|Offshore Jobs in Technology: Opportunity or a Threat?|
By STEVE LOHR
Published: December 22, 2003
The United States economy is finally getting stronger, but there seems to be one unsettling weakness: the apparent wholesale flight of technology jobs like computer programming and technical support to lower-cost nations, led by India.
The trend is typically described in ungainly terms - as "offshore outsourcing" or "offshoring." But that rhetorical hurdle has done nothing to lessen the recent public debate and expressions of angst over this kind of job migration. There are some early signs of political reaction. Last month, for example, the State of Indiana pulled out of a $15 million contract with an Indian company to provide technology services. And a proposed bill in New Jersey would restrict the use of offshore workers by companies doing work for the state.
Forrester Research, a technology consulting firm, published a report this month pointing out that the movement abroad is only gradual. The firm bemoaned "the rising tide of offshore hype." Yet Forrester itself played a significant role in framing the debate on offshore outsourcing, as well as stirring fears, with a report last year. That report, published in November 2002, predicted that 3.3 million services jobs in America would move offshore by 2015, and added that the information technology industry will "lead the initial overseas exodus."
So what is really happening? Is the offshore outsourcing of technology jobs a cataclysmic jolt or a natural evolution of the economy?
The short answer is that the trend is real, irreversible and another step in the globalization of the American economy. It does present a challenge to industry, government and individual workers. But the shifting of some technology jobs abroad fits into a well-worn historical pattern of economic change and adjustment in the United States.
"To be competitive and to maintain and improve American living standards, we have to move up the technology food chain," said Craig R. Barrett, the chief executive of Intel.
That may seem like easy advice from someone perched at the top of the food chain, but Intel represents a good example of a company that successfully navigated an earlier round of threats from international competition, from Japan in the 1980's.
In the early 1980's, Japanese chip makers appeared to be taking the semiconductor industry by storm, supported by their banks and their government. The Japanese were focused on the market for memory chips, which store data. At the time, Intel was getting battered and still received much of its revenues from memory chips. It made a bet-the-company decision, abandoned the memory-chip business and focused on microprocessors, the bit-processing engines in personal computers.
The bet, of course, paid off as the personal computer business blossomed. In retrospect, Intel's triumph might seem to be a foregone conclusion. But it did not necessarily look that way back then. Remember, those were the days when the term Japan Inc. struck fear in corporate boardrooms across America, and there was a resonant ring to the bleak prognosis of the nation's economic future by the former vice president, Walter F. Mondale: "What are our kids supposed to do? Sweep up around Japanese computers and sell McDonald's hamburgers the rest of their lives?"
It did not quite work out that way, did it? Today, the overseas challenge in technology services comes from linking nations with strong education systems like China, India and Russia with the global economy. The Internet is a big part of the phenomenon. The spread of high-speed Internet connections in the last few years has meant that Indian programmers are a mouse-click away from American corporations that are eager to cut their software development costs.
The salary comparisons are striking. A programmer in the United States would earn about $80,000 a year on average, compared with $20,000 or less in India. But analysts say the actual cost savings on a development project are not proportionate. Whole stages of a project - analysis, design and deployment - typically require face-to-face meetings. Communications and cultural differences add to costs and sometimes reduce effectiveness.
On a typical corporate software project, employing 40 programmers for a year, the savings from offshore outsourcing in India would be more in the range of 20 to 40 percent less than employing higher priced labor in the United States, estimates Joseph Feiman, an analyst at Gartner Inc., a research firm. Sometimes, American services firms with special expertise are the preferred choice, despite higher labor costs.
"The math of looking only at salaries is just wrong," Mr. Feiman said. "And it is a prevalent misconception."
Some offshore work has returned to the United States, but whether the few reported cases represent any kind of incipient "backlash," as it is sometimes portrayed, is uncertain. Lehman Brothers confirmed last week that it had stopped using offshore India workers for its internal computer help desk, and earlier this month Dell Computer acknowledged that some of its technical support for corporate customers had been brought back to the United States.
A closer look at the job migration numbers finds them less frightening than at first glance. Take the Forrester figure of 3.3 million services jobs moving offshore between 2000 and 2015. To begin with, projections of the future are always tricky, and even more so when one tries to look 12 years ahead. The projections show that half of the 3.3 million jobs are in traditional office services, like bill processing, order handling and the like. Only 14 percent of the total are in computer services, according to Forrester.
But even the larger number of 3.3 million needs to be put in perspective. The United States has more than 130 million employed workers, about 70 percent of them in the services sector. Over the last 10 years, 3.5 million private sector jobs a year have been created on average, or 35 million. Even in good years, a lot of jobs are lost through layoffs and business closings - 2.5 million jobs in 1999, for example. Given the normal job creation and destruction in the economy, the Forrester projections of offshore movement - roughly 214,000 a year from 2000 to 2015, in all categories of service employment - do not seem so alarming.
"What we did was size a trend that was out there," said John C. McCarthy, the Forrester analyst who wrote the report. "We tried to be conservative."
In an information economy, technology services are an "input'' in the same way that steel, glass and rubber are parts of a car. So reducing the cost of technology services curbs inflation while improving efficiency and productivity. A recent study by the McKinsey Global Institute estimated that every dollar of costs that United States companies move offshore yields a benefit of $1.12 to $1.14 to the American economy, mainly from cost savings and steering workers toward jobs that add more value than those replaced.
The difficulty of finding good jobs for workers, however, is a thorny policy issue. In software development, for example, the jobs that will continue to reside toward the top of proverbial economic food chain will be for people who can use technology to solve problems in specific businesses like banking, manufacturing and retailing. The software jobs most at risk, analysts say, involve straightforward coding, where technical specifications are handed off to a programmer who is told, "Do this." Not everyone is going to be able to make the transition from software coder to designer.
That is similar to the experience of workers who lost manufacturing jobs to low-cost imports. A study by the Institute for International Economics, examining manufacturing jobs losses from 1979 to 1999, found that a fourth of factory workers who were re-employed took pay cuts of 25 percent or more.
Research groups and academics have suggested forms of wage insurance, either publicly financed or privately financed by the companies that benefit from offshore outsourcing, to soften the blow for some transition period.
"Wage insurance is worth considering because technological change is so rapid," said Robert B. Reich, a professor of social and economic policy at Brandeis University who was secretary of labor during the Clinton administration. "It would spread the costs of economic change over a much larger pool."