The Realities of Offshoring

By Darryl K. Taft  |  Posted 2009-02-03 Print this article Print


IBM has been "very aggressive" over the last five years in expanding in India, but also-up to now-has been keeping its employment level steady in the United States, Kennedy said. However, the jobs offshored to India have been primarily transaction-oriented jobs such as accounting and back-office functions or technical specialties such as SAP programming, he said.

"But I'd say about 80 to 90 percent of what's happening now in terms of IBM layoffs is from the business downturn," Kennedy said. "In terms of laying off sales and distribution personnel, that function is done locally. They can't move that-so at least for that part of the layoffs, that has nothing to do with offshoring."

However, for IBM Software Group layoffs, "it's a little harder to tell," Kennedy said, noting that some of the software group efforts such as "work that has to be done close to the customer like needs analysis and requirements" cannot be offshored, while other software development activities can be.

Kennedy compared the current situation in services and technology to that of the textile industry. He said there used to be more than 3 million people working in the textile industry in the United States. "But it makes more sense to do textiles in a low-income country," Kennedy said. "Would you rather pay $10 for a t-shirt made in South Carolina or $5 for one made in Sri Lanka? Consumers want the $5 shirt. If we shift to services it's the same thing."

Kennedy said he grew up in Omaha, Neb., which used to be the call center capital. But it was still relatively expensive and inefficient when compared with India, he said. A call center employee in India might cost $400 a month, whereas one in Omaha might cost up to five times that, he said. Plus Indian call center employees on average are better educated and thus make fewer mistakes and require less supervision than their U.S. counterparts, which makes for a less expensive, more efficient operation, he said.

"In the long run, the only way for this country to raise incomes is to have us do more and more productive things," Kennedy said. "Or put another way, the only way to raise living standards is to move out of low-productivity activities into high-productivity activities. And it's the low and middle value-added sectors moving offshore."

For instance, "GM is stuck with high-cost, medium-skilled engineers," Kennedy said. "That's one reason it takes GM seven years to go from concept to design to the showroom floor [to produce a new car model], whereas it takes Toyota only three years. If they were more into tapping into the best talent wherever it is in the world, GM would be in better shape today."

Likewise, "IBM has to employ people all over the world to service those customers in those countries they sell to," Kennedy said.

He added that he believes the reality for companies like IBM is that they need to find workers who can do the work efficiently and effectively. Sometimes workers who represent the best combination of talent and lower cost are in the United States. Other times, they are located overseas, Kennedy said.

However, he said, "I'm not really pro-global sourcing or offshoring; I'm not a cheerleader for it. But it's a trend that's happening and smart managers have to be able to understand it."

Meanwhile, layoffs at companies such as IBM have yet another consequence for some employees-particularly those with H-1B visas. When H-1B visa holders in the United States lose their jobs, they must leave the country.

The H-1B issue has long been a source of contention and that is no less the case in the current recession, when major technology companies are being forced to lay off highly skilled employees. In fact, some are calling for companies to let H-1B visa holders go before they lay off American workers.

Sen. Charles Grassley (R-Iowa) even wrote a letter to Microsoft CEO Steve Ballmer in January calling for Ballmer to "protect" American workers. Microsoft has announced plans to cut up to 5,000 jobs. However, Microsoft Chairman Bill Gates has argued before Congress for increases to the cap on the number of H-1B visas allotted each year. Microsoft has been one of the top employers of H-1B talent over the last few years, with IBM not far behind.

Darryl K. Taft covers the development tools and developer-related issues beat from his office in Baltimore. He has more than 10 years of experience in the business and is always looking for the next scoop. Taft is a member of the Association for Computing Machinery (ACM) and was named 'one of the most active middleware reporters in the world' by The Middleware Co. He also has his own card in the 'Who's Who in Enterprise Java' deck.

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