Commentary: The IT diaspora

By John C. McCarthy, Group Director

Over the next 15 years, 3.3 million U.S. services industry jobs and $136 billion in wages will move offshore to countries like India, Russia, China and the Philippines. The IT industry will lead the initial overseas exodus.

A growing number of companies are shifting a range of IT, back office, customer service and sales operations offshore to cut their costs by up to 50 percent. Recent announcements, across a range of offshore services in a mix of different industries, typify the shift that is afoot.

• Software development. Major software development companies like Oracle and i2 Technologies have joined the growing ranks of Fortune 1000 companies that are moving software development to low-cost centers like India and the Philippines. In parallel, NEC took a 6 percent stake in SinoCom. The company wants to capture a larger share of business from Japanese companies doing offshore software development in China.

• Customer service/call center. Delta Air Lines says it will save $15 million a year by moving basic reservations offshore to Spectramind and Sykes Enterprises in India and the Philippines, respectively. The Philippines alone has seen its base of call center seats, providing offshore support, increase from less than 1,000 in 2000 to more than 6,000 last year.

• Back-office accounting. The World Bank has established an accounting center in India to support its global operations. AIG recently announced that claims-processing work would be shifted from its Houston life insurance subsidiary to a center in the Philippines.

• Product development. To cut costs and focus, Ericsson sold its India software development center to Wipro. The Swedish company joins companies like Caterpillar, Hitachi and Boeing that rely on Indian companies like Axis Computers for product development.

Offshore economics
As in the shift of manufacturing jobs in the last half of the 20th century, the huge cost advantage of low-wage countries like India, South Africa and the Philippines will drive the diaspora of services jobs. Forrester believes that the economics will increasingly favor the use of overseas services staff. Some key drivers:

• Cheaper labor rates. The cost of an entry-level programmer in China is 30 percent to 50 percent less than one in Tokyo, London or Chicago. The savings are similar for accounting, customer service and legal staff as well.

• Low-cost bandwidth. The hundredfold increase in capacity as a result of new undersea cables and the deregulation of telecommunications in the United States, Europe and Asia mean that companies can ship huge volumes of scanned documents overseas for processing without breaking the bank. Businesses can also use the same low-cost links to manage partners through videoconference links.

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• Standardized business applications. All the money sunk into software like SAP and Siebel Systems forced companies to standardize and document their business processes--making it easier to hand them off.

• Net-based collaborative tools. Ubiquitous e-mail and collaborative tools like instant messaging and shared whiteboards running over Internet links make it easier for clients to stay in daily contact with the services outsourcer and lower the project management overhead.

Migrant work
As a net result, Forrester expects that 3.3 million U.S. jobs will move offshore by 2015. The wages associated with those positions will go from $4 billion in 2000 to $136 billion in 2015. In parallel, the numbers will easily double when they include the rest of the G7 countries like Japan, the United Kingdom and Germany. This will have a range of impacts on services companies:

• Project management skills determine winners and losers. A key input into financial performance and shareholder return will be a company's ability to project-manage remote services providers. Lack of project management expertise already hinders businesses' ability to take advantage of lower-cost IT solutions from companies in India and Russia. Meanwhile, the strong performance from companies like General Electric that are heavily invested in outsourcing sets them apart on Wall Street.

• Successful outsourcing CIOs will vie for COO jobs. IT executives who successfully manage the offshore exodus of their technology operations will make the case that they can tackle outsourcing of other corporate operations. Their next move: service centers. By the end of the decade, executive stature will be measured by the size of the outsourcing contracts that they manage, not the number of employees.

• Businesses will need a multilayered offshore strategy. Over the next 10 to 20 years, there will be a tiering of the services industry similar to what we have seen in manufacturing. Simple, base-level back-office payroll and data entry will go to rock-bottom-wage countries like Vietnam and Uruguay, and countries like India will move up the food chain and take on more complex software and product development services. As a result, companies will have to take a portfolio approach and not rely on a single vendor or country to receive the maximum cost savings.

The wider impact
There will also be a range of business and public policy implications.

• IT and services will become the preferred economic development engine. As call and processing centers shift from rural America to Africa, South America and Asia, governments will jockey for International Monetary Fund money to boost their telecom and services-enabling infrastructure. Telecommunications deregulation will become a key economic development debate. Without a cheap pipe, companies will not tap into the low-cost labor pool. And with the services jobs comes further investment from the likes of Wal-Mart to tap into the emerging middle class.

• U.S. foreign policy will be realigned. Because of the huge amount of services trade, India will become the primary trading partner of the United States in South Asia. This will raise India's profile in comparison with traditional U.S. allies like Pakistan.

• Services issues will dominate World Trade Organization discussions. Multinationals will push for consistent intellectual property protections, clear property rights, tariff reductions on services and supportive liability laws in order to maintain control of their dispersed services networks.

• Business and technical schools will need to retool their curriculum. There is already a shortage of workers who can manage complex projects internally, let alone halfway around the globe. The current programs need to shift their focus to skills like project management and managing remote multicultural work forces. A smart second-tier business school like Boston University, Vanderbilt or the University of North Carolina could set itself apart by developing a curriculum on outsourcing/offshore project management for both the two-year M.B.A. and executive education programs.

© 2003, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.