Offshore outsourcing shouldn’t cause U.S. panic in New Year

Will 2004 one day be called the year of offshore IT outsourcing? Many warning signs indicate that the offshore phenomenon is about to take off – but it may not be as great a threat to U.S. IT employment as initially feared.

Last month, The Wall Street Journal published a report that IBM was preparing to send the work of as many as 4,730 programmers to India, China and other overseas locations. The article created a stir of concerns in a U.S. industry already nervous about the increasing trend toward overseas outsourcing. If a venerable leader such as IBM is moving jobs to cheaper labor overseas, observers said, perhaps U.S. IT is about to endure the same fate as U.S. manufacturing has experienced over the past two decades.

The Wall Street Journal article was reportedly based on internal documents that were not intended for publication, and IBM officials declined to publicly confirm or deny the data. IBM did concede that it plans to increase its use of overseas staff resources in the coming year, but officials said the majority of that increase would be the result of new business, rather than replacement of more expensive U.S. resources.

In the context of its written response, however, IBM also made a bold prediction. “We expect our hiring next year in the U.S. to equal or increase over 2003 levels,” the statement said. “In fact, on a percentage basis, our forecast is for hiring across the Americas to outpace the hiring in the rest of the world.” IBM’s strong public statement on this topic suggests that even if The Wall Street Journal report is accurate, the movement to offshore resources may be more than offset by hiring in the U.S.

In a similar vein, the Associated Press last month published a report that a growing number of U.S. start-ups are being developed and staffed by overseas personnel. In the article, several start-up executives and venture capital officials stated that offshore outsourcing is crucial to the cash flow and survival of many emerging companies. One expert suggested that this outsourcing is a threat to the entire U.S. IT ecosystem, because it takes valuable innovative experiences from U.S. workers.

Start-ups’ use of offshore resources may be increasing, but other data suggest that the threat to the U.S. IT ecosystem may be overstated. For one thing, start-ups represent a relatively small segment of total IT employment in the country. And other data, including a study published last month by Evans Data, indicates that U.S. companies are planning a significant increase in e-business and other next-generation projects in the coming year. Employment on these innovative projects will far outpace the relatively small investment made offshore by start-ups in the coming year.

Even industry analyst reports are conflicting on the offshore outsourcing topic. For example, the Gartner Group predicts that one in 10 U.S. IT jobs will move overseas by year-end. IDC reports that while foreign workers currently perform only 5% of IT services for U.S. companies, that figure will skyrocket to 23% by the end of 2007. These reports suggest that there is a great wave of offshore outsourcing coming over the next several years.

Yet, a report issued in December by Forrester Research indicates that 60% of Fortune 1000 companies have yet to do any offshore IT outsourcing, and that the overseas movement within these companies is slow. A Forrester analyst said that offshore outsourcing “has taken on a bit of a fad mentality, where people view it as kind of a quick fix.”

So will 2004 be the year of offshore outsourcing? Clearly, there are conflicting reports, but a hard look at the data suggests that the offshore move will be a slow push, not a wholesale leap. And if the U.S. economy rebounds as expected this year, that push may well be offset by domestic staffing increases that are equal or greater than those that take place offshore.