I wrote this paper as an assignment for my Business and Professional Communications class. I edited it slightly to use an alias for the person I interviewed and remove the name of the company. I didn't tell the person I interviewed the paper might end up online, so it wouldn't be fair to use their name here without permission. Also, I exported this by using the Microsoft Office save as html function, so I blame Microsoft if it does not validate correctly.
Offshoring Information Technology
Scott Mink - March 11, 2005
The possibility of having their jobs eliminated and their work moved offshore is a concern to many people who work in the information technology field today, and a reality for the many who have already lost their jobs and been unable to find new positions in their field. There are several reasons for companies to choose to hire offshore outsourcing companies instead of using domestic resources. Cost savings and the ability to build a large team of skilled workers quickly are often reasons to move offshore, at the expense of increased unemployment and the loss of skilled workers in the United States. Historically, much of the innovation that has created the technological society we live in today has been by American computer scientists, and the current job market is discouraging students from entering the field.
Starting in the early nineteen eighties, computer technology progressed rapidly and the demand for skilled people who understood how it worked grew. Previously, computers were house sized machines that only the largest companies could afford; but, the technology of the nineties brought computers into homes across America. Apple Computer, Microsoft, IBM, Compaq, Hewlett-Packard, and even Radio Shack all saw the potential of this new market and competed to be a part of it. The nineties were even better for the computer industry, as the concept of home computers became even more accepted and businesses could afford to place a personal computer on the desk of each of their employees. The public was allowed access to a global computer network that had previously been reserved for academic research and military communications. College students majoring in computer science created small websites that became Yahoo! and Google, and software that became the Netscape web browser, all as class projects. Traditional businesses started using the Internet as a means of interacting with their customers. As the popularity of the Internet exploded, thousands of small startup companies, known as dotcoms, competed for the talents of those who understood the technology. Young people across the nation migrated to the west coast expecting to help change the world, or at least make a lot of money from the stock options in their company's IPO. According to Ryan Allis (2003), "by mid 1998 almost every young MBA in America either worked at a .com or was thinking about starting one up" and, "from June 1998 until March 2000 there was an exodus of high caliber professionals from traditional firms to Silicon Valley." No one anticipated how quickly this rapid evolution of technology would end. Between March 11th, 2000 and October 9th, 2002 the technology stock heavy "Nasdaq Composite lost 78% of its value" (Investopedia).
With Internet related jobs no longer in abundance, the traditional corporations that had previously struggled to fill their information technology positions suddenly had a large pool of skilled workers at their disposal. You might think this would work out to benefit both the businesses and the workers, but you would be wrong. Companies, struggling to compete in a bad economy, found they could save considerable money by having much of their IT work, and especially software development, done outside of the United States. Thanks to the Internet infrastructure these workers had helped to build, companies could transfer data almost instantly to anywhere in the world and communicate easily with email and instant messaging programs; it was now possible to have information workers around the world collaborating on projects together. There is a tremendous savings available to companies willing to exploit the differences in salaries between the U.S. and other countries. According to the McKinsey Global Institute (2003), "A software developer in the U.S. ... costs $60 an hour whereas one in India only costs $6 an hour. This and other benefits could translate to a net impact of a 50 percent increase in profits for American businesses." I discussed these issues with Paul Johnson, formerly the CTO of the Corporate Internet Group at my company, and he confirmed that there was a large cost savings to be found in sending work offshore, however, the ability to build a large team quickly was the most important factor in his decision to outsource much of the development for the projects he oversaw. He also said that many of the Indian software development companies have achieved higher CMM, or Capability Maturity Model, levels than what is available here. The CMM is a model used by corporations to identify best practices in processes. Additionally, he pointed out that many of the dotcom companies had bad business models that created an atmosphere of poor spending habits. Traditional companies may choose to avoid employees who have this type of experience in their backgrounds. For workers, the problem is finding employment when so many of the jobs they are qualified for are being done elsewhere, since the jobs that are created require different skill sets than the ones that were moved offshore (Pastore, 2003).
There are many myths related to moving jobs offshore. For example, there are several long term benefits that many economists believe outweigh the short term job losses. According to the McKinsey Global Institute (2003):
Offshoring will allow the U.S. to capture economic value through multiple channels:
- Reduced costs - Savings from reduced costs means more savings, which can be passed to consumers or to investors to reinvest.
- New revenues - Offshoring creates demand in destination countries for U.S. products, especially for high tech items.
- Repatriated earnings - Several providers serving the U.S. market are incorporated in America, which means they repatriate their earnings back into the U.S.
Of the $1.45 - $1.47 of value MGI estimates is created globally from every dollar spend a domestic company chooses to divert abroad, the U.S. captures $1.12 - $1.14 while the receiving country captures on average 33 cents. In other words, the U.S. captures 78 percent of the total value.
Additionally, moving jobs offshore does not automatically save money for a company. In fact, 30 percent of companies see no cost reductions or even see increases do to the investments in infrastructure, time, and travel to set everything up so it has be thought of as a long term strategy (Pastore, 2003). According to Mr. Johnson, the decision to offshore has to be evaluated for each project, as some tasks are better suited for outsourcing than others. Repetitive tasks such as writing middleware software when the framework is already in place can easily be done offshore. Creative tasks, like web site design, should be done here.
For the United States, the offshoring trend could signal an end to our dominance in computer science. Throughout the last half century many of the innovations that have created our current technology based society have been made by American individuals and companies. The standard PC hardware used worldwide was originally designed by IBM, the concepts for graphical user interfaces and mice to control computers was developed and prototyped by Xerox, the operating systems and much of the business software we use daily were designed by Microsoft, the Internet was originally a DARPA project, and the Unix operating system commonly used for servers was originally created by AT&T. While India and other countries are turning out ever increasing numbers of highly educated computer scientists, the 2003-04 school year in the U.S. saw a 23% drop in the number of undergraduate students declaring their major as either computer science or computer engineering, and an 8% drop in the number of new Master's level students. The number of Bachelor's degrees awarded has been declining since 2002 after several years of steady growth (Zweben & Aspray, 2004).
In August 2004, at an annual gathering of university researchers at the Microsoft Research facility, Bill Gates was asked for his opinion of the declining enrollment statistics. His answer was that "It's not like when you see presidential debates you hear them talk about the number of engineering degrees being received in the United States." According to Todd Bishop (2004):
The Microsoft Corp. chairman said it might take a big technological advance somewhere else in the world to direct the attention of the nation's leaders to the issue in the same way that the Soviet Union's 1957 Sputnik launch accelerated development of the U.S. space program.
Mr. Johnson echoed the same concerns about the decline in enrollment, and added that it is "not just computer science, but all of the science degrees" that have low enrollments and will hurt our ability to innovate in the future. While the number of young people entering the information technology field declines, the U.S. Department of Labor predicts the need for software engineers will increase 46% between 2002 and 2012 as the economy rebounds and this "may create a worker shortage that may retard technological innovation over the next several years" (Wise County, 2004).
Many in the Information Technology field are developing their own strategies to combat the current lack of jobs. Some have formed lobbying groups such as The Organization for the Rights of American Workers (T.O.R.A.W.) to try to convince the government to enact protectionist measures to limit the ability of companies to outsource and to restrict the of H-1B visa program. H-1B visas allow non-immigrants to work in the United States for up to six years, and are intended to allow employers to bring in foreign labor for jobs requiring specialized skills that cannot be filled from the local labor pool. These visas became a popular mechanism to import foreign labor for information technology jobs during the 1990s when unemployment rates were low, but have not been limited to reflect the higher unemployment rates we now face. TORAW points out that the current limit of 195,000 new H-1B visas issued each year could allow up to 1.2 million foreign workers to be here at any given time.
There is also a growing interest among software engineers in becoming independent software vendors. These entrepreneurs are creating software businesses without the focus on rapid growth and reliance on venture capital that was the downfall of many of the dotcom companies. Eric Sink (2004), the founder of the software company SourceGear, wrote a series of articles discussing "the notion of a software product company with just one person in it" and invented the term "micro-ISV" to describe it. His article has generated considerable interest on Internet message boards, and sparked the creation of online communities dedicated to the topic. Members of these communities, such as the one at microISV.com, frequently discuss creation of business plans, choosing segments of the software market that a small company can compete in, marketing, and product pricing strategies. Companies of this type have been around for many years and some have eventually grown into sizable businesses, but most have been hobbies of their owners. Now they are becoming more professional and focusing on how to become large enough be a primary source of income.
Overall I believe that offshoring is a trend that cannot be stopped. It provides a way for companies to save considerable money and provides access to large teams of software developers who are already used to working together and can quickly start being productive. Government intervention is the only thing that could help to bring the jobs that are being lost back to the U.S., but this would not be without consequences. As Mr. Johnson reminded me, global companies have a responsibility to all of the countries they do business in, and make considerable money in developing nations. As our production of educated computer scientists declines our ability to innovate will suffer, but the ones who really love what they do are likely to find alternative ways to continue.
References
Allis, R. (2003) The causes of the dot com crash. Zeromillion.com. Retrieved January 26, 2005, from http://www.zeromillion.com/econ/dot-com-crash.html
Bishop, T. (2004, August 3) Gates: Computer science education may need its own 'Sputnik moment'. Seattle Post-Intelligencer. Retrieved January 26, 2005, from http://seattlepi.nwsource.com/business/184629_msftgates03.html
Investopedia. (n.d.) Greatest market crashes: The dot-com crash. Investopedia. Retrieved January 26, 2005, from http://www.investopedia.com/features/crashes/crashes8.asp
Koch, C. (2003, September 1). Outsourcing backlash. CIO Magazine. Retrieved January 26, 2005, from http://www.cio.com/archive/090103/backlash.html
McKinsey Global Institute (2003). Offshoring: Is it a win-win game? Author. Retrieved January 26, 2005, from http://www.mckinsey.com/mgi/publications/win_win_game.asp
My Wise County (2004) University computer science lull may result in subsequent demand as economy rebounds. Author. Retrieved January 26, 2005, from http://www.mywisecounty.com/news/072104-2.htm
Pastore, M. (2003). Who gains from offshore outsourcing? Intranet Journal. Retrieved January 26, 2005, from http://www.intranetjournal.com/articles/200312/ij_12_04_03a.html
Sink, E (2004)
Starting your own company. Microsoft Developer Network Library.
Retrieved January 26, 2005, from http://msdn.microsoft.com/library/default.asp?url=/library/en-us/dnsoftware/html/
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T.O.R.A.W. (n.d.) Glossary of terms. The Organization for the Rights of American Workers. Retrieved January 26, 2005, from http://www.toraw.org/GLOSSARY.htm
Zweben, S., & Aspray, W. (2004). 2002-2003 Taulbee survey: Undergraduate enrollments drop; department growth expectations moderate. Computing Research News, 16(3), 5-19. Retrieved January 26, 2005, from http://www.cra.org/CRN/articles/may04/taulbee.html