US IT offshoring to double to $14.7 bln by 2009

The US offshore IT services market is expected to nearly double in size to an estimated $14.7 bln by 2009, reports IDC. This represents a five-year compound annual growth rate (CAGR) of 14.4%. Discrete manufacturers will continue to generate the largest percentage of overall revenue for offshore services providers, accounting for 17% of spending by 2009. Retail, communications, banking, insurance, and other financial services companies are also expected to be prominent users of offshore IT services. In aggregate, the financial services industry is expected to account for 28.9% of the total spend by the end of the forecast period.

Source: ZDNet

Study: Offshore outsourcing creates jobs

Offshore outsourcing helps the U.S. economy by lowering production costs for IT vendors and product costs for their customers and by helping to keep inflation low, according to a study released this week by the Information Technology Association of America (ITAA).

The economic benefits from offshore outsourcing will create more than 337,000 jobs by 2010, on top of jobs lost through outsourcing, according to the study, by economic analyst Global Insight Inc. ITAA called offshore outsourcing a "net positive for American workers and the U.S. economy."

But the Institute of Electrical and Electronics Engineers-USA (IEEE-USA), representing U.S. IT workers, disputed the study, saying Global Insight failed to factor in concerns about outsourcing such as national security and the future IT innovation in the U.S. Both national security and the future of innovation will be at risk if the U.S. continues to export high-tech jobs and lose expertise in creating new defense systems and new IT products, said Ron Hira, chairman of the IEEE-USA's research and development policy committee.

"It should also weigh out the costs and the downside," Hira said of the study. "They ignore national security and technological innovations in these studies."

While the study seems to assume that displaced IT workers will quickly find jobs, that's often not the case, added Hira, a professor of public policy at the Rochester Institute of Technology. A U.S. Bureau of Labor Statistics survey, released in July 2004, found that of the 5.3 million U.S. workers who lost their jobs between January 2001 and December 2003, 35 percent had not found jobs by January 2004, Hira noted.

Combined with a push by the ITAA and many tech vendors for the U.S. to increase the number of foreign workers allowed under H-1B visas, offshore outsourcing hurts many workers, Hira said. "The bottom line result from the simulation is that U.S. software workers are losers," he said. "And ITAA continues to undercut U.S. software workers by arguing for more H-1Bs."

But Global Insight and outsourcing provider Sierra Atlantic Inc. defended the study, saying the economic benefits of offshore outsourcing are real. Large companies outsourcing their IT support and maintenance functions can eventually expect cost savings of 30 to 50 percent, while companies outsourcing portions of their new IT projects can expect savings of up to 40 percent, said G.K. Murthy, vice president of enterprise solutions at Sierra Atlantic.

The study links those savings with benefits to the overall economy. Currently, about a third of Sierra Atlantic customers tell Murthy they plan to hire additional workers with the savings they achieved with outsourcing, Murthy said.

"In some cases, they actually go and hire new people to launch a new initiative," Murthy said.

Offshore outsourcing, or "global sourcing," as the study calls it, helps raise U.S wages and raises the nation's gross domestic product. Offshore outsourcing will contribute to a US$0.06 increase in U.S. hourly wages in 2005, climbing to $0.12 in 2010, the study says.

At the same time, spending on offshore outsourcing of computer software and services will grow from about $15.2 billion in 2005 to $38.2 billion in 2010, according to the study. During the same time period, total cost savings from offshore outsourcing of computer software and services will grow from $8.7 billion in 2005 to $20.4 billion in 2010, with much of those savings reinvested in the U.S., the study said.

Offshore outsourcing can cause lower wages in the outsourced industries, but the cost savings create other economic benefits, said Nariman Behravesh, Global Insight's chief economist. "[Wage increases] don't necessarily occur in the IT sector, but it does happen in other parts of the economy," he said. "You can see the pain; it's a bit tougher to see the gain, but it's there."

Addressing concerns about national security and IT innovation, Behravesh said national security could be a concern in the long term. "We have to be very careful of the national security concern," he said. "Having said that, national security is often the last refuge of protectionists."

IEEE-USA's Hira questioned the objectivity of the study's authors, saying the study is more of an advocacy document than an unbiased research report. This is the second year ITAA has worked with Global Insight on a study about the benefits of offshore outsourcing. "Running a computer simulation is just an exercise when you've set up the exercise to get the results you want," he said.

Behravesh acknowledged that the study makes several policy recommendations, including more assistance for displaced U.S. workers and a bigger government focus on research and development. "We wouldn't do it from an advocacy standpoint unless it makes sense," he said.

Source: Infoworld

33% of IT companies will increase outsourcing in 2006

33% of IT companies plan to increase outsourcing in 2006. 6% said they are planning to decrease it, according to Evans Data. 45% of respondents to the Evans survey said they outsource less than 25% of their development operations, with only 7% reporting that they farm out better than 50% of that sort of work. 28% of the companies participating in the survey said that saving money was their primary goal in adopting outsourcing pacts, while only 19% listed a demand for specialized expertise as their objective.

Source: ZDNet

Panel praises benefits of offshore outsourcing

LAS VEGAS -- A panel of experts agreed the opportunities that offshore outsourcing brings to the table -- cost savings and innovation -- outweigh the short-term threats of job loss.

The panel, which was part of a session at last week's BetterManagement Live Worldwide Business Conference, included Nigel Holloway, director of executive services at The Economist magazine, Chip Greenlee, vice president of marketing solutions for Hewlett-Packard Co., Stephen Minton, an analyst with International Data Corp., and Art Cooke, president of SAS International.

Holloway believes that the backlash over offshoring IT services will die down -- much as it has with manufacturing. But it may take a little longer for the benefits to temper the pain.

"The concern is, services employ a lot more people than manufacturing -- about 70% of workers are in services," Holloway said. "In fact, many people in manufacturing went into services. So the issue is, where do they go now?"

But Holloway quickly turned to the overriding benefits of globalization -- benefits he claimed several studies bear out.

Figures from the McKinsey Global Institute, he said, show every dollar spent offshore creates $1.45 globally.

Holloway also mentioned a study from the Information Technology Association of America, which projects that offshoring will save U.S. companies $20 billion over the next four years -- savings that can be invested here at home.

"ITAA also found that while 138,000 IT jobs have been lost in the U.S., 277,000 have been created in IT and non-IT fields, and the disparity between those lost and gained will grow," he said.

Holloway added that ITAA also found the re-employment rate in the U.S. to be much greater than in the rest of the world, with most workers making about 96% of their original salaries. "The reduction in salaries isn't so dramatic," he said. It's clear that the benefits of offshoring outweigh the costs."

The panel brought up another benefit to offshoring, claiming that it clears the way for innovation at home.

"We should be interested in jobs that add real value on a day-to-day basis," chimed in SAS' Cooke.

HP's Greenlee, who brought an outsourcer's perspective to the panel, agreed that offshoring will not only drive the homegrown innovation needed to keep the U.S. a global economic leader, but also will open up high-end applications to firms that otherwise might not be able to afford them.

"It's hard to find and retain people to drive the innovative process," he said. "And when you're spending more money on [for example] processing purchase orders, the investment in innovation declines.

"Outsourcing takes a lot of cost out of the equation and leaves more room for investment and innovation."

Greenlee added that Merrill Lynch & Co. Inc. is an example of a company that turned to outsourcing certain functions so that it could better focus on its bread and butter.

"Merrill didn't want to provide e-mail; they thought it was better to hire brokers than people to do e-mail. The techniques used to provide outsourcing, like utility computing, allow firms to invest in their own business and not have to buy other stuff -- like computers."

Greenlee admitted that from a social perspective, offshoring has bad points to go with the good. But he believes the doors it can open, especially for small and medium-sized businesses (SMBs), make offshoring worth the growing pains.

"It's made technology affordable to a larger segment of businesses," he said. "SMBs can buy time -- there's nothing outside their range.

IDC's Minton added that the whole offshoring process is moving up the value chain at an inexorable, but not rapid pace.

"It's significant but not a radical change in the way we're doing business," he said.

And it's hardly new, as Holloway pointed out.

"The international division of labor has been going on for centuries. It didn't begin with services."

Source: SearchCIO.com

Is offshore outsourcing worth the loss of IT jobs?

CAMBRIDGE, Mass. -- What is happening in respect to technology jobs in the current environment? Is the global environment a drain on technology jobs here in the U.S.? A group of outsourcing experts gathered last month at the Emerging Technologies Conference at MIT to discuss the effect of globalization and offshore outsourcing on IT jobs in the U.S.

"At the end of the day, we -- as the consumer -- always want the best product at the least price," said Sudhakar Shenoy, one of the panelists and the chairman and CEO of Reston, Va.-based Information Management Consultants Inc. "Therefore, it makes perfect sense that we should send work offshore."

But consumers don't reap all the benefits of offshore job loss, pointed out fellow panelist Ronil Hira. "In this mode of outsourcing, companies think they are winners. But unfortunately the tech workers are really the losers in the end," commented Hira, an assistant professor of public policy for Rochester Institute of Technology.

So the question remains: Are the benefits and cost savings of offshore outsourcing worth the loss of IT jobs in the U.S.?

Offshore outsourcing stats

The reality is that offshore outsourcing is a growing trend. According to a recent study from Meta Group, the worldwide offshore outsourcing market is worth $10 billion today and will grow 20% annually through 2008. Meta also claims that offshoring growth will outpace outsourcing in general and predicts that the average enterprise will offshore 60% of application work by 2008 or 2009.

Regarding job loss, a study from the U.S.-China Economic and Security Review Commission, found that up to 406,000 U.S. jobs will be moved overseas this year. The offshore job tracker on TechsUnite.org reports that more than 259,000 jobs have been sent offshore from Jan. 1, 2000 through Oct. 12, 2004. The site also claims that 142,500 jobs have been lost as a result of offshore outsourcing during this same time frame.
Training and education

Experts suggest that better training and education could solve the IT job loss problem here in the U.S.

Michael A. Bettersworth, associate vice chancellor for technology advancement at Texas State Technical College in Waco, thinks that companies should take more responsibility for creating innovative, high-level jobs in IT.

"We need profitable businesses to provide high-paying jobs," said Bettersworth, an attendee at the Emerging Technologies conference. "Will this mean that some industries, companies and jobs will be lost? Yes. But it also means that better industries, companies and jobs will be created. To sustain this increasingly rapid world of innovation, we must have an agile and highly skilled technical workforce."

Catherine Mann, the panel moderator, is also a senior fellow at the Institute for International Economics. She agreed with Shenoy that education is the key to success in IT.

Mann presented some findings from her organization, which she said back up her theory that education aids job changers. According to studies done by the Institute for International Economics, high school graduates are 10% more likely to be re-employed than dropouts; college graduates are 22% to 26% more likely to be re-employed and suffer 7% to 9% less earnings loss; and skilled workers are 5% to 7% more likely to be re-employed than less skilled.

But not all the panelists agreed that training and education is a fix for IT jobs outsourced from America.

"Her [Catherine Mann's] solution for more training falls short since no one knows what to train for," said Hira, who is also the author of Outsourcing America: What's behind our national crisis and how we can reclaim American jobs, due in spring 2005. "The problem right now is not a lack of skills or a skills mismatch. The problem is that there just aren't many jobs out there. People whose jobs have been offshored are being laid off in the worst technology labor market we've ever had," Hira said.

Costs and savings

Most studies have shown that cost is the No. 1 reason companies decide to outsource jobs. But how much money are companies actually saving by going offshore?

Shenoy shared a story with the audience about a project he worked on. Three years ago, some researchers approached his company for help in improving their software and making it run faster. Shenoy and his company made the decision to hire some at their subsidiary in India to do the work.
In the end, the job was done in India for less than $400,000. The same job in the U.S. would've cost more than $3 million.
Since then, Shenoy and his company have signed up several financial companies, research institutions and universities that are tapping into his database.

"In addition to saving millions, we ended up hiring 12 highly paid scientists in the U.S. to explain what the system does," Shenoy said. "This is a very good example of how the commodity works -- which is basically coming up with the software -- is done abroad and results in jobs being created in the U.S."

Although these results aren't typical of all offshore outsourcing deals, they emphasize the possible benefits for companies. But aren't IT workers really paying the price?

"There is no way that the cost savings [of offshore outsourcing] make up for the loss in income for those displaced workers," Hira said. "Companies are gaining from this because they get the cost savings, but they have no responsibility for those displaced workers. The displaced workers obviously lose. In the end, America loses because the cost savings for companies don't outweigh the losses for displaced workers."Bettersworth doesn't necessarily think offshore outsourcing is a good or bad thing, but a reality. Therefore, he thinks we need to make smart decisions that will keep the U.S. competitive.

"You have three choices: remain competitive, choose a new industry or go down a misguided path of tariffs and closed markets," he said. "We rightly chose to have a minimum wage in this country and not to allow sweatshops. By doing so, we accept that we may not be able to compete in some industries where cheaper labor and lower costs of living can produce the same products at a fraction of the cost."

Can America still prosper?

BusinessWeek magazine's February 2003 cover read "Can America lose these jobs and still continue to prosper?" The article discussed offshore outsourcing and the toll it's taking on IT workers stateside.

Hira commented on this cover story, saying that without some smart new policy responses, the U.S. will not prosper by losing high skill/high wage jobs.

"The current policy response is to do nothing, which means we will not prosper," Hira said. "The policy responses proposed by industry organizations, like the Council on Competitiveness' National Innovation Initiative is to boost R&D funding and improve K-12 math and science education. These are both good ideas but don't address the job destruction caused by offshoring.

Even in the short run, we are losing as a nation," Hira added. "Hopefully, we will begin creating jobs again and those displaced workers can go to other jobs. But robust job creation hasn't happened since 2000."
But in the end, Hira still couldn't win Shenoy to his side of the offshore debate.

"Outsourcing isn't bad," rebutted Shenoy. "It brings down my costs, and it's good for the consumer. They end up with more money to spend on other stuff and ultimately help the economy."

Source: SearchCIO.com

Get the party started

Doing outsourcing right it's now a matter of staying competitive for many technology companies. In this blog I will share interesting information from the media that I come accross and my take on the subject.

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