It seems inevitable: American service and technology jobs are going the way of manufacturing jobs - that is, they're being sent far, far away. But it's not happening as massively or as quickly as the hype might make you believe.
True, about 1 in 20 Fortune 1000 companies already spends half its IT budgets abroad, according to a new report by Forrester Research in Cambridge, Mass. And programmers in India can be hired at one-tenth the salary of programmers here. Yet labor-cost savings aren't the only factor firms need to consider before jumping on the outsourcing bandwagon. And many still wonder if the benefits surpass the risks.
Part of what gives them pause are the stories of outsourcing gone wrong:
• After a Fortune 500 financial services firm outsourced some IT work abroad, it had to foot a larger-than-expected bill when the transition took more than nine months instead of the projected four to five.
• A skateboarding company brought support services back to the United States because the changing lingo of young American customers was too much for its foreign call center to handle on the other side of the world. (Both of the above companies were described, but not named, by executives at neoIT, an offshore-operations consulting firm in San Ramon, Calif.)
• Sonim Technologies, a start-up in San Mateo, Calif., reportedly brought engineering work back to the US from India after just three months because the skill levels did not meet their expectations.
• Ishoni Networks, another California start-up, filed for bankruptcy last year. Some reports attributed its demise to intellectual property theft by the company's subsidiary in Bangalore, India.
"It is so commonly imagined ... that you can just take anything to India and it will work - and that's just clearly not true," says Debashish Sinha, neoIT's managing director.
But that's not to say opponents of offshore outsourcing should celebrate the trend's demise. Once executives commit to sending service and tech jobs abroad, they have a lot riding on making it work.
"Sometimes they stumble really hard - it's costly, it takes more time, it's a big embarrassment - but they keep on plugging, and eventually they'll get it right," says Prof. Erran Carmel of American University's Kogod School of Business in Washington. Studies suggest that more than half of outsourcing contracts haven't delivered their projected cost savings, but once companies refine their strategies, they can expect to save 20 to 40 percent.
For an example of the refine-but-don't-retreat strategy, look no further than Dell Computers. A few months ago it rerouted some corporate clients' service calls from India to the US. While some viewed the move as an indication that accents and cultural gaps were forcing US companies to pull back from foreign call centers, Dell spokesman Barry French says the "rejiggering" was blown out of proportion. The company routed other calls to India rather than reducing the overall number.
While there's always room for improvement, he adds, Dell "remains committed to India.... There are very talented people there, very strong technical skills."
British companies have also experienced "initial teething troubles" with foreign call centers, but that won't outweigh the labor-cost savings in most cases, according to a recent report by Datamonitor, a market-analysis firm in London. Ryan Powell, the report's author, tells of Indian call-center staff watching "EastEnders," a popular British TV show, to pick up on language and cultural nuances that they wouldn't learn in a class.
On the American side, too, managers face a learning curve as they begin to oversee offshore projects. "The 'Ugly American' image of [businesspeople] throwing their weight around overseas and not understanding the differences in time zones and policies is beginning to disappear," says Rosabeth Kanter, a professor at Harvard Business School in Boston. Courses there now deal with crosscultural management and values tradeoffs. "One of the questions [students explore] is at what cost do you keep jobs in a community to protect the community versus your other responsibility to make a product at a reasonable cost for the consumer," she says.
Some companies eager to increase their global outsourcing realize they need hand-holding, says Katrina Teague, a vice president at Lionbridge Technologies. The product- development and outsourcing firm is based in Waltham, Mass., and operates in 10 countries.
Ms. Teague tells of a multibillion- dollar US healthcare firm that set up personnel, Intranet, and help-desk systems with offshore vendors. It enjoyed cost savings, but when communication and management problems cropped up, it turned to Lionbridge. In addition to offering staff in a low-cost country, Lionbridge sent a team with crosscultural experience to work at the client site in the US.
It's not uncommon for companies to abdicate too much responsibility and then be disappointed with the results.
"You need to leave behind enough management talent and enough checks and balances so you don't ... find out a year later that you have no control," says Pallab Chatterjee, president of solutions operations at i2 Technologies, a supply-chain management company in Dallas.
Nearly half of i2's 2,800 employees work abroad, mostly in India. Mr. Chatterjee talks to remote staff at the start and end of each day, and he recommends that companies that outsource do the same. "We call it 5-15 meetings - no more than 5 topics and 15 minutes," he says. The Internet makes those calls affordable, and because the end of the day in the US is the start of the day in India, he has the advantages of a 24-7 operation.
The Dallas company is part of another related trend: reverse migration. About 180 staffers of Indian origin who had been working in the US volunteered to work at i2 in India two years ago, at Indian salaries. "We were able to take the cost advantages ... [and] inject a level of expertise [in India]," Chatterjee says.
Some Americans complain that too many foreigners are let in on special visas and that after they gain experience, they might set up services in their home countries and offer labor rates that Americans can't compete with. But others counter that without these immigrants, many start-ups that have created jobs here wouldn't exist. "The flow is in both directions," Ms. Kanter says. "We end up capturing a lot of technology because of it."
Offshore outsourcing's impact on American white-collar jobs depends on factors that are difficult to predict. Forrester Research in Cambridge, Mass., estimates that by 2015, 3.3 million high-tech and service jobs will have moved overseas. But the Census Bureau predicts a labor shortage, because retirements will outpace new entries into the workforce.
The positives and negatives of offshore outsourcing are both being overstated, says Mr. Sinha of neoIT. But he adds, "The hype is about the potential future of this market, not the current reality ... and if the supply side scales up to meet demand, that potential is fairly significant."
From Chatterjee's perspective, we're headed toward more global equality in technology wages.
"IT professionals have to accept that their trade is becoming more like an average trade," he says. If salaries hadn't gotten so overheated in the 1990s, he says, it wouldn't be worthwhile to outsource. "Once your standard of living and expectations have gone up, bringing those back [down] is tough. But that's what's happening slowly but surely."