Offshore outsourcing is booming these days. IT firms are getting coding and other work done in countries like India for a fraction of the cost that it would run them here. The reason? Labor rates are dramatically lower in many other countries. This is good news for clients paying much less for IT projects, but it’s not sitting well with advocates for our domestic work force.
A Net Loss of American Jobs
New Jersey State Senator Shirley Turner believes that, with a weakened economy, keeping jobs in the U.S. is of paramount importance. “I am deeply concerned about the economy in New Jersey, the $5 billion deficit, and the 6% unemployment rate. I just believe that we should be recycling taxpayer dollars here in the state to help bolster our own economy. In order to do that, we’ve got to put our unemployed people back to work.”
Turner is concerned not only about states losing immediate revenue to offshore workers but also about longer-term costs. She points out that it “is costing us money when our people are unemployed. We’ve got to provide them with unemployment benefits. Here in New Jersey we have many people who’ve exhausted their unemployment benefits and they’ve had to turn to welfare” at the state’s expense, she points out.
Turner concedes that demand for computer people in the U.S. has been far greater than the domestic supply, so companies have been forced to look offshore for qualified resources. “But,” she says, “Now we have people who are prepared and qualified, but it seems corporations have gotten used to taking advantage of cheaper labor.”
To that end, she introduced legislation about a year ago requiring that IT and other contracts in New Jersey be performed by U.S. citizens or legal aliens unless the skills required to do a job could not be found among that group. The bill passed the Senate unanimously, “so it enjoyed bipartisan support,” she says.
Consider the Savings
Her initiative did not go unnoticed by the companies it would affect. Both foreign and American offshore outsourcers, she believes, “don’t want to see the bill passed because apparently the vast majority of Fortune 500 companies seem to be participating in offshore outsourcing.” And they are lobbying hard to make sure they can continue the practice as long as the work costs less or is of higher quality offshore. Their efforts got Turner’s bill temporarily tabled.
That’s not such a bad thing, says Dunn. He allows that the issue is an emotional one because it directly impacts Americans’ livelihoods. “The accompanying job loss does have negative aspects,” he admits, but trying to keep jobs in the U.S. paying inflated wages is unrealistic. “Due to Y2K, ERP, and eCommerce implementations, demand for IT services spiked between 1997 and 2000,” he says. “Traditional supplier and domestic employees could not meet the demand at an attractive price. As a result, companies looked offshore for resources. When the spike in demand ended in 2001, the offshore market did not collapse because companies discovered that offshore suppliers could provide certain services for comparable or better quality and at much cheaper rates.” For instance, he says, the Wall Street Journal reported that New Jersey agreed to pay eFunds an additional $886,000 per year to compensate for the additional cost of having a nine-person call center in New Jersey rather than in India. That works out to almost $100,000 per year per job kept onshore, Dunn points out.
Other Positive Impacts of Offshoring
What’s more, Dunn emphasizes that there are other positive impacts on the economy of the U.S. and other developed nations that should be taken into account. “For example,” he explains, “savings from labor arbitrage are reflected in some combination of lower costs to consumers, increased dividends to shareholders, and reinvestment. Thus, these savings become drivers for economic growth.”
However, even if states are willing to pay more for IT projects that use local workers, Frances Karamoucis, Research Director, IT Services, Gartner, believes that “it’s not going to change the direction where all of this is going.” She sees nothing wrong with globalization. “America was founded on pure capitalism. I think it forces the U.S. work force to truly demonstrate where their value add is,” she says.
Another factor that often gets overlooked is this — foreign offshore outsourcers now reaping these benefits had to pay their dues to break into the American market. “Because the Indian providers look a long time to establish the U.S. buyer’s trust, says Karamoucis, “they needed things like external certifications (such as the System Engineering Institute’s Capability Maturity Model, Level 5) in order to build a certain level of integrity.” Now many U.S service providers are hustling to achieve similar certifications to remain competitive, she reports.
Dunn, however, believes that’s a simplistic assessment of the situation. He says, “The attainment of SEICMM, Level 5 by itself is not sufficient. An additional, but critical, piece is the interface between the user community and the service provider, which must be set up for every new client/project. In other words, the offshore ‘factory’ may flawlessly build to a certain specification, but that is little consolation if the specification is wrong.”
Karamoucis admits that’s a start. But she also advises U.S. outsourcers to compete smarter by concentrating on solutions that require the customer be located close to the service provider. She also sees the wisdom of offshore companies making concessions to the states that bring them so much profit – she believes they might share “their intellectual property, rigor, and methodology to improve the software development processes within the state.”
Lessons from the Outsourcing Journal:
- Opponents of offshore outsourcing claim it takes American jobs.
- Trying to keep jobs in the U.S. paying inflated wages is unrealistic. Offshoring’s economic underpinnings are so compelling analysts say the practice will not go away.
- American firms have to prove their value-add capabilities given the additional cost.
- Another way for American firms to compete is to offer a service that must be local.