Date: Tue, 30 Mar 2004 16:57:13 -0800 From: Norm Matloff To: Norm Matloff Subject: new ITAA offshoring report To: H-1B/L-1/offshoring e-newsletter (This posting has been updated.) The ITAA has released a new report on offshoring. However, it turns out that their own data contradict their "It's not very extensive, and it's good for you" theme. As many of you know, the ITAA was at the forefront of pushing Congress to expand the H-1B program in 1998 and 2000. These people play hardball. They have a proven track record of flawed methodology and deliberately hiding data unfavorable to their cause, and their favorite form of intellectual discourse is ad hominem attacks. As most of you also know, my position is that offshoring does not comprise a significant percentage of software development work done by U.S. firms, and that that percentage never will be significant. I have cited various data sets which indicate that the percentage of offshoring is at about the 1 or 2% level. It is on that statistic (the 1 or 2% level of offshoring) that the ITAA and I actually agree. The ITAA now says 3%. Since most of their data has always been misleading, I am not sure what to make of our agreement in this case, but there you have it. Consider future trends, I've always argued that the percentage of offshoring will stay low, because the cost savings are much smaller than people would guess, and in fact in many cases an offshored project costs more than one done by the firm itself. This of course presumes a certain level of rationality on the part of the CEOs, which one might question. That is one reason I've said things could change in the future, i.e. the offshoring percentage could possibly go higher. Another reason is the recent trend, as I've reported before, for the venture capitalists to coerce the firms they fund to offshore their work. See http://heather.cs.ucdavis.edu/Archive/VCsDemandOffshoring.txt http://heather.cs.ucdavis.edu/Archive/VCsDemandOffshoring2.txt http://heather.cs.ucdavis.edu/Archive/VCsDemandOffshoring3.txt http://heather.cs.ucdavis.edu/Archive/VCsDemandOffshoring4.txt In other words, that 1-3% estimate above is just a static snapshot, possibly a misleading one. What would be more useful is to know how many NEW jobs are being offshored. Accurate data of this sort would portend the future more accurately. Well, the ITAA data (www.itaa.org) would indicate that the future will be VERY different indeed. Their Figure 1 shows that during 2000-2002 the number of IT software and service jobs offshored was almost equal to the number of IT AND non-IT jobs created. (I'm assuming that the data for 2003 are projections.) Since the main types of jobs created are non-IT (see below), that would indicate that the offshoring percentage for NEW jobs is far more than the 3% static number, and in fact may be close to 100%. Moreover, recall that just because a software engineer job gets created in America does not mean it will be filled by an American. Tata Consultancy Services, one of the largest of the offshoring firms, has publicly stated that most of the programmers they employ in the U.S. are Indian. (See http://heather.cs.ucdavis.edu/Archive/Tata.txt) The picture is clouded by the fact that the ITAA data also include "IT service" jobs, meaning call centers. So even if we could trust the ITAA not to present misleading data, we could not necessarily conclude that the current trend is for nearly 100% of new software jobs to be offshored. But the report did specifically say (Table 1) that the software jobs should continue to dwindle during 2003-2008. Note that this is totally contrary to the analysis of Catherine Mann, who's been getting a lot of press on this. (See http://heather.cs.ucdavis.edu/Archive/Mann.txt) Recall that some analysts have predicted that "the American programmer is becoming extinct." Well, now you know why they say it. In an online interview, ITAA president Harris Miller stated that the "IT service" jobs do not include call center work. See http://www.washingtonpost.com/wp-dyn/articles/A14645-2004Mar22.html So, there is now even further indication that the current trend may be that nearly 100% of new software jobs are being offshored. But, the ITAA says not to worry, since the offshoring will create new jobs in the U.S. Well, what kinds of jobs will be created, according to the ITAA's Table 1? You know what the biggest category is? Construction! Most of that would NOT be high-level jobs like architects, and in fact there has been quite a lot in the press about architecture work starting to be overseas too. The rest of the data show a similar trend, including the same category Mann cited, Financial Services. As in the case of construction, the high-level jobs in that category, such as market analyst and accounting, are starting to be shipped abroad, so again we're talking about jobs being created mainly at the low level. In other words, the industry's own study shows that if offshoring really does take hold, we will lose jobs requiring a more rigorous level of education while gaining jobs requiring less education. We will sell software instead of writing it, build houses instead of designing them, and file X-rays instead of analyzing them. You don't have to be a rocket economist to see that this would have a serious adverse impact on the national economy. The ITAA freely admits that the reason for offshoring is cheap labor. That statement is more honest than the ones they used to make for H-1B, where they adamantly insisted that the H-1Bs were paid as much as Americans. But interestingly, their current report cites as a side benefit of the offshore cheap labor that it would lower inflation. What a howler! We essentially have NO inflation now. But even more interesting is that back in the days of the H-1B debate, the ITAA also said that the H-1B program was holding down inflation. The AP article enclosed below appeared in the LA Times, and very possibly in your local newspaper. There were also articles in the Washington Post and the Wall Street Journal. Norm http://www.latimes.com/business/la-fi-outsource30mar30,1,6283529.story?coll=la-headlines-business Report Finds Outsourcing Will Create New U.S. Jobs A technology group says savings from labor costs will allow firms to increase positions in many industry centers. From Associated Press March 30, 2004 SAN JOSE ? Outsourcing white-collar jobs to low-wage countries such as India and China has thrown some Americans out of work, but a new report set for release today predicts that the trend will ultimately lower inflation, create jobs and boost productivity in the United States. In its survey, the Information Technology Assn. of America acknowledges that the migration of tech work to low-paid foreigners has eliminated 104,000 American jobs so far. That accounts for nearly 3% of the positions in the U.S. tech industry. Software engineers have been particularly hard hit. Researchers at Global Insight Inc., which prepared the report for the ITAA, predicted that demand for U.S. software engineers would shrink through 2008. But ITAA leaders emphasized that outsourcing has damaged the job market far less than the dot-com meltdown that began in 2000. Altogether, Internet start-ups, telecom companies and other companies eliminated as many as 268,000 positions. "The myth is that we've started this long decline into the midnight of the technology workforce," ITAA President Harris Miller said. "This report shows that, assuming the recovery continues, the number of IT jobs will actually increase." U.S. programmers earn an average of $60,000. Indian programmers earn about one-sixth as much and Chinese engineers even less. Outsourcing dramatically reduces labor costs, allowing companies to sell goods including software and tax-preparation services at lower costs or higher profit margins. Greater profits theoretically allow companies to buy new equipment, build laboratories and make other investments that can create jobs ? even in expensive Silicon Valley and other U.S. tech hubs. Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, with more than 10% of them in California, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs, including 34,000 in California. Companies spent $10 billion last year to outsource jobs in fields including medical transcription and nanotechnology research. The ITAA predicted that companies would spend $31 billion in 2008. Democratic presidential candidate John F. Kerry introduced economic proposals Friday that he said would reduce the sting for outsourced workers. More than two dozen states are considering bans on outsourcing government contracts. Such legislation would be protectionist and unwise, according to the ITAA, whose 500 members include *Microsoft *Corp. and *Hewlett-Packard *Co. But Cynthia Kroll, senior regional economist at UC Berkeley, said policymakers could not afford to ignore outsourcing. "If [research and development] is coming out of India, will the next wave of growth bypass us entirely?" Kroll asked. "We need to pay attention to what India and China and these other countries are doing to get these new rounds of investment." Page C-3