Fast Company

Is Offshoring Good? [Full-text]

The head of an Indian consulting firm and a high-tech-union president face off on the effects of offshoring and globalization.

Ashok Soota

Cofounder and managing director of MindTree Consulting in Bangalore, India

Marcus Courtney

President of WashTech/CWA, a Seattle-based union for high-tech workers

Resolved: Offshoring is good for America.

Soota: My observations: "Offshore" is a term borrowed from the manufacturing economies of the last century. In the knowledge economy, the terms offshore and onshore have no relevance. At MindTree, we have substituted these with the term "OneShore."

There are two forces at work in shaping the OneShore paradigm: Globalization and technology. These enable every nation to sell globally and source globally. This is not without transitional pain. The pain is equal for a small retailer in India edged out by a global giant or a farmer who must buy genetically modified seeds from U.S. sources and an American whose programming job may go to Bangalore.

No nation is as well equipped to take advantage of the emergent phenomena as the U.S., because it is a champion of free markets and has a large immigrant work force with global connections. Finally, American people are by nature, more adaptive. These give the country timeless resilience with which it reconfigures itself and leads the next wave.

Hence, I have no doubt that the new paradigm is good for America.

Courtney: Thanks for your observations. No question that technology and the Internet have enabled anytime, anywhere production that could not have been imagined 100 years ago. The idea that at a flip of the switch that production of high-tech products and services could be moved around the globe is a significant shift in how production gets done.

But there are consequences for this shift. The drivers that are currently moving the global economy are focused on driving down wages and benefits of U.S. employees as the work moves overseas. It is the cost differences combined with technology that makes offshore outsourcing a serious threat to U.S. high-tech workers. Also, tech workers in India are not immune from the forces around driving down costs. More and more Indian companies will be seeking ways to "offshore" their work to gain additional competitive advantage. The U.S. high-tech industry has seen very little job growth more than four years after an economic recession. The slowest job growth after a recovery since the great depression. If outsourcing is so great for the U.S., why are not more jobs getting created in the industry?

The other issue that makes offshore outsourcing unique is the impact it has for the U.S in terms of technology competitiveness. Companies are sending both high and low level work overseas, so it increases the chances of the U.S. losing its competitive advantage. Furthermore, as products and services that were once done in the U.S. are done overseas only to be reimported, it increases our trade deficit and balance of accounts which further jeopardizes our global competitiveness.

Soota: You raise very interesting issues. I have a basic disagreement with your observation that "the drivers that are currently moving the global economy are focused on driving down wages and benefits of U.S. employees."

The drivers moving the global economy are focused on two things: selling and servicing the global customer and driving down the total cost of business. It is not just about wages of U.S. workers. One part of that may be wages--and if so, it is not a one-country issue. As you rightly pointed out, it will affect Indians as well if wages are earned disproportionate to the value they add. It will be subject to pressure, irrespective of the country of origin.

In all this though, what is the fundamental truth? By nature, "value" is migratory. Once, it was India that was known for textiles--a time came when the power loom killed the homespun textile industry. Now the same power loom has to compete with international imports. Germany led the world in steel making at one time. Then it went to the U.S., then to Japan and then to Korea and now it has gone to China. You pick any industry, it will prove to you the migratory nature of value. Software programming, whether U.S. or Indian, is part of this reality.

Now I want to de-link low growth in programming jobs from high-tech leadership. I have no doubt in my mind that the U.S. will remain at the forefront of innovation. The U.S. has unique advantages that will be very difficult to replicate anywhere else, anytime soon.

U.S. competitiveness comes from its inherent diversity, intellectual infrastructure and access to long range capital. Having said that, the future will be such that the process of innovation will be borderless and cooperative. A genomic concept may be developed at Stanford, beta-tested in Bangalore and see first deployment in Beijing.

Apart from being the innovation capital of the world, the U.S. will continue to be the leader in unusual value creation in areas like capital management, health, space, energy, entertainment and defence.

So, the argument that offshoring will take away U.S. competitiveness ignores the nature of competitiveness and creation of sustainable, competitive value.

Courtney: One issue that is very different between India and the U.S. is the questions around market access and export driven policies. India has a national policy around IT that it be export driven. Most of the software services generated in India are exported. It is not consumed in the domestic market. In the U.S., what is happening is that once services that were done in the U.S. domestic market are increasingly getting done overseas only to be imported back into the U.S.

Our national policy should be different. I would argue the U.S. tech industry could go the way of the steel industry, if we do not create national policies, like in India, that promote a more export driven IT industry. The U.S. should follow India's lead in creating national policy around tech that just doesn't let market outcomes dictate everything. This can not only promote more fair competition but also avoid a race to the bottom in core labor standards.

Soota: The success of the Indian software industry is about having the right skills at the right time at the right cost. It has nothing to do with export incentives. Neither are export incentives an answer for what you perceive as the problem for the US.

You have earlier expressed concern on job losses due to offshoring. Let me give you an example where offshoring leads to job increases for the U.S. Most venture capitalists today require that product design be distributed across continents. The result? R&D dollars get stretched. When that happens, more projects can get funded. Projects that would fall "below the line" because of engineering costs become viable. In reality, offshoring (though I prefer the term OneShoring) is not a zero-sum game. It is to the advantage of free enterprise, hence to the advantage of the U.S.

Courtney: WashTech runs an offshore tracker on our techsunite.org website. Since January 2005, we have tracked more than 103,000 jobs have been offshored. These are only numbers that have been reported in the media, so we know the real total is much greater.

This is a significant number of jobs getting exported from the U.S. to other countries by multinational corporations to take advantage of the skilled low cost labor. I know of many tech workers that have lost jobs and when they have found new jobs they pay significantly less. The way offshoring/ OneShoring is currently getting done is a zero sum game, because the jobs getting created in India are mostly serving the U.S. domestic market--the worlds largest market. As more and more R&D gets done offshore, it is going to disadvantage investment in the U.S. market place--why invest in the high-cost center when you can go to the low-cost one. The Indian government invested heavily in creating the workforce with the right skills.

Soota: The issue has to be seen at a micro level and a macro level.

At a micro level, one must empathize with anyone who loses a job whether due to offshoring or obsolescence. Assistance in reskilling such persons must be available at a social and structural level.

At a macro level, jobs lost in one part of the economy are replaced by gains elsewhere. A well-known McKinsey study shows that the U.S. economy gains $1.14 in return for every dollar of offshoring spend in India.

These numbers don't take into account the additional gains from Capital investment. For example, the majority of the funding for MindTree and many other companies is from U.S. sources (institutional and individual) who will benefit when we go public.

The U.S., as the world's largest exporter of services, is the largest beneficiary of open markets. Also, countries with more open approach to offshoring like the U.S. and UK have lower levels of unemployment than relatively conservative economies like Germany and France. All of the above reconfirm that offshoring is good for America.

Courtney: If the current trends continue the U.S. will soon be running a trade deficit in its service category. At one time, the thinking was that U.S. should not be concerned with the loss of manufacturing jobs, or our trade deficit in these areas because the service sector would be the holy grail. How can the U.S. be the world's greatest tech innovator when it is importing more services than it is exporting?

As we can see with the explosive development of offshoring this is not turning out to be the case. We not only have to look at the number of jobs getting created in the macro economy but what kind of jobs. Obviously we make distinctions around jobs. We value computer jobs at a higher-level than fast food jobs. The economy in the U.S. is creating many more fast food jobs than high-end computer jobs. No one can point to what a person should be re-skilled at. If you computer programmers lose their jobs, what should they retrain for? Will employers high them once they are retrained.

I hear the retraining theory all the time but never hear much about the realities of how that is supposed to work.

Soota: To say that "if the current trends continue, the US will soon be running a trade deficit in its service category" is not based on facts. The US is the world's No. 1 exporter of services (per WTO/Dept of Commerce report 2005) at $318 billion with 15% share of the world services market. The next largest is UK with 8% share. Indian share of the overall service market (of which programming is a part) is a paltry 1.9%. That HUGE gap is not going to go away soon as feared by you.

On the re-skill issue, I must share with you what happened to computer manufacturing in India when the market was opened up to global competition. Most manufacturers had to shut shop and were replaced by IBM, Dell, Compaq and HP. What happened to the people in India who used to manufacture computers? Some re-skilled themselves, some changed professions and some I am sure, were left behind. The onus to learn and add new value is a global imperative.

Courtney: As a percentage of our U.S. gross domestic product--which is what I was referring to--we will be moving from a trade surplus to deficit. We could still be importing more services than we are exporting and be the world's largest service exporter.

Globalization requires that we have social imperatives outside of market forces. If the onus is to constantly update and re-skill, then we should have social policies around that imperative. We have to look at other values such as fairness, who is really winning, losing and why.

As you point out opening markets up for competition in India created more opportunity for large multinational corporations and they became the winners and domestic producers became the losers. We cannot have globalization and trade where the only winners are the large multinational corporations and the market. Workers, labor rights, communities and the environment should be on an equal playing field as the market in the discussion around globalization.

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