Off-Shoring the Knowledge WorkAlthough we’ve just explained that there is little reason to worry about off-shoring low-skilled, low-paying jobs that will be automated anyway, many observers are even more anxious about this related trend. Many companies are starting to off-shore some of their highly-skilled technical jobs to overseas providers.
We’ve already discussed how scores of firms from the U.S. are relocating their call-center operations and other back-office activities to India to save money. About 170,000 new jobs have been created in India in the past few years, and that figure is expected to reach 1.1 million by 2008, according to industry estimates.
But, more importantly, India is set for the next stage of a revolution: a seismic shift of highly-skilled positions from the developed nations of Europe and America that could result in the creation of up to 4 million jobs in that country.
Once again, the cheaper costs of labor are a driving force behind the off-shoring of work by U.S. firms. For example, computer programming jobs that pay $60,000 to $80,000 per year in the United States can pay as little as $8,900 a year in China, $5,900 a year in India, or $5,000 a year in the Russian Federation, according to a recent University of California-Berkeley study.
Since relocating work from the United States to the Indian cities of New Delhi, Bombay, and Bangalore can cut fully-loaded costs for American firms by up to 40 percent, it is not surprising that cost-conscious global companies are looking overseas ? and to India in particular ? for technical and highly-skilled talent.
For example, Accenture recently announced it is planning to more than double its staff in India to 10,000 people in the next year. Oracle said last August it aimed to nearly double its workforce in India to 6,000 by late 2004. IBM is estimated to have more than 5,000 people in India and is still expanding.
Companies looking to outsource jobs ? including Microsoft and Intel ? are now organizing job fairs in Silicon Valley for foreign-born, U.S.-trained tech workers willing to go back to their homelands. India’s rediff.com estimates that 10 percent of Oracle’s Indian employees were formerly based in the US.
Medical transcription, financial analysis, business research, and hospital diagnostic services such as radiology are all now conducted in India for a number of American organizations. Last year, outsourcing accounted for about one-fourth of India’s total software export revenues of $9.5 billion. India’s software sector added about 130,000 jobs ? nearly 25 percent ? to its workforce over the period 2002 to 2003, bringing the total to nearly 650,000 IT specialists.
According to a new research report from Morgan Stanley, global trade of high-skilled labor services will result in India evolving into the world’s next trillion-dollar economy. This includes activities such as customized software development, the design of automotive and aerospace components, and pharmaceutical research.
India’s Information Technology Minister, Arun Shourie, reports that more than one-fifth of Fortune 500 companies have set up research and development centers in India. Today, an Intel team in Bangalore is developing microprocessor chips for high-speed broadband wireless technology, to be launched in 2006. At GE’s John F. Welch Technology Center in Bangalore, engineers are developing new ideas for aircraft engines, transport systems, and plastics.
Be it Bangalore, Hyderabad, or Chennia, a large amount of intellectual property is being created for U.S. companies in India. Indian units of Cisco Systems, Intel, IBM, Texas Instruments, and GE have filed 1,000 patent applications with the U.S. Patent Office. Texas Instruments has 225 U.S. patents awarded to its Indian operation. Indians are parenting patents like never before in over 200 R&D labs.
Some local boosters are claiming that India will become the research and development hotbed for innovations and intellectual property for most global multi-national corporations. “India is the new hub for patents, and soon, the world will be outsourcing R&D from India,” asserts P. Gopalakrishnan, Director of the IBM India Research Lab at the Indian Institute of Technology.
Critics of off-shoring contend that it contributes to the U.S. economy’s “jobless recovery,” along with the more extensive loss of manufacturing jobs transplanted overseas. Last July, for instance, U.S. firms shipped as many as 30,000 new service-sector jobs to India, while eliminating some 226,000 in this country, according to a recent study by researchers at the University of California, Berkeley.
Gartner reports that although many CIOs and business leaders claim that off-shore outsourcing permits them to reassign people to higher-value work, in general, the off-shore movement of IT?related work displaces jobs. According to the firm, through 2005 fewer than 40 percent of people whose jobs are moved to emerging markets will be redeployed by their current employers.
Although Bureau of Labor Statistics figures show that 69 percent of those who lost non-manufacturing jobs in previous recessions were re-employed, McKinsey consultants point out that 31 percent were not fullyre-employed. And while, on average, those who found new jobs secured similar wages, 55 percent settled for lower-paying jobs. As many as 25 percent took pay cuts of 30 percent or more.
Several well-respected business leaders have publicly expressed concern. Oracle CEO Larry Ellison pronounced Silicon Valley to be a mature economy ? which, if true, would mean diminished prospects for job creation in America’s foremost high-tech corridor. When asked whether the next generation of individuals entering the job market should have lower expectations, Craig Barrett, the chief executive of Intel, replied, “It’s tough to come to another conclusion than that. If you see this increased competition for jobs, the immediate response to competition is lower prices, and that’s lower wage rates.”
Intel’s co-founder Andy Grove, whose company is developing its next generation chip in India, warned in October 2003 that the U.S. software industry was being weakened by off-shoring.
In response to the growing chorus of critics against off-shoring, the U.S. Senate adopted a $382 billion spending bill that included a clause prohibiting outsourcing of government projects abroad.
Free-market advocates fear the giant federal spending bill, signed into law by President Bush in late January, will pave the way for state laws around the country that similarly aim to prevent the export of white-collar jobs to cheaper foreign markets. Already Indiana’s governor canceled a contract to pay India’s Tata Consultancy Services $15 million for processing, ironically, state unemployment claims. The next-highest bidder, a U.S. company, reportedly wanted $8 million more for the same work.3
In all, eight states voted on bills last year that would ban the use of taxpayer money on contracts with foreign workers. Though none of those measures passed, these states and several others are expected to consider similar bills this year. The federal measure is far more limited than the various state proposals. It applies only to contracts that involve competition between a federal agency and a private contractor, prohibiting the winning contractor from performing the work outside the U.S., and it expires at the end of fiscal 2004.
The AFL-CIO is mobilizing support for bills around the country, urging not only outright bans on overseas contracting, but also an end to tax incentives that encourage overseas work, and measures that force contractors todisclose where their employees are located.
However, Harris Miller, of the ITAA, said the whole issue has been overblown. He estimated that in the entire information technology industry ? both commercial and government work ? less than 2 percent of some 10 million jobs are performed overseas.
The ITAA is monitoring the legislation in states around the country and helping organize business leaders to lobby against it. “Companies need the flexibility to use cheaper, off-shore workers to help them hold down costs,” Miller said.
Now that we’ve summed up the reasons why some observers rail against off-shoring, let’s discuss the realities of this trend.
The truth is that, for most Americans, the main sources of job destruction and insecurity remain domestic. Examples include Wal-Mart’s destruction of competitors, the dot-com and telecom collapses, or the necessary “creative destruction” embodied in the business cycle.
Like it or not, we can’t stop off-shoring ? and we shouldn’t try. For all the hand-wringing, off-shoring is inevitable, often makes good business sense, and can be beneficial to the overall health of our economy in the long run.
A recent study by the McKinsey Global Institute calculated that for every dollar spent on a business process that is off-shored to India, the U.S. economy gains at least $1.12. The largest chunk ? 58 cents ? goes back to the original employer.
But there are many other benefits. For instance, 30 percent of Indian off-shoring is performed by U.S. companies, so a lot of the money that appears to be sent overseas as costs actually returns home as earnings. And there’s no way to calculate how much the U.S. economy is gaining by freeing U.S. workers to do other tasks.
However, one attempt at quantifying the impact of off-shoring gives us a rough idea of the benefits to American companies. Market research firm Evalueserve’s recent research findings demonstrate that for every dollar’s worth of work shipped abroad, $1.30 to $1.45 is re-invested into the U.S.
Reports such as this suggest that the flow of work to the lowest-cost supplier is a healthy market process that eventually pays off for the country that loses jobs. How? By giving companies a big cost savings that can be invested in R&D to develop new products and technologies. At the same time, higher employment in developing nations puts more money in the hands of foreign consumers, spurring demand for U.S. products.
To help separate myth from reality, let’s discuss in greater detail four of off-shoring’s principal benefits.
One, off-shoring increases global trade. The movement of U.S. white-collar work to other countries is part of a positive transformation that will enrich the U.S. economy over time, even if it causes short-term pain and dislocation. Federal Reserve Board Chairman Alan Greenspan recently reminded the country that history “showed our economy is best served by full and vigorous engagement in the global economy.”
Outsourcing IT jobs to developing countries such as India can boost competitiveness and slash costs. “It’s a great business opportunity for U.S. businesses because it makes IT available for a wide swath of U.S. companies,” said Dan Griswold, director of the Center for Trade Policy Studies at the Washington-based Cato Institute. More jobs in developing countries build “larger middle classes and create a larger market for U.S. products in the future,” Griswold said.
Two, off-shoring benefits consumers. Off-shoring provides consumers with the services they demand, but at lower prices. As many businesses themselves purchase services, their lower costs will result in savings that can be passed on to consumers.
Lower prices boost purchasing power and profits. That creates more demand at home. Consumers can spend more; businesses can invest more. As long as the economy responds by expanding production ? and offering newthings to buy ? then most job losses, even if traumatic for individuals, are only temporary.
Three, off-shoring creates wealth for U.S. companies. Many people believe that the money spent to buy services abroad is lost to the U.S. economy, but such views are easily disproved. Companies move their business services off-shore because they can make more money ? which means that wealth is created for the U.S. as well as for the company receiving the job.
As McKinsey consultants noted, “[Service] providers in low-wage countries require U.S. computers, telecommunications equipment, [and] other hardware and software. In addition, they also procure legal, financial, and marketing services from the U.S.”
In fact, global trade benefits the American economy and helps sustain American jobs. Global trade provides increased flexibility for American companies, and allows them to retain and increase employment in other areas. Many U.S. companies avoided bankruptcy during the severe economic downturn four years ago because they off-shored.
Four, off-shoring frees up workers for better jobs in the U.S. By sourcing lower-valued jobs off-shore, creative energy is freed up domestically to innovate and to begin the next high-tech revolution. For example, shipping lower-end software jobs overseas leaves U.S.-based programmers with more R&D dollars to create new technology and products. And these programmers ? who are intimately involved in the marketing and delivery of new technologies ? are less likely to have their jobs farmed out than their lower-skilled colleagues.
In fact, December 2003 economic data show a 14 percent increase in business and financial occupations, and a 6 percent increase in computer and mathematical jobs in the U.S. While higher skilled work is being off-shored to India, it doesn’t appear to be canceling out job growth in the United States.
Job turnover, after all, is a sign of a healthy economy. The U.S. has lost two million jobs due to global trade over the past 20 years, but in just 10 years has added 35 million new jobs. Manufacturing employment peaked in mid-1979 at 19.5 million; now it’s 14.5 million. But over that same period, total U.S. employment grew about 40 million, and manufacturing output rose more than 80 percent.
While the share of the American workforce in manufacturing has fallen steadily over the post-war period due to vast increases in productivity, this is part of a world-wide phenomenon. According to a study by Alliance Capital Management, between 1995 and 2002, China, Japan, Brazil, and other countries lost more manufacturing jobs than the U.S did.
Technology jobs have followed a path similar to that trod by the manufacturing sector over the past 30 years. In the late 1980s, Asian manufacturers began turning out basic memory chips, undercutting U.S. chip makers’ prices and inciting a fierce policy debate. Many industry leaders argued that the United States would lose its technological edge unless the government intervened to protect chip makers.
But U.S. semiconductor makers shifted to higher-value microprocessors. Computer companies went abroad to buy commodity memory chips and other components, from keyboards to disk drives. Buyers of computers enjoyed lower and lower prices, which helped them to lower costs for millions of businesses and entrepreneurs.
Does this sound like an economic disaster? No. The result was a productivity boom in America that continues today.
Based upon the preceding discussion, we expect the following developments:
First, expect increasing globalization of trade. For years, the U.S. has prodded other nations to free up their markets. Now we’re starting to see the results. Information technology is one of the few business sectors where the United States runs a trade surplus, exporting some $8 billion more in 2002 than the country imported. If we start throwing up protectionist barriers, other countries might do the same, and the big losers will be U.S. workers and U.S. industry.
Second, executives in Japan and Taiwan will aggressively off-shore their company operations and white-collar services to lower-cost Asian locations. Japanese companies are increasingly slashing costs by outsourcing white-collar functions such as plant design and blue-print production to neighboring Asian countries like China, Vietnam and the Philippines, where labor costs are much lower.
Third, new Asian off-shore centers will soon emerge. Although McKinsey estimates it will take 15 years for wages in India to catch up with the West, outsourcers will start looking for the “next best cheap spot” to farm out their IT operations. For this reason, banks like HSBC and Citibank have already created off-shore service centers in China and in Malaysia, to support higher-cost Asian locations like Hong Kong and Singapore.
Fourth, the U.S. will continue to dominate the world economy ? not only despite the growth in off-shoring, but because of it. None of the countries that provide off-shore work has the unique entrepreneurial culture that has made the United States so successful. Nations like China and India are unlikely to build the systems and practices needed to compete with the U.S. for the foreseeable future. Many jobs may end up being done in these countries, but that creates two major advantages for the U.S.: It will lower American companies’ costs ? and it will create more demand overseas for the next generation of U.S. innovations.
References List :
1. The Washington Post, January 31, 2004, "Anxious About Outsourcing," by Greg Schneider. ⓒ Copyright 2004 by The Washington Post Co. All rights reserved. 2. Business Times Singapore, October 27, 2003, "Silicon Valley Feels the Crunch of Outsourcing," by Jennifer Lien. Copyright 2003 by Singapore Press Holdings, Limited. All rights reserved. 3. The Boston Globe, January 19, 2004, "Backlash Looms as White-Collar Jobs Leave U.S.," by Rachel Konrad. ⓒ Copyright 2004 by Globe Newspaper Co. All rights reserved. 4. Fortune, February 23, 2004, "Rage Against Off-Shoring Is Off Target," by David Kirkpatrick. ⓒ Copyright 2004 by Time Warner, Inc. All rights reserved. 5. Associated Press, February 3, 2004, "Experts: Outsourcing Helps World Economy," by Ramola Talwar Badam. ⓒ Copyright 2004 by The Associated Press. All rights reserved.
