Saturday, July 09, 2005

U.S. Immigration and the Myth of Offshoring

If conventional wisdom holds, the immigration landscape will be transformed beyond recognition within a few short months as a panicked Congress takes a meat axe to the H-1B and L-1 visa categories. Spooked by blaring headlines, dramatic testimony and anecdotal evidence of visa abuse, the politicians will run up to the 2004 election cycle by trying to find someone to blame for the nation's economic ills. When they round up the usual list of suspects, immigrants will doubtless be at the head of the line. Congress will not wait for the conclusions of the President's Council of Advisors on Science and Technology whose report on how America can maintain its high-tech leadership is due by year's end. Decisions on immigration policy will come before next spring when the General Accounting Office, the investigative arm of Congress, will tell us what the impact of offshore outsourcing of technology jobs is on the domestic job market. The political imperative to do something now must and will prevail. Desperate to regain power, the Democrats will find immigration restriction a painless way to make themselves culturally acceptable. The Executive Council of the AFL-CIO has already adopted a resolution demanding that Congress act to "reform" the H-1B and L-1 while increasing federal regulation of employers who use them. What will this mean for the rest of us?

It is ironic that the hue and cry is loudest now when the numbers are heading south. As of March 2003, according to India's National Association of Software and Service Industries (NASSCOM), the number of H-1 visas issued to Indian IT professionals dropped from 77,000 in 2001 to 33,000 in 2002 while the 2003 level is expected to be in 30,000 neighborhood. Nearly 40,000 Indian H-1B visa holders went home over the past two years as the IT bubble burst in the United States. While 15,000 L1 intracompany transferees travelled from India to the United States, this is a fraction of the 315,000 L visas issued this past year. Before Congress slashes the H-1B rolls, perhaps they would want to consider the fact that 170 Indian IT companies employed nearly 60,000 people in the United States in 2001. These Indian H-1B engineers paid almost $ 500 million in income taxes, made a significant social security contribution, and purchased $1.2 billion in goods and services. Beyond this, take a look at the findings from a study just completed by the global consulting firm of McKinsey & Company. It is certainly true that India software and service exports to the United States in 2003-2004 are expected to be a hefty $8.5 billion. It is, however, also true, though not as frequently or loudly mentioned, that the savings to the U.S. economy by offshoring work to India over this same period is estimated at between $10 billion and $11 billion. When you factor in the Indian importation of $3 billion in American high tech imports, some of which will be used to write software for export, as well as the tax and social security contributions noted above, McKinsey concluded that the aggregate benefit to the Ameican economy from Indian offshoring to be a healthy $16.8 billion.

By 2010, through offshore Outsourcing , McKinsey predicts a net savings to the American economy of $390 billion. Free Trade creates direct and significant economic benefit in the United States. The Global Personnel Alliance reports that the L-1 visa program has created 1.5 million jobs in the United States as a result of international investment; 450,000 jobs in Georgia and California alone were created or kept alive by foreign investment. For every $1 in offshoring, America gets back $1.15. During the recent debates over ratification of the Singaporean and Chilean free trade agreements, the United Parcel Service, the nation's largest employer of Teamsters members, announced that international profits had soared more than 150% over the past quarter; UPS estimated that, for every 40 packages shipped overseas, it was able to create one additional ( usually unionized) US job. Teamster President James Hoffa Jr. warned that congressional Democrats who were tempted to oppose such trade pacts "ran the risk of paying a high price." The growing profitability of US companies boosts the economy, leads to fewer job reductions at home, and enables competitive employers to redeploy displaced workers to higher-value jobs. Such workers can receive traning under both the Workforce Investment Act and the Trade Adjustment Assistance Act. Given the depressed equity markets, maximizing profitabilty by cutting costs is no longer optional. A recent report by Deloitte Research sees offshoring as essential to financial survival. Absent such a strategy, the share price of any such unfortunate employer could be expected to fall off the table as analysts write off the stock. If US companies do not make IT offshoring part of their overall labor arbitrage planning, their competitors will undercut them. In the long run, such uncompetitive businesses will either be forced to close their doors or lay off more American workers. Rather than causing the loss of American jobs, offshoring is a mechanism to maintain levels of domestic hiring that would otherwise simply not be possible. US banks, insurance companies and financial service providers have saved $6 billion in the past 4 years by offshoring to India. During this same period, such savings made it possible for these same employers not only to avoid layoffs but actually add on 125,000 new jobs.

A classic example of why offshoring may not be the menace to American workers that it seems at first glance is the difference between the US automobile and steel industries. Detroit, which long ago embraced offshoring, remains the largest automobile industry in the world. The US automobile industry employs about 900,000 workers, roughly the same number as in 1974 and 1994. Employment in car-related sales and services has grown 20% from 2 million to 2.4 million over this same period. Operating from around the world, shunning the false promise of protectionism, the American automobile industry made the key strategic decision to invest in new equipment and ways of working. It is one of our most impressive success stories. By contrast, the US steel industry, which has stubbornly resisted offshoring and lobbied for tariffs, has endured a consistent decline. Steel production in America has plummeted from 145 million tons in 1974 to 99 million tons in 2001. Employment plunged from 610,000 in 1974 to 181,000 in 2001, despite subsidies, tariffs and quotas that totaled $30 billion since 1976. No US steel producer now ranks among the top ten. Not satisfied with the current level of protection, the U.S. steel industry now demands a 20% tariff as the price of its political support. A recent NASSCOM study reveals that such a tariff would save 9,000 steel producing jobs, but cost 74,000 steel consuming jobs- a loss of 8 jobs for every steel job retained. It is not so easy these days to tell the players without a scorecard. For decades, Ford has built cars in Spain and England while General Motors has done the same in Germany. Are these American or European cars? What about the car that Toyota manufactures in Kentucky or the one that Honda builds in Ohio? Japanese or American ? While the loss of jobs is certainly an important way to define America's stake in the highstakes global economic competition, it is not the only, or even the most logical way to do so. Listen to what the Honorable Bruce Mehlman, Assistant Secretary for Technology Policy in the U.S. Department of Commerce, had to say this past June to the House Committee on Small Business:

While policymakers try to promote national interests, it is getting much harder to define them as the global economy develops. For example, is it better for America to buy a BMW made in South Carolina or a Ford made in Canada? How about IT services procured through IBM but performed in India, versus services purchased from Infosys but staffed using H1B workers living and spending their salaries in America? Is it better to help manufacturers remain competitive by enabling them to cut IT costs through Offshoring or help IT service-workers remain employed by shielding them from global competition? New Jersey recently wrestled with a similar question when its Department of Human Services…off-shored a basic call center used to support a welfare program. In the wake of the controversy, the State returned the nine jobs to New Jersey, albeit at 20 per cent higher cost (thereby reducing the amount of funds available for the welfare recipients, for whom the call center is needed). How will we answer the question when seeking to maximize resources for medical care for the elderly, education for our children or homeland defense?

The myth is that greedy American IT employers are using offshore outsourcing as an excuse to get rid of their IT staff. Truth is that most companies who have gone to offshoring retain 70% or more of their IT employees. Since many companies lose 5% anyway through annual attrition, combining planning with offshoring can reduce or eliminate layoffs. David Samson, a spokesman for Oracle, calls the expansion of operations in India as "additive" and had not resulted in any job losses in the United States. Ralph Szygenda, the Chief Information Officer at General Motors Corporation, says that the greatest risk is to ignore the realities of a global economy. "You can," he explains,"probably protect your internal resources if you have a five-to-10 year transition." Joe Drouin, the Chief Information Officer at automobile-parts maker TRW Inc. did just that when his company began IT outsourcing work offshore three years ago. Reducing staff through normal attrition, TRW never fired a single worker."We haven't let TRW people go so that we could build up our IT resources in India," Drouin explains."Everything we've done up untilnow has been supplemental."

Much ink in the press has been given to the prediction by John McCarthy, Forrester Research's Group Director of Research, that 3.3 million U.S. services industry jobs and $136 billion in wages will move offshore over the next 15 years. The fact that this represents only 2% of total U.S. employment today is rarely mentioned. An equally dramatic forecast comes from Gartner Research that some 80% of U.S. corporations will have considered offshore outsourcing by next year. Jon Piot, the Chief Executive Officer of the Impact Innovations Group in Dallas, warns that "software development in the U.S. will be extinct by mid-2006, because of Offshore software development with gradual job losses much like the U.S. textile industry experienced during the last quarter of the 20th century."
Other projections are considerably less alarmist. A new report just released by the Rand Corporation's National Defense Research Institute concludes that the United States will remain the leader in information technology for the forseeable future. Richard Hundley, lead author, dismisses potential software development and E-commerce challengers as "losers or laggards." In May, the Information Technology Association of America surveyed 400 hiring managers from both IT and non-IT companies; only 6% of all respondents, and about 12% of IT managers, said they had already moved jobs overseas. Dan Griswold, Associated Director of the Cato Institute's Center for Trade Policy Studies, reminds us that, even if Forrester is on target, and 220,000 IT jobs do leave annually, this is far less than the two to three million jobs that would disappear as a result of normal economic changes in technology and business competition. In fact, what Forrester conveniently leaves out, is the fact that the US economy typically adds a net one to two million jobs annually.The Bureau of Labor Statistics estimates that 22 million new jobs will be created between 2000 and 2010. In fact, the most rapid job growth will occur precisely in those sectors- computer and data processing- that are most susceptible to offshoring. Between 2000 and 2010, the BLS anticipates employment here will soar by 86%. Even if 300,000 computer and data processing jobs are offshored by 2010, this is only 8% of the total 3.9 million such jobs that will then exist. This pales in comparison to the impact that new areas like nanotechnology will have. Michael Roco, senior advisor for nanotechnology for the National Science Foundation, predicts that nanotechnology will inject $1 trillion into the global economy in the next 15 years and employ some 2 million people.

Off-shoring has its limits, though opponents and advocates do not seem to know what they are. Issues of cultural diversity, data privacy, intellectual property and political stability, to name but a few potentially complicating factors, may all play a part in slowing down its momentum. The impact on India itself may not be as universally positive as it first appears. A 1999 study by NASSCOM worried that the cost of employing top drawer software engineers in India could rival that in America in only 15 years, while other Indian experts predict that wage equalization could happen even faster. Already, in an effort to lower costs, Indian IT service firms are themselves sending work to cheaper markets, such as China. Beyond economics, India may find that the IT off-shoring wave that links it even closer to the American economy also serves to modulate the exercise of Indian foreign policy, particularly in such hot spots as Kashmir. The danger of a nuclear exchange between India and Pakistan is unlikely to entice more US Fortune 500 companies to come to India. When the Indians have to choose between national pride and economic enticement, which will win out? Beyond that, India's preferred position may not survive an even newer phenomenon, that of "near-shoring" in which such closer markets as Canada, Brazil, Mexico, even Russia, position themselves for a slice of the lucrative US pie.
Of all the myths that surround off-shoring, none is more pernicious than the threadbare argument that is a threat aimed solely at American workers. The off-shoring trend impacts equally US workers and US employers. Their fortunes are joined at the hip. This is NOT a worker vs. employer issue. To believe that is to misunderstand what is radically new here. Jobs have left America for cheaper labor markets before, but this is the first time that America's primacy in the global economy is under serious and sustained challenge. Corporate executives who are ready and willing to cut labor costs may not fully grasp that their own survival is also at stake. Writing recently in Fortune Magazine, Geoffrey Colvin captures the true essence of what off-shoring means: The difference this time, as we keep reading, is that outflowing jobs are higher paying and have more intellectual content.That's a difference not just of degree but of kind. Until now, smart, educated people in the U.S. have thought up ways to create wealth and then paid others to do the labor, often in foreign countries… No more. Those developing countries, which obviously always had people just as smart as ours, are now turning out people just as educated. They can design the work, too, and because educational and living costs are a fraction of ours, companies in those countries can afford to hire those people. That is a profound change: Designing the work is the essence of business, management, compet- itiveness… What makes anyone think that progression is suddenly going to stop? The next rungs on the ladder are product innovation, brand building and overall management. We're looking at three billion people getting better by the day at the things that make us the world's leading economy…We don't have to lose out in this historic shift. But nothing says we're destined to win either. We've never seen this movie before. Which is why it's a mistake to cast the latest outflow of U.S. jobs in the familiar terms of labor vs. management and the plight of the worker. It's that-but it's much more.

While America's markets can adjust, there is, and for good reason, considerably less confidence in the ability of our educational system to do so. At a time when Americans continue to earn fewer graduate degrees in computer science and mathematics, the need for such knowledge continues to grow. What is at stake is the intellectual future of the nation. American students fall further behind their international competition in virtually any test of math and science literacy. The blame for this cannot be placed at the doorstep of the H-1B and L-1 workers. Once it is the ability of IBM itself to remain competitive, then the shareholders will sit up and really take notice. Such a challenge cannot be met by limiting the number of H-1B or L visas. At most, such restrictions will slow down the ability of India to present itself as a viable strategic IT alternative but will not stop it. America has serious issues to deal with in the 21st century and it needs serious solutions to solve them. Slamming the doors shut is not one of them.

Source :Nasscom

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