How to Boil a Frog (or U.S. workers)

Date: Saturday, April 05, 2003 12:40 AM

H-1B and JOB DESTRUCTION NEWSLETTER

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Engineers should be getting plenty of phone calls for interviews since
the shortage is materializing:

"We have always had a higher demand for engineers than
can be supplied in the U.S.," says Daniel Miklovick,
Gartner's research director for manufacturing. "The
big shortage is just beginning to materialize."

Replace frog with engineers, programmers, or scientists in this
sentence:

You cannot boil a frog by putting it into a pot of
boiling water because the frog will immediately jump
out of the pot. Instead, the technique for boiling a
frog is to put it in a pot of water at room temperature
and warm the water slowly. The frog will swim contentedly
until it is cooked.

Here is another translation of the frog analogy:

Karamouzis notes that GE, which has 10,000 staffers in India
alone and is in the process of doubling that, has spent many
years gradually building up its overseas operations. "They
did this at a slow pace, and they didn't displace many
workers in the U.S.," she says. "So they didn't experience
as much of a work backlash as you would think."

http://www.businessweek.com/magazine/content/03_05/b3818051.htm

FEBRUARY 3, 2003

COVER STORY

Online Extra: Perilous Currents in the Offshore Shift

Companies now desperate to cut costs by sending skilled, high-paying
jobs overseas often don't understand what they're really doing

Each day, Gartner Inc. Research Director Frances Karamouzis says she
speaks with several giant U.S. companies interested in shifting
information-technology and back-office jobs abroad. From this feedback,
Karamouzis is convinced that the trickle of skilled work migrating
offshore is about to turn into a torrent.

Until recently, says the outsourcing specialist, only a handful of
globalization trailblazers like General Electric (GE ) and Citibank (C
) employed more than a few hundred people in India, the Philippines,
and other low-wage nations to handle key IT support and administrative
duties such as payrolls and accounts receivables. "Now what's happening
is that the pragmatists, the mainstream companies, are starting to join
this market in all kinds of industries," Karamouzis says. "We're
talking about financial services companies, high-tech manufacturers,
media conglomerates, health-care organizations -- they're all exploring
this."

The reason for the surging interest seems clear: "Now that we're in a
down economy, the top agenda item of every chief information officer is
to cut budget," says Karamouzis. Within three years, she predicts, 30%
of large U.S. companies will outsource IT services and manage certain
business processes through offshore vendors. In jobs that are highly
transportable, such as IT support, up to 20% of U.S. positions could
head overseas. And the types that are considered transferable are
getting more important, ones that pay $80,000 and more. "The
interesting question is how far up the food chain this will go."

BROADER IMPLICATIONS. All of this is great for business at IT
market-research firms like Gartner, which is supplying big clients with
gobs of info on everything from data-transmission rates in Manila to
the going salary for an Indian software engineer with a master's degree
and three years of experience. But Gartner also is assembling a
research team that's looking at the broader implications of this next
wave of globalization. What are companies really gaining and losing by
firing white-collar workers at home and becoming more dependent on
far-flung foreign operations? And what does this mean to America's
white-collar workforce?

Gartner's early conclusion: Many companies simply haven't thought these
questions through. CEOs are rushing to shift jobs now in their
desperation to slash costs and boost the bottom line, but with little
understanding of whether or not they're enhancing or endangering core
operations. As a result, many companies that will join the bandwagon
are likely to stumble. And if it's perceived that companies are
exporting good jobs simply to save a buck, Corporate America may be
setting itself up for a nasty backlash as the pink slips mount.

"We anticipate that you'll see a disproportionate number of layoffs
this year and next in info tech. The impact will be very severe," says
Diane Morella, a Gartner research director focusing on workforce
issues. "And there's very little discussion about what this means for
the U.S. and Western Europe four or five years from now."

ENGINEERS NEEDED. How are companies deciding which jobs to keep and
which can go? Clearly, salaries are the big factor. In some job
categories, the gap between what a certain skilled job pays in the U.S.
vs. in a developing nation like India is 5 or 10 to 1. Another factor,
of course, is that certain skills are still in acutely short supply in
the U.S.

Take mechanical engineering. U.S. colleges graduate only about 35,000
of them annually -- about half of what Corporate America will need in
the coming years. "We have always had a higher demand for engineers
than can be supplied in the U.S.," says Daniel Miklovick, Gartner's
research director for manufacturing. "The big shortage is just
beginning to materialize."

While Corporate America has been able to fill that gap by arranging
H1-B work visas for foreign engineers, getting such visas is now harder
because of the U.S. economic slowdown and tighter immigration rules in
the wake of September 11. As a result, more U.S. manufacturers are
hiring mechanical engineers in countries like China, which has an
oversupply.

DOES IT ADD VALUE? Similarly, big shortages of software programmers in
the 1990s, especially during the height of the Y2K panic, gave low-cost
Indian IT service providers the chance they needed to show companies
they could do the same quality of work as IBM (IBM ), Electronic Data
Systems (EDS ), and Accenture (ACN ) at a fraction of the cost.

But these days, pay and skills aren't the only considerations as U.S.
businesses cut ever deeper into the ranks of salaried professionals.
The most fundamental factor in deciding whether to shift a job offshore
is whether that position adds a lot of value to a company. "Jobs that
require an understanding of a company's requirements and an ability to
translate that understanding into an IT operation, won't go away. This
is a unique skill set," says Karamouzis.

Once a job can be defined and codified so that outsiders can do it,
however, it becomes lower-value and "can get commoditized more easily,"
she says. Karamouzis cites one Gartner client that recently laid off
500 IT staffers, mostly software coders and programmers, and is
shifting the work to India. "But this company will keep all of the
senior, higher-priced IT architects who can develop solutions really,
really well."

THREATENING SIGNALS. The big problem is that not all corporations are
adept at figuring out which jobs really should stay close to home and
which are dispensable, Gartner analysts say. Even fewer are very good
at managing networks of support staff, R&D teams, and other
white-collar workers that are dispersed around the globe. Nor do they
know how to manage such a shift without sending threatening signals to
white-collar staff that they really want to keep.

Karamouzis notes that GE, which has 10,000 staffers in India alone and
is in the process of doubling that, has spent many years gradually
building up its overseas operations. "They did this at a slow pace, and
they didn't displace many workers in the U.S.," she says. "So they
didn't experience as much of a work backlash as you would think."

The next few years are likely to be much more contentious, with some
companies hiring thousands of staff in India, the Philippines, China,
and other countries while simultaneously downsizing ruthlessly at home.
Indeed, the global job shift could become so problematic for many
companies that some kind of pullback is likely. "I think we are at the
start of a very deep and difficult learning curve," says Karamouzis.

She explains that historically, with any new business trend, "you can
expect that after five or seven years, the pendulum will shift back.
Companies will discover they they have suffered a loss of knowledge and
will retrench." But eventually, companies will likely get through that
learning curve and figure out how to manage a global workforce
efficiently. Then the offshore job shift could really kick into full
swing.

By Pete Engardio in New York

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