In-Depth

Careers: Offshore Outsourcing Discussions Heat Up

Outsourcing efforts yield mixed results. Are CIOs are asking tough questions about the hidden costs?

• By Stephen Swoyer
• 02/17/2004

Few would dispute that offshore outsourcing of IT jobs is hitting U.S. workers in the pocketbook. A recent report from salary research firm Foote Partners LLC, for example, says the net effect of offshore outsourcing has been to drive down wages in the U.S. In a study of 400 Fortune 1000 companies, Foote found that IT workers with specific skills are earning a premium of 23 percent less today than they did in 2001, while salaries for workers with certain certifications dropped by an average of 11 percent.

We spoke recently with a number of IT professionals about offshore outsourcing and received nearly as many opinions on the subject as there were candidates in last year’s California gubernatorial election.

Take Dave Kopischke, a mainframe operator with a prominent financial services company who’s an admirably rational proponent of free markets. “[W]e are losing our productive/competitive edge and we need to regain it. I've read a lot of other opinions endorsing protectionist policies and tax breaks for those who keep jobs here and such. None of those people were spouting off when other peoples' jobs were being sent off shore or outsourced,” he comments, adding, “Our only hope is to compete, and if we can't compete, innovate.”

At the same time, Kopischke allows, he is concerned that offshore outsourcing will be dishonestly politicized by those who oppose it or unfairly misused by its proponents. “It should not be a lever to crush American workers. It should not be allowed to be sabotaged either. If it is truly better, then it should progress. There is no standard of measure though,” he concludes.

James Melin, a mainframe operator with a municipal government, says that he isn’t necessarily opposed to offshore outsourcing, per se, but argues that insofar as it shifts practical expertise and know-how overseas, it’s unwise. “The way I see it, it is short-sighted. How much knowledge is going to be lost in this country? Practical, hands-on knowledge?” Melin wonders, invoking an unusual example to demonstrate his point: “If you look at the Apollo program, we couldn't do it right now without a huge ramp-up --to recreate the living base of knowledge that has been lost since the early 1970's when Apollo ended. The same thing is going to happen here. The living knowledge base, as opposed to what can be read in a book, or gleaned from the Internet, will contract.”

Divisiveness among IT professionals is mirrored on a national level. Even the President and his own advisors can’t agree on the issue. Just last week, President Bush publicly distanced himself from an unapologetic endorsement of offshore outsourcing by Dr. Gregory Mankiw, chairman of the Council of Economic Advisors. “There are still some people looking for work because jobs have gone overseas, and we need to act in this country,” Bush told participants of an economic forum in Harrisburg, Pa.

Users Report Mixed Results

Some of the IT professionals with whom we spoke say that their organizations have experimented, to one degree or another, with offshore outsourcing. All said that these experiments have delivered mixed results, such that in some cases, an organization was forced to abandon its offshore plans, while in other cases a company simply revised its offshore strategy.

“In 1999, we [the DB2 DBA Group] trained contractors from India to take our place, and then we were let go just before Christmas,” says one mainframe DBA administrator who works on a contract basis with a prominent manufacturer of athletic apparel. “Two months later, we were brought back because the replacements were sharp and well-trained, but had little real-world experience. For instance, they could quote details from the manual, but they didn't understand why they shouldn't put untested changes in production.”

Mainframe operator Kopischke says that his company tested the offshore waters by outsourcing some problematic GUI front-end applications. “Progress was slow or non-existent, so they pulled the plug on it a couple weeks ago,” he explains. “It was one of those fairy-tale apps anyway. Not much of a chance for success from the start, no matter what ‘shore’ it landed on.”

On the other hand, Joe Poole, a mainframe operator with a prominent department store chain, says his company’s chief information officer (CIO) has thus far resisted the temptation to send American jobs offshore. “Fortunately for us, our CIO … is dead set against outsourcing. He's been hounded by several companies trying to get one of his big projects for offshore development, but I think his conscience stops him,” he says.

Poole says he’s opposed to offshore outsourcing in principle, but concedes that there are ways in which tasks might intelligently be sent offshore to make his job easier. “I could make an exception with a project like converting every COBOL program to the latest and greatest version for the mainframe, so our programmers don't have to waste time recompiling everything—[the offshore guys] just send the converted PDSes back, and we'll do the final test and promotion to production,” he acknowledges.

The mainframe DB2 DBA introduced above says he’s concerned about offshore outsourcing trends, largely because he may soon be out of work. “[W]e've been working on converting to SAP on Oracle and getting rid of the mainframe”—a move that he says is scheduled for late next year. “When that happens, I'm out of a contract. Since I have only mainframe experience, I'm probably out of a job—judging from the lack of mainframe jobs in Oregon,” he points out, suggesting that the offshore trend diminishes his prospects of finding employment on other platforms as well. “I'm doing what I can to learn other products/platforms/etc., but from what I've seen, it won't do me much good without opportunities.”

Finally, Kevin Kinney, a mainframe operator with a financial services company, believes that not enough CIOs are asking tough questions about the hidden costs of offshore outsourcing.

“We outsourced a code conversion to India. To do that, we sent the source code for our entire product to the other side of the world. What's to prevent them from using it to set up their own company using our code? Would we even know this happened? Would we know what laws, if any, protected our intellectual property?” he vents, noting that when he voiced these objections to corporate decision-makers, he “was treated like a speed bump.”

An Unstoppable Trend?

Writing in Merrill Lynch’s (ML) December 2003 TechStrat Survey, for example, ML first vice president Steven Milunovich said that while offshore outsourcing currently accounts for only a small percentage of overall outsourcing revenue, this share is likely to grow over time. “A fairly modest portion of outsourcing has gone offshore, which likely means there is room for growth. Most, but not all, have been happy with their experience,” he writes.

Milunovich got word straight from the horse’s mouth, so to speak: Each quarter, ML surveys 100 Fortune 500 CIOs in companies across both North America and the European Union. Among other advantages associated with offshore outsourcing, CIOs typically cited access to strong skill sets at a lower cost, the completion of projects on time and within budget parameters, and cost savings realized by not having to train internal staff. Not quite everything came up roses, however: CIOs reported experiencing some fairly predictable problems, such as control and communications issues, a lack of quality, and a failure to realize expected cost savings.

These days, analysts say, India accounts for the bulk of offshore outsourcing-related activity. For example, a recent article in the New York Times said that for the fiscal year ending in March 2004, India is expected to grow its technology and services industry to $15.5 billion, with $12 billion of that coming from exports. More than 70 percent of India's software export revenue comes from companies based in the United States, the Times said.

Nevertheless, some IT professionals say that offshore outsourcing simply isn’t a viable alternative for their organizations. “It has been looked at in our shop, and with the bids that were received, it was still cheaper for us to continue 'independent' rather than outsource,” confirms mainframe operator Melin. “We are entirely a chargeback-for-budget operation, and we would have seen an increase in costs charged back to county entities that currently subscribe for our services, even factoring in that our chargeback rates for the mainframe include some inflation to subsidize the Wintel world here.”

One area of IT that is traditionally viewed as not offshore-outsourceable is government work, both at the state and federal levels. For example, the Times article noted that less than 2 percent of India's export earnings are derived from work performed for American governments. Several states have voted to ban government work being contracted to foreign nationals, and the U.S. Senate has also approved a similar ban for two federal departments. For sensitive or classified data, it would seem, outsourcing simply isn’t an option.

Or is it? An IT professional who works for a prominent telecommunications firm which does a good deal of government work says that his employer is trying to find a clever way to work within the letter of government requirements but also facilitate the outsourcing of application development responsibilities that involve, to one degree or another, sensitive data. “The goal is to have all software development other than strategic planning and testing sent overseas,” he confirms. “So they’re trying to creatively find a way to export software development on systems which may handle classified data.”

One of the requirements for systems that handle sensitive data is that no foreign national is allowed to work on them, this IT professional says, but his employer thinks that it has a solution to that problem. “The theory is that you could still export the work if the foreign nationals never, ever saw the actual data that is being operated on, which is why they’re planning on not exporting the testing functions … The idea is we would get the source back and somebody here would view the government data and take that and plug it in and see if it went through the system right away.”

This IT professional says that he, too, is leery about losing his job as a result of offshore outsourcing. “At this point, the only reason my applications have not been outsourced is because of that government data [requirements] thing, and, like I said, they’re still trying to find a way around that,” he concedes.