Offshore Outsourcing of Software Engineering: A Trojan Horse?
Hertzel, Chairman, Alumni Consulting Group
During the late 1990s, it was nearly impossible to find quality information technology (IT) workers at reasonable rates. The high-tech sector was booming with "dot.com" activity and the upcoming year 2000 conversions. This created outrageous demand, and therefore high salary expectations. As a result, companies such as IBM, Microsoft, StorageTek, Oracle and Cisco Systems began looking overseas to staff projects. Despite the dramatic downturn during the last three years and a drop in U.S. IT worker salaries by up to 50 percent, these companies continue to send projects offshore. Forrester Research indicates that the percentage of offshore outsourcing for U.S. IT budgets increased from 12 percent in 2000 to 28 percent in 2003.
At first glance, going offshore seems like a miracle cure for the high-tech industry. Examples abound of companies recognizing huge savings. Computerworld.com reported in March 2003 that a typical project costs 30 percent less in India than it would using U.S. IT workers. This cost savings stems from the fact that an Indian software engineer makes 88 percent less than a U.S. software engineer. Going offshore may have been a short-term cure for the surrealistic dot.com era, but it will likely turn out to be as destructive as a virus in the new millennium. Outsourcing IT projects to offshore companies undermines the security of our country, sacrifices the long term engineering advantage we hold over the rest of world, and slows the economic recovery of the United States.
In the aftermath of 9/11, security has come to the forefront in issues affecting our daily lives. The increase in physical security is most noticeable, but equally important to the stability of the U.S. are computer and information security. Every aspect of our lives, from the drinking water delivered to our homes to our 401(k)s is dependent upon computer technology. If the technical infrastructure of the U.S. was compromised by a hostile nation or terrorist organization, our banking system, utilities, and government could easily be shut down or otherwise compromised. This has not happened because, until now, potential terrorists have lacked the technical sophistication to pull off such a stunt. Depending on workers in third world countries to develop the software that runs our lives exponentially increases the possibility of such an attempt.
Fortune 500 companies started the offshore outsourcing trend, but many public sector and quasi-public organizations are also going offshore. Qwest, the company that provides much of the western U.S. with telephone service, depends heavily on an outsourcing company based in India. Xcel Energy, the company that provides power to homes and businesses in Colorado and many other states, recently announced that it was turning to offshore companies for IT project implementation. Ironically, the State of New Mexico paid a firm in India $6 million to develop an on-line unemployment claims system. The State of Pennsylvania Department of Corrections has also utilized an offshore company to develop mission critical systems. The examples go on and on.
Imagine that President Bush decided it was too expensive to maintain a U.S. military. Instead of hiring citizens of our country at twice the cost, he turned to India, the Philippines, Israel, or Ireland. What would be the impact on our security in a situation such as Afghanistan or Iraq if we depended on mercenaries to maintain our physical security and protect our interests? According to ASPnews.com, these are the countries most frequently turned to for cheap offshore development. Eastern Europe, China, and Russia will soon join the ranks of countries responsible for developing and supporting the technology infrastructure of the U.S. Does the cost-savings of offshore development justify the risk to our security?
In addition to security considerations, offshore development drains the technical brain-power of the U.S. and ultimately sacrifices the long term engineering advantage we hold over the rest of the world. The American Electronics Association (AEA) states that the U.S. high-tech industry shed about 560,000 jobs in 2002. Forrester Research estimates, in a November 2002 report, that the number of computer jobs moving overseas will grow from 27,171 in 2000 to a cumulative total of 472,632 by 2015. Fewer technology jobs in the U.S. means fewer kids focusing on engineering and science in college. In short order, we will move from leading the world in technological innovations to depending on third world countries to develop new technologies.
Finally, the increased use of offshore development has significantly slowed our economic recovery. According to a March 2003 article in InternetNews.com, American companies have contributed an estimated $10 billion to the Indian economy in recent years. Giga Information Group predicts IT outsourcing to India will grow by 25 percent in 2003. Meanwhile, the AEA found that more than 500,000 U.S. citizens lost their high-tech jobs between January 2001 and December 2002. Furthermore, according to a survey by the Denver Business Journal, 66.5 percent of U.S. IT respondents said they took salary reductions in 2002 and more than 71.5 percent expect pay cuts in 2003.
Unemployed citizens don't spend as much money as employed citizens. The downturn in our economy has been caused by numerous variables including the dot.com fiasco, terrorism, corporate scandal, and war, but one thing is certain--an economy cannot recover if its workforce remains unemployed (or underemployed).
The need for IT workers waned with the burst of the dot.com bubble. The situation has worsened, in large part, because of the move to offshore development. The San Francisco Business Times reported in November 2002 that Bank of America was eliminating 900 jobs by year-end in its information technology operations. Some of the laid off workers were reportedly required to train their Indian counterparts in order to receive their severance packages.
Turning to offshore companies for IT projects made sense during the late 1990s. Unemployment was at an historic low, the economy was booming, technical schools could not churn out enough technical professionals to fill all of the open positions, and the U.S. had not been touched by terrorism and tragedy. The world has changed. As a country, we cannot afford the long term price of outsourcing IT projects to companies overseas. Our success as a nation and a technological leader depends on our continued technological independence.