Outsourcing--its value and its costs--has been a dividing issue driving a wedge between IT management and IT workers for several years. Previously, the high-tech sector was divided by the issue of quotas for H-1B visas--the visas that allow highly skilled workers from other countries to fill vacancies in the U.S. job market. IT has been at the center of these management/worker clashes since the beginning. Now the issue of outsourcing--including IT outsourcing--has become a national debate as congressional leaders and political candidates try to square their positions. Most recently, this debate has culminated in new legislation aimed at tracking outsourcing's impact on the U.S. economy and instituting requirements upon organizations that practice outsourcing.

Defining Traditional Outsourcing

Outsourcing is nothing new, though the term has taken on new meaning in the last three years. Companies have for years hired other organizations within the services sector to perform specific functions: Hiring janitorial services, accounting services, legal services, and IT consulting services could be considered "outsourcing." If the organization no longer felt these functions fell within the central mission of the organization or if the cost of acquiring those services from the outside was more economical, companies often sought those services.

Outsourcing has been beneficial too. At this traditional level, it has helped spawn an entire industry sector within IT, including traditional data processing services in the 1970s and large consulting practices consisting of programmers and systems analysts who supplemented the requirements of in-house data processing. Many of the largest packaged software companies in the U.S. began as "outsourced" providers of software to companies that needed customized solutions.

Indeed, IBM itself has been a key outsourcing service provider throughout its history, providing one-stop shopping for everything that organizations needed to perform their data processing requirements. In the past, companies chose these services because the cost of acquiring them was in line with the expertise provided, the quality of services delivered, and the shortage of skilled resources in the local economy.

Outsourcing Versus OffShoring

However, two dynamics have shaped the outsourcing services of today: The globalization of communications and the worldwide availability of skilled knowledge workers. These factors, combined with pressures of economic globalization, have had a step-by-step impact on the very definition of outsourcing in 2004.

1. Cheap Systems: The first step was the impact of cheap hardware and software that enabled the boom of worker productivity in the 1990s.
2. Internet: Cheap systems led quickly to the development and acceptance of the Internet.
3. Increased Labor Demand: The explosion of the Internet created demands for better, faster products within the IT sector, which led to the unprecedented rise in the value of skilled IT labor. By the end of the 1990s--with Y2K concerns and new technology implementation at an all-time high--IT workers were riding high with good salaries, excellent job prospects, and an unparalleled backlog of IT projects that were clamoring for attention.
4. Increased Competition: Meanwhile, manufacturers of hardware and software were being pressured by competition to fill job positions with less-expensive IT workers.
5. Labor Studies: In response to the needs of the manufacturers of IT software and equipment, the Information Technology Association of America (ITAA)--an IT sector lobbying organization in Washington--conducted a series of high-profile, industry-sponsored surveys that concluded that the IT industry was suffering from a devastating lack of qualified IT workers.
6. Anti-Labor Legislation: The conclusions of the ITAA report called for a dramatic increase in the number of H1-B visas issued to "qualified" workers from other countries. Congress relented, and the numbers grew to over 150,000 visas per year. Yet so questionable were the conclusions of the ITAA studies that--even in 2001, when IT workers were starting to be laid off at alarming rates--the ITAA continued to press Congress to increase the visa quotas.
7. Escape of IT Knowledge/Skills: What was not anticipated during the height of the H-1B debate was the damage that had already been inflicted on the structure of IT services within this country. As the availability of the Internet spread to other countries, so too did the knowledge required to create highly skilled IT workers.
8. Offshoring: By 2001, domestic IT management realized that--instead of hiring foreign skilled workers through a faltering H-1B visa program--they could more simply and economically outsource entire projects to these workers over the Internet. By 2002, the purported savings in labor costs had spawned a whole new sector of foreign outsourcing organizations, and analysts predicted that the industry would grow by 20% that year. However, these analysts severely underestimated the response: The industry mushroomed to grow at an estimated rate of 46%.
9. Economic Recession: Last summer, Congressman Tom Tancredo (R-CO) introduced bill HR 2688, which calls for termination of the H-1B visa program, primarily in response to public realization that H-1B visas were seriously impacting technical and scientific jobs employment in the United States. Last October, Congresswoman Rosa DeLauro (D-CT) introduced bill HR 2702 to modify and restrict the number of L-1 visas. However, at this writing, both bills have been referred to subcommittees and appeared stalled.

The Impact of Offshoring

By the end of 2002, many domestic IT consultants were suddenly faced with a difficult choice: They could seek full-time positions at a lower wage within the companies where they had previously consulted, or they could try to compete with foreign outsourcing services that provided cheaper packaged deals. Those that were offered full-time employment often felt understandably cheated by the globalization of their industry, but others felt that they had barely "missed the bullet" of unemployment during the IT recession of 2002. However, the trend of global outsourcing was still building momentum, and no one's job has proven safe.

Offshoring Goes Mainstream

2003 proved to be the year that global outsourcing offshore moved into the mainstream of IT and corporate business planning. Beyond IT, entire industries were being moved to countries where the cost of labor is lower and the requirements for workers' benefits are not as stringent. Within the manufacturing industry sector, Chinese and Southeast Asian manufacturing subsidiaries have blossomed, while the North American Free Trade Act seemed to encourage a flight of manufacturing capital to Mexico and Canada. The movement of manufacturing facilities may have eliminated the higher labor costs for the parent companies, but those moves have had drastic effects on the levels of employment for domestic workers. A similar trend has placed entire IT departments at risk, further eroding opportunities for full-time IT employment within the U.S.

Jan 12: Daschle Bill Introduces "Jobs for America Act"

Last Thursday, in apparent response to the ongoing employment crisis, Senate Minority Leader Tom Daschle (D-SD) introduced a bill entitled Jobs for America Act to bring the issue of offshore outsourcing to the forefront of the American jobs agenda.

The Jobs for America Act would require companies that send U.S. jobs overseas to report how many jobs are being shipped overseas, where they are going, and why. Daschle said that the legislation was introduced in response to the President's new policy, which states that "the outsourcing of U.S. service jobs to workers overseas is good for the nation's economy."

"Alice-in-Wonderland" Economics

According to Daschle, "This week, Americans learned something important. Exporting jobs isn't an accident--it's Administration policy. This is Alice in Wonderland economics." Daschle continued, "America has lost 2.9 million private sector jobs since January 2001. Nearly every state in the nation has lost manufacturing jobs, and, contrary to the Administration's economic theories, there is nothing good about it. The Administration is putting corporate profits ahead of American jobs. And the exporting of jobs is hurting millions of Americans and countless communities across the country."

Daschle was joined at announcement of the bill by a former network engineer and computer programmer, Chuck Hackett, from Cleveland. Hackett lost his job to outsourcing nearly two years ago. "Before I was laid off, I was asked to train a replacement worker who was hired for lower wages," Hackett said. "This is a disturbing trend not only in my community, but in many other communities, and middle-class workers are feeling the brunt of it."

The Jobs for America Act would require companies that lay off 15 or more workers and send their jobs overseas to provide at least three months notice. The legislation would also require notification to the Department of Labor, state agencies responsible for helping laid-off employees, and local government officials. Such notification would inform policymakers about where job loss is most acute and help them further address the problem.

IT Workers' Response

Listening to the announcement, high-tech labor organizers praised the legislation, saying it could impede companies from sending work overseas, in part by making offshoring more expensive. "I think it can have a potentially significant impact--it sounds fantastic," said Marcus Courtney, president of the Seattle-based Washington Alliance of Technology Workers. According to Courtney, "Once state and local governments are aware of a company's offshore intentions, there can be a lot of pressure points applied to companies moving work overseas, such as attacking tax breaks they may be receiving."

A former IBM employee who is now a union organizer was quoted as saying that the legislation's disclosure requirements are exceedingly important. Robert Montefusco, now working for Alliance@IBM, which is trying to unionize IBM, said, "Disclosure is something companies do not like to do." He believes such a law will make companies think twice before offshoring work.

Will Legislation Stem the Tide?

Meanwhile, many IT sector analysts dismissed the Daschle bill as a naive attempt to pacify jobless workers during an election cycle. For instance, META Group analyst Stan Lepeak was quoted as saying the proposed legislation will have a minor effect because companies are motivated by so-called "solid business reasons." According to Lepeak, companies will continue to outsource to U.S.-based organizations, that would in turn, ship the jobs overseas.

In exactly such a move, Sprint PCS announced last week that that it was outsourcing all of its customer technical services to the IBM Services organization, which has major outsourcing holdings based in India. Since IBM is an international organization based in the U.S., it's doubtful that legislation like the Jobs for America Act would have an impact.

Is IBM's On Demand Strategy a Shill for Outsourcing?

Indeed, IBM's entire On Demand strategy for IT services is the epitome of a technical and financial mechanism that rewards organizations that spin off services toward outsourcing. The structure of IBM's touted "On Demand Journey" positions larger corporations to purchase IBM's products and services by depicting IT services as commodity utility services. IBM encourages corporations to build IT structures that enable them to purchase these services--"on demand"--from the cheapest and most efficient source. Meanwhile, within IBM's own portfolio of customer offerings, IBM Services continues to be one of its most profitable businesses.

Where Are We Headed?

MC Press has been covering the labor issues of H-1B visas and offshore outsourcing since these impending conflicts first surfaced in 1995. We have not only reported events, but also analyzed the impact in article after article throughout the years.

Though the trend for IT employment is not encouraging at present, such trends have been cyclical since the earliest days of data processing, when companies had few choices beyond IBM's proprietary hardware/software offerings. The question is "Are we in a cyclical phase now?"

I believe the trend toward offshore outsourcing will continue until one of the following occurs:

• Labor costs globally become equal.
• Drastic global economic or technical disruptions occur.
• Domestic and/or international legislation intervenes to address the disparities of the market.

Unless one or more of these factors intercedes, global corporations will continue to seek the cheapest labor sources, technology will continue to help fulfill those requirements, and governments will embrace the tools of technology to provide educational services to its citizens to improve their opportunities for employment in the global economy.

Can Legislation Be Effective?

Legislation can, indeed, impact the current trend, just as antitrust legislation broke IBM's IT monopoly in the 1960s and attempted to chasten Microsoft in the 1990s.

Still, the issue is not simple: IT outsourcing, as a financial tool, has a justifiable and historical place within business planning. It is not outsourcing that is creating the problem; it's market forces that are creating a disparity in labor costs.

The current global economic discrepancies between U.S. and offshore labor costs have seriously eroded the domestic social value of such practices. Today, offshore outsourcing is not "business as usual." It's capitalizing upon a discrepancy in global resource anomaly.

Opinion

All countries establish immigration policies to protect domestic society. All governments establish import and export policies on technologies and goods that travel between nations. These policies are put in place to protect domestic society and to protect industries. The question we are faced with today is "Is information--and its supporting services--something that governments need to protect?"

We have already entered an era in which domestic security and international terrorism are being rigorously readdressed. Information security is a key aspect of that effort. Are we also at the brink of a new era in which information itself--and the services that facilitate the transportation of that information--will be regulated? Is this good social policy even as it proves to be poor economic policy for the global markets?

Certainly, that is the debate that is beginning to surface within the United States. And I, for one, believe that the prospect of government regulation of IT outsourcing is truly in the offing.

Regardless of the outcome of the Jobs for America Act, MC Press will continue to cover the IT issues as they appear.

Thomas M. Stockwell is Editor in Chief of MC Press, LP.

Thomas Stockwell

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Thomas M. Stockwell is an independent IT analyst and writer. He is the former Editor in Chief of MC Press Online and Midrange Computing magazine and has over 20 years of experience as a programmer, systems engineer, IT director, industry analyst, author, speaker, consultant, and editor.  

 

Tom works from his home in the Napa Valley in California. He can be reached at ITincendiary.com.