Offshoring – the transfer of high wage U.S. jobs to lower-cost overseas locations especially in Banking Industry is enabled by improved communications technologies and driven by the desire of corporations to establish a business presence in potentially lucrative foreign markets as well as to take advantage of the lower costs of production and skilled labour in those markets. Forrester Research has projected that as many as 3.3 million white-collar jobs of all kinds and over $136 billion in wages will be moved from the United States to lower-cost, offshore locations by 2015.
Although the initial emphasis has been on routine service and technical support positions, the trend is expanding to include more complex engineering and design services. It is abundantly clear that many of the jobs being sent offshore were formerly held by U.S. engineers, computer scientists and other information technology professionals.
The offshoring trend is particularly unsettling for American high-tech workers. The economy lost 3 million manufacturing jobs in the past decade. American high-tech firms shed 560,000 jobs between 2001 and 2003, and expect to lose another 234,000 in 2004. The Commerce Department reports that the number of U.S. IT workers employed in all industries has declined by 8 per cent since 2000.
Although initially concentrated in the manufacturing sector and low-skilled jobs, the Commerce Department says that “recent job losses have been widespread across most IT-goods and services-producing industries, and all IT skill levels.” Some jobs are expected to return with a stronger economy, but the majority is probably gone for good. Offshore outsourcing will further compound that shrinkage.
The strong push for offshoring of high-tech jobs also comes at a bad time for U.S. electrical engineers, computer scientists, and information technology professionals. Unemployment among U.S. electrical engineers, computer scientists, and information technology professionals has been increasing over the past three years and reached historically high levels in 2003. The unemployment picture is further clouded by uncertainty about the numbers of high-tech workers who are currently under-employed, or who have left engineering or information technology for jobs in other fields
Introduction: As we start to learn about outsourcing, its impact and the way it is perceived by society and the Information Technology industry, we come across some issues that seem to define outsourcing. Some of the issues are positive about outsourcing and some are negative. One negative issue has been identified as the problem statement for this study.
The outsourcing industry in the United States has been a target of political ideologues and a fair amount of fear. During this study, we will try to explain the social and political environment that affects outsourcing. Also, many American companies have suffered losses in outsourcing because the infrastructure in the host nation is not up to the standard. We will attempt to address that issue too.
History of Outsourcing
Looking at the history of human development, the history of outsourcing dates back to the industrial development that began in the late 17th century. For instance, the making of America’s covered wagon covers and clipper ships’ sails was a job outsourced to workers in Scotland, with raw material imported from India.
England’s textile industry became so efficient in the 1830s that eventually Indian manufacturers could not compete, and that work was outsourced to England. (Kelly, 2003, p.3) The ancient Chinese empire and the Japanese were also adept at outsourcing to their conquered nations.
Looking at recent times, in the USA many computer companies used to outsource their payroll processing in the 1970s and 1980s. Learning that outsourcing existed since the early days of our civilization, one may wonder why no one talked about it, let us say, 10-15 years back? The reason outsourcing stayed out of the news is because it used to happen on a small scale and was concentrated in some specific regions, like the USA, Europe.
But now outsourcing is a $400 billion a year industry and the world cannot afford to ignore it. Globalization, the explosive growth of the Internet, and the development of information society in every region of the world have made outsourcing an integral part of the world economy.
In our study, we are focused on Information Technology (IT) outsourcing. IT outsourcing gained momentum after the Internet started bringing together every corner of the world, and globalization brought down national barriers. Nowadays American companies such as Intel and Sun Microsystems have larger research and development outside the United States than within the nation, Citibank has card processing outsourced to India, and customer support at Dell comes from the Philippines.
Some look at outsourcing as a way in which developing nations can have access to the new technology enjoyed by the developed nations and away towards economic and social empowerment.
Relevant Research on Outsourcing
The most relevant research conducted is that done by LOMA, which explores the pros and cons of outsourcing and offshoring. The focus of the research report is on information technology (IT) outsourcing and offshoring to IT service companies in the United States and India. Sources for the report include SEC filings, Internet sites, press reports, and government research. The topics in the report include: a) Explanation of Outsourcing, b) Explanation of Offshoring, c) Process of Selecting Providers, d) Reasons Why Outsourcing and Offshoring Are Rising, e) Evidence of Impact of Outsourcing and Offshoring on Jobs.
However, it must be stated here that we found a lack of theoretical research on outsourcing. The knowledge base of the industry does not focus on theoretical research but financial data and global economic and political trends. What we have observed is that the IT industry is looking at outsourcing as an economic phenomenon and is not focusing on research the way it has for the field of software, microprocessors, the Internet etc.
Why is outsourcing an important issue?
Referring to our problem statement, we would like to stress that the problem is significant not only because of its impact on the IT outsourcing industry but also because of its impact on the global economy as a whole. We know that outsourcing is a $400 billion a year industry and IT outsourcing is a vital part of the industry. A slump in IT outsourcing would mean a loss for the global economy.
Since the problems facing IT outsourcing (such as political pressure in the USA and lack of infrastructure in the host developing countries) can seriously slow down the growth of IT outsourcing, the problem facing this industry is significant. In conclusion, we would like to state that nothing should be judged in a void. If we judge outsourcing by itself we would not be able to say whether it is good for society or not, but if we view outsourcing from the perspective of the global economy, increasing globalization, the rising cost of production in the USA, and lower costs in developing countries, we can see that outsourcing has a positive side too.
Although fewer than 20% of the total American software companies outsource their jobs, in general, offshore outsourcing (“offshoring”) is seen as something bad for America. We hope that with this study we would be able to present a balanced picture of outsourcing.
The Outsourcing Debate: How DuPont Benefited from Outsourcing to China
When we began looking at the debate surrounding outsourcing, we came across DuPont, which has outsourced its project of creating an online database of fabrics to China. The report published in Outsourcing Asia’s website said that by outsourcing to China the company was able to create a 24/7 operation and complete the project before schedule. The report also pointed out why the company had selected China as its destination and also talks about China’s future as an outsourcing destination. (Rosenthal, 2005, p.6)
How US Government Can Benefit From Outsourcing
Looking at the example of DuPont, where outsourcing helped the company to complete a project in time and also saved costs, we decided to look at how outsourcing might help the government. We came across a report on the US government’s IT challenge and how outsourcing can be of help in Outsourcing Asia’s website.
The report said that, in the year 2005, 50 per cent of the federal government’s 70,000 IT workers would become eligible for retirement, according to a 1999 study. Also, the Government is IT legacy systems have also aged. So even if young people join the workforce they are not trained in the old system. They have to be trained, which means an increase in cost and expenses for the Government.
This gap has opened doors to the suppliers to offer outsourcing as a solution to the problem. (Harney, 2005, p.2) The report mentioned that many Unions and Government workers are against outsourcing because they fear that it will raise unemployment in the USA. Although there is a general fear of outsourcing among the public, we believe that if we can create a mutually beneficial outsourcing relationship between the two parties and show the benefits to the people, they will begin to feel positive about it.
Creating a Mutually Beneficial Outsourcing Relationship
The report titled “Creating a Win-Win Culture” in Outsourcing Journal talks about QinetiQ which was reaching the end of an existing outsourcing contract and realized the need to have a single-source solution to provide a wide range of services and also reduce its total cost for IT services. In the year 2003, the company signed a contract with Accenture to provide a broad range of applications; hardware and data centre services, as well as purchasing and program management.
To achieve early savings, the two companies bought into a structure and effective governance along with establishing a good relationship at all levels at both the organizations. They were able to exceed the savings target in the first year of their partnership with the help of open communication, continuous innovation and win-win based solutions. Looking at the example of QinetiQ and Accenture we can say that a good outsourcing relationship can create a win-win culture, which can benefit both sides. More and more companies are trying to copy the success of these two companies.(Garner, 2005, pp.4)
Having discussed the positive side of outsourcing, the benefits it can offer to the business and the Government, we now turn our discussion to the negative side of outsourcing namely declining satisfaction among the outsourcing clients, security risks, social effects and public opposition. Declining satisfaction among outsourcing clients Report on declining satisfaction among outsourcing clients published on ZDNet talks about Diamond Cluster International’s study, which found out that the number of buyers satisfied from their offshoring provider has dropped from 79% to 62%. Also, the number of buyers terminating their offshoring contracts prematurely has doubled and reached 51%. (Frauenheim, 2005, p.2)
Security Risks in Outsourcing
This declining rate of satisfaction will not be helped by recent reports on security breaches at the call centres in India. It was reported on the BBC by Zubair Ahmed that some employees of Indian call centre Emphasis in Pune transferred large sums of money to the fake account they created from the accounts of American customers of Citibank, whose call operations were handled by the company.
This incident has brought into focus the lack of integrated security management system in India’s call centres. The industry is still in the growing stage, and not much attention is paid to ensure that proper security procedures are followed. It is only after this incident that the companies have started doing background checks on the employees and have made the background checks a norm in their hiring process. This incident raises many questions regarding the safety and security of data when processes are outsourced; also the capacity of Indian companies to handle data securely is in question. (Ahmed, 2005, p.2)
Social Effects of Outsourcing
While data security in outsourcing is being questioned, there is a question about the social effects of outsourcing too. This issue has largely been sidelined because the industry is mostly concerned with the more visible effects of outsourcing like the cost-saving and profits, rather than look for the slow but steady social change outsourcing is causing. Kaushik Basu talks about this issue in his article,
“The Politics of Business Outsourcing,” published on Project Syndicate’s website. In his article, he says that job loss due to outsourcing may lead to protectionism and nativism. In the long run, this can lead to racism and other discriminatory practices. So it is very important to help the laid-off workers so that they do not develop these kinds of feeling toward the country where his job went. (Basu, 2004, p.9)
Unions Opposing Outsourcing IT
Unions in America have looked at one side of the social effects of outsourcing – job loss and the effect it has on the family and society. They are protesting against outsourcing and pushing the Government to pass laws to ban outsourcing. In his report “Unions step up anti-outsourcing efforts,” Juan Carlos Perez says that Information Technology Unions are fighting to keep American jobs in America.
Leading this struggle is the International Federation of Technical and Professional Engineers (IFPTE), which is trying to convince the United States Congress to pass laws that, will protect jobs from being outsourced. The Union is also lobbying hard to get the working visa, especially H1B regulations tightened so that whatever jobs stay in America goes to Americans. (Perez, 2005, p.4) Although it concerns us that the Unions are painting outsourcing as the sole reason for job losses in the IT industry, while they turn a blind eye to other reasons like stagnating industry, high costs and increasing competition from foreign-based companies. It would be better for the industry and also for the IT professionals if they start looking at the whole picture instead of targeting outsourcing as the sole evil.
Depleting IT Talent Pool in the USA:
To understand why outsourcing is happening we must realize that the USA has a fast depleting talent pool in technical fields like Computer Science and Physics. So the companies are forced to seek talent outside the country or to send the job to the country where there is a large talent pool. India and China are the best examples of this. India has a large population of engineering graduates who have refined technical skills and can do the job for less. Also, China produces the largest number of Computer engineers every year. So to compete against them united States should try to encourage its students to enter technical fields and should also introduce courses in schools and universities to increase technical skills.
The report “Inside the Debate over Outsourcing Information Technology Service Jobs Overseas,” published by Manufacturing News, talks about the issue of talent shortage in America. The reports also discuss the rising number of job protection groups, some of whom have websites; although these groups are trying to bring into focus the job loss and economic hardships caused to the American workers by outsourcing, some of their sites have included racist and biased remarks. And instead of using reasons, they are resorting to insulting the foreigners who are talking their job overseas. (Manufacturing News, 2005, p.6)
Having discussed in length about the issues in outsourcing like security concerns, questions on job loss, depleting talent pool in America, and others, we now move our discussion to the outsourcing destinations and the IT infrastructure in those destinations. Outsourcing Destinations India and China have emerged as the leading destination IT job outsourcing. For the out study, we analyzed China as an outsourcing destination.
The report “Country Analysis: China” talks about China as an outsourcing destination. The highlights of the report have been summarized as follows: The software outsourcing market in China is a US$1.5 billion market with an annual growth rate of about 35%. The present position of China is where India used to be 12 years ago.
The growth in this sector is fuelled by the large supply of low-cost and qualified labour and a large internal market. Although the Chinese market is promising it is suffering from some serious problems like the lack of English language proficiency among the programmers and managers, the Chinese companies do not have established quality control procedure like their Indian counterparts. Also, the large problem of software piracy in China is not helping it to become a credible destination for software development.
The Chinese government is launching programs to encourage and develop the software industry. But it does not have a good international image because of its un-democratic style of governance and many European companies and US companies are hesitant of doing business in China because of this. Although China has a large supply of IT professionals, those qualified in software engineering and software are very limited because the Chinese universities still emphasize the traditional engineering fields like mechanical engineering and electrical engineering.
Also, China has made great improvements in the telecommunication infrastructure but the developments are concentrated in the big cities and near the coastal regions. The heartland and the rural areas are still far behind. This limits the Chinese market for software sales and development. We can see that China is a promising destination for IT outsourcing, but then it has some problems too. The country is trying to take the position India has in the outsourcing market, which it may be able to if we look at the IT infrastructure and other surrounding issues affecting IT development in the South Asian market.
A report titled “Struggling with the Digital Divide, Internet Infrastructure, Policies and Regulations,” published in South Asia net, talks about the problems facing the South Asian IT industry. The highlights of the report can be summarized as follows: The Internet made way to the South Asian region in the late 1980s through bulletin boards, government and non-government initiatives. In India, in the year 1995 government-owned VSNL started offering Internet access to the public. Private companies entered the market in 1998.
In Nepal, the Internet was introduced in 1993 and in 1996 the people were given access to the World Wide Web. In the beginning, only the big cities in the region had access to the Internet, but now Internet usage has spread to rural areas too.
For example: In India, many villages’ government agencies have set up their websites and offer many of their services online. Although the Internet is spreading in South Asia, the lack of infrastructure, antiquated legislation, language barriers and the high cost of Internet access are hampering growth. We can see that the South Asian IT infrastructure is facing problems, but the industry is trying to overcome it and keep its position as a favoured outsourcing destination._____(Rao, Bhandari, Iqbal, Sinha & Siraj, 1999, p.7)
Offshoring High wage Jobs from Us to Low Cots Locations:
The offshoring of high wage jobs from the United States to lower-cost overseas locations is currently contributing to unprecedented levels of unemployment among American electrical, electronics and computer engineers. Offshoring also poses a very serious, long-term challenge to the nation’s leadership in technology and innovation, its economic prosperity, and it is military and homeland security.
Prudent steps must be taken to ensure that offshoring, if it does occur, is implemented in ways that will benefit the United States and all its citizens, including high tech workers. To this end, IEEE-USA recommends that: The Federal Government must collect and publish reliable statistics on the kinds and numbers of manufacturing and service jobs that are being moved offshore.
Government procurement rules should favour work done in the United States and should restrict the offshoring of work in any instance where there is not a clear long-term economic benefit to the nation or where the work supports technologies that are critical to our national economic or military security.
New U.S. workforce assistance programs should be created to help displaced high-tech workers regain productive employment and ensure that employed workers can acquire the knowledge and skills they need to remain competitive.
The H-1B and L-1 visa programs should be reformed and new trade agreements should incorporate such reforms. These temporary admissions programs for skilled workers are often used to import lower-cost labour and can result in the displacement of U.S. professionals, exploitation of foreign workers and accelerated offshoring of engineering and other high tech jobs.
A coordinated national strategy must be developed to sustain U.S. technological leadership and promote jobs creation in response to the concerted strategies being used by other countries to capture U.S. industries, jobs and markets.Federal investments and tax credits for research and development should be limited to work performed in the U.S. R&D that must, by its nature and content, be carried out offshore, is not covered by our recommendation.
This statement was developed by the IEEE-USA’s Career and Workforce Policy Committee and represents the considered judgment of a group of U.S. IEEE members with expertise in the subject field. IEEE-USA is an organizational unit of The Institute of Electrical and Electronics Engineers, Inc., created in 1973 to advance the public good while promoting the careers and public-policy interests of the more than 225,000 electrical electronics, computer and software engineers who are U.S. members of the IEEE. The IEEE is the world’s largest technical professional society.
The Consequences or Impact of offshoring on Banking Industry and Others: Whether the United States will benefit from the offshoring of jobs will ultimately depend on how the process is implemented. As in all competitions, there will be winners and losers. Potentially adverse consequences include loss of employment opportunities and income by technical professionals; loss of payroll and income taxes by national, state and local governments; growing trade deficits in goods and services; transfers of investment capital and intellectual property to overseas locations; and increasing dependence on foreign sources for consumer products and defence critical weapons systems.
IEEE-USA is particularly concerned that offshoring of engineering, computer science and other high tech jobs could eventually weaken America’s leadership in technology and innovation, a threat that has serious implications for our national security as well as our economic competitiveness. Fewer job opportunities and the downward pressures on wages that will occur as more and more scientific and engineering jobs are shifted to lower-cost, overseas locations are also likely to discourage many of America’s best and brightest young people from pursuing careers in science and engineering.
Offshore outsourcing can also result in intellectual property and sensitive personal data exports, including medical and credit information. And because U.S. laws that protect information and safeguard privacy do not have extraterritorial application, the U.S. government, corporations and citizens will become increasingly dependent on foreign laws to protect their interests. The risk posed to these interests by individuals and organizations who would take advantage of weak laws, loopholes and limited access to enforcement is not insignificant. Worker Shortage
IT faculties in India are already in short supply for IT workers. The All India Council for Technical Education (AICTE), the main body for accrediting post-secondary engineering schools, finds a faculty-student ratio of 1/45 in IT courses at AICTE-approved institutions. AICTE recommends a ratio of 1/15. This faculty shortage will reach critical proportions as MIT’s plans to triple the number of IT engineering graduates are implemented. The quality of computer science education will suffer as a result of faculty shortages.
Indian undergraduate degree programs are only three years long, compared to four years in North America. Wage scales for IT professionals are increasing as firms seek to minimize turnover. The Indian software giant Infosys reportedly raised salaries by 30 per cent in 2003 and 16 per cent in 2004. Other firms are providing employee stock ownership plans and opportunities for international travel in efforts to reward staff and keep them from leaving.
Other Countries: India’s IT workforce shortage is welcome news in Pakistan, where turnover is less than 10 per cent and the average employee wage and benefit package at IT firms is $400. Of that, $350 is for wages. The inflationary effects of a tight labour market can be illustrated by the history of the international call centre industry in the Philippines. The labour market for call centre employees in the Manila region is the tightest of any developing country’s IT labour market that we know of.
The tight labour market has seen our total service costs rise to $12 to $16 per production hour for simple voice services to the U.S. without telecommunications redundancy, up from $10 to $12 in the Philippines in 2002. Agent quality in the Philippines is excellent for general customer-service work, but at those prices, we can recruit and retain highly trained technicians or medical personnel elsewhere in South Asia. Or we can go to South Asian centres with onsite American trainers and managers.
For $18 an hour we can go to Canada and for $22 an hour we can stay in the U.S. When the Philippines experienced a modest call centre boom in 2002, it did not appear at that time that the boom was sustainable because when available labour supplies were fully utilized, the labour market would tighten quickly and wages would rise correspondingly. This dynamic is common in small labour markets.
The former British colony of Sri Lanka has many of the advantages of India and Pakistan in terms of English language skills and an emphasis on education. The population of Sri Lanka has a relatively high quality of life but a per capita income of only $930. In comparison, India’s per capita income in 2003 was $530. Sri Lanka. The civil war that began in Sri Lanka in 1984 has been winding down and the business climate is improving. With a little more pressure exercised on the Colombo government to compromise with the Tamil rebels, long-term peace and stability will be within reach.
A mix of domestic and international IT firms have been cautiously setting up operations in the Colombo area. Rapid tightening of the labour market for customer service personnel will happen in Sri Lanka if the IT industry expands too quickly there. Escape velocity and a tightened labour market could be reached in six to eight months if India implements taxes on U.S. clients of domestic or foreign-owned outsourcing facilities in India.
The average size of new merchant call centres going up in Colombo in 2004 is only around 60 seats to start, expandable out to about 150 to 200 seats. One South Indian firm is setting up operations in Colombo to provide redundancy for inbound mission-critical work from its international call centre in Tamil Nadu. It is bringing over technicians and support personnel from India to compensate for a shortage of specialized call centre technicians in Sri Lanka.
Public Policy Recommendations
Providing Good Data for Policy Analysis: The U.S. government does not presently collect statistical information about the offshoring of jobs or its impact on employment, technology and capital investment in the United States. The lack of objective data forces policy-makers to rely on speculative projections, and diverts attention from the real task of solving the problems that offshore outsourcing creates.
Federal, state and local governments are a significant consumer of high tech goods and services. Government spending increases aggregate demand and helps create jobs. If government contracts are directed overseas through offshore outsourcing, then the benefits of that spending for the U.S. economy may be significantly diminished because its multiplier effects will benefit the countries where the outsourced work is performed.
The relationship between federal investments in research and development and technological innovation is also critically important. The National Academy of Sciences report, Funding a Revolution: Government Support for Computing Research, provides dramatic evidence of the many benefits of federal support for R&D at individual companies and educational institutions, as well as for their employees and the communities in which they live.
The argument that global sourcing of government contracts can result in cost-savings that benefit U.S. taxpayers is also attractive politically when federal and state budget deficits are growing. In many cases, this argument is based on short-term assessments of costs and benefits, rather than on detailed analyses of longer-term financial impacts on employment, social services, and the domestic tax base.
When it can be demonstrated that long-term financial benefits are likely to result, the offshoring of government contracts may be warranted. When long-term benefits are not proven, when the contract involves technologies that are critical to U.S. economic or national security, or when restrictions would serve important social goals, then some limits on offshoring of government procurement contracts is probably warranted.
By Outsourcing the IT position especially in the Banking sector has been both Beneficial for the Lower cost country and the US as the lower-cost countries learn a lot from the Expertise of the skilled IT professionals of the advanced and developed countries. As enterprising foreign workers come to the United States, are trained by some of the best companies in the world and develop valuable experience and business contacts in their fields. Many returns to their own countries to establish or work for new businesses that compete for head to head with U.S. businesses.
Former H-1B and L-1 employees have helped improve the global competitiveness of India’s IT services industry, for example. And, as reported by the Center for Industrial Competitiveness at the University of Massachusetts, H-1B workers are also being hired to help foreign-owned companies negotiate and manage contracts within the United States.