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A Brief (Recent) History of Offshoring

In this Web Exclusive, the CEO of Covansys, one of the first American organizations to explore offshoring, considers how Indian government regulation, the Y2K problem, and the widespread acceptance of the Net contributed to the current job loss and economic insecurity.

Covansys, based in Farmington Hills, Michigan, was one of the first companies in the U.S. to specialize in helping American businesses move parts of their operations offshore, setting up an Indian facility in 1992. Today, about half of its employees are based in the U.S. and half overseas. Martin Clague, Covansys' CEO, has seen the situation evolve from posts at IBM and elsewhere and provides some historical perspective.

The roots of the successful development of an IT industry in India go back to the late 1970s, when the Indian government put in place a policy requiring a majority ownership of all foreign ventures, Clague says. Fearing nationalization, companies such as IBM pulled out, leaving the country with a small tech infrastructure but no one to maintain it. "They were forced to build an industry to maintain the existing base," he says. "The government actually caused the education system to turn on a dime to produce IT experts."

The next major event that eventually led to the growth of offshoring was the Y2K phenomenon. Fearing the collapse of major computer systems as the new millennium dawned, there was a huge demand for technologists to help update systems quickly. "Suddenly, in a capitalistic sense, there was need," Clague says. "Some enterprising people said we know how to do this, and the whole industry took off."

Almost simultaneously came the explosion of the Internet, along with a boom in telecommunications capacity that made doing technology work remotely infinitely cheaper for everyone and communications between the U.S. and offshore locations much more efficient. At the same time, some of India's universities updated and changed their curricula, graduating students with a much wider and deeper array of technology skills. "Meanwhile, the dotcom bust took place," he says. "Suddenly on the street are American workers who wouldn't have done this stuff. Now, [however], you have an established track record, a supply of people who are well trained, favorable economics, and a means to accomplish it."

The resulting job losses and economic insecurity here has created a bitter backlash. Clague sees it as cyclical, a natural part of capitalism, combined with the realization that our own education system — and the private sector — hasn't served us well. "Companies do owe people some training," he says. "But individuals have to look in the mirror and say if I want to work until I'm 60 years old, what other things are of value in my company?"

According to Clague, those things include any job that involves working directly with the client, project management, and interfacing with suppliers. "This will ultimately self-adjust," he says, but not go away. "If you can get work done somewhere else with the same quality for one third of the cost, why wouldn't you do that?"

A version of this article appeared in the Table of Contents - April 2004 issue of Fast Company magazine.