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.''
|