Newsworthy Items

Anchors aweigh - Engineering jobs moving out as globalization strengthens in automation industry
In an earlier article posted with InTech.com the author stated that a number of engineering jobs are being moved offshore. Tom Arrison, senior staff officer at The National Academies in Washington, D.C. stated "it is difficult to measure just how broad the trend is though because employment and trade statistics make it difficult to track when certain markets are going overseas". For the full story please click on the link above.

R&D Offshoring to Rise
Offshoring Times.com reported on February 25 that the IT R&D offshoring market in India is expected to record a CAGR of 23% and is expected to reach $21.4 billion by 2012. The information came from a study done by Zinnov, a consulting firm. Please click on the above link to read the entire story.

Indian outsourcing gains momentum in Australia
According to a report in the February 26, 2009 edition of Offshoring Times. com Australia has been slow to openly embrace India as an outsourcing destination but momentum is building and more organisations are saying they have shipped technology and business process work offshore. Many of the companies that have entered the fray play in the financial services sector, a voracious and aggressive user of information systems and services.

Industry Updates for Today

Europe prefers Indian IT outsourcing
This article highlights the fact that many UK firms are using Indian companies for their offshore IT services. Data also shows an increasing trend in offshoring supported by the fact that 57 per cent of firms polled had utilized outsourcing or offshoring within the last twelve months, compared to 47 per cent last year.

Indian outsourcing market eyes Far East
Indian companies that provide offshoring services have started to look at Japan for new customers. According to a Japan market study by neoIT, an offshore advisory firm, the total IT services sector is estimated to be around $50 billion USD. Currently less than 2 percent of this market is offshored, with China getting the majority share. Revenue from Japan contributes barely three percent of India's total software services exports. Ameet Nivsarka, Vice President, Nasscom, says that he believes Europe and Japan offer huge potential for Indian vendors.

IBM Tops India's Outsourcing Market
This article explains that IBM is outpacing domestic competition with contract wins from large Indian enterprises such as Hindustan Petroleum, North Delhi Power, and IDEA Cellular. This initiative helped IBM capture 10.8% of India's local outsourcing market in 2008, IBM said Tuesday, citing data from Springboard Research. The article goes on to explain that as U.S. sales slow, IBM is investing heavily in developing markets beyond India, including South America and Eastern Europe.

Using the Financial Crisis as a Catalyst for Restructuring

I've been working on an op-ed piece which contrasts two potential responses to the current financial:

1. Hunker down and work to "protect" jobs and current routines, or


2. Use the crisis as an opportunity to shake things up and build for the future

Jim Collins made the case in a recent Fortune Magazine article (link). He cites Boeing and HP after World War II. During a general economic slump, the visionaries running these firms made big bets on the future. Bets that transformed their firms and set them up for decades of success.

Firms today face a similar dilemma. Do they follow the lead of the politicians -- pulling back, "protecting" jobs and buying American? That's the politically correct, but economically wrong, thing to do.

The reality is:

1. The growth markets of the future are largely in developing countries. The World Bank projects that nearly half of global GDP growth over the next 25 years will occur in low-income countries.
   


2. Today's economic slump is a rare opportunity in which top-notch resources (productive assets, people, brands) are available at deep discounts. Are rival firms letting top flight talent go? It's time to grab it. Are rivals pulling out of international markets of cutting back on brand building? Now is the time to fill the void.
   

There has never been a better time to look 5, 10, or 20 years out and make the investments that will set up your firm for success once things get back to normal.
Forward looking firms should use this opportunity to expand globally. If they don't, their rivals will. And the firms who hesitate will be left wondering "what happened?"

Finding new opportunity in offshoring

Bob's book was highlighted in the February 23, 2009 edition of "Smart Brief on Workforce" at SmartBrief.com.

In the News Today

AVON UNVEILS NEW COST CUTS
This article, in the Wall Street Journal (subscription required), reports that Avon is undergoing a restructuring initiative to reduce costs. It references that approx. $200 million of savings will come from product-line simplification and $250 million from "strategic sourcing initiatives, pushing the total from the previously announced restructuring moves to nearly $900 million a year, above prior expectations.

HEWLETT-PACKARD CUTS PAY AS SILICON VALLEY RETRENCHES
HP announced that they are going to reduce salaries across the board in order to maintain their workforce. This is obviously one tact that companies can take to avoid moving jobs outside or offshore.

NISSAN WANTS TO BUILD BATTERIES IN TENNESSEE.
Nissan is requesting a loan to build a Lithium Ion battery manufacturing plant for hybrid cars in Tennessee. They would move production from over seas to the US, a reverse form of offshoring

RUSSIA PLANS TO OUTSOURCE MANUFACTURE OF OIL TANKERS
Due to the shifting of Russia’s oil fields they need to find alternate manufacturers of their oil tankers. Their own ship building industry is focused on military vessels so they are offshoring this project.

NYT Piling On: "Outsourcing of Drug Trials is Faulted"

I am often amazed by the power of memes. It seems that any activity to which the word "outsourcing" could possibly be applied is now a target.

The latest is a story in the Thursday New York Times (link).

The article suggests an ethical quagmire when drug testing is done in developing countries. Apparently some researchers from Duke, and the reporters at the New York Times, want to take choices away from potential drug trial participants in developing countries because they "may be unduly influenced with the promise of financial compensation or free medical care to participate in clinical trials."

This is despite the fact that every leading drug company has detailed "human testing" requirements to make sure that participants understand the risks and rewards.

It would, of course, be nice if everyone in the world was middle class and had access to top notch health care. But they don't. The real choice facing many potential participants is access to care or not. Seems like if you're a poor, rural person in India, Malawi, or Bolivia, the promise of free medical care might be quite attractive.

Of course participants should be fully informed. But this is naive paternalism run amok. Do the do-gooders at the NYT really think they know better than a potential participant the trade off that individual should make? Apparently they do.

Interesting Blog

Came across an interesting blog on offshoring/outsourcing issues. Check it out:

InsideOutsource Blog

Detroit News Op Ed: Work Visas Stop Offshoring of High-Skill Jobs

Published a commentary piece in the Detroit News this morning, which was written in response to a very misinformed piece by Froma Harrop that ran about two weeks ago.

Here is the original piece by Harrop: Don't Expedite Offshoring with More Work Visas

Here is my piece than ran today: Work Visas Stop Offshoring of High-Skill Jobs

My submission tackled Harrop more directly, but the editors took out the direct references.

This should lead to some amusing venting in the DetNews comments section. As of 9:30am this morning, only one not-to-bad comment. But globalization tends to bring out the crazies, often with elaborate policy proposals that ignore basic economics or incentives. Should be interesting.

Senator Schumer (D-NY) Agrees: It's Bad Policy to Restrict Access to Global Talent

Not sure whether to be happy or not about this.

Schumer isn't right on much--at least on economic issues. So it always worries me a bit when we agree on something. But even a stopped clock. . . He's right this time.

See link: Schumer Vows to Overurn Ban on TARP-Takers Hiring H-1B Workers.

Hewlett-Packard Takes Advantage of Outsourcing

A recent article in Chron.com highligted the fact the while HP's profits have slumped in the last quarter their sales rose slightly. The technology company was able to offset some of their losses by taking on service business that was outsourced by a few of their customers.

TARP and the H-1B Visa issue

Saw news that Senators Grassley (IA) and Sanders (VT) inserted language that further restricts firms which receive TARP (Troubled Asset Relief Program) funds from using the H-1B visa program.

This is short sighted on several levels. First, these companies are in trouble. That's why they need access to the TARP funds. Giving them funds with one hand while limiting their ability to access global talent is counterproductive. It's like handing someone with a broken leg a crutch with your left hand, while whacking them in the knee with your right. Two policies working in total opposition to each other.

The larger problem, however, it that tighter H-1B restrictions will push more work offshore, not slow the process. Here's why.

• Imagine a high value service operation that, to be successful, requires people with several different skill sets. If this was pharma research, these might be genomics engineers, database people, lab techs, chemists, biologists, etc. For simplicity, we'll just call the skills required A, B, C, and D.
• The United States faces critical shortages of skilled people in many technical areas. Over half of graduate engineering students are foreign born, and the ratios are far worse in electrical engineering, physics, etc.
• Assume that a firm can not find a world class person with skill C in the local market. I'm not talking someone who thinks he can do the job, or someone who could be trained over a number of years to do the job. But someone who is world class today. Without skill C, the whole operation will underperform.
  
• The H-1B visa program is intended to allow a firm to bring that person to the US to work and live here, strengthening the overall operation and making all the other jobs more secure.
  
• Remember, the H-1B program applies only to "specialty occupations" and requires potential employers to pay prevailing wages. So there is no cost savings here. In fact, it generally costs more because the firm has to arrange for visas, transportation, etc. Firms are using the program to gain access to scare skills.
• The H-1B application also asks (but does not require) whether the firm has done a local search to identify local talent to fill the position. While not legally requires, I can tell you from experience that not doing a local search is almost guaranteed to cause a rejection.
  

In the end, the program allows firms to keep jobs in the United States. If we don't allow high tech firms to bring world class workers to do work here, those firms will take the work to them, overseas. And positions A, B, and D will move overseas as well.

Restrictions on the H-1B visa program are one of the major drivers of the rise of the Indian software industry in the late 1980s and early 1990s (see chapter 4 of the Services Shift). They are also the reason that Microsoft has a huge graphics research operation in China (it could not bring the talent to Seattle), Bechtel has it's largest Engineering, Procurement, and Construction Management center in India, etc.

The real choice facing firms is whether to do the work near their home base, or somewhere offshore. Most firms would rather do it close to home. But if government policy makes this tough, we simply force them offshore.

The Grassley-Sanders visa restrictions may be good politics, but they are shortsighted and counterproductive policy. While presumably well-intentioned, the Senators have done their country a disservice. Their amendment will force more jobs offshore.

Back from Africa, now in catch up mode

Returned from a productive week in Rwanda. Was there working with the School for Finance and Banking (where WDI has a capacity building engagement) and for the graduation of the first group of women from the Goldman Sachs Entrepreneurship program.

It was a great trip on several levels:

1. The school is really starting to make some progress with the curriculum and improving the faculty. Also, wifi now available on campus, which will have a profound effect on the learning process.

2. The Goldman Sachs program was great. GS funded, and we worked with the SFB to deliver, a six month entrepreneurship training program for poor women in Rwanda. They received eight one-week-long training modules, had school faculty visit their businesses, and wrote a business plan for expansion. The last three days were devoted to a business plan competition, which was incredibly impressive.

3. Goldman Sachs sent a partner (James Garvey) from the London office to participate in the BP competition and the graduation. Things went great. He saw what we are doing, bonded with the women, etc.

--- --- ---
Only downside was that I caught a nasty stomach virus somewhere near the end of the trip and am just now recovering. Will try to catch up with the latest offshoring news (thanks Lou!!) over the next day or two. Sorry for the slow posting of late.

No Easy Answers on Offshoring

Bob's recent interview with Forbes.com ,where he outlined several broad business trends leading to an increase in offshoring, was highlighted in an article on IT Business Edge.com. The author of the article Ms. Ann All poses the question: "Is offshoring good or bad for America?" Bob's perspective on this issue is referenced in the article along with several other well know economists.

Corporate Compliance Risks

The author of a recent article in Corporate Compliance Insights.com discusses the Satyam case and offers multiple lessons for companies considering outsourcing. The regulatory risks associated with these services can be magnified by moving offshore. This article examines trends in the outsourcing industry and changes in services and delivery models that have a direct impact on the client’s compliance with laws.

ComputerWorld.com interview - IBM offers to shift workers losing jobs to lower-wage countries

Bob was quoted in an article regarding IBM's offer to shift workers who are losing jobs to lower wage countries. The item was posted over the weekend in ComputerWorld Online . Bob states; "What most of IBM's competitors are doing is just eliminating jobs and hiring people in India," (and ) "I would say from IBM's point of view, they're trying to meet people maybe not halfway, but a quarter of the way."

Off to Rwanda

I'm sitting in the Amsterdam airport, in route to Rwanda.  As some of you may know, WDI has a major capacity building program at the School of Finance and Banking (SFB) in Kigali, the capital city.

Rwanda is an interesting test case for the Services Shift.  It is a small, land-locked country in Eastern Africa (west of Kenya, east of Congo).  Temperate climate, few natural resources, and terrible transportation links to major population centers or to ports.  Rwanda also has the continent's highest population density.  GDP per capita is between $200 and $300 dollars (or about 30% of India's GDP.  This is one of the poorest countries in the world.

So, the development challenge is:  what can the country export to the rest of the world in exchange for the imports it needs?

There is some progress in coffee and tea.  And there are the famous mountain gorillas that bring in tourists.  But not much else.  Human capital is low -- more than 80% of the population does subsistence farming, and only 3% of 18-20 year olds go to college.  

This seems like a classic setup for carving out a services niche.  Find something basic, build a core competence, and rush to fill the market with your low cost workers.

The problem is that even basic business skills are in short supply.  There are few accountants, managers, telecom engineers, etc.

So the country remains stuck in a low level equilibrium.  Very low costs and a huge need to break into services.  But not enough local skills to make this happen.

We hope the SFB engagement can be part of closing this skills gap.  But only time will tell.  There is a lot to offer in Rwanda.  But the skills gap is preventing the country from grasping even the lowest rung on the global services ladder.

IBM's Project Match

IBM has an interesting new program, which seems to be generating an overly hostile reaction. 

"Project Match" (link) is a program to match up laid off employees with opportunities overseas.  As the article states:

- - - - - - 

   IBM employees being laid off in North America now have an alternative to joining the ranks of the unemployed - work for the company abroad. . . Through a program dubbed Project Match, IBM will help interested workers whose jobs are on the chopping block to "identify potential opportunities in growth markets and facilitate consideration by hiring managers in this markets."

- - - - - -

Sounds reasonable.  The position doesn't make sense to do in the US but, if you'd like, we'll move you, get a work permit, and set you up in a geography where it does make sense to do the job.  Seems a lot better than throwing these workers out in the  street.

But some kind of pseudo-union (Alliance@IBM) is trying to make hay of this.  Their view is that "Not only is IBM offshoring its work to low-cost countries, now IBm wants employees to offshore themselves.  At a time of rising unemployment IBM should be looking to keep both the work and the workers in the United States."

This is classic head-in-the-sand thinking.  The country is in a recession/depression.  Sales are down and everyone is cutting back.  IBM is working to optimize its cost and quality combination, and all the pseudo-union (it is not certified) can say is:  This is really inconvenient.

Alliance@IBM is also attempting to link Project Match to the recent layoffs.  The inconvenient fact is, however, that most of those layoffs are in strictly local positions--logistics, distribution, onsite customer service. Those jobs can't be done remotely.   Alliance@IBM is fuzzing things up to create a sense of outrage.  

It looks to me like IBM is working to meet its workers halfway.  The firm is taking tough decisions so that it survives in the new global economy.  It's doing what it can to minimize the impact on employees.  In return, it gets a PR campaign accusing it of exactly what it is not doing -- laying workers off to move the jobs abroad.  

No wonder Alliance@IBm can't get certified.  Heaven help us all if it ever does.  It would destroy any chance the company has to survive.  

Thoughts on PR process

Have been doing quite a bit of PR. Lou has been posting the various links, so I won't recount them all.

Funny how it works. The book focuses on the trend toward global sourcing of services from developing countries. Most references are to India, the Philippines, China, South Africa, etc. I think I mention Ireland once or twice in passing.

So, a couple weeks ago, Dell announces it is closing its manufacturing operation in Limerick Ireland (about 1800 positions). Service jobs (about 2600 positions) will stay. The Guardian Newspaper from London reaches out to me for a comment. Most people seem to be saying "it's the end of the world. Ireland is doomed!!!"

My view is that this is predictable and actually a sign of Ireland's strength. Low-skill assembly work is a commodity. If those jobs didn't go to Lodz Poland, they would go to Romania or China. Ireland offers nothing special for low/medium skill manufacturing work and it's fruitless to try to hold on to that work.

On the other hand, the fact that most services positions (product marketing, service, accounting, etc) are staying in Ireland says something positive about the business and regulatory environment the country has created. My view is the Ireland is still well positioned to outperform most others in the EU as a hub for within-EU services.

Turns out this was a really unique view. It led to 3-4 more newspaper articles, and about 6 radio interviews. Apparently I'm a star in Ireland now, with lots of book pre-orders. One mention of Ireland gets a couple hundred book orders.

Things also look promising in India. Several of our research partners have agreed to help promote the book and we seem to be getting traction ahead of the March launch.

In the meantime, I'm working the highways and byways of the US publishing industry and things are moving slowly. Turns out, it's pretty difficult to scare up book reviews. Lots of interviews where I am quoted on offshoring/outsourcing topics. But it's a struggle to get them to mention the book.

Ideas appreciated.

WJR Radio Interview - The Frank Beckman Show

Bob was interviewed on the Frank Beckman show on WJR Radio Thursday, February 5, 2009. The interview focused on outsourcing and offshoring, how it affects various sectors of the economy, where it is applicable and how economies grow by shifting from low-value to high-value activities. To listen to the entire interview please click on the following link:
>>> Link to interview.

Purchasing.com interview - Purchasing expands its role in outsourcing.

Purchasing.com recently interviewed Bob to discuss the fact that as more companies struggle to reduce costs and increase margins, outsourcing and offshoring of various business processes is getting a closer look. The purchasing organization is playing a bigger role in this process than it has in the past. The Q & A session can be viewed by clicking on the above link.

Book Web Site and Blog Assistance

Greetings,

My name is Lou LaFrate. I will be assisting Bob with the launch of his new book, . As his spokeman I will manage the posting of Bob's personal interviews and notification of relevant news articles to this blog. Bob will continue to write to this blog with his personal updates, observations, comments and replies.

Thank you.

IBM Still Mired in Layoff Spiral - eWEEK.com Interview

Kennedy was interviewed by eWEEK.com yesterday and discussed at length the situation IBM is facing relative to outsourcing. He told eWEEK "he believes IBM has simply come to grips with the new global economy and is making use of talent available throughout the world to reach maximum productivity and efficiency".

Satyam clients find that "Breaking up is hard to do"

Bob Kennedy discussed the topic of Satyam's tenuous business situation in a recent interview on Newsvine.com with AP Technology writer Jordan Robertson. Bob, the author of was quoted as saying "With State Farm deciding to pull their business it will be interesting to see how other customers react". His view is that Satyam will survive, but as part of another company. He says a Satyam's competitors could snap up Satyam's assets at fire-sale prices "to pick up a whole bunch of capacity and customer contacts really cheap." That, he said, could "calm customers down."

Services Shift Selected as Top Pick by Bookviews.com

This month's edition of Bookviews.com has placed The Services Shift on its top pick of the month list for February 2009, It is highlighted in the "Getting Down to Business" section.

In the News: Sony Considering Outsourcing

Kennedy was interviewed recently for an article on BusinessWeek.com discussing whether outsourcing can save Sony. The Japanese manufacturer is struggling with the decision due to cost reductions needed in their operations.

In the News: Forbes.com Interview

Kennedy was interviewed by Forbes.com on February 2. In the article Bob discusses the topic of how the US will compete with the growing talent pools abroad. Several readers have generated some interesting dialogue with opposing views in the comments section of the on-line article.