Date: Tue, 13 Feb 2007 21:47:35 -0800 From: Norm Matloff To: Norm Matloff Subject: Boston Globe story on offshoring To: H-1B/L-1/offshoring e-newsletter The jury is still out concerning how far the offshoring phenomenon will go. It's been my contention that on the one hand it is harmful to U.S. firms' profitability to offshore too much of their professional work, but on the other hand they are so focused on immediate expenses that they are blind to the big picture. Which of these two opposing forces turns out to be the stronger in the end is anyone's guess at this point. It's also been my view that large-scale offshoring is inevitable, with the eventual adverse impact on society, especially the middle class, being quite substantial, and thus our leaders--business, government, academic--have a responsibility to tell the truth about what's coming. This is not happening. Business leaders not surprisingly feel it is bad for their interests to be too candid, and sadly people in government and academia are too beholden to business to speak independently (and, for that matter, too beholden to make any real effort to investigate the situation in the first place). So, the message from the various leaders has been pretty uniform: "The low-level stuff will go abroad, but the high-level tasks will stay here. American workers just need to move up the food chain. We need more education for the young and retraining for the mid-career workers. And we must support innovation." It's a mantra. And as I said yesterday, those who speak it are usually not deliberately lying; they are simply sticking to what is for them the convenient version of reality. Again, they have no incentives to question it and really get to the bottom of the issues, so they accept the platitudes. The article below deals with this question of just how much will be sent offshore. The reporter's answer: All but the core. Some specific comments: % "Companies are extending the logic of outsourcing," said Joseph B. Fuller , % co founder and chief executive of Monitor Group, a global consulting firm in % Cambridge. "Over time, if you assume they're going to be under permanent, % unrelenting pressure to improve their financial performance, more and more % of their time, effort, and discretionary investment will go into activities % that are core to their strategy. They'll look for third-party vendors for % other activities." This goes to a little-known aspect of the offshoring issue: Firms believe that they must offshore whether they think it's prudent or not. Publicly-held firms have a fiduciary responsibility to their stockholders to minimize costs; startup firms have to show vendors that they are holding the line on costs. (For information on the latter, see the files whose names begin with "VCsDemandOffshoring" in http://heather.cs.ucdavis.edu/Archive) % Pharmaceutical giant Wyeth has contracted with Accenture for offshore % clinical research. Consumer product companies like Procter & Gamble Co., % Unilever NV , and Kimberly-Clark Corp. have sent parts of their product % development to outside parties. Dozens of companies have shut down their This illustrates the point that "moving up the food chain" is far too simplistic an answer, and that it is NOT just the low-level stuff that's going offshore. Indeed, every major Silicon Valley firm has R&D centers in India and China. % Not everything is going out the door, though. CEOs will hold on to % activities they see as defining their businesses. "Liz Claiborne's not going % to give up developing the next generation of women's apparel," Fuller said, % "and GE's going to develop the next MRI or jet engine." Presumably clinical research IS part of Wyeth's core business, and as the article points out, THAT'S going offshore. I'm sure that all the drug companies have R&D centers abroad, and that over time their scope abroad will only increase. The same is true for GE. In fact, here is a quote from the Chemical and Engineering News, which GE has chosen to highlight on GE's "Careers India" employment Web page, http://www.gecareers.com/GECAREERS/jsp/india/workingatge/interestingreads.jsp # New R&D Center in Bangalore is integral to corporate goal of growth by # innovation. # General Electric does not try to conceal it and is actually very proud # of it. Yet few people know that GE's second-largest research center is # located in Bangalore, in southern India. This fact may evoke images of # poorly paid technicians performing tedious and repetitive tasks in # substandard facilities. But the John F. Welch Technology Center, # inaugurated in September 2000, raises the benchmark on what constitutes # a world-class industrial laboratory. # The research center was initially conceived in the late '90s as a GE # Plastics lab by Jean M. Heuschen, who was then a senior executive at GE # Plastics. Its mandate was broadened to become an integral part of GE's # corporate R&D when John F. Welch Jr., then chairman and chief executive # officer, heard of the project in the summer of 1999. The Bangalore # facility now hosts research on GE technologies from nanotechnology to # advanced propulsion. All this sounds like GE's core business to me. And did you catch that reference to "advanced propulsion"? Sure contradicts Fuller's claim about "jet engines" above, doesn't it? (It also gives new meaning to Ross Perot's "giant sucking sound.") Note too the use of the word "innovation," again belying the claim that America's salvation from the offshoring phenomenon is through innovation. And it's actually worse than just the fact that some R&D is being sent offshore, with the amount likely to increase in the future. Most innovation comes serendipitously, rising randomly during day-to-day engineering work. If the day-to-day engineering work is sent offshore, and is performed by less innovative people (the proponents of offshoring believe that Americans are more innovative), then the result is that there is less innovation. Yes, Liz Claiborne is indeed a different case. Indian fashion designers, being far removed from the California culture, would probably not work well here. And that is typical of the jobs that will be left in the U.S.--those that require face-to-face contact, a keen understanding of the culture, really top verbal skills, etc. We will not just lose jobs. The promoters of offshoring are correct when they tell you we'll gain jobs too. But what they are not saying is that the net result, as I've said before, is that we will lose the jobs requiring higher levels of education and deeper intellectual skills, while gaining jobs that are not so intellectually demanding and are basically what I call "the talking jobs." The industry-commissioned report by Global Insight confirms this to some extent. If we in the U.S. rely on talk as our comparative advantage, remember that when it comes to blarney, we can't hold a candle to the Irish. # Still, the advance of outsourcing, and its spread to new arenas, will have # vast implications for the economy. In the most benign projections, Fuller # and others believe the trend will spawn a flowering of business creation and # entrepreneurship to handle all the operations companies are contracting out. The implication that all those people who lose jobs to offshoring will get work as offshoring facilitation experts is absurd. The whole point of offshoring is to save money; if the same people are rehired as go-betweens, that's a net increase in labor costs to U.S. employers, not a decrease. # "This may have a positive impact on the gross domestic product. The question # is to whom is this positive impact going to go. It will be a boon to top # executives and stockholders, but not to the US middle class." Take for example Tom Friedman ("The World Is Flat," a term which has now become its own mantra) and his favorite example, Carrier air conditioners. Friedman, touring a firm in India doing software development for a company in the U.S., noted that the Indian business had installed Carrier air conditioners. A net gain!, shrieks Friedman. Well, is it? Say the Indian market increases Carrier's overall sales by 10%. Will Carrier hire 10% more engineers? No, it probably won't hire any more engineers, as the machines are already designed. It's hard to imagine Carrier hiring more professionals of any kind, actually. They'll hire some more talking job people, I guess, but it's clear that the primary beneficiaries in the U.S. will be Carrier's stockholders and top executives. Norm http://www.boston.com/business/globe/articles/2007/02/11/outsourcing_expands_to_cover_all_but_the_core/ The Boston Globe ROBERT WEISMAN | BUSINESS INTELLIGENCE Outsourcing expands to cover all but the core By Robert Weisman | February 11, 2007 There's a new calculation taking hold in corporate suites: Identify a company's core competencies. Outsource everything else. Businesses once agonized over the risk of compromising quality and customer service by moving internal functions like software programming and call centers to outside contractors. Today such moves are commonplace, and the vendors more competent. Cost-cutting executives are combing their operations for new categories of work to farm out. The trend is likely to accelerate in coming years, even as critics complain the practice is taking a toll on the American workforce. "Companies are extending the logic of outsourcing," said Joseph B. Fuller , co founder and chief executive of Monitor Group, a global consulting firm in Cambridge. "Over time, if you assume they're going to be under permanent, unrelenting pressure to improve their financial performance, more and more of their time, effort, and discretionary investment will go into activities that are core to their strategy. They'll look for third-party vendors for other activities." Vendors have sprung up from Boston to Bangalore to Belarus to take the handoff of business processes, and the industry is attracting private equity. Last week, Charlestown's Keane Inc., a pioneer in an earlier era of domestic outsourcing, agreed to be acquired for $854 million by a smaller California company with the bulk of its employees in India. The transaction was financed by Citigroup Venture Capital International, which sees the pace of outsourcing picking up. In its first incarnation, outsourcing revolved around services like building maintenance and food preparation. Then companies began casting off business processes such as payroll and claims management. These were data-intensive operations that, in the age of the Internet, could be sent not only down the street but outside the country. In the latest wave of outsourcing, businesses are parceling out a raft of activities that was traditionally performed in-house. Pharmaceutical giant Wyeth has contracted with Accenture for offshore clinical research. Consumer product companies like Procter & Gamble Co., Unilever NV , and Kimberly-Clark Corp. have sent parts of their product development to outside parties. Dozens of companies have shut down their human resources departments and turned over health benefits administration to vendors like Towers Perrin, EDS Corp., and Hewitt Associates Inc., while others, including automaker General Motors Corp., have even outsourced some internal financial auditing functions. Not everything is going out the door, though. CEOs will hold on to activities they see as defining their businesses. "Liz Claiborne's not going to give up developing the next generation of women's apparel," Fuller said, "and GE's going to develop the next MRI or jet engine." Still, the advance of outsourcing, and its spread to new arenas, will have vast implications for the economy. In the most benign projections, Fuller and others believe the trend will spawn a flowering of business creation and entrepreneurship to handle all the operations companies are contracting out. But there are plenty of people, in technology and politics, who see a grimmer scenario unfolding. "Over the years, Americans have been told, rightfully, they would have to move up the ladder on education," said Norman Matloff , computer science professor at the University of California at Davis. "The problem is there's nowhere to move up the ladder anymore. Once you have the ability to offshore intellectual activities such as software development and financial auditing, education isn't going to help." Among the factors driving the trend are the globalization of business and a wealth of cheap technology talent in emerging countries like India and China, which have younger populations and graduate far more engineers than the United States, said Peter A. Allen , partner and managing director at TPI, a Houston consulting firm that advises companies on outsourcing. For efficiency-minded executives, Allen said, the value proposition of outsourcing is "moving from just decreasing costs to increasing capacity, speed to market, and quality." But the parceling out is accompanied by pain that does not always show up in economic statistics. Despite government-funded retraining programs that have sprouted across the country, workers displaced by outsourcing frequently end up in lower-paying jobs where their core skills aren't utilized, said Matloff, citing laid-off software engineers in Silicon Valley who have become real estate appraisers. "You're going to see more and more of that," he said. "This may have a positive impact on the gross domestic product. The question is to whom is this positive impact going to go. It will be a boon to top executives and stockholders, but not to the US middle class." Fuller, however, sees outsourcing as part of the same evolution that expanded the economy in earlier generations, even as it idled agricultural and manufacturing workers. "This type of activity has some episodic negative effects for some people," he conceded. "And it creates lots of opportunity for new business creation. People have been scared of automation and economic dynamism for hundreds of years. But the shift to higher-value activity has always advantaged the US." Robert Weisman can be reached at weisman@globe.com.