A political hot potato

Troubled by the movement of high-tech jobs overseas, state and federal legislatures are trying to discourage offshore outsourcing in the sector of the economy they control: government procurement.

In May, Tennessee became the first state to pass legislation aimed at preventing the offshore outsourcing of its IT services. Tennessee’s law says contractors that keep data entry, call center and other IT support jobs in the U.S. will receive significant preferential treatment during the bidding process on new contracts.

“The Tennessee law is precedent-setting because it’s the first regarding the whole issue of IT outsourcing,” says Justin Marks, a policy analyst with the National Conference of State Legislatures. “Tennessee didn’t ban [offshoring], but it inserted preferences into its procurement code for contractors who employ U.S. workers.”

The governors of three other states – Arizona, Minnesota and Michigan – have signed executive orders in recent months that give preferences to any contractors that use U.S. or in-state workers. Of these directives, Arizona’s is the most stringent because it prohibits state work from being performed overseas.

From Alabama to West Virginia, many other states are considering similar measures. State lawmakers have introduced 35 bills that explicitly ban offshore outsourcing on government contracts, up from eight such bills last year, Marks says.

Government spending accounts for about 30% of the nation’s economy.

The issue of offshore outsourcing “blew up this year,” Marks says. “Whenever an issue comes up as fast as this came up, legislatures are going to introduce [bills] that are designed to fix the problem. It doesn’t mean that these particular bills are going to [pass] but they will work their way through the system.”

Congress is considering making changes to federal procurement laws to prohibit or at least limit offshore outsourcing. The Senate in March passed an amendment sponsored by Sen. Christopher Dodd (D-Conn.) that prohibits offshore outsourcing of federal, state and local government contracts where federal dollars are involved. However, the Dodd amendment includes a provision that the Secretary of Commerce must certify that these anti-offshoring measures will not harm the U.S. economy. The House of Representatives has yet to consider the Dodd amendment, and Capitol Hill watchers say its future is unclear.

“Workers in Connecticut and across the nation are first-rate. It simply doesn’t make sense to export their jobs and futures half-way around the world to save a few pennies,” Dodd said when he introduced his amendment in February. “This administration needs to get its priorities straight, and use taxpayer dollars to invest in America -American workers and small-business owners. This legislation is a step toward stopping the needless export of American workplaces.”

Sparking opposition

Such measures have sparked plenty of opposition.

“When there’s an issue that has as broad complexity as this – and we’re dealing with very seminal trade issues here – it tends to be an issue that Congress cannot deal with quickly,” says Stan Soloway, president of the Professional Services Council (PSC), a trade group that represents government contractors. “So Congress tends to go to the place where they have impact: government procurement.”

Several industry trade groups, including the PSC and the Information Technology Association of America (ITAA), have united to lobby against changes to the federal, state and local procurement laws that would discourage offshore outsourcing.

“Offshoring is our most time-consuming issue by far,” says Harris Miller, president of the ITAA. “We’re actively fighting all of these bills.”

The federal government – particularly the Department of Defense – has been purchasing more commercial off-the-shelf hardware and software rather than special-purpose gear to save money. Government suppliers don’t want to see this trend reversed by the passage of bills that ban offshoring.

“If we have to do things uniquely for government. . . . that will take us a big step backwards and drive costs through the roof,” Soloway says.

Policy wonks say they were surprised at how quickly offshore outsourcing caught the attention of lawmakers. The issue gained momentum earlier this year because of the slow pace at which new jobs were being created after the recent recession.

As unemployment soared, more companies, including computer manufacturers, telecom carriers and software developers, replaced white-collar U.S. workers with their less-expensive counterparts in India, Russia and other countries. Although manufacturing jobs have migrated overseas for decades, the loss of professional and technical positions caught politicians by surprise.

Idealogical split

The issue of offshore outsourcing splits lawmakers into ideological camps – those who favor job protection measures and those who favor free trade – rather than along party lines.

“Offshoring doesn’t fit into neat categories,” Soloway says. “We see things come out of moderate Democrats such as the Progressive Policy Institute that are not radical at all. And on the Republican side, we see some members getting pressure from their constituents – mostly members of the Rust Belt states – to do something.”

“All politics is local, and we have protectionists on both sides of the aisle,” Miller adds.

State legislatures are conflicted by offshoring because tax revenues are down and they are under pressure to cut costs. States can often save money if they hire contractors who send IT support work overseas because they charge lower rates than those who hire only U.S. workers. Many states have laws that require them to choose the lowest-price bidder on all of their contracts, not just for IT services.

At the same time, lawmakers are under pressure from unions and unemployed constituents to keep high-paying, white-collar jobs in their states. When states have awarded contracts and discovered that the IT support work such as call center operations and data processing are done overseas, they’ve received sharp criticism.

“I see this as a ‘buy American’ issue,” says Ray Bjorklund, senior vice president with Federal Sources, an IT consultancy. “The economy has contracted in the U.S., and we have concern about joblessness. We have technical people running around that [are unemployed]. This [issue] is driven by the economic retrenchment.”

Neither the federal government nor the states has definitive statistics on offshore outsourcing, but experts agree that very little government IT work currently is performed overseas. It’s rare for a state or federal agency to award an IT contract directly to a foreign company. The work that has gone overseas is mostly through subcontractors, and it’s primarily telephone support and back-office information processing rather than strategic IT tasks such as network design or management.

“If I have a contract to do IT work for a government agency, the direct work is almost all U.S.-based because of security issues and customer requirements,” Soloway says. “We have 160 member companies in the PSC, and I’m unaware of any cases where [offshoring] is happening on a direct level.”

Since the Sept. 11, 2001, attacks, federal agencies have tightened information security requirements and increased the number of IT support jobs that require security clearances, which must be done in the U.S.

“Even before 9/11, the Department of Justice put out a policy that said from henceforth there would not be any software written offshore,” Bjorklund says. “Since 9/11 there’s been increasing apprehension about any kind of work that might be done offshore. For mission-critical or classified work, it’s highly unlikely there’s any done offshore.”

However, the commercial hardware and software components used on government IT contracts might have some aspects that are handled overseas. Software vendors such as Oracle and Indus conduct software development overseas. Computer manufacturers such as Dell use offshore call centers.

ITAA estimates that 2.3% of all IT work by U.S. high-tech companies is done offshore. But for government procurement, “I would guess it’s less than one-half of 1%,” Miller says. “We’re talking about minuscule amounts of work going offshore.”

Soloway says it will be difficult for prime contractors to deal with federal or state laws that ban or severely restrict offshore outsourcing on government contracts because so much manufacturing and support of commercial products is done overseas.

“Where you see the impact [of these bills] is on the indirect side,” Soloway says. “If I’m the prime contractor, I don’t know where all the software is being written or where the support is for the software. And what about the components? It becomes un-executable for the potential bidder.”

To better understand their dependency on offshoring, several states have asked their chief procurement officials to generate a list of contracts and subcontracts for which work is done overseas. Meanwhile, the Congressional Research Service is conducting a study to determine how much of the federal government’s IT work involves offshore outsourcing.

The most visible example of government offshoring has been the call center operations that support state food stamp and welfare programs. Several states contract with eFunds, a Scottsdale, Ariz., firm that subcontracts call center operations to firms in India.

Offshore recalls

New Jersey came under fire for offshoring 12 call center positions that handled queries about its food stamp program. New Jersey ended up bringing the call center jobs back to the state, which cost the state an additional $900,000. Similarly, Indiana canceled a contract with an overseas supplier last year that would have saved the state $8.1 million, Marks says.

Proponents of offshoring cite these examples as why government agencies will pay more for IT hardware, software and services if they restrict offshore outsourcing.

“If there are statutory obligations to keep the work in the U.S., that’s going to increase the dollar value of the contract,” Bjorklund says. “The cost of the procurement is going to go up, and that may not be good overall for the taxpayers.”

Business interests have joined forces to fight legislation that would restrict offshore outsourcing. A dozen major trade groups – including the U.S. Chamber of Commerce, the Business Roundtable, ITAA and PSC – formed the Economic Growth and American Jobs Coalition to lobby against all of these bills.

These groups oppose offshoring legislation for several reasons. They argue that it’s inappropriate to compare the decades-long exodus of manufacturing jobs with the latest shift of IT support jobs overseas because the U.S. IT industry has an overall trade surplus while many manufacturing industries have trade deficits. They disagree with lawmakers determining trade policy through legislation rather than through negotiated trade agreements. They worry about having a patchwork of offshoring laws being passed by various states.

“If the Dodd amendment passed as is, it would invite retaliation from other countries around the world,” ITAA’s Miller says.

“One of the major objectives of ITAA is to continue to open up government markets around the world and improve the ability of U.S. companies to compete in these markets. . . . If something like the Dodd amendment were signed into law, it would make it much more difficult for U.S. companies to compete,” Miller adds.

“If this is a trade issue, we should deal with it as a trade issue,” PSC’s Soloway says. “We need to recognize that there are all kinds of trade agreements in place and these bills would put government agencies in violation of these agreements.”

Most of the legislative activity related to offshore outsourcing is focused on government procurement. But increasingly, lawmakers are focusing on privacy and security concerns associated with information about U.S. citizens being processed overseas. Some state legislatures are considering bills that would prohibit financial or medical data from being sent overseas without the consumer’s permission.

“Interest in the security and privacy issues around offshoring is growing, but it’s hard to predict whether any of these bills is going to pass or not,” Soloway says.

Legislatures also are considering bills that require companies to give as much as 60 days’ notice to employees and state labor departments when they are going to lay off employees and move jobs overseas. Some states are debating notification-oriented bills that would require call center operators to disclose their location to consumers.

With so many proposals on the table, the issue of offshore outsourcing promises to stay in the forefront during this election year. Already, Democratic presidential candidate John Kerry has come under fire for some of his remarks criticizing offshore outsourcing, while the Bush administration is backing industry groups.

“This issue is going to remain very, very prominent,” Miller says. “If the employment situation continues to improve, it may diminish somewhat. But it will still remain hot.”