."
* "I have been unemployed for two years after 25+ years in the workforce as a hard-working, productive team member of many companies...When I have a list of companies who have turned their backs on Americans, I will no longer do business with them."
A large number of readers said something like this: "Maybe it is time for FORTUNE to offshore their writers and perhaps put Lou Dobbs in charge of your magazine. He gets it. You don't."
Another: "The working stiff is not a white-collar writer rubbing elbows with a covey of billionaires. Do take care. Writing is not beyond the capacity of talented Indians, Malays, and Chinese."
Or the tersest letter of all, which said simply: "I wish they outsource your job."
When I asked my colleague Justin Fox what he thought about my column, he said it was sometimes too easy for people like us to talk about how "we" all will benefit from the macroeconomic outcomes of offshoring and other disruptive economic changes, when the reality is that the changes are felt personally and painfully by real people. "It's inaccurate to say we all benefit," says Justin. "In aggregate, the economy probably benefits but within that upward trajectory a lot of people are permanently hurt while many others gain." In retrospect I wish I hadn't taken such a stern tone in the column, though I still hold that offshoring is unstoppable and not, in itself, disastrous. For those who want to learn more about this phenomenon, read Justin's amazing recent FORTUNE article about working in Bangalore, India. (www.fortune.com/fortune/investing/articles/0,15114,538786,00.html)
Several readers who addressed the policy challenges posed by offshoring noted, as have several Democratic presidential candidates, that tax policy currently treats offshoring benignly. It may make sense at least to create tax incentives that encourage companies to keep workers here as the economic pressure to outsource continues to grow. Another good proposal, advocated by McKinsey's Diana Farrell, whose economic analyses in the column were so roundly rejected by many readers, is legislation to make pensions and health-care benefits portable. That way workers displaced by offshoring or the other rapid-fire changes of technologized society at least will have a better chance of staying in the game.
Make no mistake, this is the issue of the year. President Bush's chief economic adviser Greg Mankiw said last week that "outsourcing...is something that we should realize is probably a plus for the economy in the long run." It was a milder version of what I wrote in this column. Like me, he was immediately under siege. He had to publicly back down. And Democrat John Kerry didn't take long to respond. While I doubt that he really disagrees with Mankiw in his heart, he condemned "Benedict Arnold CEOs" who ship U.S. jobs overseas.
The economist Jagdish Bhagwati, who wrote "In Defense of Globalization," replied to Kerry on the New York Times op-ed page last Sunday. "In a world economy," he wrote, "firms that forgo cheaper suppliers of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people." A similar point was made in a recent interview by Lee Kuan Yew, Singapore's founder and senior minister [yaleglobal.yale.edu/display.article?id=3231]. Speaking of the competition between nations, he said, "If you deprive yourself of outsourcing and your competitors do not, you're putting yourself out of business."
Like many readers, I fear that the impact of globalization could easily pull us down toward the level of the world's poorer economies rather than pull them up to our currently prosperous level. But my friend Joe Schoendorf, a venture capitalist at Accel Partners, makes a good point. He notes that if you had asked Americans in 1900 how they felt that almost all the farmers would lose their jobs over the coming century, they would have been just as outraged as today's workers are when they think about outsourcing. Yet Americans are still well-fed while only about 2% of the population works in agriculture. And the people of the U.S. found jobs doing other tasks, most of which didn't even exist until recently. It's at least a mildly reassuring thought.
David Kirkpatrick is senior editor for Internet and technology. E-mail him at firstname.lastname@example.org.
March 2, 2004 | Los Angeles Times
TOLEDO, Ohio — On a Wednesday morning, union workers and Democratic partisans gather in this Rust Belt city to hear John F. Kerry confirm something they feel in their bones: The economy has gone terribly awry.
"People who did everything that was asked of them have seen their jobs just wiped away," the Massachusetts senator says. "Dreams of retirement are challenged, and people live in anxiety."
One day later in Louisville, Ky., President Bush coaxes a factory manager to talk about his plans to add 30 workers. "Inflation is low, interest rates low, manufacturing activity is up…. The economy is getting better," Bush says.
As the race for the Democratic presidential nomination reaches a possible end today — depending on the results in Super Tuesday's 10 contests — Bush and the candidates wanting to replace him often have seemed to be describing two different worlds.
And that, in itself, says something important about the U.S. economy these days.
The economy is in such an unfamiliar place — with businesses bustling and yet reluctant to hire new workers — that economists are struggling for an explanation. And the mixed signals have allowed the president and his rivals to paint vastly different — yet plausible — pictures of the U.S. workforce and its prospects.
Gross domestic product has jumped 7% since Bush took office. But companies have shed more than 2 million workers. The stock market had a great 2003. But wage growth has been sluggish. Home ownership is at a record high. But many Americans are worried that prosperity is slipping away to low-cost Beijing and Bangalore, India.
"The economy now is very much like a Faulkner novel," said Rob Koepp, a research fellow at the Milken Institute, an economic think tank in Santa Monica. "You have competing and schizophrenic versions of reality. But it's one reality."
In most elections, the party out of power tries to highlight economic insecurities to build its case for change. By traditional standards, that should have been a hard task for this year's crop of Democratic candidates, including Kerry, who could virtually lock up the race with a sweep of today's races, and Sen. John Edwards of North Carolina, his last major rival. After all, companies have generally rebounded from the 2001 recession, and consumer spending remains high.
But throughout their primary campaign, the Democrats have focused their fire on the economy, noting that the rising demand for goods and services has not led to robust job growth. The economy has expanded at a strong 6% pace since the middle of last year, while jobs have grown barely 1%. Company payrolls are below their pre-recession levels.
"That's highly unusual, and it's an obsession with economists right now," said Pierre Ellis, senior global economist with Decision Economics, a New York consulting firm. "We're short hundreds of thousands of jobs, if not millions, from where we should be on this track."
Many economists point out that companies have become more efficient, allowing them to produce more without hiring new workers. And firms that do hire workers are more apt to add them in low-cost countries, such as China and India.
Also, some economists say that more people are working than government statistics show. They say that employees dislodged from big firms often are hanging out their own shingles, becoming self-employed software programmers, fitness trainers, management consultants and the like. These workers may not be turning up in their full numbers in some government statistics.
Economists are debating the depth and significance of these trends. But together, they seem to be producing anxiety — questions about whether higher productivity, the offshore shift of jobs and more self-employment ultimately will lift U.S. living standards or help cause an extended period in which Americans can expect less from U.S. employers and more job competition from abroad.
When a trend like out-sourcing is in flux, "people's minds don't get made up about it. And while they aren't made up — the jury is still out — you can contend anything about it," said Donald Straszheim, former chief economist for Merrill Lynch.
In this climate, Bush and the Democrats have spent a great deal of time trying to mold public perceptions of the economy. At times, the two parties seem like they are giving dueling lectures in Economics 101.
Bush has billed each of his recent speeches on the topic as "a conversation on the economy." He has held at least seven since December — many in states that could prove crucial to the election's outcome, such as Florida, Missouri and Pennsylvania.
These events usually feature the president in almost a talk-show setting, sitting on a stool, microphone in hand. The president's outlook is sunny. Bush peppered the words "hopeful" and "optimistic" throughout his appearance in Louisville last week at ISCO Industries, a piping manufacturer.
Bush's main theme is that the deep tax cuts he championed have sparked the economy after the setbacks of recession, corporate scandals and the Sept. 11 attacks. The tax cuts, he says, have given individuals and businesses more money to spend.
Bush asked ISCO President Jim Kirchdorfer to talk about the $3 million he spent last year on new equipment. Then Bush elaborated with a short economics lesson. "See, the tax bill we passed encouraged this company to invest…. We're trying to encourage Jim to make the decision to expand his business by buying new equipment," Bush said. "And when he buys new equipment, somebody has got to manufacture the equipment. And when somebody manufactures the equipment, it means they're working, right?"
The president made only a veiled reference to the nation's sluggish job creation, saying: "We are in a changing economy. These are exciting times, but change creates the need for government at all levels to act." That action, he said, should include training programs to prepare workers for "the new jobs of the 21st century."
Kerry and Edwards, by contrast, talk constantly about layoffs and of jobs moving to other nations.
Nearly every time Kerry takes the stage, out comes the litany of loss: Ohio is down 265,000 jobs since Bush became president … 5,000 jobs gone in Tennessee … 300,000 in Michigan.
While Bush has set his events at thriving companies, Kerry last week toured the rusting hulk of an Ohio steel mill closed in 1984. "Today, only ghosts work at the line of the Youngstown Sheet and Tube," Kerry recounted to a Toledo audience the next day. "To walk through that silent place was to get a heartbreaking reminder of the millions of Americans without work all over our country, in industry after industry."
This is how Kerry painted the economy to his standing-room-only crowd: "Some people are working two and three jobs, and [college] tuitions keep going up and are out of reach. The healthcare keeps going up and it's out of reach…. Under George Bush, people are working harder and harder just to stay where they are."
He stood beneath a banner that read, "John Kerry: Protecting America's Jobs."
In Kerry's view, the Bush tax cuts not only failed to spur the economy but also heavily favored the wealthy. "He promised his tax cuts would create 4 million new jobs," Kerry has said. "So far, we've lost 3 million. Now he wants to make his tax cuts permanent. I think when you're 7 million jobs in the hole, step number one is pretty simple: Stop digging."
Kerry says he would create new tax breaks for manufacturers and end tax breaks that he argues encourage companies to move jobs offshore. He has also proposed new tax credits to help cover college tuition.
Edwards also has pinned his presidential hopes in part on tapping into the uncertainty coursing through the middle class and the working poor. But while his talk of insecurity is similar to Kerry's appeal, he marries it to an upbeat message.
"It seems today, we have two Americas, with two healthcare systems: one for the privileged, another rationed by insurance companies," says a television ad that Edwards has aired in several states. "Two public school systems … two tax systems."
But the commercial, like his speeches, ends on an uplifting note: "Together, you and I can change America and make it work for all of us."
His basic assessment is that the economy is not working for average Americans. He has said, "This president doesn't get it. He believes that as long as everything is going well on Wall Street, everything is fine. He is wrong."
In a New York City union hall last week, Edwards had several garment workers take the microphone to talk about losing jobs to overseas sources. He also used the forum to restate his argument that trade agreements should include provisions that guarantee workers' rights to organize and establish tougher environmental standards.
Several economists said that until it becomes evident that new jobs are replacing those the nation has lost, anxiety will remain — and potentially make for an unpredictable election.
Like Edwards, "Kerry is focusing on the people who are suffering real pain, and that version of what's going on is accurate," said Koepp of the Milken Institute. "My own view is that it's not the whole story, and that Bush has the other side of the cube, where he's talking about the business environment being much better."
Chen reported from Kentucky, La Ganga from Ohio. Times staff writer Scott Martelle contributed to this report.
Published on Tuesday, March 2, 2004 by the Seattle Times The 'Green' Way to Fight the Loss of U.S. Jobs by Neal Peirce The swirl of political dust that the Democratic presidential contenders have stirred up over job losses under President Bush begs one question: What would they do?
To offset job hemorrhaging to low-cost countries, both Sens. John Kerry and John Edwards talk about tax breaks for U.S. manufacturers who add jobs here. Edwards is vehement about curtailing trade agreements that he says trigger domestic job loss.
But can the riptides of globalization be stilled? Not likely, given the dramatically lower costs of labor in such nations as Mexico, China and India.
This election season should elevate us past defensiveness to a grand debate on how the United States anticipates the inevitable decline of fossil fuels, pushes an imaginative array of sustainable-development technologies, and uses the process to generate millions of new jobs for Americans.
Indeed, while official Washington ponders still more subsidies for oil, gas and coal interests, several states are edging into leadership positions in advancing wind turbines, solar panels, hydrogen fuel cells, "green" buildings, and more.
Massachusetts Gov. Mitt Romney, for example, has placed a priority on job creation in the renewable-energy sector (solar, fuel cells and others). Concurrently, the Massachusetts Technology Collaborative pushes new opportunities ranging from "green power" to "green schools."
New York Gov. George Pataki talks up the $50 million his state has pledged toward a academic-business-government partnership — centered at a new research institute at Syracuse University — aimed at making the region "the Silicon Valley of environmental research." Sen. Hillary Rodham Clinton and state Comptroller Alan Hevesi are urging New York to use its investors, cutting-edge research and skilled labor force to become "the smart energy capital on the East Coast."
In New York City, labor leaders are envisioning a century of solid-paying, high-skilled construction jobs in retrofitting and new construction of "high performance" (i.e., "green") buildings that require substantially reduced energy. Together with "distributed" (i.e., localized) energy generation, backers assert New York could sharply reduce its dependence on imperiled Midwest and East Coast energy grids.
There's a nationwide opportunity, notes Bracken Hendricks of the Washington-based Apollo Alliance of labor and environmental groups, "to literally substitute high-skill construction employment for wasted energy resources," in the process cutting energy consumption 20 percent to 30 percent by 2020.
Pennsylvania's Gov. Edward Rendell has just kicked off a major campaign to streamline regulations and focus funds to accelerate recycling of industrial brownfields and revive flagging older cities.
Hendricks greets that kind of investment because he views older cities and suburbs as more efficient, more dense, "pro-union and pro-environment." Invest in them, he suggests, and the impact "reduces society's environmental footprint," avoiding "investment in low-density, nonunion, stick construction in sprawl sites that erode open space."
In California, even as the regular state budget teeters on the edge pending a bond referendum March 2, state Treasurer Phil Angelides has launched a "Green Wave" agenda to mobilize the immense investments powers of the two multibillion-dollar state pension funds — CalPERS and CalSTRS. More than $500 million in pension investments will go to private firms developing "clean" technologies that create jobs and economic growth in the state. Another combined $1 billion in the funds will be invested in stock portfolios of environmentally screened funds — funds, as Angelides notes, that are now tending to outperform regular market funds.
And finally, CalPERS and CalSTRS will audit their $16 billion worth of real-estate investments to maximize opportunities "to use clean energy, energy efficiency and green building standards."
Kerry and Edwards both endorsed the Apollo Project plan aimed at U.S. energy independence when it was announced in January. Kerry underscored the long-term national-security implications: "Renewable energy sources are important because they are entirely under our control. No foreign government can embargo them. No terrorist can seize control of them. No cartel can play games with them. No American soldier will have to risk his or her life to protect them."
What Kerry could have said, but didn't, is that most of the jobs produced by a sustainable-energy economy won't be exportable.
Suddenly, we have this dramatic convergence of 21st-century energy needs, national-security priorities, sustaining communities and our crying need to create solid, family-wage jobs that won't easily vault overseas.
It's an equation for fresh hope — a quality too often missing in these years of terror frights and dismal deficits. The presidential campaign provides an ideal opportunity to expose the challenging new ideas and possibilities to the American people.
Message to the candidates: Let's make sure we don't miss it.
Copyright © 2003 Seattle Times Company
As Technology Devours Jobs at an Increasing Rate, the Conflict at the Heart of the Market Economy is Becoming Irreconcilable
We are losing jobs all over the world. It has reached crisis proportions. In 1995, 800 million people were unemployed or underemployed. Today, more than a billion fall into one of these categories.
Even in America and Europe, millions of workers find themselves under- employed or without jobs and with little hope of obtaining full-time employment. The US has lost 12% of its factory jobs since 1998, while the UK shed 14% of its manufacturing jobs in the same period. Manufacturing jobs continue to disappear in the UK, even though the sector is growing at its fastest pace in four years.
Where have all the factory jobs gone? It has become fashionable, of late, to blame the high unemployment on companies relocating their production facilities to China. It is true that China is producing and exporting a far greater percentage of manufacturing goods, but a new study by Alliance Capital Management has found that manufacturing jobs are being eliminated even faster in China than in any other country. Between 1995 and 2002, China lost more than 15m factory jobs, 15% of its total manufacturing workforce.
There's more bad news. According to Alliance Capital, 31m manufacturing jobs were eliminated between 1995 and 2002 in the world's 20 largest economies. Manufacturing employment has declined every year in the past seven years and in every region of the world. The employment decline occurred during a period when global industrial production rose by more than 30%.
If the current rate of decline continues - and it is more than likely to accelerate - manufacturing employment will dwindle from the current 164m jobs to just a few million by 2040, virtually ending the era of mass factory labor.
Now the white-collar and services industries are experiencing similar job losses, as intelligent technologies replace more and more workers. Banking, insurance, and the wholesale and retail sectors are introducing smart technologies into every aspect of their business operations, fast eliminating support personnel in the process. The US internet banking company Netbank has $2.4bn in deposits. A typical bank that size employs 2,000 people. Netbank runs its entire operation with just 180 workers.
The UK and US jobs being lost to call centers in India, while important, pale in significance compared with jobs lost every day to voice recognition technology. Consider the US phone company Sprint, which has been steadily replacing human operators with this technology. In the year 2002, Sprint's productivity jumped 15% and revenue increased by 4.3%, while the company reduced its payroll by 11,500.
As far back as the late 1980s, industry analysts were warning that automation would eliminate more and more jobs. Because their forecasts proved somewhat premature, the public was lulled into believing that automation was not a problem. Now, however, the software, computer and telecom revolutions, and the proliferation of smart technologies, are finally wreaking havoc on jobs in every country.
Industry observers expect the decline in white-collar jobs to shadow the decline in manufacturing jobs during the next four decades, as companies, whole industries, and the world economy become connected in a global neural network.
The old logic that technology gains and advances in productivity destroy old jobs but create as many new ones is no longer true. The US is enjoying its steepest rise in productivity since 1950. In the third quarter of 2003, productivity soared by a staggering 9.5%, yet the ranks of the unemployed remain high.
Economists have long argued that productivity allows firms to produce more goods and services at cheaper costs. Cheaper goods and services, in turn, stimulate demand. The increase in demand leads to more production and services and greater productivity, which, in turn, increases demand even more, in a never-ending cycle. So even if technological innovations throw some people out of work in the short term, the spike in demand for the cheaper products and services will assure additional hiring down the line to meet expanded production runs.
The problem is that this theory appears to be no longer applicable. The US steel industry is typical of the transition taking place. In the past 20 years, steel production rose from 75m tonnes to 102m tonnes. In the same period, from 1982 to 2002, the number of steelworkers in the US declined from 289,000 to 74,000. "Even if manufacturing holds on to its share of GDP," says University of Michigan economist Donald Grimes, "we are likely to continue to lose jobs because of productivity growth." He laments that there is little we can do about it. "It's like fighting a huge headwind."
Herein lies the conundrum. If dramatic advances in productivity can replace more and more human labor., resulting in more workers being let go from the workforce, where will the consumer demand come from to buy all the potential new products and services? We are being forced to face up to an inherent contradiction at the heart of our market economy that has been present since the very beginning, but is only now becoming irreconcilable.
Greatly increased productivity has been at the expense of more workers being marginalized into part-time employment or given their pink slips. A shrinking workforce, however, means diminished income, reduced consumer demand, and an economy unable to grow. This is the new structural reality that government and business leaders and so many economists are reluctant to acknowledge.
Jeremy Rifkin is the author of 'The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era'. He is president of the Foundation on Economic Trends in Washington.
The numbers are startling: 3.3 million jobs in less than 15 years. That's the number of U.S. jobs expected to be lost overseas by 2015 according to a recent report by Forrester Research. But the sheer size of the exodus isn't what's worrying analysts the most — it's the type of jobs. Some critics are worried that this time it's the corporate main office is getting ready to shut down and head out of the country, packing up cubicles and all. As reported on NOW, a new wave of jobs are leaving U.S. shores: software development, customer service, accounting, back-office support, product development and other white collar endeavors.
In late 2002, computer giant Oracle announced that it would double its workforce in India. Texas Instruments already employs over 1,000 engineers at a Bangalore campus, and has made plans for a much bigger presence in the near future. In November of 2002, Microsoft Chairman Bill Gates announced that the company will be making investments of approximately $400 million in India.
And, It's not just technology jobs that have ended up in India. Charles Schwab recently moved part of its information technology division to a contractor in Bangalore, India. AOL already has a large presence in India. American Express and British Airways have ramped up their employment in the country during the past year as well.
FRONTLINE WORLD reported last year that over half of Fortune 500 companies have moved jobs offshore, including famous names from many fields: Oracle, Dell, HSBC, Delta Air Lines, Novartis, J.P. Morgan Chase, Hewlett-Packard, American Express, British Airways. More are expected to follow.
According to the U.S. Bureau of Labor Statistics, jobs separations due to overseas relocation are at their highest level since 1995.*
Projected Number of U.S. Jobs to Move Overseas (Source: Forrester Research, Inc. November, 2002 ):
Management: Number of jobs moving overseas by 2015:
- Business: Number of jobs moving overseas by 2015:
- Computer: Number of jobs moving overseas by 2015:
- Architecture: Number of jobs moving overseas by 2015:
Life sciences: Number of jobs moving overseas by 2015:
- Legal: Number of jobs moving overseas by 2015:
- Art, design: Number of jobs moving overseas by 2015:
- Sales: Number of jobs moving overseas by 2015:
- Office: Number of jobs moving overseas by 2015:
And where are those jobs going? Many are indeed going to India, as portrayed in NOW's story, but others are heading to China, Russia, Vietnam, the Philippines, Malaysia, and the Czech Republic. In short, they are moving toward cheaper labor costs.
In November, 2003, Bangalore will be hosting a huge IT job conference, Bangalore IT.com 2003, the largest IT conference in all of Asia. Intel and IBM are among the sponsors.
It should be noted that while salaries are much lower in India and other BPO hot spots, that does not mean that the companies are providing inadequate compensation — the cost of living is significantly lower in India. However, as both THE TIMES OF INDIA and THE ECONOMIST have recently noted, some jobs are in turn leaving India for even cheaper locales.
- Software Programmer, United States: $66,100
- Software Programmer, India: $10,000
- Mechanical Engineer, United States: $55,600
- Mechanical Engineer, India:$5,900
- IT Manager, United States:$55,000
- IT Manager, India: $8,500
- Accountant, United States: $41,000
- Accountant, India: $5,000
- Financial Operations, United States:$37,625
- Financial Operations, India:$5,500
Source: Paàras Group, 2002; International Labour Organization
The of the main reasons for the decline in President Bush's credibility is the disconnect between the rosy economic scenarios his administration keeps touting and the much more dismal real-life experience of millions of American families.
Mr. Bush likes to say, "America's economy is strong and getting stronger." He recently boasted, "Since May 2003 we have seen the economy grow at its fastest pace in nearly 20 years." He predicted that prosperity would soon "reach every corner of America."
The president needs to get out more. He could visit the working men and women across the state of South Carolina who have watched the factories and the mills close and their jobs vanish like lights in a blackout. He could chat with the people lining up at soup kitchens and food pantries from Harlem to Oklahoma and beyond. He could take a tour of the Pacific Northwest or Silicon Valley, listening to families that have been devastated by the information technology bust and the outsourcing of high-tech jobs.
When the labor secretary, Elaine Chao, was questioned on CNN about the disappointing jobs report for January (112,000 jobs were created when 150,000 had been anticipated), she said: "Well, the stock market is, after all, the final arbiter. And the stock market was very strong this morning in reaction to the news that we have just received."
She was outdone in tone-deafness just a few days later by N. Gregory Mankiw, chairman of the president's Council of Economic Advisers, who gave a thumbs up to outsourcing, including the outsourcing of skilled higher-wage jobs.
After an outcry from Republican politicians — including the speaker of the House, Dennis Hastert — who have been hearing from constituents filled with anxiety about employment, a chastened Mr. Mankiw beat a very public retreat. He said in a letter to Mr. Hastert that "my lack of clarity left the wrong impression that I praised the loss of U.S. jobs."
No amount of political mumbo jumbo can change the fact that the employment situation in the U.S. is grim, and the public is growing weary of the administration's repeated promises that boatloads of jobs are just around the corner. (Any boats with jobs on them are heading overseas.)
This recovery has been the weakest on record in terms of job growth. The Economic Policy Institute has found, counter-intuitively, that upscale workers have been among those especially hard hit, particularly in the area of long-term unemployment.
"In all recessions, the least educated have suffered disproportionately," the institute said in a report. "However, the current recession and weak recovery are unique in the extent to which workers with substantial education are also economic victims."
The simple truth is that the Bush administration has been wrong, wrong, wrong in its job creation projections, and that pattern appears to be continuing.
A joint study released last week by the Economic Policy Institute and the Center on Budget and Policy Priorities found that "actual employment levels in recent years have fallen far below administration forecasts" and that "it is quite unlikely that the administration's [current] target will be reached."
Back when it was hyping its tax cut plan, the administration predicted that 5.5 million jobs would be created in the 18 months from July 2003 to the end of this year. The study noted that in the first seven months of that period, only 296,000 jobs have been created — just 5 percent of the administration's projection.
Working Americans are caught in a terrific squeeze. Jobs are not being created in substantial numbers. The slow pace of job growth has dampened wage growth. Millions of Americans are underemployed, working at jobs for which they are overqualified, or working part time because they can't find full-time work, and so forth. Benefits are being scaled back. And the shipment of upscale jobs overseas is expected to accelerate.
This is all happening in an expansion. What can we expect from the next recession?
The president is in serious political trouble in large part because he has not come up with any credible proposals for dealing with these issues, which go to the very heart of the American way of life.
President Bush's Council of Economic Advisers, N. Gregory Mankiw, stepped forcefully last week into an issue that has touched off an escalating, often strident, political debate: the migration of jobs, ranging from call center operators to computer programmers, to lower-cost countries like China and India.
The movement, known as offshore outsourcing, is growing, Mr. Mankiw acknowledged. But he said it was "just a new way of doing international trade" and "a good thing" that would make the American economy more efficient and would free American workers to eventually get better jobs.
History suggests that Mr. Mankiw may be right. The American economy has adapted to unsettling new waves of competition in the past.
Still, many industry executives, analysts and academics — not distraught American workers alone — say the nature of the economic challenge appears to be fundamentally different this time.
The differences, they say, include the kinds of jobs affected by outsourcing, the number of jobs potentially at risk and the politics of developing an effective policy response.
Globalization and technology are amplifying the impact of outsourcing. For decades, American foreign policy has been to urge developing nations and Communist countries to join the global economy in earnest. Now they have, and vast numbers of skilled workers have joined the world labor force, seemingly overnight. Countries like China, India and Russia educate large numbers of engineers. Add the low-cost, nearly instantaneous communication afforded by the Internet, and an Indian computer programmer making $20,000 a year or less can replace an American programmer making $80,000 a year or more.
"The structure of the world has changed," said Craig R. Barrett, chief executive of Intel, the Silicon Valley company that is the world's leading computer chip maker. "The U.S. no longer has a lock on high-tech, white-collar jobs."
But that does not mean that such jobs are about to disappear from the United States. Statistics on the current job flight are estimates. Forrester Research in a frequently cited study, predicted in late 2002 that 3.3 million services jobs in America would move offshore by 2015, about 500,000 of them in computer software and services.
For all the alarm that report generated, a shift of that size over the next 11 years would be small, given that the American labor force has more than 130 million workers and normally creates and destroys millions of jobs every few months.
Many American workers are worried that outsourcing is just beginning, and they fear that in an information-age economy all kinds of jobs are potentially at risk. Not only anxious workers in the United States take that view. Nandan Nilekani, chief executive of Infosys Technologies, an Indian outsourcing company, declared at the World Economic Forum last month, "Everything you can send down a wire is up for grabs."
Another difference, some analysts say, is that during the 1980's, the interests of American workers and companies were more closely linked than they are today. From 1984 to 1986, the American semiconductor industry lost $4 billion and shed 50,000 jobs in the United States.
"But now, it is the workers who are suffering and not the companies," said Ronil Hira, an assistant professor for public policy at the Rochester Institute of Technology. "The companies outsourcing jobs overseas are profitable and mostly gaining market share. There's no gun to their head this time, no real motivation to address the issue."
Beyond jobs shifted, the broader impact may be to put pressure on the wages of many technical workers in the United States, who increasingly live under the shadow of foreign competition.
Chris Neustrup, a software engineer from Walnut Creek, Calif., has seen every boom and bust in Silicon Valley since he graduated from the University of California at Berkeley in 1969. As a seasoned programmer-for-hire, who constantly kept adding to his portfolio of skills, Mr. Neustrup was never out of work for long, and in good years he routinely made $100,000 or more.
But this time, he said, it was different. After 25 months without work, Mr. Neustrup was hired two weeks ago by Emanio, a private software company in Berkeley. The pay is less than he used to make, but he counts himself lucky in this job market. His experience is part of a picture that puzzles economists and policy makers. The economy is growing nicely, corporate profits are rising, and yet job growth remains frustratingly sluggish, even among skilled workers. Some politicians and labor advocates say offshore outsourcing is a betrayal of American workers and support bills to curb it.
Mr. Neustrup, who lives with the turmoil in the high-tech job market, takes a more balanced view. "It's great for these developing countries to move up and adopt this technology," he said. "The trouble for us in the U.S. is that we're at the top of the ladder getting squeezed. And I'm not sure there is a good answer."
The heat of the political debate over outsourcing keeps rising. State and federal bills that would limit the flow of jobs abroad have proliferated.
Senator John Kerry, the front-runner for the Democratic presidential nomination, castigates "Benedict Arnold companies and C.E.O.'s" for moving jobs overseas. Last November, Indiana pulled out of a $15 million contract with an Indian company to provide technology services because of objections to outsourcing. The National Foundation for American Policy, a research group, says 30 bills are pending in 20 states to curb the use of offshore contractors by state and local governments.
Senator Kerry introduced federal legislation last November that would require call center operators to disclose where they are located.
The Senate recently passed a bill sponsored by Republican Senators Craig Thomas of Wyoming and George V. Voinovich of Ohio, that prohibits the use of offshore workers on some government jobs. The House has not voted on any similar bill.
These steps, some economists warn, are part of a misguided drift toward protectionism that would increase costs to consumers, make American businesses less competitive and risk more trade conflict.
"This anxiety about outsourcing is not a bad thing, as long as it forces you to make the right choices," said Jagdish N. Bhagwati, a professor of economics at Columbia University. "You have to move on and upgrade your skills. We have no choice. And America, as probably the most innovative society in the world, does a pretty good job of it."
That process has begun, as companies and people enhance their skills. The result is new hiring, even as other jobs move offshore. Intel has added 1,000 software engineers in China and India in the last two years, but it has added even greater numbers in the United States.
I.B.M., the world's largest computer company, is also doing both. The company says it plans to transfer 3,000 jobs overseas, many of them white-collar jobs like computer programmer. But I.B.M. also says it intends to add 4,500 employees this year in the United States, including programmers and software designers with specialized skills.
The people in demand, says Hershel Harris, vice president for strategy in I.B.M.'s software unit, are those who are fluent in technology and in how technology can be applied to solve problems in particular fields of business or science.
Mary Trombley, 27, was hired last year by the I.B.M. software group as an engineer in San Jose, Calif. She was an English major at the University of Michigan, which she attended from 1994 to 1998, making her part of the first generation of college students with wide-open access to the Internet. She got enough of a taste for technology that she decided to change course. "It looked exciting and I jumped in," she said.
At I.B.M., she is a "human factors engineer" who helps tailor software tools for companies in the life sciences, retailing and financial services industries so they can more easily sift through vast databases to quickly mine useful nuggets of information. She works with programming languages, C++ and Java, but her main focus is a level above the code itself. "It's understanding a customer's needs and business strategy, and then translating that into solutions," Ms. Trombley explained.
After two years of slight declines, the number of professional software developers rose in the United States last year to 2.35 million, according to IDC, a research company. Today, America has more than four times as many software developers as India, and nearly seven times as many as China. But the recent growth rate, and projected growth, is far higher in those well-educated, developing nations. The United States is continuing to add high-skill jobs, like Ms. Trombley's, but others are being lost.
Maintaining and upgrading older software on mainframe computers is the kind of job at risk from offshore outsourcing. James Fusco, a mainframe programmer from East Brunswick N.J., worked for AT&T for 13 years. In 1999, seeking to cut costs, the company farmed out much of its data center operations to I.B.M.'s global services unit. Mr. Fusco and his coworkers showed up at the same offices in New Jersey, but suddenly they were I.B.M. employees. Their work, improving and updating mainframe billing and marketing applications, was the same, but one project after another was handed off to programmers in India and Canada. In May 2002, Mr. Fusco and many of his colleagues were laid off, their jobs casualties of outsourcing.
"We were not treated like real I.B.M. employees," Mr. Fusco said. "No attempt was made to retrain us to help us get other jobs."
Mr. Fusco is one of the plaintiffs in a class-action suit against the Department of Labor that seeks to extend the government's trade adjustment assistance program, dating to the 1960's and most recently revised in 2002, to software programmers. The plaintiffs have been told by the Labor Department that, because software is not a tangible "article," they do not qualify for financial assistance and retraining for jobs lost to foreign competition, as manufacturing workers do. Efforts are under way in Congress to change the law.
But even those who joined the class-action suit do not seem to resent the foreign workers who are doing their jobs. "I loved my job and I was good at it," said Ron Beyer, 54, a senior programmer from near Gun Barrel, Tex., who made $80,000 a year. "But it's time to move on, and find something else, something that can't move offshore."
Mr. Fusco, 50, found a job last November as a systems administrator at a small company in New Jersey, at a pay cut from the $65,000 salary he earned at I.B.M. With the federal assistance and retraining he is seeking, Mr. Fusco said he might consider training for another field.
"A year ago, I would have gone for newer computer skills," he explained. "But I'm not sure that programming is a smart thing to get back into. It can be done remotely."
Since last summer, I have been deluged with pained letters from HP employees asking my why the company is being destroyed. They all tend to be well written, and back up the arguments with enough facts to make a jaded analyst shudder. They all say the same thing, we love this company, how can the management do what they are doing? While they all defend the company, not a single one defended Carly or upper management. In fact not a single one was even neutral about her management style.
The mood from inside HP is demoralized, fearful, and kind of dazed. No one can actually believe the company is falling this far. Support is being outsourced, and the numbers we are told about show that hold times have doubled, and customer satisfaction is not only in the toilet, someone is jiggling the handle to make it flush faster.
Wall Street Journal: IBM Documents Give Rare Look At Sensitive Plans on 'Offshoring'. When Shifting Jobs Abroad, It's $12.50 vs. $56 in Pay, And 'Sanitize' the Memos. Excerpt: The IBM documents show that the company is acutely aware of the sensitivities involved. One memo, which advises managers how to communicate the news to affected employees, says among other things: "Do not be transparent regarding the purpose/intent" and cautions that the "Terms 'On-shore' and 'Off-shore' should never be used." The memo also suggests that anything written to employees should first be "sanitized" by human-resources and communications staffers. IBM's human-resources department has prepared a draft "suggested script" for managers to use in telling employees that their jobs are being moved. The managers will tell the employees that "this is not a resource action" -- IBM language for layoff -- and that they will help the employees try to find a job elsewhere in IBM, although they can't promise to pay for any needed relocation.
The documents describe work done by IBM's Application Management Services division, part of Big Blue's giant global-services operation, which comprises more than half of the company's 315,000 employees. The affected workers don't deal directly with customers; they write code and perform other programming tasks for applications software used inside IBM. The plan would move jobs from U.S. locations including Southbury, Conn.; Poughkeepsie, N.Y.; Raleigh, N.C.; Dallas; and Boulder, Colo. IBM plans to transfer the programming work to its own operations in Bangalore, India; Shanghai and the northeastern city of Dalian in China; and Sumare, Brazil. It isn't clear how many jobs will be added in each location. Some of the foreign programmers will come to the U.S. for several weeks of on-the-job training by the people whose jobs they will take over. That's an aspect of offshoring that many high-tech workers regard as particularly humiliating. If link is broken, view Adobe Acrobat version [PDF--48 KB].
Re:Outsourcing is a good thing... (Score:4, Insightful)
by TrekCycling (468080) on Tuesday January 27, @06:36PM (#8106070)
That's the big thing the apologists miss. America is expensive. I'd love it personally if this were not the case. Then I wouldn't have had to take out $30,000 in student loans to get an education to get out of poverty.
Their reasoning is that we're supposed to be nimble and get educated again. To what end? When I have 7 PHDs and $1million in student debt will that be enough? Will their be a job I can get? Or should I just go apply for Wal-Mart greeter now? Because this "learn more and keep up" crap is stupid. I already know what I need to know to do my job. So my choices are spend more money going to school or get a service job. Great choice.
Re:Outsourcing is a good thing... (Score:2)
by strudeau (96760) on Tuesday January 27, @07:15PM (#8106617)
We talk about how these theories are untested, well we've seen the results of this same phenemenon in auto manufacturing. After all, remember all of those car building jobs we 'lost' two decades ago? Well, they're coming back in droves.
You obviously don't live in southeast Michigan. Michigan has one of the highest (and still going up!) unemployment rates in the country right now. Our manufacturing base (centered on the auto industry around Detroit), which has been trickling out in fits and spurts for 20-30 years now, has been clobbered the last few years. If auto industry jobs are "coming back in droves" they're certainly not coming home to the Detroit area.
As an aside, this isn't just affecting manufacturing here. My brother-in-law works for Ford accounting. They sent 70-80% of the positions in his department to India (accountants, etc.) keeping only the highest skilled and most critical positions in the US filled by USians. They eliminated something like 40 or 50 decent paying white collar jobs in his department alone.
Your "equilibrium" is the race to the bottom. (Score:2)
by khasim (1285) on Tuesday January 27, @07:30PM (#8106814)
"In this case India is showing that they have a competitive advantage in programming. They can produce code at the required level and do it for FAR less than the American programmer."
Yep. They work for less. That's the race to the bottom.
"The Indian salary will not remain static."
Well, we're pumping money into their economy so they'll see an increase, that is correct.
"As the number of jobs and the complexity of the problems increase (remember, workers are a market just like anything else) the salary will begin to rise."
Maybe. But doesn't that pre-suppose that there will eventually be more jobs than programmers and that the jobs will become more complex?
"As the rest of the economy begins to feel the benefits of this economic boon in India, more and more IT workers will begin to do other things."
I don't see this. If the IT sector is making money, why move out of it? Unless some other sector is making even MORE money?
"Eventually the global market will achieve Equilibrium and the competitive advantage will close."
That's the "bottom". The lowest price you can pay someone to do the work.
In order for that factor to INCREASE you have to have MORE JOBS than programmers. Which I do not see happening.
"We talk about how these theories are untested, well we've seen the results of this same phenemenon in auto manufacturing."
Different. It costs money and time to move cars.
"After all, remember all of those car building jobs we 'lost' two decades ago? Well, they're coming back in droves."
The ones I see "coming back" are in Mexico where the parts are assembled and shipped up to the US.
Making a car is not the same as assembling a car.
The US does not make many cars anymore.
"The Japanese auto makers are now turning to American labor to build those same cars, as the Japanese workers salary has now surpassed the American auto workers salary.. factor in the cost of shipping those cars across the ocean and American labor makes a ton of sense for that field."
It's cheaper to hire someone to assemble a car in Mexico (NAFTA) and ship it up to the US than to assemble the car in Japan and ship it to the US.
Now look at our old auto cities. Massive unemployment, still. The jobs are gone.
Re:Outsourcing is a good thing... (Score:2, Insightful)
by kcbrown (7426) <email@example.com> on Tuesday January 27, @08:15PM (#8107297)
In this case India is showing that they have a competitive advantage in programming. They can produce code at the required level and do it for FAR less than the American programmer.
You don't get it, do you? The only reason they can do it for far less than the American programmer is that they live in a different economy. It has nothing to do with the individual programmer and everything to do with differences between the economies of the countries in question.
Don't you people see what's happening here? As soon as India starts to see some of the benefits of the money being pumped into their economy and starts to use that money to improve the standard of living there, the corporations will shift their gaze towards other countries that have a lower standard of living (and thus a lower cost of living). India's economy will thus go into the drink, just like ours (the U.S.) is beginning to. The corporations will play entire countries against each other until they all have rock-bottom standards of living. This is inevitably what must happen as long as the price of shifting the demand for labor remains low -- economics doesn't allow for any other outcome.
Remember: the cheapest source of labor is an individual to whom you're paying a subsistence wage where that wage is barely enough to buy food. Electricity costs money. Running water costs money. Sewage costs money. The more basic services you add to the mix the higher the cost of living and thus the higher the cost of labor. Put pressure on countries to reduce the cost of living and they eventually must reduce or eliminate such services in order to compete against countries that don't have such services. It's that simple.
Posted on Thu, Jan. 08, 2004Offshore labor drove firm to brink
By Matt Marshall
Go ahead, join the lemmings in the rush to India.
But if you're a Silicon Valley entrepreneur or venture capitalist still considering it, contemplate the over-the-cliff tale of Ishoni Networks.
Last month, the Santa Clara start-up filed for bankruptcy, a victim of moving to India too quickly.
Backed with more than $68 million from venture capitalists from the United States and elsewhere, Ishoni once was branded a rising star. It was developing a cutting-edge chip to allow voice and data services over a single Internet connection -- and was valued as high as $200 million and employed 170 people.
Seeking to cut expenses, Ishoni created a subsidiary in Bangalore, India, and hired software engineers there on the cheap.
Weirdly, though, the subsidiary stopped returning phone calls from Ishoni's Santa Clara-based chief operating officer, Amin Varis, early last year.
Varis made a surprise visit to India in May and learned a big lesson about how much damage 12,000 miles of distance -- even when connected by Internet and phone lines -- can do.
Indian executives, he found, had forced their engineers to join a rival firm, Ample Wave Communications, apparently in a scam to scoop up Ishoni's intellectual assets and then bankrupt it.
Ishoni notified police, and three Ishoni India executives were charged with illegally copying Ishoni's software -- a fiasco first reported in August by online optical networking publication Light Reading and followed by Private Equity Week.
The outcome of that case is not known.
Neither Ishoni nor any of its dozen or so venture investors -- including names like Credit Suisse First Boston, Deutsche Bank, Infinity Capital, Lucent Venture Partners and John Grillos, formerly of MVC Capital, who is the sole VC board member listed for the company -- returned phone calls.
However, a spokesman for electronics giant Philips, which owned 51 percent of Ishoni after a $25 million investment in 2002, confirmed Ishoni is being liquidated.
It won't take very long: A blue padlock already hangs on Ishoni's Santa Clara office door. Inside are empty cubicles, deserted desks and disconnected phones.
So, what's the lesson?
The growing hysteria and hand wringing over job loss to India sounds similar to the worries during the rise of the Japanese threat in the 1980s.
But soon after gobbling up U.S. companies and real estate, Japan hit its own internal limitations -- namely bad credit, cronyism and market interventionism. Japan foundered, and has never been considered a danger since.
True, India's vast, cheap labor supply poses a different, more permanent threat. Skilled Indian engineers who speak great English won't be going away anytime soon.
But increasingly, VCs say outsourcing to India has limitations.
Ravi Chiruvolu, a partner at Charter Venture Capital, wrote a column for Venture Capital Journal in March titled: ``Tech Start-ups Should Be Entirely Built in Asia.'' However, Chiruvolu, 35, has since been eating his hat. While he's still keen on doing business with India, the challenges were greater than expected, he says.
Foreign companies are considered easy targets by Indian technocrats and power brokers, he explains. They'll charge for leases and other services up to 10 times the amount they do for local companies. Companies like Intel and i2 took baths on their long-term leases, with i2 paying 100 rupees per square foot for its 10-year lease, compared with the going rate of 10 rupees, says Chiruvolu.
And prices are heading up. Land prices have gone up three-fold over the past few years, Chiruvolu notes. Labor in Bangalore -- India's Silicon Valley -- has even become scarce, and you have to pay the average head-hunter about $500 an employee just to do a search, he says. You pay up front, and sometimes hear nothing back.
Many Indians will forsake start-ups and flee to a brand-name company -- say Intel, Oracle or Sun Microsytems -- the first chance they get.
Even getting the electricity turned on in an office is a chore, Chiruvolu says, estimating that it takes about six months to get an office registered with the government and ready to use -- far more than the eight to 10 weeks promised by the Indian government. Bandwidth can cost more than four times than in the United States, he adds.
Chiruvolu reached a conclusion: Don't go to India for cost reasons alone. ``You should go to India being committed for the longer term, not buckled for a one-year cost reduction.''
Dell and a few other companies have already moved work back from India to the United States.
Dick Kramlich, a partner at Menlo Park's New Enterprise Associates, and one of the valley's most experienced venture capitalists, has a few start-ups with business in India, but he says: ``If you're doing it for labor arbitrage, you're making a mistake, because it's only a short-term gain. You'd better do it for quality.''
Termsheet -- a name drawn from the formal proposal that a venture capitalist offers to an entrepreneur -- is a biweekly column about venture capitalists and the companies they fund. Beginning Jan. 27, the column will be published Tuesdays. Contact Matt Marshall at firstname.lastname@example.org or (415) 477-2518.
The Boston Globe,
May 5, 2000
David Filipov, Anne Barnard
Moscow - Pilot software had a problem.
The Cambridge, Mass., company's customers urgently needed support and maintenance work on their copies of a popular software package Pilot no longer produces. But Pilot's engineers were too busy developing new software to spend time on the job.
Pilot found the solution in an unexpected place - the run-down laboratories that make up the campus of Moscow State University. Even more unlikely, perhaps, is that it got the help it needed from a New Hampshire-based software company that has set up a subsidiary on the Moscow campus, where it is doing its small part to help stem the Russian brain drain.
Sprawled out in the shadow of the Stalinesque skyscraper that once served as a towering monument to Russia's proud scientific legacy, this campus has come to symbolize everything about the post-Soviet era - declining prestige, outdated equipment, and plummeting living standards - that has made Moscow's best and brightest leave in droves for better opportunities abroad.
But lodged in one of the buildings is the Moscow subsidiary of Auriga, an Amherst, N.H.-based company that is bucking that trend.
The company is attracting some of Russia's most talented software designers to work in Moscow. Its 65 Russian programmers sell their expertise in software and applications design and development to US software companies via the Internet.
Known as offshore programmers, these specialists are disproving a popular myth about Russian computer experts - that anyone worth his pirated copy of Windows 98 would bolt from Russia the minute he got a job offer abroad.
From Moscow to Siberia, Russian programmers are taking on jobs without leaving home and making their American clients happy. The Russian programmers work just as well as their American counterparts, but the jobs cost up to 40 percent less because the Russians work for less, said Scott Livermore, engineering manager at Pilot Software.
Livermore turned to Auriga after offshore programmers in India did not work out.
"This is definitely the future," Livermore said of working with Russian programmers. "There is a lot of work that needs to be done, especially when you're working in an area that is as tight on labor as Boston's high-tech labor market."
Auriga's lead programmer on the Pilot job, Muscovite Alexander Belyakov, 47, said he enjoyed working for a firm in Boston area. But he would never want to live there.
"I'm too old to move around," he said. "I like it where I am."
This is the refrain sounded by a number of engineers ensconced amid the state-of-the-art machinery in Auriga's basement lab. All have experience working with US companies; many are fluent in English; some have been offered jobs with companies in California's Silicon Valley where they could earn up to $100,000 a year - more than three times the highest salaries at Auriga. But now that they have good jobs here, no one wants to leave Russia.
"Don't get me wrong, I liked San Francisco. It was the most beautiful city in the world," said Anton Kuzmin, who ran a virtual laboratory at Lynx Software in San Jose, Calif. "But I can do well here, and my wife and family feel better here."
All this does not mean Auriga has ignored the market for Russian programmers in the United States, where demand for highly skilled programmers far outstrips supply. Auriga's Web site contains an advertisement offering qualified applicants "a quality of life far above the average in the USA."
Alexei Sukharev, a former professor of computer science at Moscow State University who left Russia to found Auriga in the early 1990s, said his company has 30 Russian programmers working in its Amherst officers.
"But not everyone wants to live abroad," Sukharev said. "Offshore programming allows them to do front-line work with top companies. They are all well-fed, they all have cars, they are happy in their jobs."
In Moscow and St. Petersburg, offshore programmers are just one small slice of the action. In Siberia, the stakes are higher: Officials hope they are the vanguard of a new economy - the makings of a Silicon Steppe.
CommonInterests.com, a Web site that aims to connect people across the Boston area, took shape on a computer in a ramshackle Soviet-style apartment block in Tomsk, a western Siberian city.
The site was designed in part by Pavel Khristolyubov, 23, a Russian programmer who works in hometown of Tomsk, working for Double Decker Studios, a South Boston company whose clients include Bell Atlantic and Boston.com.
While on an internship program in Boston in 1998, Khristolyubov met Dmitry Gurevich, who emigrated from St. Petersburg in 1990 and later founded Double Decker.
Now Khristolyubov spends about half his time programming for Double Decker and half managing other Tomsk programmers who do the same. He makes less than the $45,000 a year he thinks he would fetch on the US market, but far more than the $160 a month that would be considered an excellent salary for a programmer working solely for Tomsk-based companies.
He wouldn't name the exact sum but says it allows him to live better than he would in America on an American salary. He can make mortgage payments, save for a car, support his wife, Lena, 21, in taking classes, vacation in the Caucasus Mountains, and even take his mother-in-law out for sturgeon shish kebab. Those are rare amenities in Russia, where most couples the Khristolyubovs' age live with relatives and have little spare cash.
Khristolyubov is one of hundreds of offshore programmers in Tomsk, say local officials. Yevgeny Gayevoi, head of foreign relations for the regional government, envisions them being followed by translators, physicists, chemists, construction engineers, anyone who can export brain work via e-mail.
"We're betting on the Internet for our future," he said.
It is easy to see why. Tomsk is isolated even by Siberian standards. The three-day train ride from Moscow, crossing four time zones, is lengthened by historical bad luck: In the 19th century, the city was bypassed by the Trans-Siberian railroad, and in Soviet times, it was declared closed to foreigners.
But Tomsk also has six universities and 60,000 students among its population of 500,000. The computer science departments draw students from across Siberia, the Far East, and Central Asia.
"Brains are the raw material for our industry," said Igor Itkin, whose firm, Stack Ltd., made the Russian version of Novell GroupWise and trains Microsoft-certified systems engineers in Russia. He was also named director of a bankrupt state factory that now, with Stack's help, is making computers that work in arctic conditions for oil companies.
Igor Seryodkin, 39, says his firm, Exoft, was chosen by his American partners, Montana-based Commodity Software, over groups from Moscow and St. Petersburg to help design software for the US commodities market.
"My guys are so brilliant that the Americans got very excited," said Seryodkin. One day last month, in their office that looks out at an Orthodox Church, Seryodkin's "guys" were working away to Led Zeppelin and chatting online with an American partner, who was logged on at an Ohio laundromat.
All of them said it wasn't just the money that attracted them - it was the chance to work in the field they loved without leaving home.
Khristolyubov agreed. He enjoys showing off his city - from the snowy birch woods overlooking the frozen Tom River to the latest hot night club, Millennium, which features Siberian Crown beer, pool tables, dancers dressed like robot aliens, and, if you stay late enough, an amateur striptease.
"I'm from the provinces," Khristolyubov said. "I want to be mobile and cosmopolitan, but I want to stick to Russian culture. I don't feel comfortable living in the US. I'm at home here, and I know my worth."
Silicon Taiga Cost focus leads to outsourcing failures Rachel Fielding
Objective must be to improve business process efficiency
Outsourcing projects are at risk of failure because they are driven by cost savings rather than a desire to improve the efficiency of business processes. A survey of 400 IT and finance decision makers in private and public sector companies across the UK commissioned by Unisys found that the finance department views outsourcing almost entirely as a means to cut costs, even in organisations where IT is represented at board level.
Paul Bevan, strategic marketing director at Unisys, explained that understanding business objectives, rather than a desire to slash budgets, needed to be the driving force behind outsourcing decisions.
"Even in sectors where IT representation at board level is good, such as financial services, and where the relationship between IT and finance is considered better, the IT director's influence dropped away dramatically and the finance director was much more instrumental in the decision making process about outsourcing," he said.
"Outsourcing has come from a history of 'sunset' areas that are technologically difficult or bitty, or because it's a time consuming activity not perceived to add a lot of value.
"It's no coincidence that, as we go into a recession, instances of outsourcing go up, but outsourcing is becoming more complex where it's questionable whether real cost savings are to be gained."
The research also found that, while two thirds of private companies had already embarked on or were considering outsourcing projects, enthusiasm is not being mirrored to the same extent in the public sector, where less than half outsource IT functions.
Earlier this year analyst firm Gartner predicted that 50% of IT outsourcing arrangements would fail in the next 12 months because of bad management.
At the same time, poor employee communication is also causing uncertainty, affecting employees' performance and threatening outsourcing projects.
One in five staff claim that they first hear about an outsourcing contract though the grapevine rather than official communication channels.
A separate survey sponsored by IT services provider Steria found that more than half of employees suffer from reduced productivity, and almost a quarter make errors in their work, during the outsourcing process due to high levels of stress.
The company warned that human resources departments need to play a strategic role in the outsourcing process, particularly given widespread misunderstandings about legislation that protects outsourced employees.
But 51 per cent felt that outsourcing had a positive effect on their career, and 68 per cent said that they provide a better service than they did before outsourcing.
"Treating staff badly, not giving them the information they deserve, and not caring for affected employees is not simply bad practice, it's a false economy," said Kim Lambert, director of managed services at Steria.
Softpanorama hot topic of the month
How to Go About It by Barbara DePompa, Aug 04 '03
The only way to judge whether it's a good idea to outsource any of a company's ERP workload is to closely examine current in-house ERP capabilities to see if they're really critical to the way the organization conducts business. It's also a good idea to consider the following when evaluating the outsourcing option:…
United States: Utilities Continue to Outsource More Services Aug 01 '03
Utilities are increasingly outsourcing specific tasks, and one of the most common outsourced functions is bill printing and mailing. About one-third of utilities are outsourcing their bill printing and mailing functions, according to a 142-page report from Chartwell Inc. (Atlanta, Georgia).…
Most Outsourcing Is Still for Losers by Paul A. Strassmann, Feb 02 '04
The most frequent reason companies turn to outsourcing is the need to increase profits. Replacing premium-priced labor with workers earning less has led to lower costs for products and services.…
Look Before You Leap to Outsource by Bart Perkins, Mar 10 '03
Most major corporations are considering outsourcing everything from the corporate cafeteria to IT and beyond. Outsourcing is often touted as an easy way to achieve more functionality for less money, with less aggravation.…
Bill Gates Unplugged CNET.com
Business Week. The Changing Face of Offshore Programming
The Changing Face of Offshore Programming Wednesday December 31, 8:28 am ET
After nine months of exposure to the overseas outsourcing market, I'm ready to give an update on the realities of outsourcing for small businesses. This is an emotionally charged issue for a lot of people in the U.S., so let me start by saying up front that the results are mixed. Like a lot of larger businesses, I've discovered a number of hidden risks and costs. While I don't think those issues will end the trend of sending jobs to cheaper labor markets, I do think the wholesale enthusiasm for outsourcing overseas is quickly waning.
I'm not going to recount all the issues and arguments about why I started exploring overseas labor markets, as it tends to spark an explosion of angry mail. Instead, I'm going to stick to the results I've experienced, and some trends that I've seen that confirm my belief that while outsourcing represents a serious risk to the stability of our economy, I doesn't spell the end of American enterprise, as many critics claim.
Let's start with the details. Since the first project I outsourced to Argentina and wrote about in this column, I've worked on projects outsourced to Brazil, to multiple groups in India, and I've reviewed proposals from China, Poland, the Philippines, Taiwan and Russia (see BW Online, 4/11/03, "The Woman behind the Code"). On every project that I considered outsourcing, I also solicited bids from American programmers, and about 60% of the time, Americans won the business. I see no sign of that success rate diminishing for American programmers, and in fact, I see a few signs that lead me to suspect it may grow.
A big disclaimer here: I'm dealing with outsourcing on a per-project basis. There are forces shaping my market that don't apply to big companies outsourcing overseas, so my views are limited to small businesses and not to the market as a whole. The one thing that I believe applies to both small and large businesses is that hidden costs add up quickly.
The first thing area of hidden costs relates to project management -- costs that are included when you have a development team under your own roof. That sounds obvious, but in practice, it's eye-opening. I've spent a lot more time than I expected in project management, quality assurance, contract issues, and communication. These issues have added significantly to the bottom-line costs of outsourcing. In some ways, however, they have also provided me with a valuable education.
I've realized that with programmers under my own roof, I used to get away with a lot of shaky project practices in scope management, discovery, documentation, and testing. If you don't have these processes well under control, outsourcing will burn you severely. If you don't know what I'm babbling about, don't even think about outsourcing overseas. It may sound cheap and easy, but I've seen two companies get in over their heads, and with disastrous results.
The second area of hidden costs relates to business risks and requirements. As many outfits doing business overseas for the first time are discovering, there are few reliable standards for intellectual property protection and contract enforcement. A contract is only as strong as your ability to effectively enforce it. If you can't afford the enormous costs of fighting an international legal battle, you should think twice about sending anything proprietary overseas. In a future column, I'll tell you about two companies I know fighting legal battles over intellectual property (IP) stolen by overseas vendors.
RISKS AND REWARDS. One strategy for dealing with IP risks is to break a project up into components that can be outsourced to different vendors, all blind to the complete project. One of my clients requested this kind of arrangement so it could benefit from cheap labor costs on a piecemeal basis, but the added cost of project management and integration required to bring the separate pieces back together eliminated most of the savings while introducing new risks in quality control.
And this brings up the third area of hidden costs I've discovered with my own outsourced projects -- quality control. While the general quality of projects I've outsourced overseas has been high, I have employed local programmers to provide oversight on both the outbound and inbound side of project deliverables. Call me crazy, but I don't think it's smart to deliver a code base with comments and variables written in a language you don't understand.
A general strategy that some companies use to deal with all of these risks is to outsource the project to a domestic company with overseas development partners. The local company takes on all the risk and accountability for the project. But there are risks here, too. One of my clients who took this route discovered that while their localized vendor was passing along savings on programming labor, it was front-loading costs on project management, which is where they make their money. I don't say that impugn every domestic outsourcing agency, as I'm sure there are some good ones, but you better know the pitfalls before you sign up.
All of this has led me to be very particular about the types of projects I'm personally willing to outsource overseas, and to be increasingly diligent about my own project management process to ensure that I actually realize the margins I expect. In general, I'm outsourcing non-sensitive projects that include a significant programming labor component. Anything sensitive, including projects with intellectual property or risky e-commerce components, goes first to a trusted American partner who can, in turn, outsource whatever they're comfortable sending out. To me, it's just not worth the risk of winding up in court over something that provides marginal savings -- savings that seem to be diminishing regularly.
I mentioned in one of my contentious articles on outsourcing that I didn't believe the trends that have caused the epidemic of outsourcing would continue indefinitely (see BW Online, 4/25/03, "Grasping, Greedy, Unpatriotic? Not Me"). My major arguments were that overseas labor costs would rise with increasing demand, and that increasing patronage would gradually empower workers overseas and inspire more of the local labor regulations and controls that add to labor costs in the U.S. One of those trends is already happening, at least in the labor markets I've been exploring.
Six months ago, I could find high-level programmers in India willing work for $15 an hour, vs. the $100-plus an hour I was paying Americans for the same work. In only six months, that rate has climbed to $25 an hour in India, while my domestic rates have dropped to around $35-$50. On the last project I bid out, two proposals from India came in higher than domestic contractors. Admittedly, I'm in a very small sector of the larger market, and it's too soon to tell even here whether the trend will last, but I've heard similar reports from other businesses (see BW Online, 12/2/03, ). My major arguments were that overseas labor costs would rise with increasing demand, and that increasing patronage would gradually empower workers overseas and inspire more of the local labor regulations and controls that add to labor costs in the U.S. One of those trends is already happening, at least in the labor markets I've been exploring.
Six months ago, I could find high-level programmers in India willing work for $15 an hour, vs. the $100-plus an hour I was paying Americans for the same work. In only six months, that rate has climbed to $25 an hour in India, while my domestic rates have dropped to around $35-$50. On the last project I bid out, two proposals from India came in higher than domestic contractors. Admittedly, I'm in a very small sector of the larger market, and it's too soon to tell even here whether the trend will last, but I've heard similar reports from other businesses (see BW Online, 12/2/03, "U.S. Programmers at Overseas Salaries").
COLD COMFORT, HIGH HOPES.
The speed with which this trend popped up suggests not so much that outsourcing overseas is already losing it's value, but that the factors driving cheap labor in foreign markets are a lot more fluid than we may believe -- especially in countries with the talent and infrastructure to provide quality of service.
In the end, I believe labor markets will equalize more rapidly than we might think -- just how long that takes is a question I can't honestly address. I realize that's of small comfort to the American developers who are out of work this holiday season, or to those taking a much smaller wage than they enjoyed three years ago. If you're one of them, I can only say that I understand your circumstance more than you might think.
Despite what some readers seem to think, writing this column doesn't make me wealthy or successful. The truth is that I'm still struggling mightily to recover my own business after the recession, and glowing economic numbers notwithstanding, the outcome is still far from clear. All I can do is continue to work as hard as I can in the new year, and to try to understand what it takes to run a viable and honorable business in a global economy that I truly believe in the long run will provide a better world for my son. Happy New Year.
NOVEMBER 03, 2003 ( CAREERJOURNAL ) - WASHINGTON -- In 1992, computer guru Ed Yourdon warned that low-cost Indian workers were poised to steal U.S. high-tech jobs -- a decade before the mainstream media started reporting that fear.
"International competition will put American [computer] programmers out of work, just as Japanese competition put American automobile workers out of work in the 1970s," he warned in his book Decline & Fall of the American Programmer. He included a sketch of the extinct dodo bird, labeled "the American programmer, 1999."
Exactly the opposite happened. With the advent of the Internet and the soaring popularity of home computers, the number of U.S. programmers and other IT workers jumped 40% from 1992 to 1996. So Yourdon wrote a mea culpa.
In Rise & Resurrection of the American Programmer, he said in 1996 that the U.S. culture of innovation promised a bright future for U.S. IT workers. Wrong again. Jobs increased for four years, but then slumped as the tech bubble burst. "Global ramifications are very hard to predict," he says now.
They sure are. The U.S. economy is so immense that changes in domestic demand dwarf the impact on jobs that occur when foreign nations become more competitive. Over the past three years, the U.S. has lost perhaps 150,000 IT jobs to foreign competition -- probably the same number lost during the 1990s. But the economy was creating so many jobs in the '90s, few noticed.
The 59-year-old Yourdon is a software industry star. He made his reputation developing ways to create complex software, and he is focusing now on why so many corporate software projects flop. (In other words, the newer your office software, the more aggravation you have.) In 1997, he warned of catastrophe because of the Y2k computer bug, which gave him a Chicken Little reputation, although he may have helped spur companies to make changes. (The inability of older computers to recognize the date 2000 was supposed to make machines go haywire.)
Now, with the economy in the dumps, Yourdon is again warning of disaster because of competition from low-priced, high-quality Indian software professionals. He is even thinking of reissuing his Decline & Fall book, but not Rise & Resurrection.
These days, he has a broader perspective as a director of iGate Corp., an Indian software firm that is trying to grab U.S. business. According to the company's proxy, he receives $20,000 compensation and has options to buy 60,000 iGate shares. "It's almost like I've become a turncoat because I issued a warning, and the only ones listening were foreigners," he says.
In the late 1990s, Indian firms focused on fixing Y2k problems in the U.S. and Europe. Since then, they've branched out into handling call centers and maintaining powerful corporate software that manages sales, finance and payroll. Some Indian companies are even conducting clinical trials for U.S. pharmaceuticals companies.
Software salaries in India are less than 25% of U.S. levels, and there is pressure to maintain that gap. That is because other poor nations -- Bangladesh, Pakistan, China -- are pressing Indian companies on the low end to get a piece of the software business. Given the disparity in wages and the high quality of third-world programmers, U.S. companies may find outsourcing irresistible. Yourdon figures that the least-productive U.S. software workers are doomed. "The bottom 20% will disappear," he says. "They haven't been working hard and keeping their skills up to date."
But it's unclear whether he will now have any better record as a job forecaster. U.S. companies turn to Indian firms so they can save money and increase profit. The greater their profitability, the more they can invest in new products -- trying to find that elusive "new thing" that can create an industry. The more that software workers from India and other developing nations train or work in the U.S. for a few years, the more they add to the intellectual and technological mix that produces fast-growing companies here. And the faster that India develops economically, the greater its potential as a market for U.S.-made goods and services.
The smart plan for the U.S. isn't to protect jobs that can be done more cheaply elsewhere, but to do things that stimulate the creation of new jobs. One of the economy's biggest problems since 2001 has been a decline in the number of jobs produced. Hot technologies produce job surges. "Companies are always screaming they can't find enough people in something that's hot," says Richard Ellis, a Carlisle, Pa., consultant who tracks technology employment. If competition from India and other developing nations adds more long-term to U.S. innovation than it subtracts in jobs in the short term, then U.S. workers should wind up big winners.
Unemployed U.S. IT workers may be able to find work in Canada, where near-shore outsourcers take advantage of their country's lower costs.
The average IT salary paid by Keane Inc. to employees at its application development center in Halifax, Nova Scotia, is around $60,000 Canadian, or roughly $45,000 U.S., based on recent exchange rates.
While that pay rate might seem low to U.S. IT workers, it's "considerably higher" than the average salary in the Halifax area, said Stephen Lund, president and CEO of Nova Scotia Business Inc., a government-backed economic development agency. "You can live in Nova Scotia with a lot less money than you can live in a lot of other places," he said.
And Keane is hiring. The company last month launched a national recruiting drive in Canada for its Halifax center, now at a head count of 300 and growing 30% annually, a Keane spokesman said.
Although Boston-based Keane doesn't actively recruit in the U.S. for its Canadian center, it welcomes U.S. workers, who make up about 5% of its workforce there.
Other Canadian service providers are also hiring, but none appears to be actively recruiting U.S. workers. They're finding what they need from Canada's labor pool, although they encourage U.S. IT employees to compete for jobs there.
"There is always a demand for good IT people, but to say there is a shortage -- I wouldn't say that," said Peter Thompson, CEO of RIS Resource Information Systems Inc. The Calgary, Alberta-based near-shore services provider employs approximately 400 workers, and that number is growing annually by about 20%, he said.
CGI Group Inc., which is Canada's largest IT company in terms of the number of its employees, increased its head count by more than 5,000 in the past year, from 14,600 to more than 20,000. Half of that growth came from acquisitions of other companies.
"We've been quietly growing very rapidly," said Eileen Murphy, a spokeswoman for Montreal-based CGI Group. She said some of the Canada-based workers are likely U.S. expatriates, but the company doesn't maintain such statistics. It hasn't had to recruit in the U.S. to fill Canadian jobs, Murphy said.
But a top Canadian government official, Keith Parsonage, director general of Industry Canada's Information and Communications Technologies branch, said there's a demand for U.S. workers in Canada, and the country has a liberal immigration policy to encourage IT workers to head north. All U.S. workers need is to have a job offer and meet certain educational and training criteria, he said.
Canada's computer services sector grew 3.2% in 2002, according to government statistics. But total IT employment in Canada, estimated at about 600,000 workers, declined 1.3% last year.
The U.S. high-tech industry, in comparison, lost 8% of its jobs last year, declining from 6.5 million in 2001 to 6 million last year, according to a report released last month by AEA, an industry trade group in Washington.
Still, no one is saying that Canada is at the end of the IT rainbow. Canadian IT recruiters say they see little evidence of a big rebound in the Canadian tech sector, or much interest from U.S. workers in Canadian jobs.
"I don't sense that Canada has any economic advantage in terms of opportunities over what the States can offer," said Murray Conron, an IT recruiter at D.L. Hart & Associates in Toronto. "I do not see trends that U.S. professionals are looking for jobs up here."
India is trying to enlist support of its Asian neighbours and friends to lobby against the outsourcing backlash spreading in Western countries.
Information technology minister Arun Shourie used a conference of Asian IT ministers taking place in Hyderabad, India, to ask countries in the region to put up a united front against moves to stall offshore outsourcing.
"As we are becoming strong in technology, backlash has started, particularly in the US, Europe and Australia," Shourie said. "All of us should tackle this in a concerted and united manner."
More than 30 ministers from Asia have gathered to discuss issues like the digital divide, e-governance and the implementation of broadband. India is using the occasion to showcase its prowess in information technology such as IT products for developing countries.
Recently, Indian industry lobby groups decided to take the outsourcing debate to political leaders in the United States. The National Association of Software and Services Companies will hold its next board meeting in New York and later confer with political leaders.
Last week, a large congressional group was in Hyderabad -- fast developing into an IT hub and imitating the success of Bangalore -- and other Indian cities to get a firsthand understanding of the technology industry in India. N.Y. Congressman Joseph Crowley, who led this group, suggested that Indian companies should create jobs in the United States to fight the backlash.
Some US think tanks, too, feel that the country should keep its doors open so that technology companies could remain competitive in the global economy. The Computer Systems Policy Project, backed by companies including Intel, Dell and Hewlett-Packard, last week said that "countries that resort to protectionism end up hampering innovation and crippling their industries, which leads to lower economic growth and, ultimately, higher unemployment."
The Indian minister said protectionism is a major issue facing trade talks under the aegis of the World Trade Organisation as well. "They can not expect us to go on opening our markets to their goods, while protecting their own markets and services," he said.
By Marilyn Gardner | Staff writer of The Christian Science Monitor
LONGWOOD, FLA. - Michael Emmons had logged almost six years as a software developer when he and more than a dozen colleagues received bad news: Their employer was replacing them with workers from India.
And instead of outsourcing the jobs to India, Siemens ICN had a plan that was every bit as controversial - importing Indians to do the work here. The Americans even had to train their Indian replacements in order to receive severance pay. "They told us this is the wave of the future, and we just have to go with the flow," Mr. Emmons says.
The experience radicalized him. Once casual about politics, he is planning to run for Congress from Florida's Seventh District to fight anti-outsourcing.
It's uncertain whether he'll go to Washington, or whether broad restraints on outsourcing will be enacted. But the issue has already captured public attention and sent both federal and state lawmakers scurrying to respond.
The economics of outsourcing are complicated, making it difficult to craft a broad policy response. But to Emmons, action can be taken on the particular challenge that cost him his job: programs that let high-skilled foreign workers into the United States when sought by certain employers. Some in Congress agree, and are sponsoring bills to change the visa programs in question.
Emmons blames his pink slip on the L-1 visa, which allows multinational corporations to transfer overseas employees to their US subsidiaries for up to seven years. Critics argue that the practice drives down salaries for American employees because foreign replacements often work for lower wages and no benefits.
Paula Davis, a Siemens spokeswoman, describes the company's decision to hire Tata Consultancy Services in India as "part of a global restructuring effort." She says it is "more economical to outsource this particular function." Referring to the company's requirement that laid-off employees train their foreign replacements, she adds, "It's industry standard when you're outsourcing work to any firm that you're going to have to train the new consulting firm."
As one sign of the company's commitment to American workers, Ms. Davis says, Siemens expects to add about 3,200 manufacturing jobs in the US.
That is small consolation to people like Emmons. "My job still exists," he says. "It's being done by foreign workers."
Relaxing at his home near Orlando on a Saturday afternoon as his children, Hanna and Troup, play with the family's dogs, Emmons recounts the events beginning in July 2002, when he learned that Indian workers would be filling the department's jobs. Although as a contract worker he was not eligible for severance pay, his colleagues were Siemens employees.
"It wasn't fun training our replacements," he says. "There was a lot of rage going on in the building. Two people left without taking severance." He trained three Indian workers to do his job.
Emmons now works as an application developer at the state district attorney's office, but he took a sizable pay cut. Some of his colleagues struggled to find new jobs. One cut grass, another worked at the post office before eventually landing a job in South Carolina.
"The visa program has got to be fixed," Emmons continues. "Visas have got to be for what they say they're for - when employers can't find American workers."
As one way to prevent such job losses, Rep. Rosa DeLauro (D) of Connecticut has introduced a bill requiring companies to pay L-1 visa holders the prevailing wage. Any firm that has laid off American workers within the past six months would not be eligible for L-1 visas.
"It's a very serious problem," Representative DeLauro says. "I'm supportive of guest-worker programs. They have a place in our economy. But L-1 visas are just being used as a way to bring in people to take jobs from Americans and not pay benefits or prevailing wages."
Her bill would cap the number of L-1 visas issued each year at 35,000. Currently there are no limits. H-1B visas, granted to workers from other countries in fields such as computer programming, engineering, and healthcare, are capped at 65,000 a year.
The US Citizenship and Immigration Services recently announced that it reached its H-1B quota seven months early. This could result in a spurt of L-1 visa applications, officials say.
Other bills introduced by Rep. Nancy Johnson (R) of Connecticut and Sen. Christopher Dodd (D) of Connecticut would reform L-1 and H-1B visas to prevent unintended job losses in the US.
Defenders of the visas argue against such legislative protection. "We're hopeful and optimistic that Congress will do the right thing and ensure that US companies have access to the best talent in the world," says Jeff Landy, senior vice president of the Information Technology Association of America in Arlington, Va.
Talent is the justification that spokesman Brad Russell uses in explaining why USAA, a financial services company in San Antonio, employs 600 contract workers from India. "The expertise they bring is unmatched," he says. On one scale ranking software expertise from 1 to 5, Mr. Russell explains, the Indian workers score at the top - level 5. "At USAA, we're just achieving level 3."
But Emmons notes that some replacement workers at Siemens needed extensive training. In general, he sees a threat to knowledge jobs. "Basically, any job that can be done at a desk is at risk of being moved abroad," he says - or of being done in the US by a worker who moves here from abroad.
"We shouldn't have to train foreign workers in our own country to take our jobs," he says. "I have nothing against these people who want to better themselves. But that shouldn't be at the expense of Americans."
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