Outsourcing

Technology Outsourcing and Domestic Consequences By Patrick Flaherty

The increase of human capital in developing countries has impacted the United State’s workforce through domestic firms’ increasing overseas subcontracting. The industries specializing in information technology have been utilizing this increase of foreign human capital the most. From a study of 179 IT managers a reported 69% outsource their information technology services (Outsourcing statistics). This extremely high number shows the trend of the industry, and if countries like India, who is becoming the forerunner of outsource operations, continue to become more efficient and economical, that number may become even higher. The question is whether or not the foreign IT service providers can keep up with estimated growth, or if poor infrastructures will fall the massive flow of work into their sectors.

According to a new study, as a result of increased foreign subcontracting, the information technology industry has lost 403,300 jobs from the start of the recession in March 2001 to April 2004. Nearly half of those jobs were lost after the recession's official end. This has left thousands of experienced IT professionals at the waysides of their dominatingly efficient foreign counterparts. What makes the foreign IT firms more economical to upper management is their ability to undercut domestic work by accepting lower than industry standard wages while also maintaining an extremely efficient firm (Frauenheim).

The largest player of IT service outsourcing operations is India. The number of developers in India who service primarily US markets is 250,000. This makes them a significant contributor to the total number of programmers a company has to draw form. In the United States there are about 500,000 developers, where roughly half are in product development. This makes the Indian programmer pool equal to the available domestic programming pool. India’s impact on domestic IT employees is that there has been a decline in the wage rate of developers who are still employed. Indian software exporters offer development services which are an easy target for subcontracting. The nature of these development services is very impersonal and hands off as far as management is concerned. Once a project is given, all that matters is the finished working product. India’s IT firms fill this requirement perfectly, and for the right price (Dossani).

So far the growth of IT jobs in India has been staggering. Industry experts predict that by 2015, subcontracting by US companies would represent $135 billion in wages and 3.3 million professional jobs (Gartner Group). New players are evolving every day. “Countries like Czech Republic, Poland, Hungary and Mexico are looking to take some of the outsourcing market share away from India in the coming years” (Gartner Group). Indian software exports alone exceeded 17 billion last year, representing a four billion increase in one year (Gartner Group). These massive increases have some analysts worried about how specifically India’s already poor infrastructure will hold up to the increasing demand for technical services.

The Indian hub of the IT services boom is undoubtedly Bangalore. Large IT firms have built huge developments in “Electronics City,” a few miles out of town. Some of these developments are as modern and efficient as the United States counterpart of Silicon Valley. They include state-of-the-art remote network-management systems and cappuccino bars. However, Bangalore's infrastructure is beginning to waver after years of intense expansion. Nonetheless, foreign firms are continuing “to pour in at the rate of three a week” (The Bangalore Paradox). Now Indian IT professionals, with their newly found wealth, have continually been buying motorcycles and cars adding 900 a day to the already overcrowded streets (The Bangalore Paradox). This has made the simple process of commuting a major problem. The poor road systems make a small 7 mile drive take roughly an hour to complete. Other problems include “a water shortage, inadequate sewers, and an erratic power supply” (The Bangalore Paradox). Samuel Paul of the Public Affairs Centre, an office that reviews the government's performance, says it shows that a few months of neglect are enough to reverse years of improvement. After hearing the very negative signals about Bangalore that the government released, many city workers stopped bothering to do their jobs. This has resulted in "total urban chaos" (The Bangalore Paradox).

The “total urban chaos” has not boded well for the IT firms of Bangalore. Unreliable power and other problems can sometimes make development times longer than anticipated. As a result, a “survey of 25 large organizations with a combined $50 billion in outsourcing contracts found that 70% have had negative experiences with outsourcing projects and are now taking a more cautious approach. One in four companies has brought outsourced functions back in-house and nearly half have failed to see the cost savings they anticipated as a result of outsourcing" (Gartner Group). Also, a reported 20% of outsourcing deals do not produce cost savings while 10% of those deals actually wind up increasing costs. In 2005 alone, 50% of all outsourcing projects will not deliver their expected value and will be labeled unsuccessful (Gartner Group). The question is whether or not India and other offshore IT firms will continue to be reliable and handle the high growth rates, or will the outsourcing simply be seen as a trend that will pass and lead to the recreation of the thousands of domestic IT jobs.

Contrastingly, another viewpoint is that the potential of foreign IT development and other outsourcing operations is limitless. The extent of growth and production shown to date with sub par infrastructure points to the potential once the infrastructure becomes more stable. More business opportunities are opening every day, including “processing insurance claims; desktop publishing; the remote management and maintenance of IT networks; compiling audits; completing tax returns; transcribing medical records; financial research and analysis,” that can be all effectively outsourced (The Bangalore paradox). Stefan Spohr of A.T. Kearney, an Indian consulting firm, remarked “we have barely scratched the surface" (The Bangalore paradox). Major US corporations are beginning to move the majority of their workforce to India and other countries. General Electric's “70-70-70” plan is an example of this. GE plans to outsource “70 percent of its head count, push 70 percent of that outsourcing offshore and locate 70 percent of its workers in India.” Such inclusive plans are the main concern of domestic IT workers and a reported 26% of companies already using offshore services expect to double their spending in the in 2006 (Gartner Group).

Domestically, many of the professionals whose jobs are at risk, reported by the University of California-Berkeley to be as many as 14 million, are trying to make themselves perceivably more valuable and efficient to management in an attempt to prevent their entire departments from being outsourced (Gartner Group). Their aim is to create more willingness to work with other domestic technology solution providers in an attempt to become more economical. This would help eliminate or at least reduce the temptation to subcontract the entire IT process overseas (Vizard 20). By working more closely with other local IT providers and developers, a domestic firm can become much more knowledgeable about every new IT innovation. They can also respond to problems faster. Those are the two keys to creating a more efficient economical IT model which is what executives seek in times of moderate economic growth (Vizard 20-1). However, if sub par overseas infrastructure becomes more adequate, the already economical option of outsourcing will become even more efficient for corporations. The fate of US outsourcing relies mainly on the quality, security, and timeliness of foreign work. If overseas firms can keep up with demand, domestic professionals may find themselves in much more trouble.

Works Cited

Dossani, Rafiq. “The Impact of Services Offshoring.” Asia-Pacific Research Center. Stanford University. Available at: http://www.unifi.it/eaae/cpapers/24%20Dossani.pdf.

Fannin, Rebecca. “India's Outsourcing Boom.” Chief Executive. May 2004. Available at: http://www.chiefexecutive.net/depts/outsourcing/198.htm.

Frauenheim, Ed. “Study 400,000 IT jobs lost since 2001.” 14 Sept. 2004. Accessed: 10 May 2005. Available at: http://news.zdnet.com/2100-9589_22-5364627.html.

Gartner Group, Hewitt Study, META Group, Harvard Business School, et al. “Statistics Related to Offshore Outsourcing.” 28 April 2005. Available at: http://www.rttsweb.com/services/outsourcing/stats.cfm.

“Outsourcing statistics.” 8 May 2005. Available at: http://www.bellsoftinc.com/outsourcing_s_method.asp.

Vizard, Michael. “Common Cause.” CRN 2 May 2005: 20-21.

“The Bangalore paradox.” Economist. 23 April 2005: 67-70.

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