Offshore Outsourcing of Technology Jobs Impacts

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Offshore Outsourcing of Technology JobsImpacts
Policy DialogueSeptember 14th, 2004Rochester
HTBC IEEE Joint MeetingRochester, NY

• Ron Hira, Ph.D., P.E.
• Assistant Professor of Public Policy
• Rochester Institute of Technology
• and
• Chair of Career Workforce Policy Committee
  IEEE-USA
  
• rhira_at_mail.rit.edu
• 585-475-7052

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Some Definitions

• Outsourcing Classic Make or Buy Decision
• Procter Gamble contracts with HP for IT
  services
  
• Offshore Outsourcing
• Sending work to outsourcers who operate overseas
• Offshore Sourcing aka Off-shoring MNC Captive
  Facilities
  
• Daimler Chrysler has an RD center in Bangalore
• On-site Offshore Outsourcing Foreign Workers
  On-site
  
• Tata Consultancy Services, Infosys, Wipro,
  Accenture
  
• Insourcing (media) Foreign MNCs in US
• BMW in SC, Infosys Consulting
• Insourcing (academics) Making Rather Than
  Buying
  
• Blended Sourcing, Near Shore, Best Shore, Global
  Sourcing, etc.

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Why Do Companies Utilize Overseas Technology
Talent?

• Cost An Imperative
• Exceptional Talent?
• Shortage of U.S. workers? Ph.D.s?
• Politics Access to the Local Market
• Trade, e.g., China Russia Boeing engineers
• Developing Countries Strategy
• Tax Holidays Incentives
• 24/7 Capabilities
• Collaborative Engineering Technology
• Companies Aware Of Possibility Believe It Helps
  Their Performance - Trigger

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Overseas Engineers Can Afford To Be Paid Less
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Offshore Expansion Abroad and Layoffs in the
U.S.

• India Most Mentioned Destination
• Other countries actively pursuing these jobs
• Companies Are Re-balancing Workforce in Favor
  of Offshore Share
  
• EDS 20k layoffs 20k expansion offshore
• IBM Hewlett Packard
• Intel CSC
• AOL Texas Instruments
• Unisys Siemens
• Knowledge Transfer Forcing workers to train
  replacements should be knowledge extraction

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How Much Work Has Moved Offshore?

• No One Knows
• No one in government is collecting data
• Commerce Department has pilot study of 335k
  underway
  
• Companies are reluctant to reveal their plans
• US workers unwittingly training their
  replacements
  
• Many believe it is only low-level work
• No data to support or refute this claim
• Estimates from Self-Interested Research Firms
• The Forrester Report is most-cited

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How Much Work Has Moved Offshore?

• We Do Know it is Accelerating
• Not Insignificant
• Companies Are Waiting Until After Election

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Just Low Level Work? Sample Intel India Job Ad

• RF Simulation Engineer   (Job 274125)
• In this position you will build various antenna,
  RF channel and PHY/MAC models for various RF
  technologies and simulate platform noise impact.
  You will also interact closely with internal
  wireless product groups to develop solutions to
  enhance RF performance in notebooks.This
  position requires a M.S. or Ph.D. in Electrical
  Engineering with experience in mobile notebooks,
  WPAN, WLAN, WMAN, WWAN and platform noise. You
  must also possess - Experience building various
  antenna, channel, PHY/MAC models, prototypes,
  test systems and simulating the impact of
  multiple radios that are integrated into
  notebooks

Go to www.monsterindia.com
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Developing Countries Target RD

• Singapore - 2billion Biopolis - Biotech
• Also targeting Optoelectronics HP Agilent
• China
• Requires high-level tech transfer as part of
  investment
  
• Attracting recent PhD grads of US universities
• Companies locate RD closer to production
• India
• Wants to be the Global RD Hub
• Drug Discovery and IT RD
• Google, Microsoft, Texas Instruments, Intel, etc.
  etc.

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U.S. Impacts

• Lift U.S. Economic Development
• Lower costs
• Open New Markets
• Lift Economic Development Abroad
• Geopolitical and security advantages

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U.S. Impacts ?

• U.S. Competitiveness/ Innovation System
• U.S. Workforce
• Displace Workers
• Downward Wage Pressure
• Change in Mix of Occupations
• Military Capacity Access Assimilation
• Homeland Defense - Critical Data
• Brain Circulation vs. Brain Drain
• Intellectual Property

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Developing Country Impacts

• Best Path to Growth?
• Comparative advantage is low cost skilled labor
• Spillover Benefits
• Movement up the ladder of innovation
• Learning western business practices
• Macroeconomic Advantages
• Utilize Idle Labor Force

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Developing Country Impacts ?

• Best and Brightest Supply External Markets Versus
  Domestic Problems
  
• Loss of Sovereignty to MNCs?
• Proper Use of Scarce Resources
• Work on male baldness rather than on malaria
• Race to the Bottom?
• Potential for Smoke-stack Chasing
• Mexican Maquiladoras and China

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Jobs Moving OverseasPredicted Impacts

• Job Dislocation
• Hope for quick re-employment
• Change in Mix of Domestic Occupations
• US workers will shift to non-tradable jobs
• Cant compete on price
• Will the new mix be better than the old one?
• Downward Pressure on Wages for Tradable
  Occupations
  
• No One Can Predict Future
• Creating future competitors?

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Domestic IT Labor Market Record
Unemployment(source IEEE-USA from BLS)
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1983-2003 Tech Unemployment Rates
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Job Dislocations

• Off-shoring Makes Job Market Worse
• Job creation becomes ever more critical
• Re-employment? What Occupation and Wage?
• Downward Wage Pressure
• Silver lining according to some industry reps
• Future Generation Receiving a Signal
• Will best brightest shy away from technology?
• 20 Drop in BS Comp Science enrollments

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Occupation Mix Impact Revised BLS Projections
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Job Dislocation During Low Job Creation
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Is IT Unique? Harbinger for Other
Industries/Occupations?

• IT Call Centers Are First Movers
• Manufacturing
• Financial Services
• Reporting/Editing
• Accounting Other Business Processes
• Biotech Drug Discovery
• Countries Trying to Attract RD

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Unpredictable Longer-term Impacts on Innovation
Security

• What Will Be New Occupational Mix For US?
• Is it important to maintain a strong science,
  engineering and software workforce in the US?
  
• Will the best brightest pursue these
  professions?
  
• Where will future technology leaders be
  developed?
  
• Who captures the wealth jobs created by the
  next big thing?
  
• Impacts on Military Superiority Homeland
  Security?
  
• Can economic studies predict this?

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Creating Competition?Already Exists in IT
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What About Insourcing

• Claim is that foreign multi-national firms have
  6.4 million US workers
  
• Therefore insourcing gains outweigh outsourcing
  loss
  
• Comparing apples and oranges
• If we believe the insourcing argument
• Daimler-Benzs 1998 purchase of Chrysler
  instantly insourced hundreds of thousands of
  jobs
  
• Tycos move of HQ to Bermuda instantly insourced
  thousands of jobs
  
• Offshoring is substituting foreign labor for US
  labor

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What About Insourcing

• Infosys Consulting Established
• Announced that over the next three years they
  plan on hiring up to 500 consultants
  
• Purpose
• Capture more US customers (not US workers) to
  better facilitate offshore outsourcing
  
• Infosys already has 3,700 positions in US
  (according to SEC filings)
  
• All foreign workers on H-1B L-1 visas
• Good PR move but not good for US workers

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Spate of Industry Sponsored Studies

• ITAA, AeA, US Chamber of Commerce, Business
  Roundtable, EIA
  
• All find what they are looking for
• Off-shoring is good for the US
• None address innovation impacts
• None can address the dynamics of off-shoring
  (creating future competition)
  
• None show unemployment rates for technology
  workers - Balanced view of off-shoring impacts?
  
• Attempt to change the topic towards
  competitiveness

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Spate of Industry Sponsored Studies

• Economic Studies Capture Economic Efficiency
  Argument But Miss Other Important Elements
  
• Technological Innovation
• Security

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Some (Overly?) Optimistic StudiesOft-cited by
Offshoring Advocates

• Win-WinMcKinsey Global Institute Study
• US gets 12-14 cents net benefit for each dollar
  spent offshore
  
• Finds that US workforce loses (not highlighted in
  their press release, buried in study)
  
• Before outsourcing US workforce gets 72 cents
• After outsourcing US workforce gets 45-47 cents
• 31 of displaced workers remain unemployed
• Many who are re-employed, earn less

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Some (Overly?) Optimistic StudiesOft-cited by
Off-shoring Advocates

• Win-Win McKinsey Global Institute Study
• Limitations of Study
• No one has access to their proprietary data
• The models are not explicit
• No sensitivity analysis
• Rosy re-employment scenario - 3.5 million net job
  creation every year
  
• No accounting of impacts on innovation or
  security
  
• Conflict of interest
• McKinsey sells off-shoring consulting work and
  stands to benefit from increased off-shoring

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Some (Overly?) Optimistic Studies Oft-cited by
Offshoring Advocates

• Dr. Catherine Mann, Institute for Intl
  Economics
  
• Thesis Lower IT services costs will drive IT
  demand up
  
• Limitations
• Will it help domestic IT workers?
• Additional explanations exist for high IT labor
  demand in the 1990s
  
• Technology paradigm shifts in 1990s Internet,
  ERP, Object Oriented Programming, Mainframe to
  Client-Server, Y2K, etc.
  
• Consumer Preferences - Business Strategy
  Nicholas Carr, IT Doesnt Matter
  
• Claims high wage/high skill work will not move
  offshore?
  
• Uses old (2000-2010) BLS projections as part of
  the basis of her optimism

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Misleading Statistics

• Churn Argument Greenspan,
• Job loss due to outsourcing is a small part of
  the normal churn of the economy
  
• Misleading because
• No correlation between churn and re-employment
  prospects
  
• Net jobs matter, not churn
• Number of jobs is small
• No one knows how many

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Who Wins? Who Loses?

• Winners
• Shareholders
• Company executives
• Consumers
• Some existing employees?
• Countries getting those jobs
• Losers
• Displaced workers
• Existing employees subject to the threat of being
  offshored
  
• US overall?
• Depends on re-employment of displaced workers
• Future technological innovation
• National security

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Policy Dialogue Impediments

• Poor Data Enables Any Convenient Explanation
• Affecting Workers, Not Companies
• Companies no urgency to fix a problem they dont
  experience
  
• Policy recommendations dont address offshore
  outsourcing
  
• Companies will not speak about their plans
• Free Trade vs. Protectionism Discussion is
  Misguided
  
• Good vs. Bad rather than both Good Bad
• Labeling - Protectionist
• Instead, should focus on mitigating the negative
  effects
  
• No Silver Bullets

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Guest-worker Visa Policies Accelerate Off-shoring

• H-1B L-1 Visas
• Temporary non-immigrant visas
• 900,000 in US
• Intent Used Only As A Last Resort
• Problems With Law
• Companies can and do prefer foreign workers over
  US workers
  
• Protections dont protect
• Being used by offshore outsourcers
• Knowledge transfer aka Knowledge extraction
• Bring in lower cost workers on-site

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H-1B Use That Meets Intent
Source R. Hira Analysis US Dept of Labor LCA
Database www.flcdatacenter.com
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H-1B Examples Stretch Intent of LawOffshore
Outsourcing Companies Use Is Order(s) of
Magnitude Greater
Source R. Hira Analysis US Dept of Labor LCA
Database www.flcdatacenter.com
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Offshore Outsourcing Companies Pay Low Wages to
H-1Bs
Source R. Hira Analysis US Dept of Labor LCA
Database www.flcdatacenter.com
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Technological Innovation Moving FasterCreating
Need for Lifelong Learning

• Technological innovation metaphor Creative
  Destruction Joseph Schumpeter
  
• Technological obsolescence cycle times are
  decreasing
  
• The half-life of a technology worker is
  decreasing
  
• Creates need for more lifelong learning
• Emphasis has been on skills rather than learning
  how to learn so students may be less able to
  adapt
  
• Who pays for this lifelong learning?

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Human Capital Paradox

• Recognition that Human Capital is important
  Knowledge Economy but
  
• Domestic knowledge workforce is at risk
• Employers have less incentive to invest in
  employees who might leave
  
• No governmental institutions to truly support
  lifelong learning
  
• Current tax credits are insufficient

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Implications for Engineers

• Risk is Much Higher
• Obsolescence from technological change and now
  offshoring
  
• View yourself as a consultant
• Career management is much more important
• Find ways to re-invent yourself and search for
  skills that are not easy to compartmentalize
  
• Engineering education reforms
• Mixing domain knowledge with technical knowledge
• Let your elected officials know what you think!

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What Can We Do About Offshoring?

• Acknowledge A Problem Exists
• Dont know scale and scope, but do know process
  is accelerating
  
• No Villains In This Story
• Companies acting rationally
• Workers acting rationally
• Need To Work Cooperatively
• American workers need strong and healthy
  companies that hire them
  
• Do companies that sell to the US market need a
  healthy and vibrant US science engineering
  workforce?

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Policy Responses

• Collect Objective Data
• Uncertainty allows too many convenient
  explanations
  
• Identify types of jobs likely to stay
• Jobs that are vulnerable
• New skill mix that will be needed
• 2 million study in FY05 Commerce Dept Approps
• Reform H-1B L-1 Visas
• Foreign guest-workers are replacing US workers
• Accenture pays H-1B holders 25,113 for Chief
  Programmers in Houston, TX.
  
• Tata Consultancy pays H-1B holders 21,460 for
  Programmer Analysts in Warsaw, IN.
  
• NAM is lobbying hard against reform for
  expansion

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Policy Responses

• Begin Experimenting on Workforce Retraining
  Programs Immediately
  
• New institutions should be created to be more
  responsive to the high Hz skills needs
  
• Best way to kill a new program is to put it in an
  old agency paraphrase of President Lyndon
  Johnson
  
• Human Capital Tax Investment Credit
• Wage Insurance
• Re-employed workers get part of their wage loss
  back through insurance

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Policy Responses

• Worker Notification 60 or 90 days
• Allows workers to prepare for their layoff
• Examine Potential Impacts on National Security
• Begin More Comprehensive Planning Process
• Sen. Lieberman Commission modeled after Young
  Commission of 1980s
  
• Learn lessons from 1980s competitiveness debates
  voluntary quotas and industrial policy
  
• Keep options on the table
• Government procurement is 19 of consumption
  investment

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Impacts on States Regions

• Increased Competition for Industrial Recruiting
• Competing now not just with the next state, but
  also India and China
  
• Helping Laid Off Workers
• What do you train them to do? Who pays?
• States With Particular Occupation Mix May Be More
  Vulnerable
  
• See Berkeley Study by Kroll and Deo Bardhan
• A White-collar kind of Rust Belt?

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Policy Responses by States

• Which Technologies Do You Bet On?
• Is IT a commodity? Nanotech? Biotech?
• Government Procurement Reforms
• Procurement has always been used for more than
  just economic objectives
  
• Targeted Economic Development s
• Take subsidy back if company moves work offshore
• States As Laboratories Of Policy Innovation
• 35 states with Outsourcing related initiatives