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April 27, 2006

Outsourcing expert discusses high-tech offshoring trends

The loss of jobs to India and other offshore destinations increasingly is becoming a concern for engineering and other high-tech white collar professionals who are seeing their once-secure high-wage jobs follow the many lower-skill jobs that already have departed the United States.

Author Ron Hira, a Carnegie Mellon-educated control systems engineer turned assistant professor of public policy at Rochester Institute of Technology, said the U.S. government response to the trend has been slow and current policies are flawed or ineffective in the changing global economy.

For instance, federal retraining money for those who’ve lost their jobs to foreign competition applies only to manufacturing workers, leaving information technology (IT) and other service-oriented workers ineligible for help. And, the H-1B guest worker visa program that allows skilled foreign workers to come to the U.S. lacks sufficient safeguards to protect American workers, he said.

“The discussion on offshoring is not a political one in the sense of falling along party lines,” Hira told an audience in Benedum Hall auditorium. “If you want to think about this from political terms, just break it down between populists versus elites as opposed to the Republicans versus Democrats,” he said.

The elite, who have political influence, Hira said, also tend to be “buddies” with CEOs, who tend not to know the grassroots workers. That disconnect leads to inertia while the trend continues.

Hira said it’s clear that America will continue to lose jobs to offshore destinations. But what’s less apparent is how that loss will affect American prosperity, an issue he said rests on the response of business, government and academia to the challenge.

Hira was on campus to discuss his research and sign copies of his book “Outsourcing America: What’s Behind Our National Crisis & How We Can Reclaim American Jobs” at an April 19 event sponsored by Pitt, the Pitt Book Center, IT consulting firm Ascent Systems and the Institute for Electrical and Electronics Engineers (IEEE.)

“Does outsourcing matter? At least to the American public it does,” Hira said, citing a poll conducted in March for National Public Radio that labeled global economic competition and the outsourcing of jobs as the No. 1 issue for Americans, above other issues including the Iraq war, the nuclear situation in Iran and illegal immigration.

The definition of outsourcing, Hira said, is the logical extension of the classic make-or-buy decision: “Companies deciding to buy from a supplier outside their company rather than making it in house…. The logical extension of that is offshore outsourcing, which is using a supplier overseas.”

Hira pointed to recent corporate moves showing IBM, Intel, Cisco, Dell, J.P. Morgan Chase and other firms are continuing to invest in India while some of those same firms are cutting jobs in the U.S. and Europe. And, where offshore outsourcing once affected workers in lower-level jobs, manufacturing and now higher-level engineering, research and development and other technical jobs are following.

What’s more, companies not only are investing in hiring overseas, but are putting up venture capital dollars to develop new companies offshore as well.

For instance, in the past six months, he said, Intel has announced its plans to invest $1 billion in India: with $800 million going toward engineering and $200 million for venture capital. Cisco also plans to invest $1 billion in India for engineering design, and Microsoft is putting $1.7 billion into the country, with plans to add 3,000 new workers in India by 2008. Dell also plans to double its staff in India to 20,000 workers over the next three years. The company’s U.S. workforce is 26,000, he said.

J.P. Morgan Chase’s plans are to add 4,500 new workers in India by 2008, doubling its staff there. One third of the company’s back office staff is based there, Hira said.

IBM’s headcount in India has grown from 6,000 in 2003, representing about 2 percent of the company’s worldwide workforce, to more than 55,000 by the end of 2006, when 18 of every 100 IBM workers will be based in India.

Wachovia also is on the move, with plans to relocate 3,000 Charlotte, N.C.-based IT jobs offshore, Hira said.

The corporate trend is fueled in part by competition. “[Corporate decision-makers are] being driven to this because every management consulting firm…is telling them that you’re going to be at a competitive disadvantage unless you start to utilize overseas talent,” he said. Bottom-line driven executives feel compelled to keep up with the competition, fueling the exodus, he said.

In addition, there’s political pressure. Foreign governments are insisting companies bring technological knowledge in exchange for access to their workforces. “If you want into China to utilize the low-cost production workers, you need to bring in research and development with you,” he said. “That’s part and parcel of the deal.”

And tax policy plays a role as well. “For example, if you’re in India and you’re exporting IT services or business process services, you get a tax holiday,” Hira said.

“This is targeted industrial policy at play. And these countries are targeting not just manufacturing jobs, they’re targeting services jobs, they’re targeting research and development,” he said.

Here at home, a changing relationship between workers and employers has fed the trend. “The fate of U.S. workers is no longer part of corporate decision making,” Hira said, citing what some have viewed as a pivotal point in American corporate history: the first layoffs in the early 1990s at IBM, which once was considered to be a bastion of solidity. “IBM has gone from this long-term, almost lifelong employment relationship, to now forcing its U.S. workforce to train their foreign replacements as a condition of their severance packages…. That’s a pretty big shift in the relationship,” Hira noted.

What’s good for the corporate bottom line can be detrimental to American workers.

“Managers and CEOs are not compensated by how many American workers they have. They’re compensated by shareholder prices,” he said. “You can make your own judgment as to whether that’s right or wrong. That’s the reality. And if you don’t acknowledge that reality, you’re going to miss a lot in terms of thinking about designing policy responses and for you as workers, thinking about how you set yourself up for your careers.”

Salary differentials make it extremely attractive for companies to hire a foreign engineer over an American. “Just like it’s cheaper to live in Pittsburgh than it is to live in Washington, D.C., or San Francisco, it’s a lot cheaper to live in India or China.”

The disparity can be as high as 5:1. A $14,000 salary in Russia yields roughly the same purchasing power as a $70,000 salary in the U.S., Hira said. Therefore, American workers have to justify receiving five times the salary.

“We have to be five times more productive than our counterparts,” he said. “That’s the obvious answer…. What’s not so obvious is how to attain it,” he said.

Challenges are increasing as development tools and technologies become more mobile and companies become more willing to take those tools overseas, and as other nations look at India’s success as a model for their own development strategies. “If you’re in Argentina or Brazil or Hungary or Rumania, there’s that realization, ‘Hey, we’ve got a lot of smart people too, and we can do these jobs also,’” he said.

Economists remain divided on what results the trend will produce. On the positive side for the U.S., offshoring raises American purchasing power through lower-priced goods, can open new markets for American business and can yield international security born of the interdependence that can deter warfare. But, “The trade models show that the outcomes can be uncertain,” Hira said, arguing against those who might say there’s a completely win-win result. Hira argues that the net effects are impossible to determine and that there are both positive and negative impacts related to the trend. “Some people win and some people lose,” he said.

The impact on American capacity for its traditional strongholds of research and development and technical innovation remains unknown. If large numbers of U.S. engineering and technical jobs are transferred overseas, the resulting decrease in capacity could surpass the economic impact associated with the mere relocation of centers of innovation from places such as the Silicon Valley to other parts of the globe. “Most of our military superiority is based on our technological superiority,” Hira said, adding that it’s “no accident” that so much engineering research is funded by the Department of Defense.

Hira believes low salaries in India, China and Russia will persist because of the purchasing power differential. Wealth is a powerful motivator — not only for foreign workers who aspire to fill the lucrative positions, but also for the foreign schools that train increasing numbers of aspiring IT workers.

“The race is a very difficult one ahead for us to run,” he said.

The ease with which information can travel worldwide and the nearly unlimited size of the labor pool in India and elsewhere puts many jobs at risk for offshoring. Estimates of exactly how many U.S. jobs are vulnerable ranges from 14 million to as high as 40 million, Hira said, adding, “Not all those jobs are going to go, but because they’re vulnerable, you’ve added competition,” which puts downward pressure on wages for the jobs that remain.

The total number of jobs in the U.S. may not be affected by offshoring, but “what changes is the mix of occupations,” Hira said. “People who do get displaced are adversely affected in a pretty significant way” as high-quality jobs are moved offshore.

A troubling factor, Hira said, is that there is little accurate information on exactly how much work has been moved offshore. Business leaders typically are tight-lipped about publicizing such decisions, fearing public and employee backlash, as well as to avoid having customers demand a piece of the cost savings.

Government data is incomplete and sometimes rewritten to meet political objectives, Hira claimed.

“The government’s not only not collecting the data, but is also rewriting the analysis,” he said, citing a recent U.S. Commerce Department report that was condensed to highlight only the “bright side.” Other government reports are problematic as well. In 2003, Hira said, the U.S. general accounting office reported imports from India at $420 million, while India reported its exports to the U.S. at $8.7 billion, a 20-fold discrepancy.

A lack of good data yields poor labor market signals and prevents workers from getting the information they need to prepare themselves for jobs that will last. “It doesn’t tell engineers, it doesn’t tell other workers, how do you buffer yourself, what are the kinds of skills that are going to be geographically sticky and which ones are going to go?” How to create desirable careers remains a big question, he said.

Hira refrained from making value judgments on the trend.

“There are no villains here. CEOs are acting rationally. They’re doing what’s in their best self interest,” Hira said. “They’re not Benedict Arnold or anything else, but we should recognize what their motivation is. And we should also recognize that they have a lot of influence politically. A lot more influence than you or I.

“We also should recognize that workers who are worried about this are also acting rationally because they see what is happening.”

In short, Hira said, public policy issues need to be examined and some creative thinking developed on how to produce engineers who are different and who have durable skill sets.

What those might be remains to be seen. “It’s not clear what the answers are,” Hira said. “There’s no silver bullet.”

—Kimberly K. Barlow

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