Leaping, Then Looking

By Larry Dignan Print this article Print

You want to lower costs. You will be managing projects globally. But the move of programming and other top jobs abroad has implications for national security. And you just might be creating your next rival.

Chris Heim knows he'll have to eventually send some of his product development work to India, China or some other country.

The chief executive of HighJump Software, a supplier of supply-chain software based in Eden Prairie, Minn., has a rival that already has 200 developers in India, getting paid about $10,000 a year each. He has 80 developers in the U.S., where those skills are worth an average pay of about $80,000. "At some point we'll have to do it," says Heim. "I just don't see the spread stopping."

Heim, like other heads of U.S. information technology firms, has his reservations about hiring or renting talent in other countries that are not on his direct payroll. He worries about protecting HighJump's intellectual property, if he provides source code to "outsourcing" companies that he hires at cheap wages to enhance his products. He worries about the morale of employees at home, who will worry whether their jobs are the next to disappear overseas. He's even worried about whether he will be seeding the undoing of his own company, by giving a new set of smart outsiders the keys to his company's intellectual property. "Are we training our future competitors?" asks Heim.

He doesn't have the answers. But there are plenty of questions about the burgeoning practice of using inexpensive foreign labor to develop software; and its effect not just on the suppliers and users of information technology, but the U.S. economy itself and its tax base. If high-value jobs disappear, so also could the funding and the brains that will bolster homeland security. What happens if the U.S. winds up losing its technological edge? Will the tax base be gutted as well-compensated technology professionals lose their jobs? How long will it take for a displaced worker to get back to par with the salary lost? What will that worker do? What's the impact on education? Or on national security?

Despite those worries, how can you not consider employing offshore software programmers and stay in the game with cost-conscious competitors? Can companies offshore every piece of their businesses? How, as a technology project leader, do you manage, when not only the pieces of your network, but your people—in different disciplines—are spread globally?

No one knows all the answers. But, by the time better understanding emerges, it may not matter. Few executives are stopping long enough to ask questions because they have to cut costs to keep their jobs.

Offshore outsourcing in technology has been gaining momentum for years, but the movement was largely masked by the prosperity of the late 1990s. It became commonplace as companies prepared their infrastructure for potential Year 2000 problems. During the tech boom, offshore outsourcing was a way to alleviate a shortage of workers in the U.S. Today, offshore is a primary way to cut costs. Now the bandwagon—including the likes of J.P. Morgan Chase, IBM, Electronic Data Systems and a bevy of others—is rolling downhill.

But unlike manufacturing's slower move offshore, technology is moving at its usual breakneck speed and the labor market may not have time to adjust. Consultancy Gartner Inc. projects that one out of 10 jobs at U.S.-based information technology product and services companies will move offshore by the end of 2004. For technology workers in corporations, one in 20 jobs will move offshore. Forrester estimates 3.3 million services jobs will go offshore over the next 15 years.

It's possible educated workers can find new careers on the fly, but the more likely scenario is short-term displacement in careers that were coveted just three years ago.

Meanwhile, the economic effects behind moving technology jobs offshore may be larger than when manufacturing moved abroad. These higher-paid jobs contribute more to gross domestic product.

According to research firm Economy.com, roughly 800,000 back-office jobs, a conservative estimate that includes a bevy of white-collar employees including programmers, will leave the U.S. forever over the next five years. Assuming a worker makes $60,000 a year, that's $50 billion in lost wages and $60 billion in economic activity, assuming those workers buy other goods and services. Total tax loss: $13.4 billion. That's a big number but a pittance considering the Pentagon says it has spent roughly $4 billion a month to fund military activities in Iraq since January.

So far, the debate about offshore outsourcing has been framed by free-market proponents who believe that the U.S. economy will adapt and any displaced technology workers will move on to a yet-to-be-discovered "next big thing." The aging of the U.S. populace, for instance, means that a large portion of experienced programmers and technology executives will be retiring over the next dozen years anyway; and there won't be as many homegrown replacements as in the past as the baby boomers give way to Generations X, Y and Z.

On the other side are groups such as the Washington Alliance of Technology Workers, which wants Congress to impose limits on offshore outsourcing. According to executives using offshore outsourcing or pondering it, there's more nuance to the debate.

"To a certain degree, your competitors are doing it and delivering products more cost effectively. You get to a point where you have to jump in that game whether you like it or not," says Marge Putman, CIO of Relizon, a process-management company. "On the flip side, you look at what is that doing to the U.S. economy. It's an economic balance, conscience balance and a moral balance. Of late, the economic balance is at the forefront. If the prevailing mindset out there continues, you have to wonder what point is the stopping point, and is there one?"

This article was originally published on 2003-09-05
Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.
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