The offshoring debate

Marty Clague, Covansys's president, has seen many US companies set up facilities in India since the early 1990s, and he believes the offshoring (also referred to as utsourcing) of IT services (that is, the sending of work to an overseas location) is a trend that can't be reversed. "Jobs are being off shored because companies realize they can save time and money by sending critical IT projects offshore," he explained.

Currently, India is the leading off shore destination for the IT sector, annually earning around $16 billion of the IT offshore revenues or about 60 percent of the total. The research and development off shoring market for India is estimated to grow from $1.3 billion in 2003 to $9.1 billion in 2010 at a compound annual growth rate of 32.05 percent, according to a study that the London, England based research firm of Frost and Sullivan did in 2003 for the Indian government's Department of Information Technology.

A study by the Chicago based research firm A.T. Kearney explained that India has become the world's favourite offshore location because it has many advantages: low costs, a large pool of technically trained manpower, and a good infrastructure in terms of telecom, production facilities, and technology support. "The Indian population is highly

literate, English speaking, and very talented, and, each year, its university system continues to produce a high number of well-trained graduates," explained Pamela Sedmak, a partner in Ernst & Sedmak, a Cleveland, Ohio-based consulting company that helps US companies evaluate their offshore options.

Other major offshore destinations for high tech companies include Ireland, the Philippines, Russia, and Eastern Europe, with China gaining in the manufacturing sector. The Stamford, Connecticut-based Gartner research firm predicted that China and India could receive almost the same amount of revenue from IT outsourcing, an estimated $27 to $30 billion, in the next three to five years. As an example of China's growing importance as an offshore centre, even well known Indian service providers as Tata, Infosys, and Wipro began to outsource their jobs to China in late 2002 and 2003.

In comparing the labour costs in China and India, Gordon Brooks, President and CEO of the Waltham-Massachusetts based E5 Systems, which has off shoring operations in both China and India, noted "The lure of US companies to outsource IT jobs to China is obvious: cheap labour costs. China is about 40 percent less than India right now, and I think, that gap will widen."

According to a research study published by Gartner, by 2004 more than 80 percent of the board of directors of US firms had discussed off shoring and forty percent had some kind of offshore pilot project in the works or were planning to off shore their IT services.

"Economically, we can't go back to where we were twenty to thirty years ago," said Roger Chen, Vice President of SBF Inc., a Silicon Valley based IT research and consulting company and a professor at the University of San Francisco School of Business and Management. "I know there are political considerations, but the economic trend is toward global integration."

The political considerations Chen alluded to have made outsourcing a controversial and hotly debated issue. In 2003, the US began vigorously debating its merits and effect on the economy. It's a debate that has continued unabated ever since.

The factor driving the offshore trend is cost saving. Studies have shown that companies in the US and other developing countries can substantially cut labour costs by replacing highly-paid high tech job with positions in developing countries such as India, Poland, or the Philippines that pay far less.

Critics charge, however, that the cost savings are coming at the expense of the American worker and that high tech jobs are following the familiar path of the manufacturing industry, which has sent millions of jobs offshore, contributing to a decline in wages of low skilled workers. Some analysts, moreover, say that, in the move to offshore, companies may overlook the logistical, technical, cultural, legal, and financial considerations that lead to hidden costs. "Moving your accounts payable operation to Bangalore, is not the same as moving to a shared services operations in Des Moines," Scott Furlong, an executive director with Gunn Partners, explained in the September 2003 issue of Financial Executive magazine. "Companies can't rush headlong into this. There are all kinds of cultural, political, and other concerns. For example, most offshore

destinations do not have 'safe harbour' status, which raises concerns about having them process data."

Intellectual property regulations can vary significantly from country to country, as do labour laws. Cultural differences can lead to conflicting performance standards, which can hamper administration and efficiency, while a currency that gyrates can be a headache.

Many companies are enticed by an offshore labour pool that's not only cheap but talented. But having access to a large pool of highly trained workers won't necessarily guarantee a smooth running offshore operation. In early 2003, ValiCert, a Redwood City, California based security software company had to revise its off shoring plans. The company hoped to make big savings by transferring software development work to India from the US, but, since the Indian workers knew little about the company and its products, the company's US software programmers had to spend a lot of time writing detailed instructions for the overseas workers.

Some analysts worry about a reverse brain drain, the result of the US pursuing government and private sector policies that threaten the health of the US economy and might even lead to a shift in the world's balance of power. American companies are continuing to contribute to this brain drain by outsourcing 'knowledge workers'software, product design and developmentabroad, they say. As many as 250 to 500 million knowledge workers may have already been outsourced. Alan M. Webber, a founding editor of the business magazine Fast Company, has warned that US companies using highly skilled foreign workers in India and other offshore locations may "in effect, be outsourcing their brains. In the short term, they may save money and boost profits. In the longer run, they outsource creativity, and, gradually, erode their capacity to generate new products and services."

Given the issues and challenges relating to offshoring, it's certain that not every company will benefit from the trend. Gene Morrissey, a management psychologist with the Chicago-based RHR International, which advises companies dealing with issues relating to their plans to off shore, said: "Companies need to think through all the potential consequences of an outsourcing move before they do it. The cost saving they anticipate may be short-term, but over the long term it will not be as inexpensive as they thought. I know some companies have brought their outsourced operations to the US."

The offshoring trend has sparked a strong reaction in the US. Lawmakers in several states are pursuing legislation to stem the loss of white-collar jobs to lower-wage countries. In my home state of South Carolina, for instance, lawmakers have introduced legislation that bans state agencies from using foreign call centres.

At the Federal Government level, the General Accounting Office is beginning to investigate the impact of government offshoring on the economy. Meanwhile in Europe, the press reported that the European Union has begun examining the offshoring issue. Concerned by these developments, several US tech giants, including IBM, Intel and Hewlett-Packard have warned that protectionist measures to stem the export of jobs would hurt the US economy.

Offshoring, no doubt, will remain an important economic and political issue for some time, given both its complexity and impact.

Ron Chepesiuk is a Visiting Professor at Chittagong University and a Research Associate with the National Defence College in Dhaka.