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Offshoring and the New World Order


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Outsourcing as a means of meeting organizational information technology (IT) needs is a commonly accepted and growing practice; one that is continually evolving to include a much wider set of business functions: logistics, accounting, human resources, legal, and risk assessment.3 Today firms of all sizes are rushing overseas to have their IT work performed by offshore vendors. Such changethe pundits argueis merely the natural progression of first moving blue-collar work overseas followed by whitecollar work. IT jobs are most visible to us in the IT field, but the same is happening to other business functions/processes. With labor costs in India well below the U.S. and technical skills equal or better, the argument for offshoring is compelling. (Offshoring refers to the migration of all or a significant part of the development, maintenance and delivery of IT services to a vendor located in another country, typically in the developing world like India and China. The service provider hires, trains and manages the personnel. Alternatively, an organization might set up IT operations offshore but still controlled by the organization's management2). Here, I seek to analyze some of the arguments underlying the notion of offshoring and implications for the IT field from a U.S. perspective. While I am aware that such an undertaking is unquestionably a thorny proposition, I feel that too little 'serious' thought has been given to this issue. Currently, we are plagued by hype (both positive and negative) but little critical reflection. Hopefully, this paper can begin to reverse this trend and shed light on the challenges we face.

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OffshoringA Pending Crisis?

Although offshoring is not a new phenomenon - U.S. organizations have been outsourcing to vendors in other countries for more than two decades recent public awareness has been raised to the potential deleterious consequences of offshoring white-collar work. Friedman's4 well written and highly publicized book calls offshoring 'the quiet crisis' and warns of the impending doom it will cause in the West. Sheshabalaya11 commented that the erosion of the Western economic system by job relocation to India is the real "weapon of mass destruction." Essentially, the dotcom bust and the resulting loss of jobs intensified the concerns about loss of domestic jobs to foreigners and fuelled public sentiment against offshoring. Numerous reports in the popular media about 'offshoring' with arguments both 'for' and 'against' the practice have kept the issue in the public eye.

Lou Dobbs on CNN talks about 'the Outsourcing of America' and accompanies this with sound bites of displaced American workers. He notes that Kathy Brittain-White's Rural Sourcing initiative is a model of creative thinking for saving American jobs. Such reporting may make for good television ratings but is such hyperbolae warranted?

Most of the opponents of offshore outsourcing focus on the potential consequences for displacement of domestic jobs on the economic structure of the country, citing lost U.S. wages of $135 billion, 3.3 million lost jobs, and reduced salaries for the jobs that remain.5,6 Such numbers have intensified the negative sentiment towards offshoring. There are many 'positive' predictions as well, forecasting a strong positive impact on the U.S. economy due to global outsourcing.8,9 Such predictions are based on economic models of technological advances of the past, noting that efficient economic markets provide benefits to everyone in the long run. They suggest as the wages and incomes of workers in India and China increase, they will have sufficient disposable income to buy new products and services thus having positive affect on the entire global economy. Another benefit is the savings that accrue through offshoring are translated into lower costs for U.S. corporations and hence larger profits for shareholders and lower costs for customers. Lower costs may also enable firms to invest in new products and processes, which generate new, higher paying jobs. But are such predictions accurate? The truth is: these forecasts are based on speculation and little empirical data or theory. It is little wonder that the public is confused and frightened by such prognostications.

The decline in employment and compensation in the IT industry have also had a backlash in the educational system. Konrad7 notes that recent computer science graduates aren't even looking for jobs in IT since they believe there are no IT jobs left in the U.S. Worse, citing a Gartner Group report, she suggests that 15% of the IT workers will drop out of the profession by 2010, with demand for systems developers shrinking by 30% during the same period. This has led to a dramatic decline in enrollment in computer science and information systems programs. Vegso12 reported that the percentage of incoming undergraduate students in U.S. universities indicating they would major in CS declined by over 60% between 2000 and 2004, and is now approximately 70% lower than at its peak in 19821983.

The combination of declining enrollments in IT and the fact that many of those who majored in Computer Science and IS were international students who often return to their home country after graduation, is leading to a diminution of IT knowledge in the U.S. Coupling this depletion of IT talent at home with the loss of IT knowledge to a foreign country has led many commentators to suggest the U.S. is dangerously vulnerable regarding IT knowledge. But it gets worse.

Friedman4 notes the quiet yet dramatic changes that are occurring globally which portend the gradual erosion of U.S. dominance. In particular, he talks about the economic and educational hole the U.S. has dug itself into. Educationally, U.S. students simply don't get it. The purpose of education isn't to please one's parents or simply get a piece of paper (such as a diploma), but to prepare oneself for the uncertain future ahead. First generation immigrants did not want their children going through the hardships they endured and saw education as the vehicle to a better life. Children of immigrants to a large extent went to college, graduated, and wound up with good jobs. The next generation of children does not appear to have been imbued with the same value system. They saw college as their parents dream, not theirs. Higher education took on a new role a means to satisfy or appease parents (who typically paid for their children's education). The focus of these students was on 'getting the piece of paper'; in the process, much has been lost. That hunger for knowledge and creative thought seems to have vanished. (Steve Jobs in his Stanford 2005 commencement speech made reference to this exact point as it related to his education experience).

More middle class American students than ever attend college earning degrees, but failing to grasp the essence of what higher education can offer: such as, the ability to critically think and adapt to change. This is America's failing. The purpose of higher education has been corrupted, and largely lost. In India, China, Vietnam, Singapore, Taiwan, and Korea, education is considered the key to the future. Students in these countries work hard because they know education is the way out of their economic condition. The same cannot be said about U.S. students.

The fact is that we have moved from a U.S.-centric notion of globalization which is "take American ideas and values and place them in foreign countries' to true globalization where countries (because of their newly found or newly emerging economic freedom) decide for themselves how they fit into the coming new world order. No longer are they bound to the U.S. for their survival. This change may not be as subtle as Friedman and others suggest, but rather the equivalent of standing in front of speeding train. It is as relentless as it is unstoppable. The real question is how will the U.S., and the West in general, fit within the new world order? Will it be like the former British Empire where the British simply refused to believe the Empire was dead, and spoke instead of 'the Commonwealth' as a vestige of former British glory?

The Commonwealth is a reminder of how the world changes. With its economic power eroded, many in the U.S. cry 'foul' as though the world has somehow done them wrong. The truth is: the new world order will be very different from what it was the last 50 years. History has shown that empires always erode, usually because of decay, complacency, and a failure to recognize change. The victors become vanquished, believing that somehow history has dealt them a raw deal while concomitantly believing that 'some day it will all be made right again.' The U.S. may be suffering this erosion. It simply cannot see what is happening and/or is powerless (or at least do not have the will) to adapt. Instead of complaining about how U.S. jobs are disappearing and going offshore, and how the government should legislate against offshoring, the U.S. should reflect upon what it has to offer; what it needs to do to be competitive in the future. Lamenting about the past or enacting legislation to protect the past, serves no purpose other than to possibly soothe the egos of some. Fundamentally, it will do nothing to alter the inexorable shift toward the East.

A recent article in The Guardian stated an interesting fact: India never rebelled against the British when in 1699 the British enacted legislation which forbade the weaving of cotton in India even though the raw material - cotton - was grown in India. The British didn't want this skill to be lost nor allow India to have the economic gain from weaving so used their power to maintain the then world order of the 'haves' (British) and the 'have-nots' (Indians). It has taken 300 years but perhaps the Indians are finally getting what was rightly theirs in the first place! Yet this does not tell the whole story.

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The Fundamental Nature of Offshoring

Discussion of the perceived deleterious consequences of offshoring misses a more subtle change which is based on the key role that IT plays in the commoditization of work The new terms "IT-enabled services" and "utility computing" are suggestive of an important side effect of technology that has been a hallmark of 'modernization' since the beginning of the first industrial revolution. the expropriation of individual skills into explicit methods and techniques that are then coded into turn-key technology "solutions." From a systems perspective, the same phenomenon has been labeled "blackboxing." The operators of turn-key solutions no longer have to master the craftsmanship to perform the work the turn-key solution automates, because the original complexity is now behind the levers and buttons of an interface. Thus, the operator of a programmable lathe needs fewer skills than the blacksmith, or the factory-trained laborer in a semi-automated shoe factory with a fraction of the skills of the shoemaker.

Modern IT has facilitated extending this market logic of commoditization to white collar work - clerical work initially (such as payroll computations) but growing to encompass knowledge work such as IS (in particular) but also business processes in general. Hence, IT has served both as a medium and catalyst for turning subjective skills and know-how into a market commodity to be contracted out to the lowest bidder. IT has both facilitated and made possible the taking of knowledge work (such as business processes), dissecting it into individuals modules, and permitting them to be performed anywhere in the world by the lowest cost provider. Commoditization through IT has allowed knowledge work to be disaggregated, distributed, performed, sent back and re-aggregated so that it does not matter where the knowledge work comes from or where it is performed. As long as the knowledge skills and the means for electronic distribution and communication are available, it simply does not matter where the work gets done. (In India, radiologists analyze CAT scans performed in the U.S. and Australia, and send back their reports over the internet.) In this sense offshoring really refers to true globalization.

Some might see irony in this. The commoditization process has come full circle, affecting the IT profession itself: IT workers are now experiencing what technology did to others in the 1970s and 1980s. Whilst commoditization is not wholly dependent on IT (the causes of commoditization are deeply rooted in the progress ideal of the enlightenment and liberalist ethics of market economics), IT does fundamentally extend the reach and speed with which it spreads throughout the global economy. It is virtually unstoppable.

The real problem is even more insidious, commoditization is only one aspect. It is the myopic focus of the corporate world on quarterly earnings and implementing strategies necessary to boost quarterly earnings. Wall Street expects improved earnings each quarter, and corporations do what they must to satisfy Wall Street. Since profits are the difference between expenses and sales, a key way to improve profitability is to lower costs (although Enron and WorldCom simply reported fictitious earnings!). Corporations typically have less control over sales, but they can cut costs (often by firing or reassigning staff). This unwavering focus on quarterly earnings and the 'bottom line' leads to managerial short-termism. Policies are adopted to cut costs, which lead to short term savings, but in the long term, may be counter-productive. Offshoring is one short-termism strategy: benefits (such as cost savings) accrue now but at the expense of the loss of skills. Such cost savings are couched in terms of efficiency improvements which Wall Street typically rewards.

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Implications and Recommendations

Although I have painted a somewhat grim picture of the likely future for the U.S., all is not lost. Responding to what I term "the new world order" is not going to be easy for the Western World (in general) and the IT academic community (in particular), but we must try. In responding to the challenge, I wish to offer some thoughts on what the field of IT should do, and then, on a more general level, what the West (especially the U.S.) should refocus its attention on.

First, the IT field has to acknowledge that offshoring is not a passing fad and that this has major implications for the discipline. Many of the entry level jobs IT graduates used to get are gone, and are unlikely to return. Pastore10 notes that most non-IT companies simply are not hiring any entry level IT staff. Those who do are hiring folks with 5 plus years experience who they typically hire away from IT consulting firms. Corporations who hire IT students want them to be business analysts and not programmers. We need to prepare IT graduates for these customer facing jobs. These jobs require individuals with people skills, knowledge of the business, and ability to help organizations find and refine business processes which IT will enable. This emphasizes project management skills. IT staff must be able to manage projects involving business unit employees, IT staff from the business unit, staff from corporate IT, consultants, short and long term contractors, domestic outsourcing vendors, offshore outsourcing vendors, IT vendor sales people, and numerous others. The people skills required are broader than simply communication and negotiation skills; they will involve understanding the different cultures, value systems, and goals. Of this vast array of team/project members. IT curricula must change to meet this new environment.

Second, the IT field has experienced a dramatic decline in student numbers. Not long ago a headline in the Wall Street Journal noted that "if you work in IT, you had better find another job." Such ominous pronouncements have had a deleterious effect on the field; students simply did not want to major in a field where there wouldn't be any jobs. Although many of the old IT jobs are gone, it is inconceivable to believe that organizations are somehow going to stop needing IT, or are going to get all their IT offshore. Organizations are more dependent on IT, not less. For me, the idea that IT is a commodity that adds no value to the organization is bankrupt. In the early days of outsourcing, firms rushed to outsourcing vendors to handle their IT for them. Those who were successful were the ones who kept a number of IT staff internally who managed the arrangement and sought new IT opportunities. Those who turned all of IT over to outsourcing vendors typically failed, and have resorted to bringing significant parts of IT back in-house. I believe the same will happen with offshoring. Successful companies will maintain a judicious mixture of on-shore/offshore staff of which a considerable portion will be internal company employees. IT is not going away but it is changing. Our challenge is to adjust public perception. We must get students to recognize that IT jobs will not disappear, only change; that IT jobs are not dull, they involve working globally on interesting and sophisticated IT projects.

Third, and moving beyond the IT field, the West has some important issues to face if it is to have any significant role in the coming new world order. To me education is a major part of the solution. Western societies, especially the U.S., need to rediscover its affection for education, starting at the elementary level but continuing through all stages. More than this, people in the West must acknowledge that education is not a 16 year process but a life-long journey. The academic community must recognize that we are part of the solution. It is our job to help individuals develop and then re-develop the skills which will keep them employable in the new world order. It is our job to develop innovative curricula that includes the important skills sets for the future. Part of our research effort should be directed at finding out what these skill set are or ought to be. This will likely involve collaborative efforts with our academic colleagues in places like India and China. It is already occurring. Marquette University offers a project management course that is taught jointly with a university in India. The University of St. Thomas takes IT students on a field trip to India to work with Indian students. Such collaborative efforts will help us in the West better understand the culture and mindset of the offshoring vendors. This must be reflected in our teaching.

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References

1. Carmel, E. and Tjia, P. Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce, Cambridge University Press, Cambridge, 2005

2. Davis, G., Ein-Dor, P., King, W. and Torkzadeh, R. IT offshoring: History, prospects and challenges. J. of the Association for Information Systems 11, 7, (Nov. 2006), 770795.

3. Dibbern, J., Goles, T., Hirschheim, R. and Jayatilaka, B. Information Systems outsourcing: A survey and analysis of the literature. Database 35, 5, (Dec. 2004), 6102.

4. Friedman, T. The World is Flat: A Brief History of the Twenty-First Century, Farrar, Straus & Giroux, NY, 2005.

5. Geary, L.H. Vanishing jobs. money.cnn.com, Jan. 9, 2004.

6. Harrison, A. and McMillan, M. Dispelling some myths about offshoring. Academy of Management Perspectives 20, 4, (Nov. 2006), 622.

7. Konrad, R. Computer jobs lose luster as young techies aspire to other careers. Houston Chronicle. June 19, 2005.

8. Mann, C. Globalization of IT services and white collar jobs: The next wave of productivity growth. International Economics Policy Briefs: PB03-11, Washington, DC, 2003.

9. McLaren, J. Globalization and vertical structures. American Economic Review 90, 5, (2000), 12391254.

10. Pastore, R. The story you won't find here: CIOs don't want to talk about the future of the entry-level IT job. CIO Magazine, June 15, 2005.

11. Sheshabalaya, A. Rising Elephant: The Growing Clash with India Over White Collar Jobs. Common Courage Press, London, 2004

12. Vegso, J. Interest in CS as a major drops among incoming freshmen Computing Research News 17, 3. May 2005.

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Author

Rudy Hirschheim (rudy@lsu.edu) is Ourso Family Distinguished Professor of Information Systems in the E.J. Ourso College of Business at Louisiana State University, Baton Rouge, LA.

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Footnotes

DOI: http://doi.acm.org/10.1145/1592761.1592792


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