By Martin Hutchinson

WASHINGTON, Nov. 14 (UPI) -- "Is high-tech offshore outsourcing a threat to innovation and economic prosperity?" asked a New America Foundation forum on Thursday. Rather the question should have been: Given outsourcing, the relative cost structures, and its current modus operandi, is the U.S. tech sector headed for long term decay?

Make no mistake about it, there is nothing magical about tech that makes it intrinsically a U.S. based industry. Consumer electronics, for example, pioneered by RCA and Zenith in the 1950s, is now dominated by Japanese and South Korean producers. If other countries develop a tech capability that outstrips America's, in terms of innovation or cost, they will get the business.

Outsourcing research and development, or high level software, or complex engineering, or middle management integration between different elements in the "value chain" of tech products has very different implications from outsourcing low level manufacturing operations. Whereas the workers in say an assembly plant in Malaysia are unlikely to develop the capability to compete with the plant's U.S. owner, Indian software engineers and researchers, with education very nearly as good as that in the U.S., and with experience at a responsible level in a U.S. company, will quickly acquire the capability to compete with the U.S. The largest semiconductor manufacturer in the world, in terms of volume, is no longer Intel but Taiwan Semiconductor; there can potentially be many more such stories in the future.

Of course, many factors are required for business success beyond entrepreneurial ability. Professor Michael Porter has identified the tendency of regions to form a "pole" of excellence in a particular activity, whose residents will dominate that activity worldwide, providing the majority of the activity's innovation and new business, as well as a high proportion of its overall revenues and employment. Naturally, in the tech sector, this factor has tended so far to favor the United States. However, as higher-level functions are outsourced overseas, "poles" of capability are gradually built up in overseas locations. Once such "poles" have been established, new competitors in the industry are as likely to arise in the new "pole" as in the original one. Two excellent examples of such "poles," both of which have arisen in the last decade are Taiwan in semiconductor manufacturing and Bangalore in software. In both cases, there are plenty of opportunities for new competitors in those locations, and little competitive advantage for U.S. companies against such competitors.

The real advantage that overseas competitors may have against their U.S. counterparts in the tech sector, however, is the cost of top management. In the United States, this can run into the billions, even the billions per person. John Chambers, for example, not the founder of Cisco but a professional manager brought into the company in the early 1990s, cashed in $38 million worth of stock options Friday, but this still left him with options worth $363 million at today's prices, all of which he has received since 2001. In total Cisco's stock option plan has issued 321 million shares, with a total value of $7 billion -- considerably more money than the total earnings of the company since its formation. Except for social security tax, of course, none of this money has been reflected in Cisco's income statement, only in its balance sheet, where the company is buying back shares at a frantic rate -- more than $7.8 billion of scarce cash has been spent on share buybacks since 2001, in years of a tech downturn.

Cisco, paying out 100 percent of its profits to executives through share options, is exceptional (though there are companies such as eBay that pay more.) However, many tech companies pay out 30-50 percent of their profits, when the math is done properly. At this level, top management remuneration is not just significant, it may be the largest single element in the company's costs, an element that is almost wholly out of control while that management remains in the U.S., with remuneration standards as they have been since 1995.

In other countries, needless to say, such largesse is unnecessary. The Indian software company Infosys, for example, paid its executive directors 60.7 million rupees (approximately $1.5 million) in 2003 -- between the two of them. Admittedly, they got stock options as well -- to a value of approximately $700,000 between them in the same year. By Indian standards, of course, this may be princely remuneration, but American top executives of a company of Infosys' stature ($1 billion in sales and $250 million profit after tax) would not be satisfied with ten times the amount, and might call in compensation consultants to see if they could boost their income even if they were paid 100 times the amount.

Taiwan Semiconductor, located in a richer country than India, pays somewhat better than Infosys, in terms of salary and bonus -- its remuneration to Directors in 2002 totaled 133.9 million Taiwan dollars ($3.8 million.) The company's stock option plan issued options on 19.7 million shares in 2002, 0.1 percent of the total shares outstanding with a total fair value (at 2002's rather depressed share price) of 34.9 million Taiwan dollars ($1 million), around 0.25 percent of the company's Net Income. This was spread between the entire management team.

Of course, because of the sector's energetic lobbying, investors are not directly informed of the true cost of stock option grants. Indeed, they currently appear to take no account of them when valuing companies (else, why was eBay, a loss-making company when stock option grants are taken into account, valued at $35.1 billion Friday?)

While U.S. investors allow their interests to be diluted ad infinitum in this way, the cost of capital for U.S. tech companies is exceptionally low, even negative, and hence the companies can flourish. However, can it be doubted that at some stage in the future, whether or not the Financial Accounting Standards Board forces proper valuation of stock option grants, the U.S. investor community itself will finally take their cost seriously, and factor into its earnings calculations the true remuneration of the top management of tech companies in the United States?

At that point, the U.S. tech sector will be in trouble, as the true unattractiveness of further investment therein will become apparent. Labor cost differentials can be overcome, by outsourcing, even if the labor is highly skilled, such as top engineering or research and development. But if you outsource top management, you are sending the entire nexus of the company overseas. At that point, if its top management is outsourced overseas, the tech business may thrive worldwide, but it will no longer have a significant U.S.-based component, beyond a few salesmen.

The short-sighted greed of U.S. tech management, and the foolishness of a regulatory system that has allowed them to hide the true costs of their overpayment, will bear true responsibility for this development.

United Press International

By Alison Diana

While India and China have long been recognized as centers for U.S. offshore outsourcing, other nations also are hustling to tap into this lucrative market. Ghana, South Africa, Israel, Russia and several Eastern European countries all are vying for jobs and money in the sector.

Corporate America is outsourcing an increasing number and variety of jobs to foreign shores, a trend that few industry experts predict will slow, let alone reverse, in coming months and years.

"Offshore outsourcing is just one small part of a (US)$5 trillion global outsourcing market. This market is growing by more than 15 percent per year, and the offshore component is certainly among the fastest growing," Michael Corbett, president and CEO of New York-based Michael F. Corbett & Associates, told the E-Commerce Times. "We are at the earliest stages of a fundamental transformation from regional economies to a single, integrated global economy. Just as companies now compete globally, workers need to realize that they, too, are competing globally."

Recently, the AFL-CIO -- citing a report by Gartner -- reported that by the end of next year, one out of every 10 jobs with U.S.-based information technology vendors and service providers will be exported. By 2004, according to the 2002 Gartner report, more than 80 percent of corporate boards of directors will have considered offshore outsourcing, while 40 percent of corporations will have finished an outsourcing pilot program or be actively involved in outsourcing technology services.

However, at least one analyst is more optimistic about the future of U.S. workers. "The outlook for the future is more offshore outsourcing, but not at the levels predicted by other analysts in this area," said Alan Pelz-Sharpe, vice president of software and services at London-based research firm Ovum, in an E-Commerce Times interview. "I think there is a leveling-off period coming up over the next 12 to 18 months. The backlash is growing, an election is due, and these are white-collar jobs."

Where the Jobs Aren't

Although industry observers would be hard-pressed to find any spot in the United States that is completely unaffected by offshore outsourcing, several technology experts believe the most hard-hit regions are those with a high cost of living, such as New York, Los Angeles, Silicon Valley and Chicago.

"I would guess the [cities] in the Northeast, Illinois -- the expensive areas -- and certainly the whole West Coast [have been impacted]," Ernie Nounou, a founding partner of the Catalytic Group and coauthor of a report titled "The Impact of Outsourcing on the American Worker," told the E-Commerce Times.

"The least [affected] would be the states where there aren't a whole lot of corporate headquarters. Most cities are losing out. New York City's unemployment rate is higher than the national average. I've got to think it's the same in places like Chicago and San Francisco."

While it is difficult to quantify which regions have been most affected by offshore outsourcing, overall unemployment rates remain high. Thirty-five states now have fewer jobs than they did when the recession officially began in March 2001, according to the Economic Policy Institute's JobWatch.

More specifically, JobWatch reported that New England's overall unemployment rate stood at 5.2 percent in September 2003, with the Mid-Atlantic region at 5.9 percent, East North Central states at 6.4 percent, West North Central at 4.7 percent, the South Atlantic at 5.1 percent, East South Central at 5.5 percent, the Mountain area at 6.3 percent and the Pacific region topping the list at 6.6 percent.

Plan of Attack

As a result of the outsourcing employment drain, IT workers must begin considering themselves as part of a global workforce, according to Corbett. "For U.S. IT professionals, this probably means that their future success will come from moving up the IT value chain, focusing more on business, design and analyst skills -- skills that are more client-facing -- and less on the pure coding skills that are becoming commoditized and can be tapped anywhere around the world," he said.

U.S.-based IT professionals who specialize in high-end solutions and technologies will continue to be in demand in their homeland, Pelz-Sharpe agreed. "For the very bright, IT will continue to be a draw, but the jobs lower down the ladder in basic coding and support work will cease to be attractive," he said. "It's definitely not as attractive a career route as it once was, but you can't outsource everything, and much in IT remains complex and difficult. As such, there will always be opportunities, particularly for the specialist."

However, Nounou -- whose company recently has lost an estimated $1 million in business and potential business opportunities due to offshore outsourcing -- is less optimistic. He noted that companies such as General Electric are considering offshoring such functions as legal general counsel to foreign shores. In fact, some researchers have estimated that 500,000 financial jobs will head offshore in the next five years.

"It's not just limited to low-paying jobs," Nounou cautioned. "Given the technology, there's very little that's sacred that can't be offshored. It's pervasive. If the financial institutions are going to get bankers based in India doing analysis instead of doing it in New York -- if Wall Street's paying one-tenth in India ... you [don't only] lose jobs on Wall Street. No one measures the ripple effect."

Relocation Time?

While India and China have long been recognized as centers for U.S. offshore outsourcing, other nations also are hustling to tap into this lucrative market. Ghana, South Africa, Israel, Russia and several Eastern European countries all are vying for jobs and money in the sector.

"Places in Africa want to compete on cost," said Nounou. However, he noted, "It takes a lot of infrastructure to compete. It's going to be tough to compete with India, [though] other countries are beginning to make overtures. Once you reach a certain critical size, it tends to draw others. It's a magnet unto itself."

As Corbett added, "In each case, these countries become potential destinations once they reach a critical mass of skilled programmers who can provide high-quality work at competitive prices supported by the needed business, technological and governmental infrastructure."

Don't Forget Canada

U.S. corporations also are looking north, Pelz-Sharpe noted. "The most interesting one to watch from a U.S. perspective, I would suggest, is Canada -- often described as nearshore rather than offshore," he said.

However, he added, semantics are fairly irrelevant. "It makes little difference when your jobs go north of the border. Again, it's a highly educated and productive workforce and, due to the dollar disparity, a great deal. In addition, the cultural differences are fewer and the physical distance [is reduced], such that close monitoring can be kept on the outsourced operation."

Indeed, for workers displaced by offshore outsourcing, it makes little difference whether their jobs are going to India, China or Canada. The end result is more competition for fewer positions, increased demand for sophistication and specialization -- and the knowledge that corporations likely will outsource even the remaining functions someday.

TechNewsWorld

By BRADLEY J. FIKES

It's false to think of the reported economic upturn as a "jobless recovery." Thousands of jobs are being created by American companies, but many are being created in India, where millions of trained, English-speaking workers are available there for a fraction of the cost of American equivalents.

This makes for a heart-wrenching story: Greedy companies throw out Americans and hire foreign replacements very cheaply. Outsourcing advocates sound cold and heartless when they correctly point out that a company endangers its own health ---- and the future of all its employees ---- if it turns down a chance to cut costs and become more competitive.

Because the story is so inflammatory, India's software trade association, Nasscom, has done what seems logical: It has hired a PR agency to help refute anti-outsourcing sentiment. But it made the worst choice possible: the infamous mega-PR firm Hill & Knowlton.

PR firms, with some honorable exceptions, are paid to present one side of the story without any attempt at balance. But Hill & Knowlton has an especially infamous history of deceit in an area that may arguably be described as lethal. I'm talking about cigarettes.

Hill & Knowlton started working for the tobacco industry in 1953, when courageous voices in the medical establishment began warning of the deadly effects of smoking. The firm continued its disinformation campaign until 1968.

John Hill, the firm's late founder, personally coached the tobacco industry on how to manipulate public opinion and cover up the evidence of smoking's harm. You can search the history of this man's deadly campaign for Big Tobacco at http://tobaccodocuments.org.

Today, of course, even the tobacco companies admit that smoking kills. Their major defense in tobacco litigation is that everyone knows smoking is dangerous, so smokers knowingly consumed a deadly product.

But for decades Hill and his kind were supremely successful in covering up the truth about tobacco. They helped millions of people around the world to unknowingly puff their way into early graves.

Despite this record, Hill & Knowlton still reveres its founder. That, without too much of a stretch, may tell you a lot about its present-day ethics.

By no means is Hill & Knowlton the only PR firm with a dishonorable past. Many of its competitors represented dictators such as Nicolae Ceausescu, the brutal Romanian tyrant killed by his own people in 1989.

India's software professionals will not be well-served by such amoral connections. My advice to them: Tell your own story, and reject the temptation of media manipulators. Unless, of course, you want to wind up as popular as Big Tobacco.

NCTimes

Gartner Inc., a Stamford, Conn., research and consulting firm, estimates that 10 percent of all the jobs at US information-technology vendors and service providers and 5 percent of all tech jobs in more general companies will shift offshore by the end of next year.

By Chris Gaither

Andre Brassard keeps sending out resumes but has largely given up on the profession that employed him for a decade: writing software. In his old department at Mindspeed Technologies Inc., most of the software engineers are gone. The work Brassard and his colleagues did is now largely done in Ukraine for one-quarter to one-third the cost.

"What has happened to me is irreversible," Brassard said. "It's not like the downturn of 10 years ago. Then it was just bad times." In the next generation of high-tech companies, entrepreneurs and venture capitalists are making the outsourcing of jobs overseas part of their business plans from the start. Ruthlessly, perhaps, they see outsourcing as the latest innovation in an industry built on innovation.

"Right when you think about Employee 11, you should think about India," said Ravi Chiruvolu, a general partner with Charter Venture Capital, a Palo Alto, Calif., firm that invests in fledgling technology companies. "My view is you should not start a company from scratch in the United States ever again."

Outsourcing is dramatically changing the way companies of all sizes distribute their workers, hitting hard places like Boston, the second biggest tech center behind Silicon Valley. People and companies are forced to adjust, often with great pain, to a fundamental restructuring of America's role in the global technology industry, one creating a sharp division between the people who invent and sell software and those who actually write and maintain those computer programs.

To the surprise of white-collar programmers who thought themselves immune, many of their jobs have turned into "grunt labor" positions exported to India, China, Russia, and other countries and filled with skilled but less expensive workers. IBM Corp., Oracle Corp., Microsoft Corp., EMC Corp., and other high-tech leaders have set up software design and maintenance centers in India, and scores of other large companies have farmed programming work to Indian consultancies. The Boston economy has gone through enormous transformations before. There was the 1980s defense industry crash, the 20th-century exodus of textile jobs, and the country's western expansion that made the region's farms uncompetitive by the late 1800s.

Each time, Boston survived, innovated, and ultimately thrived. Economists disagree on what will happen this time and when. Locally and nationally, it's clear right now that the economy is growing rapidly but job growth is not. Proponents of outsourcing say the brilliant ideas that fuel new companies will continue to emerge and win venture capital in the United States. Start-ups will still incorporate in the United States with hopes of winning American customers and going public on the Nasdaq stock exchange. But after the first few employees create a technology and a plan for selling it, the costs of readying that technology for the marketplace will force young companies to think globally.

A prime example of the new tech model: Lumenare Networks, a Sunnyvale, Calif., company that creates programs for testing complex software, network equipment, and data storage systems. Lumenare was on the verge of shutting down under heavy debt in early 2001. When the board hired new executives to rescue the company, one of their first moves was to fire 12 contractors writing software code for $180 an hour and replace them with a team of Indian programmers earning $10 to $20 an hour in Noida, a suburb of New Delhi. Within a few months Lumenare was saving so much money that Phillip Cavallo, the chief executive, moved all software development and maintenance to India, despite resistance from some of his upper-level managers. He laid off 30 American programmers in Sunnyvale and hired replacements in Noida.

"Software engineers -- India produces about a million of them a year -- are a commodity," Cavallo said in a phone interview from India, where he was visiting employees and trying to sell software to Indian outsourcing firms. Today 35 coders work in Lumenare's office in India, writing new software and testing it. In the Sunnyvale headquarters, which once employed 45 people, only 15 Lumenare employees remain: Cavallo and other executives, some accountants, the sales and marketing team, program managers who install the software for US clients, and engineers.

"I don't think the company would be here if we hadn't made these moves," Cavallo said. The high-tech industry is legendary for booms and busts that produce millionaires and then pink slips. But losing jobs overseas was once a problem reserved mostly for blue-collar workers. The Internet boom, which at first sparked an employment surge in the United States, also created the means for a white-collar variety of offshore outsourcing. Information became increasingly digital. Faster and more pervasive Internet connections enabled anyone sitting at a computer, anywhere in the world, to do much of the same work as an American.

"I thought I was safe," said Janice Johnson Kuhl, a software engineer in Mill Valley, Calif., who until the work dried up two years ago, designed computer systems for two decades as a consultant for Visa International, Providian Financial Corp., and the California State Automobile Association. Since then, Kuhl found only one monthlong contract, and that was for investigating why a $6 million programming job outsourced to a major Indian consulting firm was $40 million and 18 months overbudget, she said.

"War on Nerds" is how Keith Scruggs, a 38-year-old unemployed developer, described it on a picket sign he carried at a Concord, Calif., antioutsourcing Labor Day rally. About 30 software coders, dressed in Silicon Valley's rumpled uniform of jeans, T-shirts, and Hawaiian prints, sipped bottled water and exchanged pleasantries under the Northern California sun. Then the techies picked up their picket signs and began shouting for three hours outside Bank of America headquarters, decrying the company's use of foreign programmers to do work Americans once did. Gartner Inc., a Stamford, Conn., research and consulting firm, estimates that 10 percent of all the jobs at US information-technology vendors and service providers and 5 percent of all tech jobs in more general companies will shift offshore by the end of next year. Fewer than 40 percent of American workers who lose their jobs to outsourcing will find work within the same company, Gartner forecasts.

Brassard has been trying to latch onto any tech company since Mindspeed, a California maker of networking chips with local offices in Westborough, let him go from his job writing testing software on Jan. 19, 2002. "I can't even get replies on applications, let alone interviews," he said. "It's that tough."

Because of his wide knowledge of computer languages, Brassard once thought he was indispensable. He has since become certified as a tennis instructor and enrolled in a real estate appraiser training program. Mindspeed hired ArrAy Inc., an outsourcing company based in Westborough, which shipped most of the work to the Ukraine. ArrAy now employs 40 programmers in Westborough and 60 total in the Ukraine and Russia. The company is exploring an expansion into China and Bangladesh.

"In order to stay competitive in the business we've built at ArrAy, we have to have offshore capabilities," said Charlie Palmer, ArrAy's CEO. "That's troublesome to me as an American citizen." Still, there are many benefits to outsourcing. A recent report by management consultant McKinsey & Co. said outsourcing helps US companies become more profitable and cut prices to consumers, as well as boost the export of equipment and software to the developing countries doing the outsourcing work. "Unless we pander to protectionism, there is no good reason to believe that our dynamic job-creating economy cannot absorb the level of change" posed by outsourcing, the report said.

Just not immediately. Marc D. Lewis, president of Morgan Howard North America, a job placement firm, said software coders used to making $60,000 or more a year will have to learn newer programming languages to stay employed. "The new jobs creation in this country will stem from intellectual property gains and creativity and better uses of human and machine intelligence," he said.

The invention of new applications, installation and customization of new systems, and sales and marketing will stay in the country, said former Labor secretary Robert B. Reich. "These are the jobs that cannot be done by specialists on other sides of the world," said Reich, a 2002 gubernatorial candidate in Massachusetts. "When we get out of this jobs recession, there will be a large and growing number of technological specialties available to Americans."

EcommerceTimes

An average of 41% of new development activity is now outsourced, according to META Group, Inc. (Nasdaq: METG). Last year, the average percentage of new development from outsourcing providers and external contractors was 35.9% worldwide. Despite political instabilities in India and other parts of the world, more and more companies realize the strategic and financial advantages to using offshore resources for both programming and business processes, according to new findings from META Group's upcoming 2004 Worldwide IT Benchmark Report, which looks at IT trends in various industries across the globe. "IT budget cutbacks have left IT managers little choice but to outsource if they are to get their development projects completed," says META Group executive vice president Dr. Howard Rubin. "IT organizations often use external resources -- such as consultants, contractors, packaged solutions, and outsourcing providers -- to augment and sometimes replace internal resources. Going offshore and using the economics of offshore outsourcing have been the only competitive options left for larger companies since all the IT budget decreases of 2000, 2001, 2002, and even 2003."

There is a substantial increase in the use of outsourcing providers and external contractors for new development in both US and non-US companies. Offshore outsourcing is definitely up as offshore companies mature, providing cost-effective and high-quality services. These companies have found methods for mitigating risk and have compiled a substantial list of strong customer testimonials. India continues to be the preferred offshore country, with more than 500,000 knowledge workers, but other countries are competing -- Russia, the Philippines, Ireland, Israel, and China are the up-and-comers to watch.

Turnover rates for IT staff are decreasing both in the US and worldwide. US turnover is at 8.1%, down from 11.8%; worldwide turnover is at 8.2%, down from 11.7% last year -- such rates are to be expected when hiring is down because those who have managed to hold on to their jobs do not quit when the job market is depressed. Not surprisingly, India, the preferred offshore outsourcing country, is also the country with the highest turnover rate; Canada has the lowest turnover rate.

"There is no doubt that 2003 has been a terrible year for IT workers," said Dr. Rubin. "Staff cutbacks and the unavailability of new positions have sent many IT professionals looking for new career options. However, there seems to be better news on the horizon for 2004 -- we've noticed a recent increase in internal hiring, which could be an early sign of a slow economic recovery."

Upcoming Event

META Group will host a complimentary IT Measurement How-To Webcast on Thursday, November 13, 2003, 11:30 am to 1:00 pm ET (US) -- "How Does Your IT Organization Measure Up to Current Industrywide Spending and Performance Metrics?" This Webcast will discuss how IT organizations from around the world are responding to the current political and economic conditions impacting IT spending, performance, and productivity in the coming year. Our measurement experts, Dr. Howard Rubin and Jed Rubin, will provide a complete review of key investment and performance trends from the past year and an exclusive preview of the top priorities for IT organizations next year based on findings from META Group's new 2004 Worldwide IT Benchmark Report, which will launch on November 18, 2003.

NOTE: If you are a member of the press interested in registering for this event, please contact Samantha Finnegan at (303) 346-3176 or samantha.finnegan@metagroup.com. If you are not a member of the press, please call (802) 872-7350 to register or visit www.metagroup.com.

About META Group

META Group is a leading provider of information technology research, advisory services, and strategic consulting. Delivering objective and actionable guidance, META Group's experienced analysts and consultants are trusted advisors to IT and business executives around the world. Our unique collaborative models and dedicated customer service help clients be more efficient, effective, and timely in their use of IT to achieve their business goals. Visit metagroup.com for more details on our high-value approach.

BUSINESS WIRE

IT folk should consider becoming plumbers

IT IS RARE that a day goes by without US and UK reports of yet another company retrenching local staff and sending the work offshore. It could be in computing or in call-centres but the flow of work continues. Indeed, the recent announcement of an uptick in IT spending in the UK and US has been received in India with some delight because it should lead to even more outsourcing work. The flood of work and the loss of jobs has many people questioning what is happening and there are signs that offshore outsourcing is starting to become a heated political issue in more than one country.

It is clear that the subject of offshore outsourcing is a highly emotional one that is characterised by subjective and often dubious statements from both sides. It is very difficult, probably impossible, to be a pawn in the offshore outsourcing business and yet have an altruistic attitude to the other party.

In India a call centre worker can expect a monthly salary five times the national average and more than twice as high as other openings for university graduates; a software worker with two years experience can expect a salary more than 13 times the national average but still way below US salaries for their counterparts. Is it any wonder that they are keen to take the work and are opposed to any attempt to limit it?

On the other hand, those workers in the countries signing up for outsourcing are seeing their livelihoods drastically altered. They often have loans for their education to be repaid and their lifestyles have been created on the basis of a certain level of income, but now their financial circumstances are changing, with many forced to draw on their savings or other assets. The impact is on them is also felt by partners, families and local communities. Even if you have not been retrenched or are not at risk of being retrenched by outsourcing, this phenomenon will probably not leave you unscathed because there has been a flow-on effect right across the industry.

One of the most interesting aspects of offshore outsourcing is the role played by the various governments.

There was a time when a government supported its people either through favourable employment laws or through the support of businesses which in turn created employment for its citizens. This no longer applies in many countries because big business calls the shots and employing local citizens is not high on their agenda.

In those countries winning outsourcing work the governments are trying to encourage the new industries and they work with industry associations by fast-tracking government and non-government developments, especially those providing telecommunications and facilities infrastructure. These governments are working to support their businesses and their people because all parties are winners.

On the other hand the UK, US and Australian governments are continuing their support for businesses with the full knowledge that those businesses are replacing local workers with offshore labour. It is hard to fathom whether these governments have been hoodwinked by business lobbyists or genuinely believe that what amounts to a sacrifice of a certain section of professional workers is highly desirable for the rest of their citizens. What is easy to fathom is that displaced high tech workers were also good spenders and good taxpayers and that a loss income to these people will have consequences right across the local economy.

Supporters of offshore outsourcing say that exporting jobs is nothing new and they point to the car industry and other industries where jobs have been transferred to other countries. Without exception these earlier jobs were in blue-collar trades, such as manufacturing, where the employees did not have several years of university education behind them and where their re-training for a new and financially comparable role was relatively easy, but the export of high-tech jobs is a different ballgame with different impact.

The UK government has shown its support for outsourcing by hiding behind industry and accepting the argument that it was better to lose a couple of hundred jobs than be forced to close down. This from a government whose own IT projects regularly run over budget and over schedule or whose outsourcing projects consistently fail to deliver the promised savings.

The Australian government declared its attitude by the endorsement of a White Paper that recommended that Australian companies send their IT work to other countries. In recent weeks Telstra, a telecommunications carrier majority owned by the Australian government, has said that it would export 1,500 jobs to India and cut $A957 million in IT costs over the next three years. Those savings are doubtful because they represent an annual saving of about $A200,000 per job and yet the average salary of the current employees is much closer to $A50,000.

In the USA the whole issue of outsourcing has become a political football with some states trying to limit the amount of work to be sent offshore and other people lobbying for changes and favours.

Various people in business and politics are proposing that the US should reduce corporate tax in order to compete with foreign countries. Others are blaming the education system for failing to produce certain types of graduates, or the government in general for failing to encourage skilled foreign students to stay in the country. Only a very few of the outspoken have admitted that they outsource because foreign labour is far cheaper than US labour.

Silicon Valley, and California in general, are especially hurting in this high-tech downturn because the loss of jobs has limited the funding for schools and other facilities and operations financed by the state. Some companies that have sent work offshore have offered to repatriate their profits to help the state but only if the current corporate tax on profits for them is slashed from 35% to 5.25%. Some of these companies have said they are headed for bankruptcy without these funds but others have said if this proposal is rejected, they are happy to spend the money in those other countries and the US will see no benefit.

Not surprisingly, other US companies have declared that the adoption of the proposed cut in corporate tax is an endorsement and encouragement of offshore outsourcing. They argue that these companies knew at the outset that they would be paying tax to those other countries as well as to the USA.

The matter of H1-B visas for high-tech has drawn more attention in Washington than has offshore outsourcing. The US government has now reduced the number of these visas despite the fact that workers on those visas pay US tax and spend money in the local community, which is something that cannot be said for jobs that are simply exported.

Even for displaced IT workers in the USA willing to accept any job in any industry the situation is not good. Official unemployment is about 6% but it is unclear how many more people have slipped out of view after exhausting the nine months of welfare benefits available to them. A study of the figures in September has shown that of the number of unemployed who moved onto federally funded benefits for the last three of those nine months, 75% were reaching the end of that period without finding a job.

Government hands are largely tied regardless of what they may wish to do about the exporting of jobs. That bastion of global trade, the WTO, has mandated that businesses have the right to move workers across national boundaries and arguably moving the jobs themselves is equivalent. Even if governments were under political pressure, it is highly unlikely that they would stand in the way of major companies.

Much has been said about the impact of offshore outsourcing, how it is not damaging the economy and how it will lead to better things, but most statements are either based on wishful thinking or ignore some fundamental truths.

A recent report tried to justify outsourcing by saying that for every $1 spent on business services that move offshore to India, the US gains about $1.13. It claimed savings of 58 cents mainly through lower wages; a further benefit of 5 cents was attributed to increased sales of computer equipment and the repatriation of profits by US companies with offshore divisions will contribute another 4 cents. It then optimistically claimed that US companies will spend the savings to train labour and generate up to 22 million new employment opportunities of higher value, thus creating a further 45 cents for every dollar that is spent offshore.

Nowhere did that calculation include the impact of reduced income for US citizens, the cost of the welfare to support the jobless, the reduction in money gained through taxation or the consequences on the local community which would result from reduced spending. It also neglected the long-term consequences to the economy of the retrenched people drawing on their savings and assets.

There have been confident suggestions that U.S. companies will eventually reinvest the money saved by outsourcing and they expand operations at home, ultimately leading to an increase in jobs at home. That is hard to believe when the CEOs of major companies are saying that they must increase operations overseas in growing markets.

Recent reports have also claimed that the coming en masse retirement of baby boomers will create a huge vacuum for IT skills -- one that even outsourcing companies will struggle to cover. That retirement might not happen because the nest eggs of many people took a battering from the massive falls in the stockprice of many high-tech companies and stockmarket darlings. These older workers are often skilled in older languages and operating but the maintenance of this kind of software has been as much a candidate for outsourcing as the roles of younger workers skilled with new languages and methods.

There have also been assertions that the displaced IT workers will become information workers but no-one has defined this role any more precisely or produced some clear examples of this happening. It is hard to imagine that all of the IT workers who have lost their jobs through outsourcing will find places in this rather nebulous field.

In similar fashion predictions have been made that the IT business will rebound and that there will be jobs for all but these predictions have given no hint as to why such work will remain at home and not also be exported to low-cost countries, assuming of course that such work materialises.

Others have declared that displaced IT workers will find higher roles in the IT departments of their companies but this is a fallacy because without the lower levels in that department there is little need for team leaders, section leaders. At a lower level, recent graduates will have no roles in which to develop their skills. There is also a lack of confidence about higher roles because even the role of the CIO is diminishing with many now reporting to their Chief Financial Officer (CFO) and not the CEO.

One consequence of offshore outsourcing is that students are shunning courses in IT for others with better job security. In Australia the number of university students in 2003 selecting information technology courses as their first choice dropped by 25% by comparison to 2002. They certainly understood the message when their own government encouraged offshore outsourcing.

It has been predicted that only about 500,000 U.S. IT jobs, roughly 5% of the workforce, will move offshore by 2015. It is difficult to know who to believe when others are saying that 10% or even 20% of IT jobs could disappear from the US in the next five years. Whichever figure is correct, it still means a double-whammy because the number of unemployed IT professionals will increase and there will be fewer jobs to employ them.

Inevitably the competition for jobs and the pressure of financial support for the unemployed being limited to nine months will mean that workers are prepared, however reluctantly, to accept lower salaries. Even now the various web forums on this topic often contain examples of where people who have lost jobs to offshore outsourcing have expressed great relief at being able to find a new job even if it pays only 50% of their previous salary. While that lack of jobs continues, lower salaries will progressively spread throughout the entire industry.

Information technology is becoming another utility, much like electricity or water, and like with most utilities, the cost is seen as more important that the quality, at least until something serious goes wrong. It is cost more than anything that is driving the jobs offshore to countries where the knowledge is comparable or even better t certain levels. The simple truth is that any almost job that can be done solely by telephone or data link is a candidate for offshore outsourcing.

There seems little doubt that offshore outsourcing will continue to grow and it is difficult to argue with the costs and logic offered by those performing the work even if one should wish to.

For those who are receiving the work their future looks assured. Indian companies have no trouble attracting employees but according to reports are having trouble keeping them because the employees quickly move to better opportunities in other companies. Those workers are thriving, their personal situation is improving and doubtless they are generally happy.

The choices are far more limited for those who are at risk of retrenchment by offshore outsourcing.

Immigration to the countries offering outsourcing is rarely an option, in part because those countries give first preference to their own citizens but also because no one country suits everybody.

The most sensible option for IT professionals who are on the losing side of outsourcing is to take steps towards a more secure future. Whether that be trying to move into higher levels of IT or into some new profession is something that each individual needs to decide.

Many former IT professionals have moved into the skilled trades and retraining as plumbers, electricians, painters, decorators or heating engineers. They have identified that the shortage of these skills in many English-speaking countries has meant that the money is quite good. In the US especially some IT professionals have moved into nursing because of its growing demand as the population ages and safety from outsourcing, although it is perhaps entirely safe from H1-B visas for foreign workers.

It is certainly very doubtful that any kind of political action will be useful. The power has moved from governments to the business world and even if the government could devise some action which is not in contradiction to trade agreements it is doubtful that companies would comply.

The offshore outsourcing of IT and call centre functions has been just the thin edge of the wedge because similar operations for legal, medical and business activities are already starting. The skilling of labour markets in low cost countries is causing a major shift in global work patterns. Some of this is undoubtedly good but there are major consequences for those whose jobs disappear and those people need to critically look to their future.

Lure of lower costs has sent sales soaring for software services provider in India

By KEITH DAMSELL

TORONTO -- The trend of outsourcing to lower-cost foreign jurisdictions is reshaping the technology sector -- whether Canadian firms want it or not.

Increased competition dictates that technology players find low-cost partners or contract out work, said Ramalinga Raju, chairman of Satyam Computer Services Ltd., a tech provider based in India's booming tech capital of Hyderabad. Mr. Raju was interviewed while visiting Toronto to address an entrepreneurs' association.

"Competition is something you cannot wish away," said Mr. Raju, founder and chairman of India's fourth-largest software services exporter. "More often than not, offshore delivery has meant an offset in costs."

Potential savings are dramatic. In Canada, the average computer programmer with two to three years experience earns between $33,000 and $65,000 annually. In comparison, programmers in India earn between $8,000 and $13,000 each year, reports on-line research firm Neolt.com.

The appeal of lower costs has sent Satyam's sales climbing. In fiscal 2003, the company reported revenue of 20.5 billion rupees ($594-million), up from 18 billion rupees a year earlier. Sales are expected to rise 26 to 28 per cent in fiscal 2004.

"The global economy is showing signs of reviving again and more importantly, global outsourcing and its advantages are now much better understood than ever before. Clients are clearly looking for better value for their money," Mr. Raju said.

Canadian partners include document management software maker Hummingbird Ltd. of Toronto and business intelligence software provider Cognos Inc. of Ottawa.

"It makes sense for us to outsource certain aspects of development," said Andrew Pery, Hummingbird's chief marketing officer. Satyam developed a data warehousing solution that works closely with Hummingbird's analysis software and the two firms co-market their products across Asia and Europe, he said.

In addition, outsourcing frees up financial resources for better use, reports ATI Technologies Inc. of Markham, Ont. All of the company's graphics chips are made for it by low-cost manufacturers in Taiwan, allowing the company to invest more heavily in research and development.

The trend is expected to continue. Research In Motion Ltd. of Waterloo, Ont., currently makes all of its popular BlackBerry communications devices in-house. But "in the next two years, if it makes sense to outsource, of course," Dennis Kavelman, RIM's chief financial officer, told a Toronto investment conference last week.

Nevertheless, many firms are resisting the outsourcing trend. For example, Toronto's Cryptologic Inc. says the value of the low Canadian dollar means manufacturing its gambling software at home makes financial sense.

"The lure of lower-cost development . . . is not a panacea," said Jim Ryan, chief financial officer. Past dealings with India have been marred by long air travel time and problems related to weak infrastructure and networking, he said.

Cinram International Inc. of Toronto said timing makes it nearly impossible to manufacture CDs and DVDs in foreign markets.

"The product has to be very close to the pipeline. The retailers today work on just-in-time inventories and its very critical to be able to ship the product very quickly," said Cinram's chief financial officer Lewis Ritchie.

And finally, nationalism plays a strong role, too. Open Text Corp., a rapidly growing business management and analysis provider based in Waterloo, Ont., has no plans to outsource future jobs, chief executive officer Tom Jenkins said in a recent interview. The company has resisted past offers to move its operations and remains strongly committed to building its Canadian presence, he said.

Nevertheless, Satyam's Mr. Raju argues that "the push for more and more outsourcing" is inevitable as global trade intensifies. Outsourcing will reduce costs and, ultimately, save and create jobs as Satyam's partners grow and prosper, he said.

"This is good news for more mature and developed markets," he said. The company describes growth opportunities in Canada as "significant."

"The offshore model is now a fairly established one," Mr. Raju said. "Customers have stated that offshore delivery has also meant more consistent, reliable service and lower cost."

A few global players will dominate the outsourcing industry, which will be worth $1.2tn within five years, according to an analyst

The outsourcing market, riding a healthy seven per cent annual growth towards an estimated $1.2tn (£0.72tn) in 2007, will be dominated by a few global players in on-demand computing, an industry watcher said.

"There is consolidation occurring across the industry. The future trend is all about on-demand utility computing," David Tapper, programme manager, infrastructure management research, International Data Corp (IDC), said at an outsourcing conference in Bangalore, according to the news wire AP.

Utility computing, when companies access IT resources over a network and pay only for what they use, and on demand computing, are expected to be major new IT drivers. "This trend will create a major restructuring of IT outsourcing and service models," he predicted.

IT firms like IBM, HP, Sun and storage giant EMC are among those promoting a utility model of payment.

He pointed to IBM and HP as global IT leaders in this segment, the Times of India reported. India has had recent success in outsourcing, with the sector making around a quarter of India's total software revenues of $9.5bn last year.

Tapper believes that Indian and other offshore firms must consolidate to compete. "For offshore firms to compete successfully in the US, they need to build scale through acquisitions or consider being acquired," he told AP.

He also noted future opportunities in e-commerce applications, data warehousing, web hosting and storage management.

Traci Gere, group vice president (services), IDC, estimated that "about 12 per cent of US IT outsourcing will go offshore and about 30 per cent and 50 per cent of applications will be outsourced by the US in the next five years."

The Golden Age of Russian Offshore Outsourcing is coming. Most Russian offshore outsourcing companies have doubled in growth in the last two quarters. And for the first time since the IT boom in Russia, new economic stability brought by the Putin administration is keeping Russian brain power back home. And among those who stay, the best and brightest of Russia’s scientists and programmers are working in the field of offshore software development.

By Denise Dubie

Bertucci's Inc.'s James Lux told an audience of network managers recently that he turned to outsourcing to quickly and inexpensively connect the restaurant chain's 90 locations with voice over IP, speed credit card transaction processing and support online applications. "IT is a hard sell in my business. Restaurant people care about good food and service, not about how to manage routers," Lux, vice president of IT, said at an event sponsored by Vanguard Managed Solutions. "I have to make a good case to spend more money in IT."

Lux convinced upper management by detailing how outsourced network services would reduce the time it took to process transactions from about 15 seconds to 2 to 3 seconds. Rolling out Vanguard Group Inc.'s 340 Router and signing on for managed services with the company helped him cut long-distance charges by half and bring Bertucci's up to speed without having to add IT personnel.

"I estimated for the network expertise, I would have had to spend $100,000 on at least one IT specialist in-house," Lux said. "If I was thinking like a larger IT-focused business, it would make sense to hire someone. But as a restaurant, it makes sense to outsource."

According to Gartner Inc., the market for outsourced IT and management services reached almost $280 billion last year and should grow to $410 billion by 2007. A study conducted by ThinkStrategies found 39% of companies doing some form of network outsourcing and another 17% considering network outsourcing.

Of those companies currently outsourcing, approximately 60% are doing so to reduce head count and other costs. About 20% of the companies are seeking to improve service quality and reliability, the study found.

Of those considering outsourcing, 40% say they would like to cut costs, and 30% want to improve service quality and reliability, according to ThinkStrategies.

Among companies not considering outsourcing, 62.5% are concerned that it will cost more than expected and half are afraid of losing control of network operations, says Jeff Kaplan, managing director of the IT consulting firm.

Outsourcing leaders include Computer Sciences Corp., Electronic Data Systems Corp. and IBM, all of which sign multimillion-dollar deals that encompass multiple technologies with enterprise customers. But service providers such as NetSolve Inc., SevenSpace Inc. and Vanguard typically sign contracts designed to fill IT skills gaps quickly for small to midsize companies such as Bertucci's.

Stephen Lynch, director of technology infrastructure at Citizens Financial Group Inc., uses Vanguard's Managed Router service. He said that when his company acquired another company in 2001, he had just two days to get 400 locations connected to Citizens' corporate network. He also needed to ensure consistency across the acquired locations and Citizens' core network. He decided to outsource the job.

"We like to say it was the Jurassic Park of technology, and we had to convert each location," he said.

Citizens was able to get a frame-relay network up and running parallel to the time division multiplexer network the company had in place. With a 12- to 15-person team, Citizens worked with Vanguard to coordinate legacy data, account information and systems. Most important to Lynch was the flexibility of working with an outsourcer.

"We were able to quickly establish communications, negotiate pricing and create a workable contract," Lynch said.

NETWORK WORLD

AMR Research says the number of IT companies that outsource will jump from 20% to 50% in three years.

By W. David Gardner, TechWeb News

Another market researcher is weighing in with predictions that IT outsourcing is poised to grow substantially. AMR Research says the number of IT companies that outsource will jump from 20% to 50% in three years.

"The reason for the dramatic growth is quite simple," says Lance Travis, lead researcher on the study. "Cost savings from outsourcing are too compelling to ignore. The more aggressive a company's outsourcing strategy, the more money it can save. Unfortunately, risk increases along with savings."

The lure of offshore outsourcing is particularly enticing because so much money can be saved, he says. Also, the dynamics of offshore outsourcing are changing rapidly. With the help of improved VPN technology, some IT managers are finding offshore operations that failed just three years ago can often be implemented relatively painlessly.

Network advances in security, leased lines, and storage all contribute to making offshore outsourcing painless for the experienced IT manager who may have a tight budget.

Travis remembers from his days at Hewlett-Packard that networks were not so sophisticated--with the result that usually only the largest of the multinational companies could afford to use offshore outsourcing in a big way. One of the major changes is that companies with undersized budgets now can afford offshore outsourcing because the technology is cheaper and more reliable.

"Almost everyone who does a first offshore [job], has a problem," Travis says. "The second and third attempts gradually get better. The culprit is often a bad process at home."

Many IT managers have poor processes at their internal installations that manage to perform well even though the IT people may be operating in an ad hoc manner, he says. But this situation is a recipe for disaster when operations are moved offshore.

The applications that seem to be most successful in offshore outsourcing are generally the easiest computing tasks--for instance, payroll, human resources, and benefits. Conversely, more complex work--he mentioned ERP environments such as SAP and PeopleSoft--are more likely to fare better when kept in house. Obviously the strategically important IT tasks should remain in house.

As an example of a successful move of computing activity offshore, Travis points to the example of Kana Software Inc. The California-based company has moved most of its R & D functions to India. "They're getting fine quality work in India," Travis says. "But they've kept their product architecture and product management in house."

Closer to home, Travis says the recent boom in compliance initiatives--fueled largely by the recent Sarbanes-Oxley legislation requiring better accounting record keeping--is causing IT managers to consider outsourcing compliance applications. Noting that compliance issues are "non-strategic tasks," he suggests they are good candidates for outsourcing "to experts that guarantee their services."

When an IT installation takes advantage of the repertoire of outsourcing available, Travis says many IT budgets can be cut by 40%. It won't always be easy, he says, but it will be worth it in the long run.

COMPUTERWORLD