Globalization and Offshoring of Software

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      1. Globalization and Offshoring of Software*

William Aspray (Indiana University), Frank Mayadas (Sloan Foundation), Moshe Y. Vardi (Rice University)
Computer science and technology have been stunningly successful in forging a global market. Through these tools, the IT industry has created innovations that have driven data and voice communication costs to almost zero; added Web features that provide information to anyone, anywhere, anytime; driven hardware costs so low that this technology is affordable in developing countries; developed standardized curricula, and made educational material widely available; and agreed on software standards that enable different machines and system to interoperate.
Globalization has resulted in billions of people joining the free-market world, and dozens of countries joining the World Trade Organization. This trend has produced a world where not only goods are globally tradable, but so is labor, which can be sent over a wire rather than physically relocated.
ACM's Job Migration Task Force undertook an in-depth study of software offshoring: extent and magnitude, perspectives of key countries and companies, globalization of research activities, risks and exposures involved, and counter-balancing steps underway or contemplated in key countries.
The study's findings, released earlier this year, point to continuing growth in the IT sector in both developing and developed countries; unlike the perception in the media, offshoring has not has an adverse impact on IT employment in developing countries. At the same time, the study points out to an intensifying competition within the global IT market. The study suggests increased investment in education and innovation to sustain countries' competitive edge and technological leadership position.
1. Software Globalization: The Big Picture

Over the past decade, low-wage countries such as India have developed vibrant, export-oriented software and IT service industries. Attracted by available talent, quality work, and most of all low cost, companies in high-wage countries, such as the United States and the United Kingdom, are increasingly offshoring software and service work to these low-wage countries. Trade (together with automation) cost many jobs in the manufacturing sector to be lost from the West and many developing nations in East Asia to increase their wealth and industrial prowess since 1970. Changes in technology, work organization, educational systems, and many other factors have caused service work—previously regarded as immune to these forces—also to become tradable. This trade in services, led by the trade in software and IT-enabled services, presents many opportunities and challenges for individuals, firms, and policymakers in both developed and developing nations.

Many people in the United States and Western Europe fear that sending software work offshore will cause wage and job suppression in the high-wage countries. Others believe that the process of getting good labor at lower prices will make the economy more productive, enabling the creation of new wealth and new jobs. Many people in the low-wage countries are excited by the economic development that their software and service industries are bringing them; while some are concerned about the side effects such as congestion, pollution, and loss of traditional cultural values. One thing that is clear is that the globalization of software is here to stay, so that policymakers, educators, and employers all need to address the realities of offshoring. This includes, for example, how to help people whose jobs are shipped to another country to get assistance with their careers, how to create innovative environments that help to create new jobs, and how to revamp educational systems for the realities of a globalized world.

“Offshoring” is the term used here. It is a term that applies best to the United States because, even though the United States does outsource work to Canada and Mexico, most of its work is sent over the seas—mostly to India, but also to China, Malaysia, the Philippines, and many other places. Germany, for example, also sends work across its borders, including to Eastern Europe, but there is no water—no shore—to cross. Some of the work that is offshored is sent to entrepreneurial firms established in these low-wage countries. Other times, multinationals headquartered in high-wage countries open subsidiaries in the low-wage countries to work on products and services for their world market. Multinationals may also open facilities in these low-wage countries in order to better serve the local market there, but that situation is not the primary interest of this study.

There are at least six kinds of work sent offshore related to software and information technology: (1) programming, software testing, and software maintenance; (2) IT research and development; (3) high-end jobs such as software architecture, product design, project management, IT consulting, and business strategy; (4) physical product manufacturing—semiconductors, computer components, computers; (5) business process outsourcing/IT Enabled Services—insurance claim processing, medical billing, accounting, bookkeeping, medical transcription, digitization of engineering drawings, desktop publishing, and high-end IT enabled services such as financial analysis and reading of X-rays; and (6) call centers and telemarketing. Our primary interest is with the first three of these categories, which are the ones most closely associated with the transfer of software work across national boundaries. However, it is almost impossible to study offshoring without at least at times considering the other three categories of work as well. This is because companies that do one of these kinds of software work may also do several other kinds of offshore work as part of their product and service line of offerings; and companies that send work offshore may send work of several kinds. Because companies and industries intermingle these categories of work, so does most statistical data that tracks this industry—and it is often impossible to disaggregate data to capture information about only the categories of work of greatest concern here. Thus we focus on the first three categories but discuss the others in passing.

The countries that send work offshore are primarily developed nations. The United States followed by the United Kingdom have been the largest offshorers, but other countries in Western Europe, Japan, Korea, Australia, and even India send work offshore. The countries that receive the work fall into four categories: (1) those that have available a large workforce of highly educated workers with a low wage scale (e.g., India, China); (2) those that have special language skills (e.g., the Philippines can serve the English and Spanish customer service needs of the United States by being bilingual in these languages); (3) those that have geographic proximity (“nearsourcing”), familiarity with the work language and customs, and relatively low wages compared to the country sending the work (e.g. Canada accepting work from the United States, the Czech Republic accepting work from Germany); and (4) special high-end skills (e.g., Israeli strength in security and anti-virus software).

There are many drivers and enablers of offshoring. These include: (1) The dot-com boom years witnessed a rapid expansion of the telecommunications system, making ample, low-cost broadband available in many countries at attractive rates. This made it possible to readily transfer the data and work products of software offshoring. (2) Software platforms were stabilized, with most large companies using a few standard choices: IBM or Oracle for database management, SAP for supply chain management, and so on. This enabled offshoring suppliers to focus on acquiring only these few technologies and the people who are knowledgeable about them. (3) Companies are able to use inexpensive commodity software packages instead of customized software, leading to some of the same standardization advantages as with software platforms. (4) The pace of technological change was sufficiently rapid and software investments became obsolescent so quickly that many companies chose to outsource IT rather than invest in technology and people that would soon have to be replaced or retrained. (5) Companies felt a competitive need to offshore as their competition began to do so. (6) Influential members from industry, such as Jack Welch from General Electric, became champions of offshoring. (7) Venture capitalists pushed entrepreneurial startups to use offshoring as a means to reduce the burn rate of capital. (8) New firms emerged to serve as intermediaries, to make it easier for small and medium-sized firms to send their work offshore. (9) Work processes were digitalized, made routine, and broken into separable tasks by skill set—some of which were easy to outsource. (10) Education became more globally available with model curricula provided by the professional computing societies, low capital barriers to establishing computer laboratories in the era of personal computers and package software, national plans to build up undergraduate education as a competitive advantage, and access to Western graduate education as immigration restrictions were eased. (11) Citizens of India and China, who had gone to the United States or Western Europe for their graduate education and remained there to work, began to return home in larger numbers, creating a reverse Diaspora that provided highly educated and experienced workers and managers to these countries. (12) India has a large population familiar with the English language, the language of global business and law. (13) India has accounting and legal systems that were similar to those in the United Kingdom and the United States. (14) Global trade is becoming more prevalent, with individual countries such as India and China liberalizing their economies, the fall of Communism lowering trade barriers, and many more countries participating in international trade organizations.

At first it was believed that the only software work that would be offshored was low-level work, such as routine software maintenance and testing, routine business office processes, and call centers. Offshoring suppliers, however, have made strong efforts to move up the value chain and provide services that have higher value added because this is where there is the greatest opportunity for profit. Research and development, project integration, and knowledge process outsourcing such as reading X-rays and doing patent checking are increasingly being offshored. Today, some people believe that any kind of software or IT-enabled work can be offshored. While there is an element of truth in this belief, there are some important caveats. Some kinds of work have not been offshored. Even if it is possible to offshore a particular type of work, it does not mean that every job of that type actually will be offshored. In fact, there are a number of reasons why a company might not wish to offshore work: (1) the job process has not been made routine. (2) The job cannot be done at a distance. (3) The infrastructure is too weak in the vendor country. (4) The offshoring impacts too negatively on the client firm such as the client firm losing control over an important work element, losing all its in-house expertise in an area, or too high a loss of worker morale in the client firm. (5) Risks to privacy, data security, or intellectual property are too high. (6) There are not workers in the supplier firm with the requisite knowledge to do the job, which happens for example when the job requires application domain knowledge as well as IT knowledge. (7) Costs of opening or maintaining the offshore operation are too expensive. (8) There are cultural issues that stand between the client and vendor. (9) The company can achieve its goal in another way, such as outsourcing within its home country or consolidating business operations.

One might wonder whether IT is still a good career choice for students and workers in countries that offshore software and IT services work. Despite all the publicity in the United States about jobs being lost to India and China, the size of the IT employment market in the United States today is higher than it was at the height of the dot-com boom. Information technology, aggregated across all industry sectors, is likely to be a growth area at least for the coming decade, and the US government projects that several IT occupations will be among the fastest growing occupations during this time. There are some things that students and workers in this field should do to prepare themselves for the globalized workplace. They should get a good education that will serve as a firm grounding for understanding the rapidly changing field of IT. They should expect to participate in life-long learning, which means learning intensively in the workplace as well as more formal kinds of education and training. They should hone their “soft skills” involving communication, management, and teamwork. They should prepare to become familiar with an application-specific domains in particular industries, especially in a growth fields such as health care, in addition to core technical computing skills. They should learn about the technologies and management issues that underlie the globalization of software, such as standard technology platforms, methods for re-using software, and tools and project management for geographically distributed work.

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