Offshoring IT jobs? Consider the risks, not just the rewards

Offshore outsourcing is changing the U.S. economy and the very role of the CIO. This can be a good thing or a bad thing, depending on how firms go about the outsourcing process.

Everyone knows that the U.S. has been hemorrhaging jobs lately. The American Electronics Association reports that

560,000 IT jobs were lost in calendar years 2001 and 2002, roughly 10% of the total IT work force.

But if you're convinced that a rotten economy is the main culprit, think again. Offshore outsourcing (IT services provided from resources located abroad) accounts for a sizable portion of tech job loss, and outsourcing will continue to grow, according to research from both Foote Partners and other industry analysts.

Cambridge, Mass.-based Forrester Research Inc. projects that more than 3 million U.S. white collar jobs will be lost to offshore outsourcing during the next 10 or so years -- a half million of them in IT -- accounting for almost $136 billion in annual wages [based on the 3 million jobs].

Offshore outsourcing will continue to grow at a rate of more than 20% annually, according to Stamford, Conn.-based Meta Group, becoming a $10 billion market within two years. Gartner Inc., also in Stamford, Conn., predicts that 40% of Global 2000 enterprises will embrace offshore or near-shore IT outsourcing by 2005, and that more than 80% of U.S. companies will seriously consider outsourcing critical IT services by 2004.

Will these lost jobs ever come back? Consider this ominous finding from a recent Foote Partners' study that involved 400 of the Fortune 1000 companies: They anticipate that 35% to 45% of their full-time IT workers (based on the numbers they employed in 2002) will be permanently outsourced by 2005 or otherwise replaced by a more flexible workforce -- one made up of contractors, part-timers and job sharers. This more flexible work force would enable companies to "shift gears quickly" for competitive necessity.

Is this a carbon copy of what happened 20 to 30 years ago, when thousands of U.S. manufacturing jobs were sent overseas? The loss of relatively well-paying, blue collar jobs hurt that segment of the workforce, and real wages for the bottom 25% of the workforce never recovered. It's happening now to IT workers who are settling for less in new IT positions and taking lower-paying jobs outside of the IT field.

But driving the IT outsourcing juggernaut are speed to market and quality, not just cost of services. A new wave of outsourcing is allowing companies to quickly acquire reliable IT to deploy specialized services and ramp down easily when those services are no longer needed. Moreover, it's enabling corporate transformations, so companies may have more agile and responsive business models.

The truth is that successful IT executives obsess about how they can contribute to company growth, profitability and strategic direction. In many cases, they've been constrained by bloated, often ill-equipped IT workforces, which have now been pared down. Big pools of cheaper, high-quality offshore talent have made it easier to strike a cost-efficient balance between the desired skill level, exemplified by the skill sets that salaried in-house workers have; and the flexibility of contractors, who can be retained on an as-needed basis.

As a result, CIOs are now focusing more energy on hiring experienced salaried project managers and business/IT liaisons, and redirecting their employees to critical roles such as leadership, architecture, business analysis, business enhancement and vendor management.

But at what risk? Serious challenges abound, and they spell potential disaster to companies charting the offshore course:

Security. Companies are outsourcing software development to cheap labor overseas, where there is little or no way to ascertain the security risks posed by offshore workers. One risk is the potential loss of intellectual property and business-process secrets. Offshore outsourcers can copy and sell that knowledge or repackage it and present it to a competitor. China, in fact, lacks laws to protect companies' intellectual property assets and is suspected of having a significant economic espionage program that targets U.S. technology.

Business continuity and political situations. Terrorist networks exist in the Middle East and Southeast Asia, which are also home to superb IT talent. Companies that exclusively outsource to a third party in a single country are at greater risk that their operations could be disrupted. A political situation, such as armed conflict between Pakistan and India, could shut down offshore operations.

Controlling customers' fears. It can be difficult to convince customers that their data will be secure with a company thousands of miles away, in a country with a different language and culture, run by a government whose regulations and concepts of intellectual property ownership may be alien to those in the U.S.

You can minimize risk in the following ways:

 

  • Work with large vendors that have multiple regional centers worldwide.
  • Break up key pieces of the work being sent offshore, so no one can easily re-assemble those pieces; this process is analogous to encryption.
  • If you're big enough, open your own dedicated offshore center staffed with local talent provided by an outsourcing partner. These employees can be managed under the same umbrella as U.S. employees.
  • Have detailed business continuity procedures spelled out in contracts, and be aware of a country's intellectual property laws.

Offshoring has the potential to redefine the CIO role from head of IT operations to executive in charge of global delivery of business services. What an auspicious opportunity for cautious CIOs who have the right stuff!

David Foote is president and chief research officer at Foote Partners LLC, a management consultancy and IT work force research firm he co-founded in 1997. He was formerly an industry analyst at Gartner Inc. and Meta Group, where he founded and directed Meta's CIO/CTO research service and led its IT human capital management and compensation research areas. Contact him at dfoote@footepartners.com or 203-972-6689.

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