Online Extra: Perilous Currents in the Offshore Shift
Each day, Gartner Inc. Research Director Frances Karamouzis says she speaks with several giant U.S. companies interested in shifting information-technology and back-office jobs abroad. From this feedback, Karamouzis is convinced that the trickle of skilled work migrating offshore is about to turn into a torrent.
Until recently, says the outsourcing specialist, only a handful of globalization trailblazers like General Electric (GE ) and Citibank (C ) employed more than a few hundred people in India, the Philippines, and other low-wage nations to handle key IT support and administrative duties such as payrolls and accounts receivables. "Now what's happening is that the pragmatists, the mainstream companies, are starting to join this market in all kinds of industries," Karamouzis says. "We're talking about financial services companies, high-tech manufacturers, media conglomerates, health-care organizations -- they're all exploring this."
The reason for the surging interest seems clear: "Now that we're in a down economy, the top agenda item of every chief information officer is to cut budget," says Karamouzis. Within three years, she predicts, 30% of large U.S. companies will outsource IT services and manage certain business processes through offshore vendors. In jobs that are highly transportable, such as IT support, up to 20% of U.S. positions could head overseas. And the types that are considered transferable are getting more important, ones that pay $80,000 and more. "The interesting question is how far up the food chain this will go."
All of this is great for business at IT market-research firms like Gartner, which is supplying big clients with gobs of info on everything from data-transmission rates in Manila to the going salary for an Indian software engineer with a master's degree and three years of experience. But Gartner also is assembling a research team that's looking at the broader implications of this next wave of globalization. What are companies really gaining and losing by firing white-collar workers at home and becoming more dependent on far-flung foreign operations? And what does this mean to America's white-collar workforce?
Gartner's early conclusion: Many companies simply haven't thought these questions through. CEOs are rushing to shift jobs now in their desperation to slash costs and boost the bottom line, but with little understanding of whether or not they're enhancing or endangering core operations. As a result, many companies that will join the bandwagon are likely to stumble. And if it's perceived that companies are exporting good jobs simply to save a buck, Corporate America may be setting itself up for a nasty backlash as the pink slips mount.
"We anticipate that you'll see a disproportionate number of layoffs this year and next in info tech. The impact will be very severe," says Diane Morella, a Gartner research director focusing on workforce issues. "And there's very little discussion about what this means for the U.S. and Western Europe four or five years from now."
How are companies deciding which jobs to keep and which can go? Clearly, salaries are the big factor. In some job categories, the gap between what a certain skilled job pays in the U.S. vs. in a developing nation like India is 5 or 10 to 1. Another factor, of course, is that certain skills are still in acutely short supply in the U.S.
Take mechanical engineering. U.S. colleges graduate only about 35,000 of them annually -- about half of what Corporate America will need in the coming years. "We have always had a higher demand for engineers than can be supplied in the U.S.," says Daniel Miklovick, Gartner's research director for manufacturing. "The big shortage is just beginning to materialize."
While Corporate America has been able to fill that gap by arranging H1-B work visas for foreign engineers, getting such visas is now harder because of the U.S. economic slowdown and tighter immigration rules in the wake of September 11. As a result, more U.S. manufacturers are hiring mechanical engineers in countries like China, which has an oversupply.
DOES IT ADD VALUE?
Similarly, big shortages of software programmers in the 1990s, especially during the height of the Y2K panic, gave low-cost Indian IT service providers the chance they needed to show companies they could do the same quality of work as IBM (IBM ), Electronic Data Systems (EDS ), and Accenture (ACN ) at a fraction of the cost.
But these days, pay and skills aren't the only considerations as U.S. businesses cut ever deeper into the ranks of salaried professionals. The most fundamental factor in deciding whether to shift a job offshore is whether that position adds a lot of value to a company. "Jobs that require an understanding of a company's requirements and an ability to translate that understanding into an IT operation, won't go away. This is a unique skill set," says Karamouzis.
Once a job can be defined and codified so that outsiders can do it, however, it becomes lower-value and "can get commoditized more easily," she says. Karamouzis cites one Gartner client that recently laid off 500 IT staffers, mostly software coders and programmers, and is shifting the work to India. "But this company will keep all of the senior, higher-priced IT architects who can develop solutions really, really well."
The big problem is that not all corporations are adept at figuring out which jobs really should stay close to home and which are dispensable, Gartner analysts say. Even fewer are very good at managing networks of support staff, R&D teams, and other white-collar workers that are dispersed around the globe. Nor do they know how to manage such a shift without sending threatening signals to white-collar staff that they really want to keep.
Karamouzis notes that GE, which has 10,000 staffers in India alone and is in the process of doubling that, has spent many years gradually building up its overseas operations. "They did this at a slow pace, and they didn't displace many workers in the U.S.," she says. "So they didn't experience as much of a work backlash as you would think."
The next few years are likely to be much more contentious, with some companies hiring thousands of staff in India, the Philippines, China, and other countries while simultaneously downsizing ruthlessly at home. Indeed, the global job shift could become so problematic for many companies that some kind of pullback is likely. "I think we are at the start of a very deep and difficult learning curve," says Karamouzis.
She explains that historically, with any new business trend, "you can expect that after five or seven years, the pendulum will shift back. Companies will discover they they have suffered a loss of knowledge and will retrench." But eventually, companies will likely get through that learning curve and figure out how to manage a global workforce efficiently. Then the offshore job shift could really kick into full swing.
By Pete Engardio in New York