Outsourcing: Good or evil?

Lou Musante says the leading presidential candidates might be missing the point when they bemoan offshore outsourcing.

"The real issue is that the Bureau of Labor Statistics says that by 2006 -- that's just 23 months away -- that for every two people leaving the work force, only one person will be coming into the work force," said Musante, founder and managing partner of Echo Strategies, a consulting company in Allison Park. "By 2008, we're going to have 10 million unfilled jobs in this country. I think offshore outsourcing is going to be a necessity."

Echo helps companies ranging from Bayer Corp. to U.S. Pipe and Foundry identify tasks that can be outsourced, and helps companies implement outsourcing strategies, particularly in product development and design. Musante said many of the company's clients see outsourcing as a threat, "but a significant number know they are going to have to deal with it."

As the private sector looks to send more white-collar jobs to cheaper labor markets, government officials are moving to stop what many politicians call a "crisis."

Dozens of bills -- including one in Pennsylvania -- have been introduced in states around the country that would prevent companies that outsource work to foreign countries from working on state contracts. Others, including Federal Reserve Chairman Alan Greenspan, worry that such protectionist measures will do more harm than good if countries targeted by the legislation respond with protectionist measures of their own.

Originally, jobs such as call center operators and computer code writers, among others, were sent to China, the former Soviet Union and, most notably, India. But these days more complex jobs also are heading to foreign soil, raising alarm among elected leaders who bemoan the country's "jobless recovery."

Pittsburgh-based PPG Industries Inc. routinely sends research-and-development and engineering work to the former Soviet Union, as well as India and China. Two years ago, Mellon Financial Corp. began cautiously moving information technology and business services work overseas, primarily to India. Despite the hardship of having to lay off 20 percent of its 1,200-member information technology work force -- including 120 people in Pittsburgh -- Mellon today says it expects to achieve average savings of 30 percent when it identifies a business activity appropriate for offshore outsourcing, or "offshoring."

But even as offshore outsourcing becomes a hot political and economic issue, a report by Forrester Research predicts that just 3.3 million American jobs will be lost through offshoring by 2015 -- a far cry from the more than 1 million jobs lost each year through traditional layoffs (typically, the lost jobs are replaced each quarter in a process economists call "churning").

And many economists and industry officials believe the problem is being blown out of proportion. They say by moving jobs overseas, American corporations can cut costs and create new -- and often better-paying -- jobs domestically. At the same time, foreign companies typically outsource more jobs to the United States than U.S. companies send overseas.

"I think what we are seeing not only presents challenges but opportunities for the future," said Randy Weinberg, director of Carnegie Mellon University's Information Systems program. "The challenges are that things like (computer) programming jobs can and in fact are being outsourced overseas.

"But I don't think anybody thinks this entire sector is going to disappear," Weinberg said. "At some point, you reach a limit as to how much of a company's intellectual resources can be outsourced."

Lester Thurow, an economics and management professor at Massachusetts Institute of Technology, said it's probably too soon to say how much of an impact offshoring is having on the U.S. economy. And many of the job losses since 2000, he said, are more likely the result of the scaling back of the dot-com boom than the offshoring trend.

"If you went out and looked at the numbers, in 2003 India's software exports were probably about $10 billion," Thurow said. "Now how big is the world software market• No one really knows, but it's probably in the neighborhood of $500 billion.

"The numbers are very small compared to the world market," he said.

But that's little consolation to the thousands of U.S. white-collar workers who have lost their jobs to offshoring. Meanwhile, some companies, including Dell Inc. and Lehman Brothers Holdings Inc., have pulled workers back to the United States in recent months after employee and customer complaints.

Thurow said companies often find that despite the far lower salaries in a labor market like India, the cost of training workers can quickly erase savings. He cited an example from a medical dictation company in Boston, where the worker in India didn't understand a doctor's notes about a patient who had been injured "by tailgating while rubber-necking."

"Someone in India who is perfectly fluent in English still needs about eight months of training before they can take medical dictation because they don't know American slang," Thurow said.

Krishna Pendyala is president of consulting and enterprise data management for iGate Corp., which offers software and back office support to customers such as General Electric Co. and Bank of America Corp. But Pendyala said he cautions companies that jump into outsourcing -- be it offshore or domestic -- to look beyond the financial considerations.

"The thing I'm most concerned about is have people really looked at what impact the decision to outsource is going to have or not have on the company -- and its people, its employees -- going forward," Pendyala said. "People are fundamentally motivated to do this because of financial reasons, but they don't evaluate what impact it will have on the remaining employees -- their loyalty, confidence and morale."

Companies that fail to do that, Pendyala said, will find that their remaining employees will be worrying about whether they'll be next to lose their jobs to outsourcing. He cited Hewlett Packard as a company that has been successful in implementing outsourcing strategies without alienating customers and employees.

"My whole approach is that it has to be done responsibly," Pendyala said. "One of the reasons I think outsourcing gets such a bad name is that the primary motivator is usually money. And people don't really care about somebody else making money at their loss."

Additional Information:

Summit at convention center

The Pittsburgh Technology Council will host 'Competing in an Outsourced Economy,' an all-day summit, on Wednesday at the David L. Lawrence Convention Center to provide local businesses with information on 'the pros and cons of outsourcing.'

The event is targeted at technology companies and will feature national experts and officials from Pittsburgh-based companies, including FreeMarkets, Marconi, PPG, iGate and Red Square Systems, among others.

Sessions include identifying key issues and pitfalls, a briefing on the world market, expectations vs. reality and a public policy forum.

For more information, contact the Pittsburgh Technology Council at (412) 687-2700 or online at www.pghtech.org .