The Hindu : Opportunity or threat?

Online edition of India's National Newspaper
Tuesday, Dec 23, 2003

Opinion

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Opportunity or threat?

By Steve Lohr

The shifting of some technology jobs abroad fits into a well-worn historical pattern of economic change and adjustment in the United States.

THE U.S. economy is finally getting stronger, but there seems to be one unsettling weakness: the apparent wholesale flight of technology jobs like computer programming and technical support to lower-cost nations, led by India.

The trend is typically described in ungainly terms — as "offshore outsourcing" or "offshoring." But that rhetorical hurdle has done nothing to lessen the recent public debate and expressions of angst over this kind of job migration. There are some early signs of political reaction. Last month, for example, the State of Indiana pulled out of a $15 million contract with an Indian company to provide technology services. And a proposed bill in New Jersey would restrict the use of offshore workers by companies doing work for the State.

Forrester Research, a technology consulting firm, published a report this month pointing out that the movement abroad is only gradual. It bemoaned "the rising tide of offshore hype." Yet Forrester itself played a significant role in framing the debate, as well as stirring fears, with a report last year. It predicted that 3.3 million services jobs in America would move offshore by 2015, and that the information technology industry would "lead the initial overseas exodus."

So what is really happening? Is the offshore outsourcing of technology jobs a cataclysmic jolt or a natural evolution of the economy? The short answer is that the trend is real, irreversible and another step in the globalisation of the American economy. It does present a challenge to industry, Government and individual workers. But the shifting of some technology jobs abroad fits into a well-worn historical pattern of economic change and adjustment in the United States.

"To be competitive and to maintain and improve American living standards, we have to move up the technology food chain," said Craig R. Barrett, the chief executive of Intel. Intel represents a good example of a company that successfully navigated an earlier round of threats from international competition, from Japan in the 1980s.

In the early 1980s, Japanese chip makers appeared to be taking the semiconductor industry by storm. The Japanese were focussed on the market for memory chips, which store data. At the time, Intel was getting battered and still got much of its revenues from memory chips. It made a bet-the-company decision, abandoned the memory-chip business and focussed on microprocessors, the bit-processing engines in personal computers. The bet, of course, paid off. In retrospect, Intel's triumph might seem to be a foregone conclusion. But it did not necessarily look that way back then.

Today, the overseas challenge in technology services comes from linking nations with strong education systems like China, India and Russia with the global economy. The spread of high-speed Internet connections in the last few years has meant that Indian programmers are a mouse-click away from American corporations that are eager to cut their software development costs.

The salary comparisons are striking. A programmer in the United States would earn about $80,000 a year on average, compared with $20,000 or less in India. But analysts say the actual cost savings are not proportionate. Whole stages of a project — analysis, design and deployment — typically require face-to-face meetings. Communications and cultural differences add to costs and sometimes reduce effectiveness.

On a typical corporate software project, employing 40 programmers for a year, the savings from offshore outsourcing in India would be more in the range of 20 to 40 per cent less than employing higher priced labour in the United States, estimates Joseph Feiman, an analyst at Gartner Inc., a research firm. Sometimes, American services firms with special expertise are the preferred choice, despite higher labour costs.

Some offshore work has returned to the United States, but whether the few reported cases represent any kind of incipient "backlash," as it is sometimes portrayed, is uncertain.

A closer look at the job migration numbers finds them less frightening than at first glance. Take the Forrester figure of 3.3 million services jobs moving offshore between 2000 and 2015. To begin with, projections of the future are always tricky, and even more so when one tries to look 12 years ahead. The Forrester projections show that half of the 3.3 million jobs expected to move offshore are in traditional office services, like bill processing and order handling. Only 14 per cent of the total are in computer services.

But even the larger number of 3.3 million needs to be put in perspective. The United States has more than 130 million employed workers, about 70 per cent of them in the services sector. Over the last 10 years, 3.5 million private sector jobs a year have been created on an average, or 35 million. Even in good years, a lot of jobs are lost through layoffs and business closings — 2.5 million in 1999, for example. Given the normal job creation and destruction in the economy, the Forrester projections of offshore movement — roughly 214,000 a year from 2000 to 2015, in all categories of service employment — do not seem so alarming.

The difficulty of finding good jobs for workers, however, is a thorny policy issue. In software development, for example, the jobs that will continue to reside toward the top of the proverbial economic food chain will be for people who can use technology to solve problems in specific businesses like banking, manufacturing and retailing. The software jobs most at risk, analysts say, involve straightforward coding. Not everyone is going to be able to make the transition from software coder to designer. — New York Times

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