CIO Series on Outsourcing, H-1B, and L-1
CIO Series on Outsourcing, H-1B, and L-1
Date: Friday, September 12, 2003 1:48 PM
JOB DESTRUCTION NEWSLETTER
www.ZaZona.com
The CIO did a three part series and it's a long, but excellent piece of
journalism. Reading articles from the CEO perspective can render some
valuable insight into what they are thinking, and these articles
provide that in abundance. The articles are long and detailed, very
well written, and quite balanced considering who published them. You
can post comments to any of the three articles.
Here are the direct links. I recommend going there instead of reading
my text version because there are pictures, commentary, and of course
reading straight text for an article this long gets tedious.
http://www.cio.com/archive/090103/backlash.html
Offshore Outsourcing
http://www.cio.com/archive/090103/people.html
The Radicalization of Mike Emmons
http://www.cio.com/archive/090103/money.html
The Hidden Costs of Offshore Outsourcing
Use this link to go to Mike Emmons website:
http://www.outsourcecongress.org:81/
Go here to see the Orland TV news videos (Mike has them but my server
is much faster):
http://www.zazona.com/shameh1b/MediaClips.htm
One of the most interesting statements of the series illustrates that
without H-1B and L-1, outsourcing would be impractical. If we got rid
of these nonimmigrant visas, the outsourcing problem would be largely
solved without having to use tariffs or other trade barriers. This
statement explains why we should spend much more time opposing
nonimmigrant visas than worrying about outsourcing.
"You have to bring people to America to learn your
applications, and that takes time, particularly if
you're doing it with a new vendor for the first time,"
explains GE Real Estate's Zupnick,
This explains why offshoring can be such huge a job destroyer for US
workers:
after the transition is complete, CIOs have to get
those employees out of the office if offshoring is
to be a money-saving move. "It's got to be 80 percent
or 85 percent working offshore or the numbers just don't
work," explains GE Real Estate's Zupnick.
Here is a problem that gives CEOs nightmares, and why it's no lie that
L-1s are brought in the learn the skills of American workers:
"You need to keep employees there long enough to share
their knowledge with their Indian replacements," Zupnick
explains.
http://www.cio.com/archive/090103/backlash.html
Sep. 1, 2003 Issue of CIO Magazine | Offshore Outsourcing
As a growing number of IT jobs move overseas, some CIOs and economists
prophesy a political storm against offshore outsourcing.
BY CHRISTOPHER KOCH
A CIO at a famous Fortune 100 manufacturer has a recurring nightmare:
As he continues to lay off American IT workers and move their jobs
offshore to places such as India, never to return, American public
opinion suddenly swings violently against globalization. He and his
company are demonized, and Americans boycott his company's products.
"Public perception isn't always accurate, but it counts for a lot of
things," he says, after insisting on anonymity. "We don't want a
situation where the public sees us as a malevolent force and takes it
out on our products."
Other CIOs are becoming similarly cautious about publically endorsing
offshore outsourcing. Of the dozen CIOs contacted for this article,
only two agreed to talk completely on the record. Though all believe
that the offshore outsourcing trend will continue, some are privately
worrying about carrying out the inevitable in a sick economy and
wondering if it isn't happening too quickly.
It's not hard to find reasons for CIOs to worry. "Do you want to do
business with companies that take away jobs for U.S. citizens by
outsourcing work to foreign countries?" asks The Organization for the
Rights of American Workers (Toraw), a group of displaced, angry
American workers laid off by Connecticut insurance and financial
services companies. In June 2002, dozens from Toraw and similar groups
from across the country held a two-day demonstration outside the
Strategic Outsourcing Conference at the Waldorf Astoria hotel in New
York City. The same month, other laid-off workers demonstrated outside
an outsourcing conference at the Hynes Convention Center in Boston.
Organized labor protests at IT conferences in the United States? Even
two years ago the idea would have seemed absurd. But as IT employees
see many of their jobs moving overseas in a bad economy, opposition to
globalization in the United States, hidden during the good economic
times of the '90s, could reemerge more strongly than ever. IT companies
such as Accenture, IBM Global Services, Microsoft and Oracle and
mainstream Fortune 500 companies such as American Express, Citibank,
Bank of America, DaimlerChrysler, General Electric, Procter & Gamble,
Prudential and United Technologies are outsourcing to offshore IT
companies or expanding their own development centers out of the
country.
Ron Hira, an official with the Institute of Electrical and Electronics
Engineers, says government visas actually encourage the trend toward
using non-American IT workers.
Some CIOs, like Joe Drouin of TRW Automotive, have experienced backlash
against outsourcing inside their own companies. TRW began moving IT
development work offshore to India four years ago, mostly through
attrition and shifting contract work overseas. Drouin, who became vice
president and CIO after the move began, says he didn't do enough to
clarify which jobs were going to stay in the United States and which
ones would go. "We talked around that issue, and we didn't talk in
black and white," he says. "I think it was because we anticipated a
negative reaction." He got it. Morale plummeted, and there was a lot of
grumbling and dissatisfaction among the staff. "It was like a dark
cloud hanging over everything we did," Drouin says.
Technology jobs are following a path well-trodden by the manufacturing
industry, which sent millions of jobs offshore or simply eliminated
them in the past 30 years, contributing to a drop in the average wages
of low-skill workers. Technology professionals will face the same kind
of wage drop, and the work could go offshore much faster than
manufacturing did, according to Matthew Slaughter, Dartmouth College's
associate professor of business administration. "[IT work] will move
faster because it's easier to ship work across phone lines and put
consultants on airplanes than it is to ship bulky raw materials across
borders and build factories and deal with tariffs and transportation."
Indeed, by the end of 2004, research company Gartner estimates, one in
10 IT jobs at U.S. IT companies and one in 20 at non-IT companies will
move offshore.
The Visa War
Government restrictions on temporary work visas might slow the stampede
to offshore outsourcing but would not curtail it altogether
Read More
Revving up the speed even more are temporary worker visa programs that
allow foreign companies to relocate employees here in the United States
to coordinate the offshore work. Opposition to these visas is growing;
currently under consideration at the national and state level are a
number of bills designed to limit them. Their passage would slow the
movement of jobs offshore and perhaps force U.S. companies to bring
some work back onshore (see "The Visa War," right).
Even if such legislation is passed, many observers expect the offshore
trend to continue. And its long-term implications for the U.S. IT
industry have some deeply concerned. As the bulk of technology work
moves offshore, the deep, experiential knowledge that comes from coding
applications and solving technology problems the soil of technology
innovation could move offshore with it. U.S. IT services companies
don't spend much on R&D, but they are still innovative because they
build the U.S. technology infrastructure, says Ron Hira, chairman of
the R&D policy committee with the U.S. branch of the Institute of
Electrical and Electronics Engineers (IEEE), a nonprofit research and
advocacy group.
"The reason [U.S. companies] can innovate without spending much on R&D
is that they are learning each time they do an implementation," he
says. "You build up that knowledge in those workers, and there's
spillover as they move into other sectors, start new software companies
or take a permanent job with a client. If we don't have that knowledge
base here, we will lose out on that innovation and spillover."
TRW Automotive's Drouin wonders where he will find his next rising
stars in IT if he isn't growing them internally. "It isn't clear what
the new entry-level job in IT will be," he says. "We haven't eliminated
all our developer jobs, but a good portion is gone. So where do you
look for that superstar who is doing a great job and has a rapport with
the customer and understands your business?"
Jobs, Homes, Families
Inside an Elks Club lodge in an ugly strip mall in Wethersfield, Conn.,
a group of former IT workers are gathering. They have little in common
besides the fact that they're out of work, having recently been laid
off by big Connecticut IT employers such as Cigna, GE, ING,
Northeastern Utilities and United Technologies. The group at the
meeting is a mix of male and female, young and old, though more have
gray in their hair than not.
The aluminum-gated window that connects to the Veterans of Foreign Wars
bar next door slams down, signaling the end of drink sales. Everyone
squints with anticipation toward the front of the room, where John
Bauman, president and cofounder of Toraw and himself an unemployed IT
manager, shouts over the blasting air-conditioning system to bring the
meeting to order.
"This is about our jobs, our homes, our families," he tells the group.
His speech, and that of the other Toraw officials, rambles. Bauman
admits that the group hasn't quite found its direction yet. But on one
point Bauman and the other leaders of Toraw are clear: While pointing
out that their group does not oppose immigrants or immigration, they
rip into the H-1B and L-1 visa laws, saying both programs are being
abused and have created a rise in illegal immigration.
When TRW Automotive began moving jobs offshore four years ago, CIO Joe
Drouin had to deal with backlash from employees who feared losing their
jobs. As it turned out, Drouin was able to accomplish the outsourcing
without laying off full-time workers.
These foreign workers are the focal point of most Toraw members' anger.
Frustration boils over a few times at the meeting. "How active are you
going to be?" demands an angry man in his early fifties. Another calls
visas "a tool of the devil" and goes on to excoriate the "corporate
greed of CEOs that is ruining this country." A woman questions the
strategy of going after H-1B and L-1 visas. "I see offshoring as more
of a threat than H-1B or L-1," she says. "Whole departments are going
offshore. What do you propose? Taxes? Tariffs?"
"Taxes, tariffs and reporting every foreign nonimmigrant worker onsite
in Connecticut companies," promptly responds James Pace, Toraw's vice
president.
A man in the audience fumes that offshore outsourcing has the potential
to wipe out the middle class. "Are our legislators aware of this?" he
asks.
Of the three Connecticut legislators who have sent representatives to
the meeting, only one representative speaks: Mark Stephanou, director
of constituent services from U.S. Sen. Christopher Dodd's office. He
doesn't have anything conclusive to say, either. "We are as concerned
about jobs as you are," he offers. (Later, Dodd became a sponsor of a
bill in Congress to limit the L-1 and H-1B visas.)
Toraw describes itself as a grassroots movement, not a union. But some
say that if the outsourcing trend continues, a white-collar labor
movement could arise. This time, the structure would be completely
different than the traditional blue-collar labor unions (think Internet
rather than union hall).
"I don't want to wake up one day and find that American IT has
disappeared."
FORTUNE 100 CIO WHO IS CONCERNED THAT OFFSHORE OUTSOURCING COULD
SABOTAGE THE U.S. TECHNOLOGICAL EDGE
"I believe that some sort of e-labor movement is going to rise in IT,"
says Maria Schafer, program director for Meta Group. Indeed, the
Internet is already the preferred meeting place for disaffected IT
workers. Marcus Courtney, president of Washtech, one of a handful of
unions that serve IT exclusively, says his membership is only about
250, but the number of subscribers to his e-mail newsletter went from
2,000 at the beginning of 2003 to 14,000 in June. Dozens of websites
such as Toraw's have sprung up on the Web, many with an anti-visa or
deeper anti-immigration theme.
Opponents of offshore outsourcing ignore the large benefits that it
brings to the U.S. economy, says Sunil Mehta, vice president of the
National Association of Software and Service Companies (Nasscom) in
India. Mehta estimates that U.S. companies will save up to $11 billion
in 2004 by outsourcing to India and that India will purchase $3 billion
in high-tech imports from the United States in that time. "I think it
is really a two-way mutually beneficial argument," he says. "If IBM is
able to lower its cost structure, the U.S. economy benefits as a
whole."
Mehta argues that trade protectionism has not helped other American
industries such as the steel industry, where employment has declined 80
percent since its peak, he says, nor has it helped steel consuming
industries in the United States that were forced to pay high prices for
steel. "At the individual U.S. IT employee level, I do not have any
answers," he says, "but if you look at it in a total economic
perspective, it is mutually beneficial."
Gone for Good
It's tempting to write off the threats of offshore outsourcing. The
economy will improve, IT workers will find new jobs, opposition to
offshoring of U.S. jobs will melt, and all will be well. Or offshore
outsourcing will never mature to the point where anything but the most
basic development work and maintenance will go offshore. That's what
some economists like Robert Reich think. According to various analyst
company predictions, only about 10 percent to 20 percent of IT jobs
will go offshore.
Anyone who subscribes to this soothing theory risks getting blindsided.
The trend will continue (unless the U.S. government intervenes) because
the apparent cost advantages are simply too seductive. According to a
May 2003 survey by CIO, 68 percent of the more than 100 IT executives
who responded said their offshore contracts will increase this year.
Only 30 percent foresaw no change.
"The primary benefit to moving IT offshore is cost, and the only thing
that's holding it back is building up the capabilities offshore to do
the work," says IEEE's Hira. "So unless you could come up with a way
that markedly advances U.S. workers productivity so that they could
produce a higher-quality product faster than they do today, there is no
economic incentive to keep the work here."
In other words, this isn't like the old days, when the local factory
used to lay off workers during a lean spring and hire them back in the
fall when demand picked up again. The IT jobs that are going offshore
are going there for good. It's what economists call a structural, as
opposed to cyclical, change in the labor market. And if costs in India
the primary center of offshore IT work today begin to rise, the work
will move to other cheap offshore locations, such as China.
The trend toward offshore outsourcing has only just begun. Indeed, in
the CIO survey, 67 percent of respondents did not begin offshore
outsourcing until after 2000. Offshore outsourcing is just beginning to
hit the mainstream, with 80 percent of companies saying they will
discuss it in 2003, according to Gartner.
Until now, offshore outsourcing has been mostly limited to large
companies that have big chunks of work to send offshore (the
coordination expenses were too high to make small projects
cost-effective). But as the offshore outsourcing companies have
matured, so have their processes. "Many of our clients are now starting
projects with five people," says Peter Harrison, CEO of Induslogic, a
global outsourcing company.
As more jobs move offshore, the work will move higher on the IT food
chain. Indeed, it already has. The CIO survey found that 11 percent of
the companies had outsourced system and architecture planning offshore,
and 14 percent had outsourced research and development two categories
that analysts and chief information officers have predicted would never
leave these shores. "When people say there is IT work that can't be
done offshore, I disagree; it just takes longer to move the more
complex work offshore," says Atul Vashistha, CEO of Neo-IT, an
outsourcing advisory company.
The Dilemma for CIOs
When low-skilled manufacturing work left these shores beginning in the
1970s, the U.S. economy reabsorbed those workers into other areas of
the economy primarily in the services sector, says Dartmouth's
Slaughter. It's this reabsorption effect that leads the majority of
economists to believe that global competition is ultimately good for
the U.S. economy. Manufacturing companies in the United States are now
more productive than they were before they faced international
competition. Higher productivity per worker means more corporate
profits and higher salaries on average, as long as the workers being
displaced can be reabsorbed into the economy somewhere else.
Even if workers are reabsorbed, however, it doesn't necessarily mean
they will be better off. Low-skilled workers make less in real dollars
today than they did in 1973. Now that white-collar jobs are coming
under the same global competitive pressure, the same effect on wages
may be felt at the managerial level. "In the past, the distributional
impacts from global competition were pretty clear," says Slaughter.
"The more-skilled guys are going to benefit from more global
engagement, and the low-skilled guys aren't. Now it's more of a grab
bag."
Experts don't see a "white knight" industry that will come along to do
for IT workers what the services sector did for displaced manufacturing
workers. Other high-skilled fields are also under pressure from
international competition accounting, engineering and architecture are
already feeling the same kind of pressure as IT. As competition for
skilled service jobs in the United States increases and low-cost
options increase offshore, white-collar wages could begin to drop
across the board. Economic statistics show that when people change jobs
because of global competition, it usually involves a decline in wages,
at least initially.
Even so, many CIOs see the move offshore as inevitable.
Jeff Campbell, CIO of Burlington Northern Sante Fe Railway, sees
offshore outsourcing as an inevitable trend that needs to be embraced
to build a truly global economy.
"You can fight global trade with tariffs, but long term it just doesn't
work," says Jeff Campbell, vice president of technology services and
CIO of Burlington Northern Sante Fe Railway. The company has outsourced
40 percent of its development work to the Indian company Infosys.
Campbell says that he was able to achieve the employment shifts without
layoffs, mostly through attrition.
"You have to meet cost challenges or you won't provide shareholder
returns," Campbell adds. "We are intertwined with the global economy
now, so the question is how to embrace that and move it forward."
This is not to say that CIOs don't have ethical qualms about what they
see going on inside their departments. The CIO from the previously
mentioned Fortune 100 manufacturer sounds as angry as the displaced
workers at the Toraw meeting when the discussion turns to temporary
work visas. He says Indian contractors consistently abuse the
requirement that they first look for a suitable American to fill the
job before bringing in an Indian on a visa. "Every now and then one of
the big [Indian] companies comes to me and says, 'Before you sign the
contract, we need you to sign an affidavit that says you looked for
Americans to do the work and you didn't find them,'" he says. "And I
say, 'Get out of here. That's a lie. I won't do it.' And they say, 'OK,
OK,' and somehow it becomes a nonissue."
That CIO feels guilty, but he is insulated from the ethical and legal
implications of the visa issue, indeed from the entire transition to
offshore as is his company. Its executives simply are not involved,
except to make the decision in the first place. They hire an
outsourcing company, and the outsourcing company takes care of all the
messy immigration and work transition issues. Nor is there the kind of
visible drama to the IT move offshore that there was during the
manufacturing transition, when major plant closings made the news. The
movement of IT jobs offshore is happening quietly, almost
imperceptibly. And if the economy continues in the doldrums, few new
jobs will be created to replace them.
What CIOs Can Do
If you have to outsource jobs offshore, here are six ways to minimize
the destructive impact on your workforce
Read More
The government is not prepared to deal with the prospect of millions of
highly educated, well-paid white-collar workers hitting the
unemployment rolls for extended periods of time. Universities are
focused on educating young people, not older workers who need to
retrain themselves for a new white-collar occupation after years in the
workforce. Even economists who support globalization agree that the
transition for white-collar workers in the coming years will be
difficult until new industries arise to take the place of ones with
jobs being sent overseas. Dartmouth's Slaughter, for one, advocates
that the government focus on easing job transitions for white-collar
workers by making pensions and insurance more portable across jobs, and
offering tax credits for older employees who want to relocate to find a
new job or go back to college for retraining.
If IT employees want to stay employed in this new era, they must be
willing to accept lower wages, change jobs more frequently, relocate
when necessary and consider going back to school to gain new skills.
"I don't have a ready answer for what we do in IT after we send these
jobs offshore," says TRW Automotive's Drouin. Even so, he feels he has
no choice but to continue with the offshore strategy it saves his
company a great deal of money.
However, the Fortune 100 CIO who has that recurring nightmare is
worried that it's too easy for companies like his to outsource overseas
today. "Look, I can't wake up tomorrow and decide I'm going to move to
Italy and get a job," he says. "So why should someone from another
country be able to come here on a temporary visa and take jobs from
Americans? There are people who say open everything up. That's one
world view. Another view is you bring people in to the extent that you
can assimilate them, and that they build on the society rather than
disrupt the society.
"I don't want to wake up one day and find that American IT has
disappeared."
Do you have opinions about the impact of globalization on the IT
workforce? Tell Executive Editor Christopher Koch at ckoch@cio.com.
Senior Writer Stephanie Overby and Staff Writer Ben Worthen contributed
additional reporting to this story.
http://www.cio.com/archive/090103/people.html
The Radicalization of Mike Emmons
Until he was laid off by a company moving jobs offshore, Mike Emmons
rarely voted. Now the computer programmer is considering a run for
Congress.
BY BEN WORTHEN
Sep. 1, 2003 Issue of CIO Magazine | Offshore Outsourcing
Longwood, Fla.Mike Emmons' home office doesn't look like much: just a
desk, some shelves littered with books, a couple of computers, a
server, a printer and some other gadgets. But for the past 11 months,
it's been headquarters for a ferocious one-man campaign against the
practice of offshore outsourcing and supplanting American workers with
foreigners on temporary work visas. Emmons lost his programming job
last winter when his entire IT department at Siemens Information
Communication Networks (ICN) was outsourced to an Indian company. Until
last year, the University of Florida graduate rarely voted; now he
plans to run for Congress ("I'll probably lose," he concedes). During
the past year, Emmons has made himself an expert on labor policy. He
has harassed corporate executives, gotten himself on television and is
one of the main reasons that legislation reforming the L-1 visa was
introduced in the U.S. House of Representatives in May.
"They took my job; they took my livelihood," he says, with a crisp
cadence that barely hides his anger. "You don't do something like this
to someone and expect them to turn a blind eye."
The radicalization of Mike Emmons provides a personal window on the
growing backlash against the offshoring of IT jobs and importing of
nonimmigrant temporary workers on H-1B or L-1 visas. (Read more about
this trend in "Backlash".) This story could even be considered a
wake-up call: CIOs beware; you might have a Mike Emmons on your staff.
Fighting Back
At age 41, Emmons is the type of programmer that companies used to
dream about. Tireless and dedicated, he taught himself Cobol, 4GL,
database design and Web programming as the times demanded. In January
1997 he started working as a contractor for Siemens Business
Communication Systems in California, earning $90,000 a year. His office
merged with the Lake Mary, Fla., division in 2000, forming Siemens ICN,
in June, and Emmons and his family moved back to the state where he had
grown up.
Mike Emmons, who lost his job to programmers in India, has been waging
a campaign from his Florida home to protect other IT workers from a
similar fate.
On April 19, 2002, Siemens ICN told employees it was going to outsource
its IT department and that they would all be laid off once the
transition was complete. While the news was bad, none of the 20
employees was devastated; the layoffs wouldn't take place for a few
months, and they figured that some of them would stick around as
consultants. But in the last week of June, Siemens announced it had
selected Tata Consulting Services, and by July 1 the office was filled
with consultantsall from Indiawho would eventually take the Siemens
employees' jobs. The American workers were offered severance packages
as high as $13,000 if they would train the Indians to do their jobs.
(Siemens spokesman Bud Grebey says that only a handful of the company's
70,000 U.S. employees have been affected. "Our customers are big
telecommunications companies, and telecom has been hit hard," he says.
"We need to do things to make the business more efficient.")
Despite feeling betrayed, Emmons and the other laid-off workers did
what was asked of them. The money was too good to pass up, especially
when the alternative was immediate unemployment. Meanwhile, training
the replacement workers proved challenging. According to Emmons and
other ex-Siemens employees, some of the Tata consultants had only two
weeks of preparation before they arrived. This raised a red flag for
Pat Fluno, a now ex-senior systems analyst who started inquiring about
the visa status of the replacement workers.
No Americans Need Apply
Daniel Soong, who lost his programming job to Indian offshore
companies, is willing to relocate to India. But Indian officials have
told him they don't hire Americans.
Read More
On Aug. 15, Fluno sent a letter to her U.S. representative, John Mica,
asking him to investigate a situation she thought was illegal. "An L-1B
visa is for a specialist knowledge worker who has in-depth knowledge of
the company's products, policies and procedures," she wrote. "It is not
meant for generic skill sets, such as computer programming, but for
skills specific to the sponsoring company. If these people were brought
over on L-1B visas, it is an attempt to avoid the strict [Department of
Labor] laws regarding displacement of Americans."
Fluno showed Emmons this letter. "That's when it hit me," he says.
"Something has got to be done. I said to myself, I can fight this and
get caught and lose 12 weeks pay, or I can get paid for 12 weeks and
never work again."
Fluno was laid off 15 days later. For Emmons, whose termination date
was Dec. 20, the battle was just beginning. He called and e-mailed
Mica's office almost daily and distributed fliers about the alleged
visa abuse throughout his neighborhood. In late September, he received
a phone call from Mica in which the representative assured Emmons he
would try to help and that he would make inquiries with the INS, now
known as the Bureau of Citizen and Immigration Services. On Oct. 11,
Mica sent a letter outlining the situation at Siemens to Secretary of
Labor Elaine Chao. Emmons put a sign supporting Mica in his front yard
and voted for him in the November election.
When Mike Emmons lost his job at Siemens, the devoted family man
(pictured above with his two children) knew he had to get another
full-time position with health benefits.
Then, Emmons says, nothing happened. According to the Center for
Responsive Politics, a Washington, D.C., campaign finance watchdog
organization, Mica received four donations totaling $3,999 from Siemens
between the time Emmons first contacted him in August and the November
election. Emmons, who was still training the replacement workers at
Siemens, was livid when he learned this. By the time he resigned to
take another position on Nov. 24, just weeks before his termination
date, he concluded that he had to fight not just the corporations that
were replacing American workers but also the government.
Two days after he quit, Emmons drove to Mica's house and hand-delivered
a letter to the representative's wife in which he accused Mica of
sacrificing American jobs for corporate donations. He also contacted
congressional aides, and when none of this produced any legislation, he
went to the media. In mid-February, Orlando television Channel 6 ran a
series on Florida workers who had lost their jobs to offshoring. The
channel interviewed Mica and then revealed his voting record, which has
consistently supported raising visa caps and loosening visa
restrictions.
Gary Burns, legislative director for Mica, says the Florida congressman
has done plenty for laid-off workers: In addition to bringing the
Siemens case to the attention of the INS, Mica has called for a
Department of Justice study on the issue and introduced legislation to
prohibit bringing in offshore workers on L-1 visas. (For more, read
"The Visa War".)
A Guerrilla Campaign
Emmons has been equally aggressive in pursuing his former employer.
While he maintains that he has nothing against either Siemens or the
Indian workers who took his and his colleagues' jobs, he says, "I
learned that I have to use this situation to expose what's happening to
Americans." At 5:30 in the morning on Jan. 14, 2003, he began what he
calls his "e-mail bombing campaign." Knowing the Siemens e-mail
administrators wouldn't be at work, he sent a message describing what
had happened to him and his fellow employees to thousands of Siemens
employees, including the executives in Florida and at Siemens AG's
headquarters in Germany. (He had written a program to collect their
e-mail addresses from the Internet and other documents.) In the e-mail
campaign, he named Siemens' executives and accused them of selling out
their company's workers. Emmons says that the 1,000 workers in the Lake
Mary Siemens plant openly cheered when they read it. It is the moment
in his campaign that he is most proud of.
They can't just give all our jobs away and expect this country to
survive.
MIKE EMMONS, COMPUTER PROGRAMMER
The Florida native considers himself lucky. He got a job as a database
manager at the district attorney's office. At $55,000 a year, it pays
him 40 percent less than he made at Siemens. (H-1B workers at Siemens
ICN make as little as $28,000, according to immigration documents.) But
Emmons' new job does come with health insurance, which he needs since
his 7-year-old daughter, who has spina bifida, has already undergone
eight operations and will likely need more. Two of Emmons' friends
haven't been so lucky. One who worked at Siemens for 23 years is now
doing landscaping and odd jobs. A 15-year veteran is trying to make a
living as a woodworker.
Emmons calls his political campaign against offshoring a war. "They
can't just give all these jobs away and expect this country to
survive," he says. "What's happening now is going to haunt this country
for years to come."
Staff Writer Ben Worthen covers public policy issues for CIO. You can
e-mail him at bworthen@cio.com.
Offshore Outsourcing: The Money
http://www.cio.com/archive/090103/money.html
Moving jobs overseas can be a much more expensive proposition than you
may think.
BY STEPHANIE OVERBY
The current stampede toward offshore outsourcing should come as no
surprise. For months now, the business press has been regurgitating
claims from offshore vendors that IT work costing $100 an hour in the
United States can be done for $20 an hour in Bangalore or Beijing.
If those figures sound too good to be true, that's because they are.
In fact, such bargain-basement labor rates tell only a fraction of the
story about offshore outsourcing costs. The truth is, no one saves 80
percent by shipping IT work to India or any other country. Few can say
they save even half that. As just one example, United Technologies, an
acknowledged leader in developing offshore best practices, is saving
just over 20 percent by outsourcing to India. (For more, read "Inside
Outsourcing in India.")
Hank Zupnick, CIO of GE Real Estate, found that because of cultural
differences you cannot simply replace one American worker with one
offshore worker.
That's still substantial savings, to be sure. But it takes years of
effort and a huge up-front investment. For many companies, it simply
may not be worth it. "Someone working for $10,000 a year in Hyderabad
can end up costing an American company four to eight times that
amount," says Hank Zupnick, CIO of GE Real Estate. Yet all too often,
companies do not make the outlays required to make offshore outsourcing
work. And then they are shocked when they wind up not saving a nickel.
In this article, we will explore a new TCO the total cost of
offshoring. We will uncover all the hidden costs of outsourcing areas
in which you'll have to invest more up front than you might think,
places where things such as productivity and poor processes can eat
away at potential savings, and spots where, if you're not careful, you
could wind up spending just as much as you would in the U.S. of A. (For
more on how to calculate your own TCO, see the worksheet "Do the Math"
on bottom of this page.)
"You can't expect day-one or even month-six gains," Zupnick says. "You
have to look at offshore outsourcing as a long-term investment with
long-term payback."
The Cost of Selecting a Vendor
With any outsourced service, the expense of selecting a service
provider can cost from .2 percent to 2 percent in addition to the
annual cost of the deal. In other words, if you're sending $10 million
worth of work to India, selecting a vendor could cost you anywhere from
$20,000 to $200,000 each year.
These selection costs include documenting requirements, sending out
RFPs and evaluating the responses, and negotiating a contract. A
project leader may be working full time on this, with others chipping
in, and all of this represents an opportunity cost. And then there are
the legal fees. Some companies hire an outsourcing adviser for about
the same cost as doing it themselves. To top it off, the entire process
can take from six months to a year, depending on the nature of the
relationship.
Ron Kifer, VP of program solutions and management at DHL Worldwide
Express, ran into delays and additional costs in shifting jobs offshore
when it took longer than expected to install the necessary hardware in
India.
Vice President of Program Solutions and Management Ron Kifer spent
several months on vendor selection before contracting with Bangalore,
India-based Infosys to handle a whopping 90 percent of development and
maintenance work for DHL Worldwide Express, a shipping company.
"There's a lot of money wrapped up in a contract this size, so it's not
something you take lightly or hurry with," Kifer says. "There has to be
a high degree of due diligence making sure that the [offshore] company
can respond to your needs."
Even when there is an existing tie between customer and offshore
vendors, the expensive and lengthy step of vendor selection is a
must-do for successful outsourcing. The chairman of Tata Consultancy
Services (TCS), a Mumbai, India-based outsourcer, sat on the
international advisory board of Textron, a manufacturing company that
owns such brands as Cessna Aircraft and E-Z-GO Golf Carts, for several
years. However, when David Raspallo, CIO of business unit Textron
Financial, began exploring offshore outsourcing in 1999, he still spent
five months doing what he calls "the usual Betty Crocker Bake-Off" with
service providers Covansys, ITS, TCS and Wipro. Ultimately, he went
with U.S.-based Covansys, which has three development centers in India.
Selecting the vendor took 500 hours in total, involved Raspallo and
three senior managers, and cost $20,000 in additional expenses.
At this stage, travel expenses enter the picture as well. A trip
overseas helps CIOs get comfortable with their choice. After all,
offshore vendors can send their best and brightest over for a dog and
pony show, but checking out the company on its home turf provides more
insight. John Dean, the CIO of Steelcase, an office furniture
manufacturer, spent several thousand dollars to send one of his IT
executives to Intelligroup Asia in Hyderabad, India, for a week before
signing on the dotted line.
"You can read everything you want to read and ask for advice as much as
you want, but you have to make it a fact-based decision," Dean says.
"So it was important to visit India to validate our thinking."
Bottom line: Expect to spend an additional 1 percent to 10 percent on
vendor selection and initial travel costs.
The Cost of Transition
The transition period is perhaps the most expensive stage of an
offshore endeavor. It takes from three months to a full year to
completely hand the work over to an offshore partner. If company
executives aren't aware that there will be no savings but rather
significant expenses during this period, they are in for a nasty
surprise.
"You have to bring people to America to learn your applications, and
that takes time, particularly if you're doing it with a new vendor for
the first time," explains GE Real Estate's Zupnick, who maintains a
handful of three-year contracts with offshore vendors, including TCS
and smaller vendor LSI Outsourcing. In GE Real Estate's case, the
transition time for each vendor was three months at the very least and
up to a year in some cases, in addition to the money-draining vendor
selection period of several months.
"The vendors say you can throw offshore jobs over the wall and start
saving money right away. You have to build in up to a year for ironing
out cultural differences."
HANK ZUPNICK, CIO OF GE REAL ESTATE
Zupnick, who has seven years of offshore experience, says most of his
peers don't appreciate the time and money it takes to get a
relationship up and running. "The vendors say you can throw it over the
wall and start saving money right away. As a result, I've heard of CIOs
who have tried to go the India or China route, and nine months later
they pulled the plug because they weren't saving money," Zupnick says.
"You have to build in up to a year for knowledge transfer and ironing
out cultural differences."
CIOs must bring a certain number of offshore developers to their U.S.
headquarters to analyze the technology and architecture before those
developers can head back to their home country to begin the actual
work. And CIOs must pay the prevailing U.S. hourly rate to offshore
employees on temporary visas, so obviously there's no savings during
that period of time, which can take months. And the offshore employees
have to work in parallel with similarly costly in-house employees for
much of this time. Basically, it's costing the company double the price
for each employee assigned to the outsourcing arrangement (the offshore
worker and the in-house trainer). In addition, neither the offshore nor
in-house employee is producing anything during this training period.
But it has to be done. "We made a mistake in the beginning of just
packing up the specs and shipping them over, looking at it from a pure
cost standpoint," says Craig Hergenroether, CIO of Barry-Wehmiller, a
packaging manufacturer that has its own development center,
Barry-Wehmiller International Resources, in Chennai, India, and works
with other offshore vendors. "Silly mistakes were made because we
didn't take the time to have them come over. It's a false savings to
keep costs down by communicating only by phone."
During the transition, the offshore partner must put infrastructure in
place. While the offshore partner incurs that expense, the customer
should monitor the process carefully. Often it can take longer than
expected. "It took an awful lot of time to bridge the Pacific
[networking our company to the Indian vendor] and getting that to work
correctly," remembers Textron Financial's Raspallo, who spent six
months and $100,000 to set up a transoceanic data line with Infosys in
1998 for Y2K work. It also cost an extra $10,000 a month to keep that
network functional. "You have to know hands down that the technology
infrastructure you put in place is fully functional and will operate at
the same performance level as it would if you were connecting to
someone on the next floor. Otherwise, you'll have a lot of costly
issues to deal with."
DHL's Kifer had similar problems. Long lead times for acquiring the
necessary hardware in India delayed development work, he says. The
hardware holdup put off the start of offshore work for several months,
requiring DHL to continue to keep vendor workers employed onsite at the
more expensive rate.
During the transition period, the ratio of offshore employees in the
United States to offshore employees working at the vendor's overseas
headquarters is high. But after the transition is complete, CIOs have
to get those employees out of the office if offshoring is to be a
money-saving move. "It's got to be 80 percent or 85 percent working
offshore or the numbers just don't work," explains GE Real Estate's
Zupnick.
It makes sense for offshore service providers to place as many of their
employees in the United States as possible. The provider's margins
already quite decent for offshore work (Indian companies charge U.S.
companies $20 an hour for an employee they pay around $10) really
skyrocket when they're on American soil. "They make more money and
often the client feels better having them close," says Praba
Manivasager, CEO of Minneapolis-based offshore adviser Renodis. "But
the customer immediately loses all of the bill-rate savings." If not
included in the original contract, additional travel and visa costs
also must be figured in. Tally it all up and you will pay as much as
you would for one of your own employees.
It's a difficult area for CIOs to manage. Work is much easier to do
with offshore workers onsite, but to cut costs they must push as much
overseas as possible. Conversely, the more manpower based offshore, the
more project problems and delays. Barry-Wehmiller's Hergenroether says
the amount of workers you can reasonably send offshore depends on the
type of work being done. Industry- or company-specific system
development requires more developers onsite. Legacy maintenance or
simple upgrades may not require a soul.
"On some of our projects, up to 50 percent of offshore workers are
onshore; on others it's closer to 10 percent," Hergenroether says. In
some cases where specific skills are the reason for offshoring he may
even bring in offshore talent over long term. "But if you're going to
do that, your cost savings diminish dramatically," he says. In fact,
there may be no savings at all.
Bottom line: Expect to spend an additional 2 percent to 3 percent on
transition costs.
The Cost of Layoffs
Laying off American employees as a result of your offshore contract
poses other sometimes unanticipated costs. To begin with, you have to
pay many of those workers severance and retention bonuses. "You need to
keep employees there long enough to share their knowledge with their
Indian replacements," Zupnick explains. "People think if they give
generous retention bonuses it will destroy the business proposition.
They cut corners because they want quick payback. But then they lose
the people that can help with the transition and incur the even bigger
cost of not doing the transition right."
Layoffs can also cause major morale problems among in-house
"survivors," in some cases leading to disaffection and work slowdowns.
Companies with experience in offshoring factor productivity dips and
potential legal action from laid-off employees into the cost-benefit
analysis.
"You can never underestimate the effect these issues will have on the
success of [your offshore venture]," says Textron Financial's Raspallo.
CIOs must take time to communicate with their staffs, being "brutally
honest," he says. "If your intention is to lay off some workers and
move work offshore, let them know. If you want to move legacy systems
offshore and retrain staff for other systems, tell them that. And
constantly reinforce what the vision is."
Raspallo sets aside time for a monthly meeting with all staff (offshore
included) by video. "In the beginning, we spent the whole time talking
about the offshore proposition," he says. "If you don't spend that time
doing that, your staff is going to make up stories about what's
happening themselves."
Without this kind of effort, offshore endeavors are doomed.
"Internal people will refuse to transition to the offshore model
because they have a certain comfort level, or they don't want their
buddy to lose his job," Renodis's Manivasager says. "There has to be a
mandate. Trying to build consensus can take a very, very long time."
Manivasager has seen some relationships take as long as three years to
get off the ground because the strategy was neither shared with nor
embraced by employees.
Bottom line: Expect to pay an extra 3 percent to 5 percent on layoffs
and related costs.
The Cultural Cost
One of the biggest impediments to offshore savings is productivity.
"You simply cannot take a person sitting here in America and replace
them with one offshore worker," GE Real Estate's Zupnick says. "Whether
they're in India or Ireland or Israel."
One reason for that is the American workers' comfort level with
speaking up and offering suggestions. "A good American programmer will
push back and say, What you're asking for doesn't make sense, you
idiot," Zupnick says. "Indian programmers have been known to say, This
doesn't make sense, but this is the way the client wants it." Thus,
work takes more time and money to complete. And a project that's common
sense for a U.S. worker like creating an automation system for consumer
credit cards may be a foreign concept offshore. Additionally, offshore
vendors often lack developer experience (the average experience of
offshore developers is six years).
On average, IT organizations going offshore will experience a 20
percent decline in application development efficiency during the first
two years of a contract as a result of such differences, Meta Group
Vice President of Service Management Strategies Dean Davison says.
According to Meta Group, lags in productivity can add as much as 20
percent in additional costs to the offshore contract.
Another productivity killer is high turnover at offshore vendors.
Attrition rates climb as high as 35 percent in India, according to the
National Association of Software and Service Companies. "Unless you can
somehow address that in your contract, you're paying for someone to
learn your product and then they're gone," Zupnick says. Turnover can
cost an additional 1 percent to 2 percent.
Finally, communication issues can slow things to a halt. "We had to do
a lot more face-to-face interaction than originally anticipated because
[offshore workers] just didn't interpret things the same way," says
DHL's Kifer. "That resulted in a lot more travel there or bringing them
onshore to bridge that gap. We did that a lot more often than the model
would have prescribed." Language and other cultural differences can
cost an extra 2 percent to 5 percent, according to Meta Group.
Bottom line: Expect to spend an extra 3 percent to 27 percent on
productivity lags.
The Cost of Ramping Up
Well-defined and accepted internal software development and maintenance
processes are also key to making an offshore situation work. "If you're
an organization that develops and maintains by the seat of your pants,
or it's a case where Mary Jo and Fred have been here for 30 years and
they know how to do everything, you are in trouble," says Raspallo, who
currently sends 65,000 man-hours of work to India.
Raspallo spent five months and $80,000 in consulting fees to get ISO
certified in 1998, which puts his company at about Level 3 in terms of
his employees' "capability maturity" in developing software. He also
invested in an automated Web-based system to support the new software
development and labor management practices. Most of the Indian offshore
companies are ISO certified and at Capability Maturity Model (CMM)
Level 3 or 5. "If your own staff can't get used to working at that
level, you're going to have a major disconnect," Raspallo says.
If a company doesn't create solid in-house processes, "the vendor will
have to put more people onsite to compensate for your inadequacies, and
they'll spend all of your savings," says Meta Group's Davison.
DHL America's IT department spent a full year to get to CMM Level 2 in
2002. Kifer is aiming to be at Level 3 in the United States this year,
with the ultimate goal of achieving Level 3 across the entire global IS
team. "It's a big project, and it entails a significant level of
training and education," he says. "But if you're going to take full
advantage of offshore outsourcing, you have to raise your own maturity
level." Not everyone was gung ho about the new level of discipline
required, but Kifer lit a fire under them with annual bonuses tied to
certification.
The ability to write clear specifications is also critical to achieving
offshore savings.
"When you're doing this stuff internally, you tend to be much more
cavalier," says Hergenroether. "When you have to package specs to go
outside the company, that has to be done exceptionally well." Creating
a great spec package is costly and time-consuming. On a 1,000 man-hour
project for example, Hergenroether's staff will spend 100 hours to
create a spec package.
At the other end of the process is quality assurance (QA) testing, an
area which must become more robust in an offshore arrangement. "We
essentially picked up two shifts of people in India working while we
slept. The work we sent out at 4 p.m. came back to us at 10 a.m., and
we didn't have a QA funnel big enough to handle that," says Radio Shack
CIO Evelyn Follitt, who now hires more temporary QA staffers during
development time.
Bottom line: Expect to spend an extra 1 percent to 10 percent on
improving software development processes.
The Cost of Managing an Offshore Contract
Managing the actual offshore relationship is also a major additional
cost. "There's a significant amount of work in invoicing, in auditing,
in ensuring cost centers are charged correctly, in making sure time is
properly recorded," explains DHL's Kifer. "We have as many as 100
projects a year, all with an offshore component, so you can imagine the
number of invoices and time sheets that have to be audited on any given
day."
At DHL, each project manager oversees the effort. He audits the time
sheets from the vendor and rolls the figure into an invoice, which then
has to be audited against the overall project, which is then funneled
to finance for payment. Kifer's staff has been a bit overwhelmed. "We
knew there would be invoicing and auditing," he says. "But we didn't
fully appreciate the due diligence and time it would require."
At GE Real Estate, managing the offshore vendor is such a big task that
Zupnick assigned someone to handle it on a half-time basis at a $50,000
salary. The individual makes sure projects move forward, and develops
and analyzes vendor proposals against the RFPs when it comes time to
bid out new work.
"It's a critical job," Zupnick says. "That's the price you have to pay
to make this work."
Bottom line: Expect to pay an additional 6 percent to 10 percent on
managing your offshore contract.
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