Talk:IT Outsourcing: Economic and Policy Analysis

Some considerations for the project: where the outsourcing predominantly goes to. Some of the main case analysis we could make are India or China. As for as IT outsourcing, I think India is the where most US firms are outsourcing to.

Reasons for this: living costs in India are low, India's government focuses alot of its policies to increase their worker's value in the IT sector. From a source (I will do more research on this), earning a $72,000 salary in India, you could live as if you had $100,000 in the US.

Bush administration encourages outsourcing. There was a recent release referring to outsourcing, and basically the Bush administration is mainly concerned with profit maximization, efficiency, but not American "equity". (Are Americans even at par with Indian workers in regards to education level?)

France enacted tax cuts for firms to discourage outsourcing. There are a few articles on this, but I have yet to read them indepth.

Even with tax cuts, firm expenses [including logistics such as operating expenses like high-speed internet access, janitor wages for its facilities, secretaries, airconditioning, complementary food in break rooms-- things often taken for granted at US firms] are much higher than in countries such as India.

India has a surplus of highly skilled, educated individuals, and they are willing to work for a lot less.

• what risks do we run when we outsource IT?

-Mandy

Economic considerations to outsourcing

On the US-firm side, the consideration of whether or not to outsource is made on the basis of a cost/benefits analysis. In this analysis, US firms take into account some of the following in determining whether they choose to outsource or not.

Costs: Increased transportation costs Increased competition from abroad Lower employee morale with lower employee wages and fear of losing jobs

Benefits: Lower cost of production of good Lower wages paid (due to lower standard of living) Cut costs go towards R&D, marketing, business development Decrease layoffs

On a policy leve (US government policy), we would consider the tradeoff between exploiting comparative advantages by outsourcing and the redistibutional effects of outsourcing (loss of lower-level jobs, decreased wages, increased competetiveness from abroad). Its important to confront the tradeoffs with the various costs and benefits to determine how the US should create policy, if at all, to speak to the issue.

User: mandy_c I think communication could be costly as well. And as far as money saved going into R&D, I think it might be a strong assumption. During an earlier discussion I had with someone, they pointed out to me that there are various things that a firm could do with increased profits. Some of these could be simply pocketing the additional profits to increase the value of their shares, or declare more dividends-- it mostly depends in where on the business lifecyle the firm is and whether R&D is a priority. But yes, you're right that it definitely increases the capabilities of the company to develop.

User: bradstr The series of articles (specifically "Sink or Schwinn") in the Nov 13th Economist has some good themes related to this: "Cheaper labor brings down production costs. This keeps companies competitive, raises profits and reduces prices as firms pass their lower costs on to their consumers....Companies spend their profits on improving existing products or introducting new ones. Customers buy more of the things they already consume, or spend the money on new goods and services. This stimulates innovation and creates new jobs to replce those that have gone abroad."

User: bradstr There may be some interesting data in a 2003 McKinsey Global Instituate Study to bolster the argument for global outsourcing. The fourth paragraph of this (Exploding the myths of offshoring - might require free registration to read) article says: "...offshoring creates wealth for the United States as well as for India, the country receiving the jobs. For every dollar of coprorate spending ousourced to India, the US economy...gains as much as $1.14 in return." I couldn't find the original source of the data, but the library may have premium access to McKinsey content. Quick update - this may be the original source of the data: Offshoring: Is it a Win-Win Game? (may require free registration)

Non-economic considerations in outsourcing

User: mandy_c I think one of the technological incentives to outsource are that older technology and processes can be outsourced to countries such as India, leaving US workers to devote more energy in R&D. But there are also many technological disincentives for outsourcing, one big one being the risk of "losing it all". If technology development and maintenence is outsourced, foreign agencies might not deliver what they had promised, or classified information might leak.

Analysis of existing public policies

I know that France has announced that it will enact tax breaks for 20 "competitiveness zones" in hopes that outsourcing will become less of an issue to its economy. I'm trying to find more information about what industries France is primarily concerned with, and what their ultimate concerns are.

I'm debating whether to take an international stand on research of public policies, or to stick with local ones such as San Jose's "living wage" ordinance that directly involves tech jobs.

I can approach it the following way:
1) Foreign country policies on outsourcing
2) Discussion of industry differences
3) Possible downfalls of the comparison
4) Domestic policies that effect outsourcing--minimum wage laws

US public policies to "manage" outsourcing

User: aamiralavi Im not convinced that these measures are necessary. Several of the articles that were posted claimed that the effects on the US workforce in the long-run will not be negative. Instead, outsourcing is a positive phenomenon in the long-run (its really only hits us in the short-run). Also, several of them showed that its more of the blue-collar jobs that are outsourced, so i dont think extra education would be that effective, unless we can move people from a level of education where they would be blue-collar to white-collar. I think once we do our economic analysis of outsourcing, we might find this to be true. This is because each country is working with its comparative advantage. This saves money for US firms to invest in other initiatives (or skim off the top), but also work towards long-run gains. So i think the policy alternatives (a-e) suggested in section 4 should be reconsidered because i think we still have to do our economic and technological to evaluate if we need to (or should) try and keep jobs in the US. Instead, we can focus on US policies towards outsourcing and maybe based on our sectoin 1 and 2 evaluation, if they should be relaxed or more restricted. I think a bigger issue is dealing with decreased US wages due to outsourcing.

User: jk37I agree with Aamir but maybe we need to do more research on that to decide. Anyway, I will collect the data as much as possible in the beginning. One thing that I am not sure of at this point is whether our research should be normative or not. Of course this should be also decided after our indepth reserach such as reviews on cons/pros and cost/benefit analysis of outsourcing as well as a comparative case study, followed by our discussion. But my question is whether we want to take sides in our conclusion. Or do we just suggest possible best (and alternative) policies like a bi-partisan policy think tank does? I think we need a consensus on this before we get started our research.

User: BradstrProf Maurer's instructions said that we were supposed to create a neutral policy paper. So, for policies, it seems like we should discuss the relevant policies that have been proposed and the pros/cons associated with them. I agree that policies such as penalties for companies that outsource are too far reaching. For bad policies such as this, I think we will find the cons will outweigh the pros. For education though, the paper that discusses outsourcing in Washington State (Global IT Sourcing: Impacts and Implications for Washington State) has some interesting thoughts on why and how our education of IT professionals could be changed to allow us to be better prepared for an increasingly outsourced economy.

The Paper

[brad] We need to come up with a consistent term for global outsourcing - in looking through the various sections, "offshoring" might be the best?

Introduction (Abstract?)

In this brief we investigate the causes and effects of recent increased IT outsourcing to lower-waged countries. In the first section, we examine the economic considerations to outsourcing IT work abroad. The economic considerations include a cost/benefit analysis of the impact that outsourcing has on an individual firm and on the US market as a whole. This section provides insight into the economic incentives to outsource or not. Delving into the economics of outsourcing has important implications for policy because policy can alter decision making of whether to outsource or not by changing incentives.

We then analyze the non-economic issues involved in outsourcing. These include looking at the risks and benefits associated with project quality, public relations, employee morale, and time to market. We then address the educational curriculum in the United States, along with recent trends of views on the IT industry in the US. Through recent trend analysis we will provide an explanation for why outsourcing is a growing phenomenon.

Finally, we will examine the possible public policies and discuss their feasibility. Although offshoring is still small relative to the total U.S. job market, it is likely to increase in the future and the issue of offshoring across geographic and temporal boundaries requires detailed analysis of complex short and long-term issues, both on the national and international level. With careful consideration of all stakeholders mentioned here, and with thorough analysis of the strategies, outsourcing can be a “win-win” situation for all. Tough tasks remain to policymakers.

Introduction/Background(NEW)

[brad - I created this new section and have copied (not cut) several paragraphs from the below sections that could can be used to write this section. I have not edited them at all.

The term “offshoring” refers to the relocation of jobs and production to a foreign country. The relocated jobs and production could be at a foreign office of the same multilnational company or at a separate company located abroad. In contrast, the term “outsourcing” does not necessarily imply that jobs and production are relocated to another country.

Outsourcing of such jobs as janitorial services and payroll accounting by manufacturing firms to domestic services companies has long been an important factor driving the growth of business services employment. It used to be that blue collar jobs, factory jobs, were the ones most vulnerable to overseas competition. Now, with an advent of Internet and technological advance, white collar jobs and highly skilled jobs, such as accountants, computer programmers, medical technicians, and other professionals, etc. worry that the through outsourcing of service

What changes have enabled corporations to consider offshore outsourcing for their IT projects? The primary factors that have enabled this are (1) a highly trained international workforce, (2) improvements in telecommunications and related technology that better support disparate software development, and (3) the move within corporations to modular software development.

[Aamir] - I think the above 2 paragraphs can be left in their respective sections. This is unless the intro will serve as an executive summary for the main points presented in the paper. What do you think?

[Jeongsoo] I guess, the first paragraph needs to be in the intro. I discussed this matter in my section as well. It seems that many people are using outsourcing when it is offshoring case. Thus, I would suggest we clarify this definition in the beginning (intor part), and then use the consistent term 'offshoring' afterwards.

There are a wide range of functions that are ripe for offshoring. This can include back office, customer contact, common corporate functions, knowledge service and decision analysis, or research and development. The criteria for generally more successful functions in offshoring are those that can be digitized or handled by telephone and ones where appropriate skills are available or easily developed at the offshoring center. Thus, less complicated functions were the first to be outsourced. This includes back office work where less skilled work such as basic data entry is performed. Even some higher-value works such as software maintenance, application development, and technical support, is also attracting considerable investment. The most skill-demanding work, however, has yet to play a large role in outsourcing. This includes decision analysis and research or development. As of 2000, the Outsourcing Institute and Dun & Bradstreet study found that the two most widely outsourced services in this group are support services and internet services.

Before we look at the benefits, let’s look at what IT departments have typically outsourced. Initially companies look to outsource system maintenance, quality assurance, and application migration. Beyond these basic systems, companies vary in their strategy. Some companies will avoid outsourcing components that are of strategic advantage or are differentiator’s in their market. While others argue that given how difficult it is to predict what will be the competitive differentiators even a year or two in advance, it is best to “maximize flexibility and control” in contracts. This allows corporations to change course as business needs dictate. Even with critical or strategic systems it can often make sense to outsource components of these systems to get them implemented sooner or more cost effectively.

Some characteristics that makes a particular job in the IT industry easy to outsource include highly repetitive work, where physical distance to the consumer is of little importance, jobs that are sasy to break down into smaller parts, little constant collaboration is needed, and also when there is a given protocol of how things are to run.

Economic Considerations for Outsourcing

Brillian, an American company based in Arizona, is an expert in display technology. Brillian outsources the creation of bits to create a top-end TV to Wilpro, an Indian technology company. Wilpro, in turn, sources the television’s bits and pieces from companies in America, Japan, Taiwan, and South Korea. After design and testing, assembly of the television passes on to a company such as Flextronics or Solectron, companies that boast the capability to provide the best quality services with the highest value added at lowest costs. These companies have facilities all over the Americas, Europe, Asia, and Flextronics has one in Africa as well. The purchaser of the television could pay with a credit card administered in Kuala Lampur and receive technical support from India. Thus, as we can see, outsourcing has created a worldwide network of businesses, with each corner providing their own expertise.

[aamir] I deleted this above part of my section for the final draft.

According to the Outsourcing Institute and Dun & Bradstreet study, in 2000 IT headed the list of outsourced functions with 28% of the share of outsourced functions. Further, according to the same study, the U.S. market for outsourcing was $100 billion in 1996 and it more than tripled to a market size of $345 billion in 2000. These facts lead to a great question. Why has outsourcing in the IT industry faced such explosive growth? Studying the reasons that outsourcing in the IT industry has grown so fast is essential because this trend is redefining the way that business is done. Before exploring some of the more prominent issues surrounding outsourcing in the IT industry, we will briefly look at some of the major functions that offshore companies offer.

There are a wide range of functions that are ripe for offshoring. This can include back office, customer contact, common corporate functions, knowledge service and decision analysis, or research and development. The criteria for generally more successful functions in offshoring are those that can be digitized or handled by telephone and ones where appropriate skills are available or easily developed at the offshoring center. Thus, less complicated functions were the first to be outsourced. This includes back office work where less skilled work such as basic data entry is performed. Even some higher-value works such as software maintenance, application development, and technical support, is also attracting considerable investment. The most skill-demanding work, however, has yet to play a large role in outsourcing. This includes decision analysis and research or development. As of 2000, the Outsourcing Institute and Dun & Bradstreet study found that the two most widely outsourced services in this group are support services and internet services.

[brad] I cover some of the same type of material in the above paragraph in my section (#2) as well. Perhaps we should combine these and other general outsourcing/offshoring information into a "background" section?

[aamir] I think thats a good idea. Maybe we can keep the intro we have as an abstract and create an intro with some background info including offshoring functions and size of market and what not. The last lecture had some good stuff in it that we might want to think about.

Proponents of offshoring state that offshoring allows companies to take advantage of competitive advantages in the production of goods or provision of services. Economic theory suggests that exploiting comparative advantages makes firms more efficient and productive by focusing their energy on producing what they are best at while trading for goods or services from another firm that produces a different good relatively better than the first firm can. This specialization allows both firms to produce more of their specialty while trading for the goods that they did not produce. An important implication to this is that more of each good can be produced for cheaper, saving people valuable resources to spend on other goods.

A McKinsey&Company study shows that offshoring drives significant performance improvement. The study brakes down the savings into a 60-65% factor costs savings and a 5-10% telecom cost savings. However, there is an added 5% management cost (this gets us to 45-55% of original cost). From that point, there is another 30-40% savings on offshore cost base (from both task and process reengineering). This gets us to a cost base of 30-35% of the original cost, or a 65-70% savings.

[brad] The numbers in the above paragraph are good, but it is a little confusing to me what the actual savings are vs a company performing the work in-house. Perhaps start off with what the savings are and then break down what makes up those numbers? Maybe even a chart or table?

Taking a look at the India offshore industry case from McKinsey&Company (MGI) offers further insight into the cost-savings that offshoring IT offers. India, which holds the second to largest offshored services market (with $7.7 billion of the market, second to Ireland with $8.3 billion) captured $0.33 from each dollar offshored by the US in 2002. $0.10 of the dollar goes to labor, $0.10 in profits is retained in the Indian offshoring service provider, $0.09 to the supplier, and another $0.04 goes to the central and state governments. The other $0.66 spent brakes down as savings accrued to U.S. investors and/or customers ($0.58), import of U.S. goods and services by providers in India ($0.05), and transfer of profits by U.S. providers in low-wage country to parent ($0.04). Thus, Americans capture $0.58 of savings for each dollar they offshore. These studies show that by outsourcing, the U.S. firm exploits the comparative advantage that overseas firms have in an aspect of production of their good. The overseas firm is able to produce the good at a much lower cost, allowing the U.S. companies the ability to shift resources to other productive capacities. A decade ago, U.S. companies began shifting much of their weight into IT services as much of the manufacturing has already been outsourced abroad. However, as IT services are also being offered abroad at lower cost and high quality, U.S. have been shifting their weight once again towards tailored services that require close interaction with customers. It appears as if U.S. companies are slowly losing their competitive advantages in the industry and finding fewer services to provide customers.

A large fear associated with offshoring is that jobs at home are lost when production is outsourced to lower income countries. In the short-run, jobs are lost. Studies by MGI estimate that about 11% of jobs in the economy, about 14.1 million jobs, are “at risk” to be offshored. The other 89%, or 113.8 million jobs, are in service industries such as retailing, catering, and personal care. This work, by its nature, cannot be moved abroad. In 2003, the number of jobs that were being offshored was 345,000, over triple the amount of outsourced jobs since 2000. Further, as functions outsourced moves from mechanization to more skilled labor, more and more white collar workers are being laid off from their companies as their jobs are shipped overseas. [brad] are the numbers in this previous paragraph all jobs or IT jobs? If just all jobs, we could considering removing this paragraph to slim are paper down (as suggested by Prof Maurer)

However, proponents of outsourcing show that in the long-run new jobs are created. Because machines and foreign workers can perform the same work more cheaply, the cost of production falls. That means higher profits and lower prices, lifting demand for new goods and services. Looking back to the India example stated above, MGI estimates based on an analysis of historical U.S. reemployment trends that there is a $0.45-$0.47 added value when outsourcing due to reemployment of U.S. labor. Thus, this study suggests that not only does offshoring reduce costs, but also one dollar previously spent in the U.S. has a potential value of $1.45-1.47 dollars as labor is reemployed at home in other job functions. [brad] I'm a little unclear about how what is described in the 1st half of this paragraph actually works. Is it possible to describe a little more As evidence of growing job functions at home, offshoring in manufacturing has been accompanied by growth in services. From the 20 year period from 1983-2003, an average of 3.4 million net new service jobs have been created per year as compared to a total of 2 million jobs lost to outsourcing throughout the entire 20 year period. Yet again, there is uncertainty about jobs of the future because in the long run, most of them will involve producing goods and services that have not yet been invented. And finding a job to fit the unemployed skills depends on demand in the labor market and the opportunity, willingness, and ability of workers to retrain.

[aamir]include studies that show impact on wages that outsourcing has on workers whose jobs are replaced oversees

Now that we have examined some of the major issues associated with outsourcing in the IT industry, we shift our attention to policy that affects the incentives to outsource. Identifying key policies that can impact outsourcing in the IT industry is important because, as we have seen, not only is outsourcing in the IT industry a booming business, but the business is also evolving. If U.S. firms want to be able to capture the benefits of outsourcing, policies may need to be implemented to support U.S. industry as the industry changes. [brad] since the policy section comes at the end, we should edit this paragraph to reflect the actual next section

Additional Drivers of Outsourcing

[aamir] i like the detail in this section. one thought that comes to mind is that the way its structured/worded, it doesn't sounds as nuetral as prof maurer would have liked. (eg. section 2.2 starts with "benefits of outsourcing are many if companies approach outsourcing in the correct way." ) Also, maybe the title can be changed from "additional drivers to ooutsourcing" to something more neutral (and specific so its not so broad-ranging).

[brad] good feedback. I'll work to make my section more neutral and find a new title.

In today’s marketplace there are many reasons why outsourcing can give a company a competitive advantage. As detailed in the previous section, the primary driver is economics. According to the Computerworld/InterUnity Group Survey, 44% of those surveyed cited cost reduction as the top reason for offshore outsourcing. While the potential economic benefits of outsourcing are often the first reason corporations look to perform global outsourcing, there are a variety of additional reasons that they look to outsource IT functions. There are also several pitfalls for corporations to work to avoid.

What changes have enabled corporations to consider offshore outsourcing for their IT projects? The primary factors that have enabled this are (1) a highly trained international workforce, (2) improvements in telecommunications and related technology that better support disparate software development, and (3) the move within corporations to modular software development.

[brad] I'm planning to move the above paragraph to the intro/background section

IT economics can not be the only consideration in offshore outsourcing and companies that outsource solely to gain an economic advantage put themselves in a risky position. While today the economics of offshore outsourcing are good, there are signs that they are diminishing over time. One early sign has been the high rate of turnover at many Indian outsourcing firms due to job switching between companies. This has been caused by the strong demand for skilled workers in India. At several major Indian outsourcing firms, competition for talented engineers has caused wages to increase by 15-17% per year. Furthermore, Gartner analyst Partha Iyengar predicts that demand for Indian IT outsourcing will exceed supply in five years. While the economic benefits will still be there to some degree, given these trends, corporations need to ensure they are finding benefits with outsourcing beyond cost savings.

[brad] the above paragraph could be moved to the economic section, but I think it's a good transitional way to talk about why companies need to look for other benefits when offshoring. thoughts?

2.1 Analysis of what is typically outsourced

Before we look at the benefits, let’s look at what IT departments have typically outsourced. Initially companies look to outsource system maintenance, quality assurance, and application migration. Beyond these basic systems, companies vary in their strategy. Some companies will avoid outsourcing components that are of strategic advantage or are differentiator’s in their market. While others argue that given how difficult it is to predict what will be the competitive differentiators even a year or two in advance, it is best to “maximize flexibility and control” in contracts. This allows corporations to change course as business needs dictate. Even with critical or strategic systems it can often make sense to outsource components of these systems to get them implemented sooner or more cost effectively. [brad] move above paragraph to intro/background section

2.2 Benefits beyond economics

The benefits beyond economics to outsourcing are many if companies approach outsourcing in the correct way. The major benefits that can be gained from outsourcing include:

• Improved IT project quality

• Tackling new types of projects

• Flexibility in finding skilled workers.

• Managing headcount efficiently

• Efficiencies from increased competition

The following sections analyze these benefits.

Improved IT project quality. Project quality is the double edged sword of global outsourcing. While many corporations see improved project quality, there are also many companies that do not see these gains. Project quality can be improved in outsourced projects because:

• International outsource vendors are often able to hire more highly qualified employees for a lower rate that corporations can.

• The lower operating costs at the outsource vendor allow for additional money to be spent on training and oversight.

• Outsource vendor employees may be more motivated because their jobs are high-end in their country, but often considered lower end in the US.

• Many outsource vendors have excellent ratings in their processes for software development. These ratings are often significantly higher than those of the corporate IT departments they are working with. For example, according MIS Quarterly, “the best know quality yardstick is the Capability Maturity Model, and a number of Indian IT forms have attained world-class levels of quality by implementing CMM processes.” Major Indian outsourcing companies such as Wipro have also embraced the Six-sigma process quality focus.

The main reasons why project quality may not improve are:

• Problems with the contract itself. Often times the issue is that the “contract doesn’t reflect business objectives or that requirements are not stated specifically enough. Furthermore, it is critically important to a good contract that key people from each organization impacted (IT, end users, legal, etc.) are involved in the contract discussions.

• High rates of turnover or shuffling between projects at the outsource vendor. This can lead to constantly needing to bring new team members up to speed. To avoid this it is recommended that the contract provide the ability to limit team members moving between projects and to give companies the ability to interview and approve new team members.

Tackling new types of projects. While economically related, IT outsourcing can provide companies the ability to tackle significant projects that would not have been possible prior to outsourcing due to cost, internal skill, or time to market considerations. For example, outsourcing has allowed companies to expand operations by providing more customer support for the same or less money. This increased customer support can result in better customer satisfaction.

Flexibility in finding skilled workers. Outsourcing can help solve the challenge of finding experienced workers in key technology areas by provide expertise that is not available inside of the corporation’s IT department. Given how quickly technology is changing and evolving, corporate IT staffs are often unable to stay abreast of new developments, let alone be proficient in them. Moving projects to a qualified outsourcing company can provide this knowledge much faster than would be possible by hiring or training staff in their internal IT departments.

Managing headcount efficiently in response to sways in IT demands. Corporate IT departments often go through cycles of demand for their services. This can create cycles of hiring and firing as they work to meet the ups and downs of the demand. Utilizing outsourcing for rapid ramp up of their work force to handle peak demand can allow companies to avoid layoffs when business levels drop off. This allows the company to avoid over hiring during cyclical business upswings.

Efficiencies from increased competition. Increased competition is big driver in reducing costs and improving IT efficiency. This is both between outsourcing vendors and between vendors and a corporation’s internal IT department. Firms have found that including their internal IT departments in the competition for projects has had many benefits. One benefit is that it provides insight into what needs to be included in an outsource contract, if the decision goes that way. It also provides the incentive for IT departments to be more efficient and creative in their planning and implementation, or as MIS Quarterly says, it puts “market pressure on internal IT Units.”

Allowing US-based IT staff to focus on strategic projects. Many corporations begin by outsourcing more mundane tasks. These tasks include quality assurance, porting, or product upgrades. This can benefit internal IT staff by freeing them from these mundane IT tasks and providing them the opportunity to work on more strategic projects.

2.3 Risks Associated With Outsourcing

Moving projects to an outsource vendor are not without risks. The major risks to be aware of include:

• Impact on internal employees. This can include lower morale caused by concern about potential job loss or as one IT executive said he worries about the “unease it created among domestic employees.” This can be more perception driven than based upon reality. In a survey of ten major Washington corporations, only one layoff was tied to offshoring .In fact, a Government Accountability Office report states domestic relocations are twice as likely to cause layoffs as offshore relocations . To help employees overcome their concerns it is important that corporations have “clear policies regarding the impact that offshore resources are likely to have on employees” and to involve IT employees in outsourcing decisions.

• Public relations issues in community. Since outsourcing is a hot topic in the press today, it’s important that companies proactively manage communication with the press on their outsourcing decisions.

• Lacking the right skills to manage external project. To be successful, outsourcing needs good internal oversight by employees with experience managing outside vendors including contract management, service delivery experience, and international experience.

• Loss of IT core competencies. One danger of outsourcing is the potential loss of internal capabilities in key technology and business process areas which can cause a company to be become dependant on an outside supplier. To avoid this it is critical companies retain the IT staff involved in critical projects and keep them up to speed on work being done at outsource vendors.

• Loss of IT training ground. With entry level jobs moved offshore, companies can be faced with lack of projects to allow new employees to gain experience. It is important for companies to develop policies that support continued training for less experienced employees.

• Project quality. As discussed above in section 2.2, project quality can suffer if project diligence is not followed.

2.4 Impact of outsourcing on US innovation and R&D

One of the major benefits of outsourcing is that money saved by outsourcing can be invested in research and development, in new technologies, or new product ideas. This can lead to innovations with will result in new jobs . As mentioned above, outsourcing can also create new and better job opportunities for current IT employees by moving less interesting work abroad and enabling companies to tackle new, more challenging IT projects.

[brad] above paragraph would probably be better elsewhere or deleted?

Discussion of Interest, Education, and Competitive Advantage in the US IT Industry.

[brad] we need a good transition into and out of this section. There is lots of good info here. perhaps the focus could be on (1) IT education trends (well covered), (2) how these trends in IT education are actually dovetailing well with the move towards offshoring (i.e. continued forecasted demand for IT jobs in US (Prof Lazowska's talk from Thursday) combined with fewer US grads along with economic trend of offshoring allows demand to be met with global supply of workers), and (3) specific educational policy options to allow US to adapt well to these changes

According to the 2002-2003 Taulbee Survey conducted by the Computing Research Association, we see a decrease of BS degree productions in the computer science and computer engineering fields within the United States and Canada, beginning 2002. Prior to that, there was a steady increase in degree production . We see an even steeper drop of newly declared undergraduate majors in these fields. The most observable rationale for this occurrence is the burst of the dot-com era. In the late 1990’s, computer scientists were in high demand – it seemed like a lucrative career choice as undergraduates were offered full-time positions even before they graduated. It was an era in which tech companies would vie for every computer scientist and engineer they could get, driving starting salaries sky-high. To meet the demands, there was a growing trend of computer scientists and engineers, as shown in the 1996-1997 Taulbee Survey. Enrollment in computer science and engineering majors in the United States and Canada grew as much as 40% annually, as we approached the new millennium.

The reason that there is such a decline in interest in computer science, computer engineering, and related fields is due to its loss of relative attractiveness. As with all economic upturns, the dot-com frenzy eventually ended, and the tech field headed into a recession. Being a computer scientist then became just like any other occupation—those that had previously pursued education, training, or careers in the computer science fields purely for money now had to reassess their career goals. Throughout 2001 and 2002, about half a million jobs nationwide were lost due to the recession, leaving the number of workers in the industry back where it had been before the dot-com boom. In addition to job loss, there was also a significant contraction in salaries paid out to workers in the IT industry. The Bureau of Labor Statistics reported in January 2003 that the unemployment rates for computer scientists and systems analysts to be 4.9%, computer programmers at 6.7%, database administrators at 3.4%, and networks systems and data communications analysts at 7.4% . These figures do not take into account salary declines, benefit losses, and underemployed workers. Therefore the figures provided by the Bureau of Labor Statistics could well have understated the real effects on the workforce.

We see in the 2003-2004 Taulbee Survey that the decline in computer science major enrollments had dropped as much as 30% in 2003 from 2002. Other factors that caused the decline of interest in the field were that companies began downsizing. All the start-up companies quickly ran out of capital when the dot-com bubble of the late 1990’s burst. Many start-up owners began personally taking huge pay-cuts, and letting dispensable workers go. Then came news of outsourcing technology. Headlines from popular news journals regarding outsourcing prospects further discouraged Americans to pursue a career in the field. Eventually, even the larger technological corporations, known to be more resistant to economic recessions, downsized, worked their employees harder, and became extremely wary about hiring. This is about the time when temporary work programs became popular with many technological firms. [brad] Prof Lazowska had some interesting comments about the downturn in his Thursday lecture. He seemed to be showing that the demise of the IT industry is exaggerated by comparing boom years to today. But if you compared the pre-dotcom bubble to post-dotcom bubble, IT-related hiring is actually holding steady/improving

Temporary work programs purely benefit the tech companies. It is like an extended, intensive, interview for job seekers. Temporary work programs allow firms to employ workers and pay them by the hour, and provide little to no benefits. After the so-called trial period, workers are either hired permanently or are let go. This is tactical from the firms’ perspectives because it allows a period of time to analyze how the business is doing and decide whether hiring is a good idea. With temporary work programs springing in the midst of economic recession and outsourcing, landing a job in a computer science related field became challenging.

[brad] I would suggest deleting this paragraph. I think the temporary worker issues are at the margin of the offshoring issue

As we have discussed in this paper, the key incentives to outsourcing IT are of economic and technological nature. Firms want higher profit margins, and by outsourcing IT jobs to countries like India, firms can pay a fraction for workers of equivalent caliber, thereby increasing their profits. However, something that I would like to venture into is the fact that there is a shortage of qualified human capital within the United States. The issue at hand is not simply the marginal cost of employment for human capital. What the US is dealing with is not simply a discrete measurement of qualified workers. It lies not in the discrete, numerical, scarcity of qualified IT workers available domestically, but on a spectrum of worker productivity. What firms should really care about is the marginal productivity associated with employment in the US versus a country such as India.

There have been arguments that the United States education curriculum is not structured to give workers the relevant expertise for the field. Critics of the education curriculum have observed the skill sets produced by US universities and have concluded that the way computer science courses are taught in the US puts Americans at a disadvantage compared to workers in India. Computer science and related fields rank high on the list of industries supported by the Indian government. India’s public policy is such that the IT industry has the financial and political support to develop at higher rates than in the US. According to a paper written by Craig A. VanLengen, “CIS Curriculum Development Post-dot-com”, IT curriculum in the US has always focused on teaching students how to program. A curriculum focused on programming and theory of the field is not detrimental in itself, but one that lacks innovative training could be. [brad] it would be great to detail more of his specific programs for this 'innovative training'

VanLengen also reinforces the notion that there has been a decline of interest in the field. He states that, “Except for creating flashy Web pages student interest in development jobs is also declining. Most of our current majors do not see themselves working on programming projects where transaction data is collected, verified, and then used to maintain data stored in a database.”

Recent headlines have the US IT industry even more worried. IT outsourcing always existed, but recently has accelerated due to the high domestic salaries of the dot-com era. There has even been news that IT outsourcing will permeate countries other than India, such as Vietnam and China where human capital is relatively cheap.

The key for IT professionals seeking jobs in the industry is to develop skills that cannot be easily outsourced. “Proof that programming and other lower-level IT skills have become commodities is the concern of software companies and developers in India,” noted VanLengen. In effect, the lower end IT jobs positions have been the first to be outsourced in efforts to cut costs. Traits that make a job in the IT industry easy to outsource are:

1) Highly repetitive work

2) Physical distance to the consumer is of little importance

3) Easy to break down into smaller parts

4) Little constant collaboration is needed

5) There is a given protocol of how things are to run

[brad] the above list might also be a good complement to the intro/background section

The five traits listed above can be used to describe the most commonly outsourced jobs: call centers, and software programming. Computer science and the IT field are even more of an evolutionary industry now than it was before. Educators now need to work even more closely with businesses to figure out what types of skills are needed; and more importantly, which ones are least likely to be outsourced. Some of the IT job functions that are less likely to be outsourced are project management, security, and wireless networking , in which timing is essential, and which require a high degree of collaboration and innovation. In another paper published by Hoffman (Demand 2002), he states that based on a study done by ITAA/Dice on the IT industry, skills that are highly demanded include Oracle, SQL, C++, and Java.

Management as a partial solution

All economic recessions eventually recover with time, but outsourcing can have a lasting effect on the industry. There is little that the US can do to compete with the costs of labor in foreign countries. Therefore it is imperative to keep the IT industry alive domestically and make outsourcing a relatively trivial aspect to the whole industry. Computer scientists should become involved in the processes that are occurring abroad. It is the time for traditional IT workers that had started out as programmers to move up the ladder and manage the outsourcing business. There is plenty of room for management because without proper management, firms might even see their profit margins dwindle due to increased costs of communications, increased potential non-delivery, and security breeches. However, management is not in itself a solution to outsourcing. The US IT industry still needs to keep a competitive advantage.

[brad] perhaps outline the skills/retraining that might be necessary to move today's IT workers into a good position to migrate to these roles.

Curriculum Insinuation

If less and less programming skills are required in the US because the jobs are being outsourced to countries like India that have government legislation to encourage the IT industry, then what is left for the IT curriculum in America’s universities? We have seen a significant decline in interest of the field through the Taulbee Survey, yet computer science classes are still being filled at top-notch universities like Carnegie Mellon. The question is how we keep IT thriving in the US, and what types of courses, skills, and methods are crucial to the industry. Curriculum needs to evolve with the industry. The US should take the management and innovation aspects of IT, and expand them.

IBM’s Grady Booch discussed that, “[Computer scientists] are good at out-of-the-box thinking but weaker on fundamental business skills such as teamwork and project design. Many [American] universities teach people how to program, but they don't teach them how to work in projects. They don't teach them how to design."

Innovation as a complementary remedy

Like many industries, IT is one that is gradually becoming perfectly competitive. The only way to break free of this is to procure a competitive advantage and utilize it. Low cost is a competitive advantage that India has. As stated earlier, hiring an equivalent IT worker in India costs only a fraction of the costs in the US.

Competitive advantage is something that can only be maintained by action. It is something that can and needs to be maneuvered by public policy. [brad] are there specific recommends for policy? Through observation we can tell that establishing a firm in the US is a lot more costly than establishing one abroad. Considering corporate responsibilities such as company benefits, and relatively higher salaries, the driving cause of IT firms still being born in the US is that the US is an environment in which information and innovation exists in greater amounts. The United State’s competitive advantage is that is has the resources to push innovation to higher levels.

One area particularly influenced by the downturn in the dot-com era, and by offshore employment in the tech industry is the Silicon Valley. There runs the argument that outsourcing could potentially be good for the tech industry in the US: if the important jobs are kept domestic and the routine ones are sent abroad, then there is more room for innovation and management in the US. This way, the US IT industry could stay one step ahead of all other foreign competitors like India. On the flip side, if outsourcing occurs without sufficient innovation domestically, we will have a case where competitors in other countries catch up technologically. In the case of the Silicon Valley, if innovation does not keep up, then eventually more and more IT jobs will be outsourced, and other countries will outdo the US IT industry. According to the Bureau of Labor Statistics, a programmer in San Jose earns a mean of $77,690 every year plus benefits, and the same job pays about $10,900 in India (according to salary information firm PayScale )

"Silicon Valley has always been on top of the technology food chain," Kroll said. "It's always managed to stay one step ahead. If this region stays on the cusp of innovation, the theory goes, new industries will be invented here, and because of Silicon Valley's unique cross- pollination of businesses, venture capitalists and talented workers, even ideas born in other places will be nurtured into moneymaking concerns here. These new industries will create new, high-paying jobs locally, at least in the early years."