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programmer, but at roughly Indian charge rates plus a small premium (45,000
USD). He was ¬‚ooded with 90 resumes, many from excellent programmers.7

As the Boston story illustrates, for the software professionals who continued to be
employed, software wages were standing still, or in some cases, decreasing. One source
reported that computer wages declined 20% in the 2002“2004 period.8 There was con-
cern that offshoring would create long-term IT wage reductions in the USA and Western

Reactions to the backlash

In the months and years following the 2002 Forrester forecast, two camps emerged (in
America and elsewhere): the ¬rst camp saw offshoring as a crisis that requires immedi-
ate action to repair. The other camp, positing free trade arguments, argued that offshoring
is inevitable and that it will bene¬t all industrialized economies through greater ef¬cien-
cies. The two camps have been labeled “The sky is falling” and “Don™t worry, be happy.”

Reaction 1: The sky is falling/protectionism is needed
The reaction in US politics to dire forecasts was swift. By 2004 more than 20 federal
law proposals (“bills”) to restrict offshoring were proposed in the US Congress. One of
these proposals, made by Senator and Presidential candidate John Kerry, would require
disclosure of location of a call center at the beginning of a call (“Hello my name is Raj
and I am calling from Kolkata, India”). One of the proposals, passed by the Senate,
243 Offshore politics

although unlikely to become a law, stipulated that government contracts will not be
granted to a company that replaces US workers with offshore workers, if such work
was previously done by US workers (even if passed, this law is unlikely to stand up to
the US™ World Trade Organization agreements). Other proposals, such as that of Senator
Hillary Clinton, set out to limit offshoring by limiting personal data exporting, similar
in its impact to the European Union Privacy Directive that took effect in 1998.
Of the 50 states of USA, 36 states have discussed some kind of legal restriction on off-
shoring. All the Democratic Presidential candidates of the 2004 elections developed polit-
ical platforms and proposals on reducing “outsourcing” (the code word for offshoring).
In Europe, concerns soon followed those voiced in America. For example by late
2004 the French government set aside a 1 billion euro fund to entice French companies
to continue operations in France if they guarantee not to move jobs offshore.

Reaction 2: Don™t worry be happy/free trade is good
The opposing camp did not see offshoring as a problem that needed to be ¬xed. At the
time the political debate was ignited, President Bush™s administration in the US
espoused this view and chose to leave trade open and not to implement protectionist
steps. Across the Paci¬c, the Australian Trade Minister went even further in 2004,
voicing support for offshoring large portions of Federal IT work to reduce costs.
This camp argued that the new ¬erce competition in services is simply a natural out-
come of global trade liberalization. For Americans free trade has been positive, raising
standards of living, and it has been positive for growth in the long run. Americans are
bene¬ciaries of the free ¬‚ow of capital and investment with millions of Americans
employed by foreign ¬rms.
The number of jobs lost to offshoring is very small compared to the “creative destruc-
tion” “ the annual churn of America™s ¬‚exible labor markets which turn over two million
jobs per month.9 The US Department of Labor, the most respected American gatherer of
statistics, reported that in the ¬rst quarter of 2004 only 2% of the IT workers who lost
their jobs did so due to offshoring.10 The situation in Europe appeared to be similar
with most job losses resulting from the economic recession “ and not from offshoring.
For example, The Netherlands had 15,000 unemployed IT workers in 2004 with the
economic downturn responsible for the majority of these job losses.11 Several studies
looked a few years into the future and pointed out that the baby boom generation in
North America and Western Europe is about to retire, which will create an enormous
gap in jobs that are being conveniently ¬lled by able engineers offshore.
Others pointed out that this was not the ¬rst time that US industries and US jobs
were at stake from massive waves of offshoring. In fact such concerns have appeared
roughly every decade: in the 1970s, it was the newly emergent Germany; in the 1980s,
Japan; and in the 1990s, the fear of the North American Free Trade Agreement send-
ing jobs to Mexico. Although, as noted previously, all these jobs were (generally) man-
ufacturing or agricultural.
244 Other stakeholders

The consulting ¬rm McKinsey & Company estimated that every dollar spent off-
shore returns a gain for the US of 1.12 USD.12 This is due to savings accrued to US
corporations, to the value added from US labor redeployed, and from several other lesser
items. The US technology industry association ITAA issued a report in 2004 project-
ing that by 2008 more than 300,000 jobs will be created (not lost) due to offshoring.
A United Nations (UN) report on globalization of services also emphasized the
positive.13 It pointed to several factors that should bene¬t the wealthy nations: most
offshoring of services still takes place among the wealthiest nations; that offshoring
reduces costs, which bene¬ts the home nations; that offshoring allows to shift resources
to more productive activities; that revenues from offshoring in host nations is used, in
part, for other imports from wealthy nations. The UN report did note that industrialized
nations will have to manage the transitional loss of jobs through adjustment policies,
such as training.

Companies™ reactions
As the political debate swelled American companies were adjusting by offshoring
under ¬re. Offshoring was not presenting a competitive threat to these companies. To
the contrary, these companies perceived offshoring as vital to their competitiveness
and opposed any protectionist obstacles. Both technology and non-technology compa-
nies continued to expand their use of offshoring.
In spite of the political backlash, some corporate spokespeople were bold about
offshoring. Carly Fiorina, superstar CEO of America™s HP, famously pronounced that
“There is no job that is America™s God-given right anymore.” Intel™s CEO Craig Barrett
was quoted repeatedly praising the bene¬ts of offshoring.
Many corporations, though, were concerned about the public relations fallout. Some
American and European companies chose to take the cautious political path by hold-
ing IT employment at home steady, while expanding operations offshore. This way,
they cannot be accused of displacing their employees at home with offshore workers.
The backlash caused most large US companies to enter into a covert offshore mode
in which information was to be contained as much as possible. As an example, some
IT managers were reluctant to speak “on the record” for this book because they were
advised against doing so. Journalists were reporting similar experiences.
Some companies were careful to display public sensitivity to the job loss issue. For
example, IBM declared publicly in 2004 that it would invest in retraining of those
whose jobs were replaced due to offshoring. It set up a 25 million USD fund for
retraining and gave employees on notice more time to ¬nd alternative positions within
IBM. One 2004 survey14 of American executives indicated a high degree of sensitivity
to the social and economic consequences of offshoring: 40% supported a per head
offshore tax for retraining, while 58% believed that ¬rms that offshore should pay
higher taxes.
245 Offshore politics

It is more dif¬cult to assess the overall impact on corporate decision-making.
Namely, did the political backlash slow offshoring? Probably, not much. During the
early 2000s, as the political debate emerged, offshoring was increasing very rapidly,
probably as fast as the supplier nations of India, China, and others, could sustain. Polls
in the US suggest that backlash had little impact: two American surveys in 2004 found
that 86% and 72% of managers were not changing their plans due to backlash. A num-
ber of commentators began repeating the belief that the political backlash actually
helped increase offshoring, since it focused so much attention on the subject that there
could be no manager left in America who was not educated about the offshore option.

Reaction in India
With India being the largest bene¬ciary of offshoring, Indian companies and politi-
cians were confused by the backlash. A common response was also articulated by
then-Prime Minister Vajpayee who said “the very process of liberalization, on which
we have been lectured for so many years, has created competitive skills ¦ we should
not now drive a reverse process.” India was disappointed that it had succeeded in cre-
ating a relatively open market economy, had succeeded through the grit of its people,
and was now perceived as the bad guy. Others saw it as racism against brown-skinned
people: when thousands of IT-related jobs moved to countries such as Ireland, this was
never seen as a problem, was the refrain of some. India™s software industry was careful
not to stir the backlash: Indian ¬rms stopped publicizing many of their new deals by
2003; and NASSCOM, the industry association, hired an American public relations ¬rm.
In reality India had but limited exposure to many of the protectionist proposals that
emerged in the US. Some proposed US laws called for restricting offshoring for tax-payer
supported government projects. But India™s business to the US government, or to any of
the 50 states and many local governments, was well under 5% of its total business in 2003.
India does, however, have a larger exposure in ITES due to data privacy regulations.

The longer-term policy issues

For advanced industrialized nations offshoring is not just an issue of job loss, as impor-
tant as that is. It is also about loss of leadership in innovation. The Chinese and Indian
technology centers are threatening to compete with the US and other leading technol-
ogy nations in innovation activities.

Human capital and innovation
Once offshoring permeated the political landscape, Americans and Europeans began
to look around and realize that a more serious threat than the direct loss of a few thou-
sand software jobs may be the loss of innovative leadership. After all, technological
246 Other stakeholders
















Figure 12.1 Number of degrees in Science and Engineering awarded in key nations (1999 or most
recent year available).
Source: NSF Science and Engineering indicators.

innovation is the driver of economic growth and a key ingredient for a nation™s long-
term prosperity.
Innovation occurs because of many factors, but mostly due to a nation™s human cap-
ital. In this regard, two trends became worrisome: fewer talented students were choos-
ing careers in science and technology (S&T), and in the USA fewer talented foreign-born
students were arriving for university degrees. The result has been a decline in the rela-
tive number of S&T-trained students in the USA relative to the global supply. Each of
these trends is introduced below.
The educational ratios are beginning to favor Asian nations. Of university graduates
about 5% of students in the US and Western Europe receive degrees in engineering
compared to roughly 20% in Japan and roughly 40% in China. Figure 12.1 presents the
number of students completing Science and Engineering degrees in selected countries
indicating that the pipelines in key Asian nations are now quite robust. More recent
estimates are less favorable to the US (focusing only on engineering), namely that the
US graduated 60,000 engineers in 2002, while China graduated as many as 300,000 “
more than four times more. The number of engineering degrees increased in China in
1995“1999 by 37% while they decreased in the US.
The number of Computer Science students began falling in the US. Computer
Science and Computer Engineering students fell 23% in 2003.15 In response, Bill Gates,
Microsoft™s Chairman and founder, embarked on a stumping tour at America™s ¬nest
universities, the University of Illinois, Carnegie-Mellon, Cornell, MIT, and Harvard, to
instill a sense of excitement in students about careers in computer science.16
For two centuries Germany has taken pride in its engineering and scienti¬c innovations,
which resulted in Nobel prizes, the invention of X-ray machines, and Mercedes Benz,
among others. But Germany has seen a steadily declining number of students who choose
to study engineering. Its technical universities are under-funded. The situation became
so worrisome that Chancellor Schroeder declared 2004 as the “Year of Innovation.”17
247 Offshore politics

54 maximum
1986 1
Ordered by 1999
India US Non US Japan South Taiwan China
citizens citizens Korea
Number of degrees awarded in 1998
4800 16,200 9800 6600 2500 900 6400

Figure 12.2 Growth in doctoral degrees awarded in 1986“1999 in key nations. Source: NSF
Science and Engineering indicators, 2002.

The second worrisome trend is affecting the US. For a century American innovation
was fueled in part by foreign-born S&T talent. In other words, the US has bene¬ted
from brain-drain in other nations. People in Silicon Valley jest that it was built on ICs
which are Integrated Circuits, but also Indians and Chinese. But there are early indica-
tors of a drop in those coming to the US and more of those who come return home to
China, India, and Taiwan. The migration of S&T talent to the US has slowed since
2001,18 partially because of increased industry opportunities in Asia, partially because
of better education programs in Asia, and partially because of more dif¬cult entry
requirements since the September 2001 attack on the US.
Even the relatively favorable US position portrayed in Figure 12.1 is partially a
result of a higher ratio of degrees given at the Masters and PhD level, many of which
are awarded to foreign-born students, who are now returning home in greater numbers.
Figure 12.2 shows the growth of doctoral degrees granted in the US versus key Asian
nations. In the US nearly all of the growth can be explained by immigration of talented
individuals from abroad. Again, it is likely that the data underestimate the actual con-
tribution of immigrants since the data are for US citizens rather than US-born versus
foreign-born. Among PhD holders working in US technology companies, half of the
computer scientists were not US citizens.19

Techno-nationalism is the notion that a nation™s technological prowess will serve it
well from a military-security perspective. The US, China, Russia, Israel, and Taiwan,
are all countries with a strong techno-nationalist orientation.
248 Other stakeholders

Table 12.1 US rivalry with Japan in the 1980s versus China today.

Japan China

High-value, high-wage advanced tech, Low-value, low-wage, advanced tech.
“just like us”

We have entrepreneurial advantage but Entrepreneurial
they have industrial policy advantage Using industrial policy

Rule of law Limited rule of law

IP protections IP theft model. 250 billion USD per year
(US FBI est.)

Subsidized currency. Buying our debt Subsidized currency. Buying our debt

National security “ allies National security “ peer competitor
Source: Bonvillian, 200422

Offshoring is viewed as a threat to US technology leadership. Besides the loss of
jobs, offshoring is perceived as a threat to US national security: advanced technologies
used by the military will be increasingly sourced from foreign nations; and, due to the
porous nature of software, it is vulnerable to attacks and disruptions from insiders (pro-
grammers) in foreign nations working on the software that is offshored. US Senator
Lieberman became the principal political proponent of this view arguing that “[off-
shoring] threatened to undermine America™s innovation infrastructure.”20 Lieberman™s
science advisor positioned this techno-rivalry in Table 12.1. Not everyone in America
subscribed to these techno-nationalist sentiments: “It is arrogant to think that we will
be able to keep all research in the US,” said the chairman of the Computer Research
Association, an industry group.21

Concluding lessons

The social and economic consequences of software™s migration offshore are still too young to assess.
What is clear about this offshore migration is that it has no precedent in that, for the ¬rst time, jobs
migrating offshore are of white collar, highly-educated professionals.
For the business decision-makers in America or Europe, the political backlash has resulted, in
many cases, in the following reactions:
— Companies are keeping offshoring plans covert.

— Companies are expanding offshore while maintaining employment at home at steady levels.

— Companies replacing workers at home are making efforts to retrain targeted workers.

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