Date: Sun, 12 Nov 2006 23:02:16 -0800 (updated) From: Norm Matloff To: Norm Matloff Subject: 2 Duke studies of offshoring To: H-1B/L-1/offshoring e-newsletter There seems to be a bit of an academic civil war developing at Duke University over the offshoring issue, with the recent release of two dueling studies. On the one hand, there is the study by Arie Lewin and Carine Peeters of Duke's Fuqua School of Business, and Mahadeva Mani and Vinay Couto of the consulting firm Booz, Allen and Hamilton. You can download it at https://offshoring.fuqua.duke.edu/pdfs/globalization_of_white_collar.pdf On the other hand, there is the study by Vivek Wadhwa, an "academic without portfolio" (his actual title is Executive in Residence) in Duke's School of Engineering. In this e-newsletter I've previously described Wadhwa as the rare (former) tech executive who is capable of "thinking outside the box" on the offshoring issue; see http://heather.cs.ucdavis.edu/Archive/VivekWadhwa.txt for my comments. Wadhwa's new study is at http://memp.pratt.duke.edu/news/?id=793 So, what do these two studies say? In short, it is about shortages (pun intended). BAH says that firms are offshoring tech work not just to save money but also to remedy a tech labor shortage; offshoring is no problem, BAH says, since Americans couldn't fill those jobs anyway. Wadhwa says, "No, there is no tech labor shortage. We surveyed tech firm HR people and the like, and they told us there was no problem." It so happens that I'm teaching a freshman seminar course on immigration this quarter (http://heather.cs.ucdavis.edu/~matloff.frs.html). I'm really enjoying it, since it has been many, many years since I've taught nonengineers (and for that matter, freshmen). One of the things I hope to impart to them is critical thinking (much ballyhooed in the high schools, but almost totally ignored in actual educational practice). And the very first thing I brought up with them was that they should be quite wary of what any "study" says, or of what any seemingly-neutral person in authority (e.g. academics) says. There is quite often an agenda, sometimes hidden. In our case here, BAH appears to be the financial sponsor of the Fuqau study. That of course is a danger signal from the beginning; as John Miano pointed out to me, "Who ever heard of an academic study that devotes a full page to listing its sales offices?" But it's much worse than that; one of BAH's clients is NASSCOM, the trade body in India that promotes offshoring. See the article enclosed at the end of this message. The Wadhwa study did not have commercial funding. Not surprisingly, then, BAH concludes that offshoring is both necessary for business and good for the U.S. Both studies consist of business surveys, but they are poles apart, not just in their conclusions but also in terms of methods. The Wadhwa survey states exactly who was surveyed, exactly what they were asked, and even how the integrity of the data was preserved. The BAH does none of this. Much more importantly, the Wadhwa survey asked employers precisely how their hiring is going. How long does it take to fill a job? What is the quality of the people hired? Clearly the conclusions of the Wadhwa study, which I'll detail below, are more in line with the way I view things. But as longtime readers of this e-newsletter know, I've never hesitated to criticize studies, claims and so on which supported my point of view but were based on sloppy thinking and questionable data. In that light, I must say that there is simply no comparison between the two studies. Even someone who knows little about the subject matter would find that the Wadhwa study is more concrete and precise, whereas the BAH report consists of one unsupported claim after another. A case in point is the BAH study's claim that part of the offshoring trend is due to a lack of American workers with Master's degrees in engineering. They offer no evidence that this is a motivator for employers who offshore engineering work. As I mentioned, they do not provide a list of questions in their survey, but it is fairly clear that they did NOT ask employers, "Do many of the workers you employ overseas have a Master's degree?" I say it's fairly clear that they didn't ask this, because all the authors of the study offer as "evidence" is a vague "correlation" (their word, but again not quantified or studied) over time between the numbers of Master's degrees granted to Americans and the amount of offshoring. The starting salaries for Master's graduates in electrical engineering and computer science, adjusted for inflation, have been FLAT or FALLING since 1999 (www.cis.org/articles/2001/back301.html). Employers admit that many of the engineers they are laying off have Master's degrees. And based on my experience and those of others I've talked to, I am reasonably sure that only a tiny fraction of engineers who do work offshore for U.S. firms have a Master's degree. So the whole thing is a phony issue; the industry lobbyists know that Pushing the Education Button is a great way to distract attention from the real issue, which in this case is cheap labor. One more word on the BAH study: In case some of you readers are wondering, there really are precious few rules, or even customs, in academia to safeguard against undue influence from a research sponsor, in this case BAH. At any major research university, research funding is sought with a maniacal obsession; any safeguards would be attacked as "bad for business." As noted, I do believe that the Wadhwa study was done with rigor, and is a valuable contribution. Here are the main points: Those surveyed were "presidents, division heads, managers and senior HR representatives"--quite a contrast to getting "data" that has been spun by PR people. The job category focus of the study was "computer science and computer technology." The survey began by asking about various measures which might indicate a labor shortage. One of these measures was rather ingenious, what the survey termed "acceptance rates"--the percentage of job offers which are accepted by the offerees. If there were a labor shortage, job seekers would have many offers, and thus the acceptance rate would be low. The survey reports: # We asked how acceptance rates have changed over the past three to # five years. 80% of respondents reported that acceptance rates had # stayed constant or increased (see Figure 3 below). This would indicate that the industry lobbyists' claim that the job market has rebounded is not correct. The survey then reports data showing that 80% of the jobs are filled within four months. I think the authors' spin on this is that this too contra-indicates a labor shortage. Some people may disagree. But I wish to add that that datum concerns how long it takes to hire someone AT THE PRICE THE EMPLOYER WANTS TO PAY. If they were to offer a much higher wage, they'd get someone right away. This is a key point; remember, whenever the industry claims a shortage, they mean a shortage of cheap labor. Now if the industry were to say, "Gee, we can't make a profit unless we turn to cheap labor, either by offshoring or by importing H-1B visa workers," I would have very little comment. My sole objection all along has been the gross deception of the public and Congress by the industry lobbyists. The survey asked a series of questions about the employers' assessment of the quality of their American engineers. Here are some highlights: # On the question "what changes have you seen in the capabilities or # skills of engineers that you have recently hired from those that you # hired 3-5 years ago?", the top response was that graduates had better # technology and programming skills. # On the question "what capabilities do your US engineers have that make # it advantageous to keep their jobs in the US", the response was that # U.S. engineers have a very good understanding of U.S. consumer needs, # culture, business, and better communication and interpersonal skills. # Respondents also stated that U.S. engineers were more creative, excelled # in problem solving, risk taking, networking and had strong analytical # skills. Plus they could work on high security applications and had the # advantage of proximity to resources. # We asked "how similar or different are the types of engineering jobs # that your company performs in the U.S. from those that your company has # offshored?". 44% said that their company's U.S. engineering jobs are # more technical in nature vs. 1% that said that their offshore # engineering jobs are more technical in nature. 33% said that jobs were # equivalent. When asked to compare the productivity of the engineering # workforce between their U.S and offshore facilities, 37% of respondents # stated that U.S. engineering employees are more productive, while 24% # stated that U.S. and offshore engineering teams are equivalent in terms # of productivity. See Figure 6 below. We also asked companies to compare # the quality of engineering work between their U.S. and offshore # facilities. 38% said their U.S. engineering employees produced higher # quality work and 40% reported that work quality was equivalent between # U.S. and offshore facilities. 1% reported that their company's offshore # engineering employees produce higher quality work. A full breakdown of # these statistics can be found in Figure 6 below. # We asked if the current U.S. engineering workforce met their business # needs for entry-level engineers. 75% of companies who expressed an # opinion said that India had between an adequate and large supply of # well-qualified entry-level engineers vs. 59% for the U.S and 54% for # China (see Figure 8). (Point added by NM: A BusinessWeek analysis found that Bachelor's salaries at the entry level have been flat for several years, just as with the Master's-level analysis I did.) # To the question, "What are the key reasons why either the U.S., Indian # or Chinese entry- level engineers might not be able to meet your # needs?", the responses were as follows: US: Respondents cited salary # demands as a key issue, limited supply of available people, and lack of # industry experience. Some respondents stated that there were no issues. # A small minority of respondents raised issue with inclination towards # non-technical work, an unwillingness to relocate and poor work ethics. # China: The top response was that Chinese engineers lacked communication # skills. Other issues included visa restrictions, a lack of proximity, # and inadequate experience. A few respondents also cited lack of loyalty, # cultural differences, intellectual property concerns and a limited "big # picture" mindset. India: Inadequate communication skills, a lack of # specific industry knowledge, and proximity/visa restrictions were the # top responses. Other issues raised were lack of domain experience, # limited project management skills, high turnover and cultural # differences. # We asked, "what are the relative strengths or advantages of U.S, Indian # or Chinese entry- level engineers when compared to each other?". The # responses were as follows: U.S.: Strong communication skills, an # understanding of U.S. industry, superior business acumen, strong # education/training, and a sense of creativity and desire to challenge # the status quo. A few respondents cited strong technical skills, # proximity to work centers, and a lack of cultural issues as advantages. # China: Many respondents stated that the key advantage of hiring Chinese # entry-level engineers was cost. A few respondents cited strong # education/training, work ethics and a willingness to work long hours. Norm http://www.boozallen.com/publications/article/8471428?lpid=66005 Growing Demand for Engineering Services Creates Opportunities for Emerging Economies Companies look beyond cost control to find skilled work forces, access to expanding markets. NEW YORK, August 3, 2006 – Global spending on engineering services is large and rising – constituting about 2% of global GDP, and companies are increasingly moving these high-value services to emerging markets as the next step in globalization, according to a new study by Booz Allen Hamilton for National Association of Software and Service Companies (NASSCOM), the trade body and the chamber of commerce of the IT software and services industry in India. Competition for these high-end, desirable opportunities is expected to be fierce, led by India and China. Although companies have previously focused on cost reduction in offshoring lower-value business services, decisions about locating engineering capabilities will turn on strategic drivers, such as access to growing markets and an expanded pool of skilled labor. The NASSCOM/Booz Allen study, “Globalization of Engineering Services,” is the first to take a systematic and comprehensive view of the role of emerging markets in engineering services, assessing the evolution of the engineering market from 2005-2020. The study examined product and component design, plant design, process engineering and plant maintenance operations, for industries including Automotive, Aerospace, High Tech, Utilities, Construction and Industrial machinery. Key findings of the study include: Engineering services is a growth market. Current spending on engineering services ($750 billion in 2004) is projected to increase to $1.1 trillion by 2020. The market is highly fragmented by industry, with Automotive at 19%, Aerospace at 8% and Utilities at 3% in 2004. High-Tech/ Telecom is the dominant and fastest growing sector, with 30% of the market. CEOs are increasingly viewing offshoring as a way to counter market forces that are exerting pressure on engineering services. While cost control remains a concern, companies are also seeking access to a high quality talent pool that can grow engineering capacity and increase productivity. Locating engineering services in emerging markets also provides access to a growing market of customers, and can decrease time to market. While today only $10-15 billion of engineering services is offshored, the market is expected to grow to $150 -225 billion by 2020. India’s current revenue base in the offshored engineering services market is about $1.5B – relatively small as compared to its information technology and business process outsourcing sectors. The study also found that India is well-positioned to increase its market share of engineering offshoring from 12% to 30% by 2020. The potential engineering market in India could exceed $60 billion by 2020. “The Indian IT and software industry is continuously renewing itself and seeking to grow by addressing newer service lines; the latest one being engineering services. Companies in India have developed capabilities and skill sets, and invested in technology platforms to leverage this opportunity,” said Kiran Karnik, President NASSCOM. “The growth in engineering services signifies the need for global corporations to expand their R&D pool beyond their home countries.” “The demand for engineering talent is growing, and emerging market countries such as India will play a vital role in expanding capacity,” said Kevin Dehoff, Vice President at Booz Allen. “This isn’t a case of substituting jobs in low cost countries for those in the developed world – these are core capabilities that provide a competitive advantage in the global marketplace.” However, other nations, led by China, pose a competitive threat to the growth of engineering services in India. A recent survey of the attractiveness of offshoring locations found that 46% of companies identified China as a future resource, compared to 26% for India, 13% for Latin America and 9% for Eastern Europe. “The offshoring of innovation poses unique challenges not found in IT or business process outsourcing,” said Vikas Sehgal, Principal at Booz Allen. “The emerging markets that can meet the needs of global corporations for infrastructure, skilled labor and a positive business environment will capture the largest growth in market share.” “Over the next 15 years, the global supply base will be very dynamic. Vietnam and Eastern Europe will become the low cost providers as operating costs in China and India near those of developed countries during that time.”