Governments promote outsourcing at their peril

IN PART ONE of this article we noted that offshore outsourcing holds some great attractions, that a very large number of countries are getting involved and that they are certainly gaining plenty of customers. Now we will look at what the implications may be for IT professionals in "customer countries" and how governments are reacting to this phenonemon.

The first clear consequence of transferring work to an offshore outsourcing provider is that the locals will lose their jobs. That could be regarded as acceptable if the numbers are small, but they're likely to be a little on the large side.

The whole outsourcing industry is still quite young and it is difficult to predict its growth and impact with any kind of accuracy in the short term, let alone the long term, but as wild as they may be, some predictions make sobering reading.

In a report here, unnamed industry experts predicted that in the long term, offshore outsourcing services will reduce demand for IT staff in the UK for certain types of work by about 30%.

In the USA, Forrester Research Inc predicted that the IT sector will lead the exodus of jobs and that a total of 3.3 million jobs and $136 billion in wages will be transferred to countries like India, Russia, China, and the Philippines by 2015 (See here).

The most worrying factor is that these predictions were probably made on the basis of the events at the time - late 2002 - and do not take into account any continuing slump in the economies of the USA and Western Europe.

The currently stagnant economies means that companies are continuing to search for ways to reduce costs and so offshore outsourcing must be looking even more attractive. Even when the economies improve, companies that outsource will be unlikely to return to former levels of in-house employment.

We are far more likely to see that the additional outsourced work actually helps a lot of companies in low-cost countries gain experience, and they will start to offer services at a high-level on the IT pyramid. Outsourcing will continue to be a very attractive way of doing business, especially if companies continue their focus on the bottom line.

The signs are that outsourcing services will continue to thrive. They might come under market pressure caused by having many competitors and limits to what they can physically provide, and they will grow quite nicely - but to the detriment of displaced IT professionals.

One consequence of having large numbers of unemployed IT professionals is in Silicon Valley, where unemployment has risen from a low of 1.8% in September 2000 to almost 8% now. Businesses are feeling the impact of having less money in the area, stores are closing and about 25% of commercial property stands empty. Community-funded facilities such as schools are also hurting because there is less money available to them.

Extend that situation across the whole range of jobs that are outsourced now, or have the potential to be outsourced, and the situation is not pretty. Some people will be without a job, and will rely on social security payments but the government will extract less tax because people are not working.

In the UK, and in many other countries with government funded pension schemes, the ability to pay these pensions in future years is already causing concern, let alone the further burden of reduced government income through tax.

Certainly some displaced people will find other jobs, but it is difficult to see how a large number of these people could move to higher jobs and help the country become "knowledge workers" which is what some analysts claim. We are, initially at least, talking of lower levels of IT work such as data-entry and software development.

These are not jobs that are just one short step from project managers or from being specialists with skills that cannot be matched offshore.

The entire IT business is being eroded from the bottom up, from these lower levels and up to project management as more and more skills are acquired by these outsourcing companies. This has the potential to alter the structure of any IT department that deals with outsourcing - assuming of course that the entire department itself is not outsourced.

The lower echelons of these departments could easily disappear, because, even now, those skills are readily available offshore. IT managers will really be contract managers, in order to deal with the outsourcing contracts.

Gone will be the days of rising through the ranks of a company as a person gains skills and experience. The IT manager of the future will probably have little background in analysis, software development, testing, debugging or software evaluation. He or she will be trying to manage or coordinate activities that they really know very little about.

It is also entirely possible that the role of the IT manager will disappear, with local outsourcers dealing directly with a company's accountants and senior officers, and then engaging the offshore office to create the entire turnkey solution.

The consequences for IT education in the face of growing outsourcing are also enormous. It is the new, relatively inexperienced graduates that are most vulnerable to being displaced by outsourcing. New graduates want to receive good salaries, but those salaries are very difficult to justify when experienced people can be hired at half-price or less in some other country.

The demand for such courses is likely to be quite low when it is clear that job prospects are quite poor. Who knows which courses will stay relevant to the industry when so much IT work goes offshore?

In the face of these changes at a professional and social level, you may wonder what your government is doing about outsourcing, especially offshore outsourcing. It will, after all, be the government that suffers some of the consequences of the displacement of these people.

The most overt example of government endorsement of outsourcing in general and encouraging offshore outsourcing comes from the Australian government.

In December 2001, when the downturn in high-tech was patently obvious and unemployment was common in the Australian IT industry, the Department of Foreign Affairs and Trade produced a report about the Indian economy and the prospects for Australian companies to do business. (See here.)

This report, sponsored by major companies, ignored the situation of Australian IT professionals and stated in the executive summary, "…the Indian IT sector is flourishing due to its strong comparative advantage in relatively low cost skilled IT engineers and supportive government policy. Significant opportunities exist for Australian firms to enhance competitiveness through direct investment in and outsourcing to the Indian IT sector."

So much for the consequences to anyone except businesses that will reap the benefits of low-cost labour.

In Australia the respective state governments have also been happily outsourcing all of their IT operations en masse. This "all-of-government" outsourcing has resulted in such things as the IT operations for the South Australian government being done by EDS at their centre in the west of London as reported here here. Whether it was known at the time or not, the South Australian government is endorsing offshore outsourcing in a big way.

The UK government has been keen to outsource most of its IT activities to private companies but the government has said very little about offshore outsourcing. The Meta Group states here, that ...major outsourcing vendors like EDS and Accenture [who handle a lot of UK government work- Ed.] have developed their own offshore capabilities; rather than trying to sell clients on a pure offshore outsourcing model, however, they state that they will selectively use an offshore division as a less-expensive delivery engine for fulfilling outsourcing engagements."

Despite some offshore work being very likely, at least in the eyes of the Meta Group, the true extent of such work remains unknown and the matter has not been discussed in detail in the British Parliament.

The only clear reference to offshore outsourcing in Hansard recordings is an exchange in July 2002 and found at the foot of here. This comment makes it clear that data processing for the Criminal Records Bureau was being subcontracted out from the local outsourcing company to one in India. The government showed no concern about this situation other than about the accuracy of the data entry.

Offshore outsourcing is certainly more openly discussed in US government circles. In some recent developments the state of New Jersey has approved a bill which forbids state agencies from using contractors who send work offshore (See here).

Apparently, the state had lost a lot of IT work from its large pharmaceutical and telecommunications industries to offshore outsourcers. The last straw came when New Jersey state senators were unhappy that the state's welfare services phone lines were being operated by a call-centre in India, and they decided that the loss of jobs was becoming too great.

In another recent development, two senior federal IT policy-makers have stated that they had no objection if government contractors used offshore outsourcers for non-sensitive, non-strategic coding. (See here). They basically said it could save taxpayers' money and that the critical factor was that the software met quality standards. One policy-maker declared: "I don't have a problem if work for the government - if it's done cheaper, same quality, talking about best values - is going offshore…I see my job as trying to be an honest broker here to get the best value for the country."

From all the above, it would seem that governments are unconcerned about IT work going offshore and locals losing their jobs. In all three cases the government seems far more concerned about the financial advantages to the country as a whole. It really does seem very short-sighted, because governments will have to bear the bunt of some of the consequences of these actions. Perhaps like governments almost everywhere, they really don't care about future problems because in all probability another set of politicians will have to deal with them.

In many respects this offshore IT outsourcing was inevitable, because it is a very easy way for countries to rapidly develop. One doesn't need a huge investment in plant and equipment for manufacturing but just some computers, some reasonable telecommunications infrastructure and some knowledge. There are no significant costs of raw materials or costs of transporting goods to markets. IT has drawn foreign money into these countries and it has created jobs that are generally well-paid by local standards. The development of the infrastructure to support this kind of work has also been very beneficial to these countries.

The workers in IT outsourcing in these countries have much to smile about, but not so those who have been displaced. I am sure that for them, the situation is extremely depressing.

To other IT professionals who are still working in the "customer countries" the best advice is to be aware of the risk that your position may be outsourced, and try to take appropriate action. For some, it may be making that extra effort to acquire skills which will make it difficult to outsource you, but for others it might simply be having some kind of "insurance" to fall back on when outsourcing happens.

And for anyone who is about to join or rejoin the IT profession, either through education or some kind of return to work scheme, think very carefully before you do so because low-level jobs are the usually the easiest to outsource. µ