Business Forum: Globalization Meets Outsourcing

By Isaac Cheifetz
Published February 9, 2003

The Feb. 3 edition of Business Week magazine offers a cover story titled: "Is your job next?" The article details the increasing long-term trend of big corporations moving elements of R&D, information technology and back-office operations such as payroll and accounts receivable to subsidiaries or partners in low-wage nations.

A dizzying array of countries are described: China is becoming a key hardware and embedded software product development center for electronics firms including GE, Intel and Microsoft. In the Philippines, more than 8,000 Western companies employ accountants, architects and graphic artists. Russia is beginning to market globally the software engineering talents of its first-rate technical educational system.

But India is dominating. IT services, call centers and back-office outsourcers generate $10 billion annually. Homegrown Indian service providers such as Tata and Wipro are global giants, and most Western software and service providers have Indian operations.

Is this another example of corporate jobs chasing low wages around the world? The past several decades have seen the manufacturing jobs of many industries migrate overseas, generally to Third World countries with lower wage rates and fewer rights for workers. Apparel is rarely manufactured in the United States today; the label is much more likely to say "Made in China" or "Made in Bangladesh."

The trend toward professional offshore outsourcing, to a substantial extent, is driven by cost. College-educated, English-speaking professionals in Third World countries are paid 10 to 20 percent of an equivalent American professional. Such savings are catnip to American CIOs and CFOs attempting to cut costs in the current economic downturn.

But it is just as accurate to say that jobs are chasing trained brains, sending work to regions with highly educated and motivated workforces. The cost factor -- which encourages Westerners to take risks on this new paradigm -- is an enabler, not the core driver.

Decline of U.S. Programmer?

In 1992, Edward Yourdon, a leading software engineering methodologist, published "The Decline and Fall of the American Programmer." Yourdon put forth a shocking thesis: It was not only low-paying manufacturing jobs that were at risk to move to foreign countries but software programming as well.

Yourdon described how India was competing on quality as well as cost. India's technical university system had become first-rate, with classes taught by MIT-and Berkeley-educated professors who had returned to India. The brightest and most motivated students out of a population of 800 million competed for entry to these elite schools.

Yourdon, a pioneer of structured software development methodologies, made clear that U.S. software developers were not necessarily more sophisticated than their Indian counterparts. Though most innovations in software engineering were created in the United States, Indian software development organizations tended to be more consistent in treating software as an engineering discipline rather than a creative function.

There also were the issues of motivation and employee retention. Maintaining an outdated but critical mainframe application would be a job of last resort for an American engineer but an entree into the international economy for an Indian counterpart.

Yourdon's prescription for U.S. programmers was to compete by adding value through business and process savvy, and giving up their self-image as technical high priests. This advice had a powerful impact on my career as an executive recruiter at the intersection of business and technology.

Validation in Time

Yourdon's vision largely has been validated by events of the past decade.

As software systems grew in their size and sophistication, corporations bought "shrink-wrapped" business applications from software vendors such as Oracle and SAP. IT departments are finding that their chief challenges are not technical but strategically aligning IT with the business they support and improving the return on investment of their companies' IT spending.

Additionally, the re-engineering of the Global Fortune 2000 during the past 15 years resulted in a large increase in the outsourcing of corporate back-office functions outside of a company's "core competence" or "value proposition." This outsourcing also is moving to countries with well-educated, English-speaking workforces, such as India and the Philippines.

The Internet certainly represented a burst of technical creativity, but it ultimately is an enabler for offshore outsourcing. The increasing robustness and flexibility of Internet technologies are enabling office parks in New Delhi or Kuala Lumpur to operate an international call center or technical support line as reliably as one could in Chicago, at a fraction of the cost.

How to Compete

How big a threat is this trend to us and out economy? What are the best practices for companies considering offshore outsourcing of professional work? What can regional governments do to position themselves to compete?

Next month's column will focus on offshore outsourcing strategies. But here is a short list of critical factors to consider:

• Societies can compete by raising the bar on citizens' education and sophistication. Ultimately these jobs are chasing elite educated professionals, not just lower cost. You cannot buy or legislate jobs, but you can attract them.

• Corporations should avoid the errors made during the reengineering era of the early 1990s. Outsource offshore strategically, not tactically.

The Business Week cover story quoted a Gartner Group study that said: "Many companies simply haven't thought these questions through. CEOs are rushing to shift jobs now in their desperation to slash costs and boost the bottom line, but with little understanding of whether or not they're enhancing or endangering core operations."

Ultimately, the rise of middle-class professional workforces in India, Korea, Taiwan, the Philippines and other countries represents the triumph of U.S. dynamic capitalism.