In this issue we’ll look at the IT sector. Let’s first take a look at what the buzz has been in the newspapers, the business magazines and outsourcing news sites these past months. The news has been around productivity, jobs, protectionism, innovation and problems around overseas outsourcing.  The media seems to agree that the US is caught in a transitional job market and is now starting to acknowledge that the public backlash against overseas outsourcing may be exaggerated because automation and high tech have also been taking jobs, albeit quietly, from the service sector.

 Productivity and jobs: The 2003 view that overseas outsourcing was the main culprit responsible for the slowness in the US economy is now starting to change. There is greater acknowledgement that productivity and operational efficiency are major contributing factors for the job loss. Let’s look at the numbers.  The actual productivity has increased one percentage point more than the expected productivity growth of 2-2½ %. (Note: a 1 percentage point of productivity is equivalent to 1.3 million jobs). Of the 2.7 million jobs lost in the past 3 years, 300,000 (about 11%) were due to overseas outsourcing. The Forrester Research study of late 2002 that predicted that 3.3 million service industry jobs will move overseas by 2015, translates to 220,000 jobs per year in an US economy of 130,000,000 jobs. According to the ITAA (Information Technology Association of America) about 10 million Americans earn their living in an IT job; 10% work outside the IT industry – for banks, stores, factories; 80% work for the small businesses, a sector where a very large subset is unlikely to seek global solutions.  

 Innovation and protectionism:  There is also much commentary on what steps should be taken in the US to boost the economy. While there is concerted effort by state legislatures towards protectionism as the vehicle to stem the tide of outsourcing, there is also discussion on the need for a public policy that keeps the US IT industry strong by encouraging both federal and private industry spending on IT R&D. The rationale for this is that without the R&D spending, such activities as short and long term innovation, next generation technology breakthrough, IT knowledge and expertise being spread to other industry sectors, domestic economic growth, cyber security, national security and trade expansion is not possible. Recently leading US IT companies (IBM, Intel, Dell, EMC, HP, Motorola, NCR, Unisys) have joined forces under the “The Computer Systems Policy Project” (CSPP), to become an advocacy group of CEOs suggesting innovation and investment rather than protectionism as the desired method to grow jobs in the US.

 ITAA’s view: Let’s take a look at what the IT industry’s lobby group ITAA has to say about the competitive realities brought on by overseas outsourcing.

·         Cost is still the fundamental business rationale for overseas outsourcing and it is here to stay.

·         Overseas software firms will compete for increasingly more complex and sophisticated IT work.

·         While protectionist barriers save jobs in the short term, in the long term it is free trade, and global competition that sparks innovation and job creation.

·         The Buy America provision of the Defense Authorization Bill which requires the DoD to purchase goods that have at least a 65% US content is being termed a unicorn provision – meaning such a product does not exist. Compliance would require creating such industries for a single client, the DoD.

·         It is the productivity-enhancing technology innovations of America that is being used by foreign firms to compete. Therefore technology such as high-speed broadband (which facilitates collaboration requiring very large files and real-time projects), and VOIP (Voice Over Internet Protocol) will continue to contribute to lowering the cost of communication.

·         ITAA has advocated dropping the corporate tax rate one time to encourage investment of profits in the US.

 Thus far we’ve examined the media buzz and the ITAA view on outsourcing; now let’s take a look at some projections for the IT industry and some problems the IT sector is facing.

Projections: No matter which firm does the research the overall consensus is overseas outsourcing is a growing trend. For instance, International Data Group (IDC), Dec. 2003 projects that US spending on IT services will increase from $16 billion in 2004 to $46 billion in 2007; Hewitt Associates (an Illinois outsourcing firm) in surveying 500 HR executives reports that overall, the trend to outsource is gathering steam – from 29% in 1995-99 to 43% in 2000-03.  The number is also up on mid-sized businesses jumping on the outsourcing bandwagon.

Problems: In the last few months there has been an increasing awareness of some of the problems that Fortune 1000 and 2000 and smaller companies face when they engage in outsourcing. Notably

• lack of project management skills
• not accurately assessing costs
• not doing a cost vs. benefit analysis
• not selecting the activities and vendor/suppler with care
• not having a plan to carefully integrate the project or service into existing processes
• unrealistic view of cultural barriers
• personnel management both at home and abroad.

These problems are causing many outsourced projects to cost more, be more frustrating to the personnel and take longer to complete.  Consequently, companies are recognizing that outsourcing isn’t just about throwing a project over the fence and seeing it come back a finished product.

 As in any business venture, outsourcing requires due diligence, planning, and methodology to succeed. This is where GRC Consulting can help. We use the foresight routinely applied by the Fortune 500 corporations to the overseas outsourcing experience of our clients. If your firm has encountered any of the problems discussed here, we’d like to hear from you. Contact us at info@grc-consulting.com.

 We hope you found this a useful summary on the trends in overseas outsourcing and the IT sector in particular.  We welcome your comments.

More next time.

Sources:

·          Miller, Harris N.  President  ITAA,  "A Hearing on The Offshoring of High Skilled Jobs", Testimony at The US House of Representatives Committee on Small Business,  20 October  2003.

·          Mandel, Michael  "Meeting the Asian Challenge: How America Can Boost Innovation" , Business Week, 8 December 2003.

·          "Choose to Compete", position paper,  www.cspp.org, January 2004.

·          Thrum, Scott "Tough Shift, Software Firm’s Lessons in India: Some Jobs Cannot Be Outsourced",  Wall Street Journal,  3 March 2004.

·          "Study Notes Offshoring Downside", 5 March 2004,  www.money.cnn.com/2004/news/economy/outsourcing.

·          "High-tech Companies Lobbying to Let More Educated Foreigners Stay Here",  The Milwaukee Journal Sentinel, 21 March 2004.

·          "Tech Jobs Have Room to Grow Here and Abroad", Chicago Tribune, 22 March 2004.

·          Nussbaum, Bruce  "Where are the Jobs?",  Business Week, 22 March 2004.

·          Cooper, James  "The Price of Efficiency", Business Week, 22 March 2004.