Can U.S. IT Survive Outsourcing?


In this era of economic uncertainty there is one thing you can count on--IT companies looking out for their bottom lines. In this week's column, software developer Matthew Heusser explores why American companies are increasingly sending IT jobs overseas and what the U.S. industry can do to adapt to this employment exodus.

Anyone who has glanced through business-oriented magazines lately has probably noticed that outsourcing is the latest rage. Companies looking to cut costs are moving technical support, call centers, software development, and even project management to India, Russia, and Eastern Europe.

As more and more software is Web-delivered, outsourcing of testing is becoming more popular as well. This trend is much more threatening because we are in the midst of a rather high unemployment rate in the U.S. It's time to take notice that globalization has come to IT whether we like it or not.

How did we all fail to see this coming?

America experienced great prosperity in the 20th century, which, among other things, increased the demand for land and increased the cost of housing. Americans accumulated boats, RVs, SUVs, and credit cards. All are things that increase our cost of living. Taxes, education, health care, and planned retirement all create hidden costs that must be paid before the employee sees a discretionary dollar from his paycheck.

A typical person in a developing nation might have none of those things, and the currency exchange rate makes the cost of living much lower. Developing nations teach English in school and import computers. Plus, unlike manufacturing, with IT there are no material or shipping costs, few logistic issues, no heavy equipment to buy and move, no import or export tariffs. All of this makes it relatively easy to put a non-U.S. worker with a college degree on the global IT market and allow him to be competitive in the U.S.

To understand how globalization is going to affect the U.S. IT industry, we must look to industries that have already experienced it. To discover how to adapt, we must look to other U.S. companies that have been successful despite it. The obvious example is the automotive industry; still reeling from Japanese competition that began thirty years ago.

Surprisingly it was the quality movement that hurt the American automotive industry in the first place. An American by the name of W. Edwards Deming was astounded by the amount of waste he saw in manufacturing and created a quality model designed to improve the manufacturing process. He was mostly ignored by American business as an academic, so Dr. Deming went to Japan, which had a serious quality problem and was not too proud to admit it. The Japanese manufacturers embraced his ideas and, combined with their lower cost for materials and labor, turned around and tore into the market of the U.S. auto industry. It took decades for the Big 3 (GM, Ford, and Chrysler) to recover, and they did it by turning around and embracing those same quality methods.1

The comparison to offshore IT is simple: The per-hour cost of developers is massively less and the quality is equal to or better than the lowest hourly bidder in the US. In addition, there are fewer logistical issues than those in the auto industry.

Yet there is still hope for U.S. companies. When global competition came to the auto industry, some companies like Harley Davidson, Hummer, and John Deere were able to not just survive, but consistently increase profits. While the Big 3 competed head-to-head with similar products, these companies instead chose to distinguish themselves within their market niches. Eventually, the Big 3 brought quality and price to a standard that made them competitive, but it was, and remains an uphill battle.

To survive, the IT industry in the U.S. needs to learn to compete on something other than price.

While the U.S. economy has suffered a massive loss of jobs in the past four years, most offshore economies have experienced rapid job creation and wealth increase. As the demand for skilled workers in those developing nations increases, so do salaries; while in the United States, IT pros are adopting more of a "take what I can get" attitude. As the global economy begins to merge (thanks to the Internet), it will also tend to equalize. A recent Business Week online article2 stated that six months ago, hourly rates for highly-skilled American contractors averaged $100 per hour, while their counterparts in India averaged $15 per hour. The article went on to say that in January 2004 rates are more like $35-$50 for the American programmer and $25 for the Indian programmer.

However, even with the playing field leveling, the hourly cost of offshore work will remain substantially less for years to come. In order to survive, organizations in the business of software will need to adapt as the auto industry did. One way to do this is to offer consistent productivity advantages (hourly rates mean little the work can be done in 1/10th the time). Companies can also compete on something other than price, such as quality or specialization. Dramatically lowering defect rates could give U.S. software manufacturers an edge. Well-documented, easy-to-understand, easy-to-change systems could be a niche to hone, or IT companies could partner with global groups, working across boundaries to focus on what each entity does best.

The next twenty years of IT will be no free ride, but, then again, neither were the last twenty. Just as when the mainframe left and the desktop arrived, the U.S. IT industry must adapt or die.

1The Handbook of Software Quality Assurance, 3rd Edition contains a longer explanation of the history of the quality movement in Japan.

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