Softpanorama (slightly skeptical) Open Source Software Educational Society

May the source be with you, but remember the KISS principle ;-)

Bulletin of Skeptical Views of Offshoring, 2004

Notes: Those pages are written by people for whom English is not a native language. Some amount of grammar and spelling errors should be expected. This is a Spartan WHYFF (We Help You For Free) site. It cannot replace the best teachers and the best books. The site contain some obsolete pages as it develops like a living tree... Some links on older pages are broken. Please try to use Google, Open directory, etc. to find a replacement link (see HOWTO search the WEB for details). We would appreciate if you can mail us a correct link. Search Amazon by keywords:     Open directory Research Index

Old News

Slashdot RMS Blasts Sun's Open Source Patent Licensing

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.

[Feb 09, 2004]  Costly Surprises of Outsourcing (COMPUTERWORLD) - News Story by Bob Violino

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.

Vendor Selection

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.

Transition Period

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 bviolino@optonline.net.
Outsourcing Resources

NOW with Bill Moyers. Politics & Economy. New Jobs on Main Street PBS

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

Problems with computer media objectivity.  That actually includes coverage of outsourcing and open source.

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.

ElectricNews.netNewsOutsourcing failures abound, experts say by Ciaran Buckley

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."

[Jun 14, 2004] Outsourcing debate dwindles

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

[Mar 3, 2004] An Unseen Peril of Outsourcing

GROWING CONCERNS By David Gumpert An offshore alliance seemed to answer a struggling outfit's prayers. Instead, the U.S. parent has been wound up and its intellectual crown jewels are in India

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.

Oil industry awash in record levels of cash - Oil & Energy - MSNBC.com

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.

[Apr 1, 2004] Insurance Networking News

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."

Gaining votes

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.

Different approaches

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."

Fight Against Secret Outsourcing

U.S. Programmers Fight Offshore Outsourcing - Computer Careers

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.

TechsUnite.org - 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: Treasury Secretary Says Outsourcing Benefits Economy (Registration required)

http://knowledge.wharton.upenn.edu/article/955.cfm

Mark Zandi, chief economist at economy.com in West Chester , Pa. , 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.”

 

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.

http://www.forbes.com/work/2004/02/18/cx_ld_0218outsourcing.html The Politics Of Outsourcing  Lisa DiCarlo, 02.18.04, 2:15 PM ET

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.

US & them Taxing times for Infy - The Times of India

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

[Mar 22, 2004] Toward a Progressive View on Outsourcing

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).

Jeff Madrick

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).

Doug Henwood

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).

Los Angeles Times Free Trade Is Anything but Fair, and Lousy Economics Besides

By Amitai Etzioni

March 5, 2004

"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.

 

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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 Seize On Offshoring as Campaign Issue (washingtonpost.com)

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.

The New Republic Online Missed Target --  those 5% will di