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The Selling of America

TORONTO, Digital Journal — Fans of political irony must have had a good time in late 2003 when Lou Dobbs, host of CNN’s business show Moneyline, went on a rampage.

Dobbs, a flint-eyed patriot and a high-minded capitalist, took aim at those U.S. companies that had outsourced jobs overseas. Outraged, he asked viewers to help him create a rogues’ gallery, which he called “Exporting America,” and added to it every night for a week. By the end, he had listed more than 200 businesses — some of them very large — which had used “offshoring” as a business tactic. CNN then posted the list on its website.

No stranger to bombast, Dobbs thundered that these businesses are unpatriotic. He took the position that it is every American’s duty to create jobs, and that by exporting jobs from the United States, these companies aren’t showing commitment to the country they call home.

He touched a nerve. His populist ranting was rewarded with a flood of supportive letters, many of which CNN published on its website.

Dobbs’ list is sobering because it shows how enthusiastically the high-tech sector has embraced the concept of outsourcing, especially offshoring. Handily, a third of the businesses Dobbs listed are exclusively high-tech operations; Dobbs doesn’t break the offshoring statistics down, but many of the non-tech companies on the list got there because the divisions they chose to send offshore are either new technology divisions, or somehow handled through new technology.

The political irony lies in the fact that Dobbs, a tub-thumping right-winger brandishing a Harvard economics degree from his bully pulpit at CNN, was declaiming against the export of jobs, and thereby aligning himself with his traditional opponents: Democrats, unions, East-Coast intellectuals, anti globalists and left-leaning political science professors.

His reasoning slammed a torpedo just under the waterline of the Free Trade Agreement, which the business community had lobbied so hard to float, mostly because it wanted cheaper labour. Businesses saw profit in exporting blue-collar jobs to unskilled workers in Mexico, where the standard of living is much lower, and the more skilled jobs to Canada, where talent is plentiful but the dollar generally runs 40 per cent cheaper.

Rather than addressing President George W. Bush’s administration, which had racked up a whopping federal deficit in only three years, Dobbs turned his wrath on those businesses he could denounce for their lack of correct political sentiment.

By politicizing offshoring, Dobbs raised the bar on irony by placing himself and his supporters close to liberals, who condemn the practice of sending jobs offshore for almost the same reasons — though few of them are based purely in hot-eyed patriotism. And this put business, which traditionally sees itself as in the political middle or slightly to the right of it, at an extreme to both the right and left. Globalization, of which offshoring is a major element, has reversed the traditional schematic of political positioning into the hairpin theory of politics: The extremes of the left and right are now closer to each other than they are to the middle.

While Dobbs has been careful to limit his criticism to jobs shipped outside the country, he has not really done much to separate offshoring from its benign twin, “outsourcing,” meaning the practice of contracting out labour within the United States. The problem lies in the fact that the idea and the motives behind each practice are identical: To cut off the corporate endeavour from the mainstream and ship it to a place where it can be done more cheaply. The only difference between outsourcing and offshoring is how much farther afield a company is willing to look to find cut-rate labour.

The justification, more often than not, is a desire to return to a company’s “core business,” a buzz-phrase one hears more frequently during poor economic cycles. It is also a euphemism designed to deflect blame away from management’s expensive (and not always successful) efforts to move their businesses into the technological future. In this linguistic trope, technology can be dismissed as a distraction from the “core” business.

It also allows companies to blame recent financial losses on their efforts to incorporate technology, and suggests that these losses can be reversed by handing the operation over to someone able to concentrate exclusively on that part of the business. There’s a baroque logic in this, one that suggests corporate profits are less influenced by fluctuations in the economy than they are by management’s ability to turn things around.

Confronted with evidence that outsourcing is a wise move — and under intense pressure to improve shareholder value despite the sluggish economy — many businesses consider it a relief to dump the circadian headaches of security patches, software upgrades and hardware purchases onto someone else. Ultimately, an enterprise can reduce the relationship between its core business and its less attractive duties (customer service, shipping, call centres) to the level of an arm’s-length service contract.

Michael Roach, president and chief operating officer of the Montreal-based technology services provider CGI Group Inc., explained the situation succinctly to Globe and Mail reporter Kevin Marron. In a lean economy, he said, companies are under pressure to re-examine their business models “to redraw the line on what is core to their business and what is not — to look at what we do best and who we should partner with to do the rest.”

What is most attractive about outsourcing is that it appeals to the corporate manager trying to improve the bottom line without getting his hands dirty in the messy and unpredictable business of handling difficult work, like keeping up with new technology. The cost of an outsourcer’s contract is a hard figure that the client corporation can safely enumerate in its quarterly reports,
a number immune to whatever surprises may arise from a volatile economy or new technological developments.

Infrequently mentioned, however, is another benefit: A corporation can absolve itself of blame when an outsourcer fails to deliver as promised. A failure in customer relations, for instance, is unforgivable when it happens within the walls of the corporation; if the failure lies with an outsourcer, management can blithely express disappointment and correct the situation by finding another one.

Labour in other countries can be very cheap. At the beginning of the great overseas outsourcing trek a few years ago, programmers in India were happy to take home one-tenth of the salaries paid to their U.S. counterparts. American corporations raced to take advantage of these low salaries, and India instituted a serious push to develop its high-tech industry. Now Bangalore, a city in the southern part of the subcontinent, rivals Silicon Valley in its heyday. [Click here to see Paul William Roberts’ story for more information on this topic.]

Other countries are hunting for offshoring deals too, among them the Philippines, China, Ireland and Russia. Bangladesh exports software to 23 countries including the U.S., and is trying to compete with India, which is expected to generate $13 billion (US) in revenue from technology outsourcing in the fiscal year ending in March 2004.

Canada has enjoyed the benefits of U.S. job offshoring, mostly due to lower labour costs, cultural compatibility, geographic and time zone proximity and an educated, productive work force. The McKinsey Global Institute reported that in 2002, Canada had $3.7 billion (US) in outsourcing revenue, making it the world’s third-largest supplier of labour for U.S. information technology and business-process outsourcing (after Ireland, with $8.3 billion, and India, with $7.7 billion). Many Canadian-based IT services operations and provincial economies, such as New Brunswick’s call-centre industry, have prospered as a result.

These are major contracts. Nortel, for example, recently opened a development lab in China with 600 jobs. Intel has hired more than 1,000 engineers in India and China. American Express has created a fraud analytics department in Asia staffed by specialists with doctorate degrees. HSBC moved mortgage processing operations to Asia, J.P. Morgan dispatched some research operations to Mumbai in India and Goldman Sachs moved some British-based operations to Asia.

One study done for the high-tech industry in October of 2003 found that $1.2 billion (US) of work related to information technology went offshore between 1995 and 2001. Forrester Research, another high-tech consultancy, predicted a loss of 3.3 million American jobs over 15 years, most of them in IT.

Diane Morello, an analyst with Gartner, Inc., says that one of every 10 jobs with U.S.-based IT vendors and service providers will move to emerging markets by the end of 2004, and that “it’s an irreversible megatrend.”

But when Morello says it’s “irreversible,” one must question the validity of the assertion. Was this a dispassionate observation or a sales pitch? The same question could be put to Forrester Research, which predicted that an astonishing number of jobs would be exported over the next decade and a half.

The problem is that these statements are based on research proferred by consultancies that are selling outsourcing services. Consultancies grew in popularity with the birth of high technology, stepping in as lifelines for enterprises trying to steer a course in a difficult, expensive and unsettling new atmosphere. Makers of soup, detergent or cosmetics did not have the time or energy to focus on computerization, even though they knew they had to make some sort of move to remain competitive.

Advisers at Accenture (formerly known as Anderson Consulting), Forrester Research Inc. and Gartner Inc. jumped in to offer sage advice on how to make the transition to digital business less terrifying and more profitable. They offered mountains of research, studies and surveys that indicate where the trends are.

They also offered outsourcing services.

Accenture, for instance, “helps forward-thinking companies use outsourcing innovatively as a strategic tool to transform their enterprises and achieve high performance.” Gartner and Forrester provide services matching businesses with the appropriate outsourcers.

There is nothing illegal or even unethical in providing both outsourcing services and studies showing its benefits. But it does make one wonder whether such studies would ever question the whole notion of outsourcing to begin with, or even measure the very real impact of massive offshoring on the U.S. or Canadian economies. Certainly there is little research that warns potential clients about the political opprobrium they might face from CNN’s Lou Dobbs and his followers, who are trying to create a political climate hostile to outsourcing, stopping just short of using the word “traitorous.”

This uneasy relationship between apparently unbiased statistical observation and the selling of services is further blurred by the kind of language in which its promoters wrap it up. Forrester, for instance, describes its outsourcing services this way: “Firms want services from specialists so they can free up internal resources to focus on core competencies. The providers range from data centre operators and system integrators to business process outsourcers (BPOs). Users prefer services vendors with vertical and geographic skills and that partner with best-of-breed providers for complete solutions.”

The underlying message, tricked out in management jargon, is clear: Forrester will tell you exactly how to restructure your business so that it can be chopped into a series of discrete operations that can then be cut loose and farmed out.

“Layoffs” is not a word you’ll hear in discussions of outsourcing, despite the fact that layoffs lie at the heart of the process. In fact, IBM was recently embarrassed when an internal memo was leaked to the Wall Street Journal, which sought to educate Big Blue managers on how to speak to employees who were about to be laid off. The managers were not, for instance, ever to use the words “layoff” or “offshore” or even “onshore.”

Managers will instead speak in opaque and painless-sounding terms, such as “business-process outsourcing” or “third-party logistics” (shortened to “3PL”), a term especially favoured by the warehousing industry.

Euphemisms like these are becoming necessary because the entire notion of outsourcing, which increased in popularity in direct proportion to the souring of the economy two years ago, is coming under question. The high-tech sector is showing signs of revival, if not a return to the heady days of overheated IPOs, and so there is less pressure to export jobs.

As a result, consultancies are beginning to hedge their language; instead of touting outsourcing as a panacea, they are beginning to admit that foreigners cannot meet all a company’s demands.

Brett Turner, vice-president of Toronto-based Blast Radius Inc., which sells high-tech marketing services, evidently felt it necessary to soothe the business community when he said that “offshore solutions can work for certain types of development, but not for more complex multi-department business requirements. Roles that involve integration, strategy, management customization, localization, business analysis and consulting must be staffed locally.”

This is intended to be a reassuring statement, especially considering that offshore labour rates are quickly catching up to competitive levels. The Indian programmers who once worked for 10 per cent of what U.S. programmers earned are now commanding wages running at 30 to 40 per cent of their U.S. counterparts.

Moreover, mainstream thinkers are beginning a steady drumbeat against the practice. David Ticoll, a technology columnist and no enemy of business, warned recently in The Globe and Mail that “Canada is living in a fool’s paradise on the entire issue of offshore outsourcing.”

He cited Andrew Grove, Intel Corp.’s founder and co-chairman, who warned that offshore outsourcing threatens to turn U.S. computer software and services industries into bit players in the global marketplace, going the way of the steel industry, which went from controlling 90 per cent of the global market to 10 per cent in the space of a few decades. Similarly, the United States dropped from manufacturing 90 per cent of the world’s semiconductors to 50 per cent in 15 years.

The reason Canadians don’t worry so much, Ticoll reasons, is that IT employment in Canada is generally healthy, certainly healthier than it is in the United States. Few jobs have been lost, and so we do not feel any sense of urgency about the matter of exporting jobs; we seem to be working on the theory that the jobs we are sending overseas are balanced out by the jobs created here by U.S. high-tech companies.

“Only problem is,” Ticoll concludes, “no one seems to know whether this theory is true.”

That’s because Statistics Canada does not collect data about IT outsourcing. No one knows how many IT jobs are moving to Canada from other countries or, conversely, how many jobs have actually moved offshore.

But while offshoring may improve a company’s bottom line in the short term, it is creating another problem in grooming the technologists of the future. Paul Swinwood, president of the Software Human Resources Council, says that university computer science graduates are finding it tough to get entry-level jobs — especially because so many of those jobs have been shipped overseas. Canadian universities may produce
a bumper crop of engineers and technical workers, but they won’t find their first jobs with companies that don’t hire and develop local talent.

The situation will only get worse over the next decade or so as Boomers in the tech industries begin to retire. With entry-level jobs mostly in Bangladesh and Bangalore, there will be precious few people here who can step into the senior or even middle ranks of our businesses with any confidence.

Moreover, however tempting it is to carve off a part of the business to increase profitability, an unduly fragmented company is headed for trouble.

“You are always going to need direct person-to-person access to professionals who understand the latest and greatest technology choices and especially how the pieces fit together,” said David Smart, vice-president of systems and technology services with the CIT Group Inc., a U.S.-based lender with Canadian operations. “The IT body of knowledge is becoming so large that there is
a need for local pockets of expertise or specialization.”

Shane Schick, editor of ITBusiness.ca, has been asking pointed questions about the practice of outsourcing.

In September of 2003, Schick attended a conference on outsourcing hosted by the Conference Board of Canada. He described a scene in which an attendee cornered an Accenture partner who had just delivered a summary of the benefits of outsourcing.

“I didn’t get the impression anyone was saving any money,” the attendee said.

It fell to Scotia Group vice-president of strategic sourcing Linda Tuck Chapman to respond. She admitted that many enterprises anticipate achieving cost savings of 30 per cent or more from outsourcing.

“I don’t know where these comments come from,” she said. “Sometimes we’ve managed to see savings of 10 per cent or a little bit more, but it’s usually been much more about the value (outsourcing) brings to the company.”

Only sometimes? In other words, there is an enormous gap between what is promoted as the benefit of outsourcing and the reality.

Schick has noted that outsourcing has reached a “saturation point” in the IT departments of large companies, and consultants are now trying to persuade their larger customers to outsource departments other than those connected to technology.

Their biggest problem, he said, is to get beyond thinking of outsourcing as offloading “grunt jobs” so that a company can focus on what it does best, like dealing with customers. “Yet many firms, if they were put under the microscope, aren’t as good at those things as they claim to be,” he wrote. “That’s why, for the first time, we’re starting to see more companies outsource areas other than IT, like call centres and supply chain management.”

But selecting and managing outsourcers is not as easy as it seems.

“Even if technology allows outsourcing in other departments, those charged with selecting and working with outsourcers may have more of a legal or (human resources) background than a thorough knowledge of data centres,” Schick wrote. “But even once you know what you’re not good at and you’ve decided to let someone else handle it, shouldn’t you involve someone who’s sort of good at it so they can help the person who takes over the job?”

Ultimately, the future of outsourcing may not be about patriotism or the economic fallout from exporting so many “grunt jobs” overseas, as Lou Dobbs would see it, but one of expediency. If sending work far away from the head office simply proves unprofitable — or just not profitable enough, with savings of usually less than 10 per cent — the “megatrend” of outsourcing will disappear and be dismissed by historians as just another management fad.

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