Special Report: Outsourcing Vs. Immigration
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Time is running out to resolve one of the most critical debates in Western society.
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(InfoWorld) - The outsourcing and offshoring of software development work has become such an ingrained part of the technology industry in the U.S. that stories about it no longer rouse the public's interest as they did even a few years ago. That means the only way to gauge the growth of the phenomenon is by watching the bottom line of outsourcing giants like India's Wipro, which recently reported a 41 percent jump in revenue in its latest fiscal year, and the heated debate in Washington over the number of H-1B high-tech visas that the federal government grants. But the runaway growth of offshoring has created its own problems in countries like India, where a substandard infrastructure and stiff competition for talented workers has changed the economics of setting up shop outside the U.S. The decision to hire a staff in India "wasn't even a second thought" when Munjal Shah, CEO of RiyaÂ , was laying the groundwork for his visual search startup back in 2004. (Riya is part of InfoWorldâs Month of Enterprise Startups feature.) "At 30 percent wage rates [the ratio of an Indian salary to a U.S. salary], it still was worth the communication overhead, the travel, and the late-night conference calls," Shah recalls. Those were the good old days. Today, wages in India have risen so much that maintaining development operations in Silicon Valley and India no longer made sense, forcing Riya to make what seems like an unusual decision: In April, the company nixed its Bangalore operations and consolidated operations back in the company's Silicon Valley headquarters. In the end, the cost advantages of lower Indian wages did not outweigh the efficiency losses that came from maintaining some 35 employees in two offices, 12 hours apart, Shah said.Â  Indian software development shops have been the workhorse for countless high-tech firms and U.S. enterprises for more than a decade. But steady demand for development talent is erasing some of the cost advantages that offshore development outfits have enjoyed, according to a report by Gartner. In fact, the wage rates for Indian software engineers will reach between 40 to 50 percent of Silicon Valley wages by 2008 with the gap continuing to narrow after that.Â  Wage increases for Indian engineers averaged 15 percent from 2005 to 2006, compared with a 3 percent average increase for U.S. engineers, according to a recent Gartner report. That's not to say that things will be even-steven any time soon, though. "Even if Indian salaries continue to grow at 15 percent annually, it would take 16 years for Indian software engineers to catch their U.S. counterparts," the report says. But wages among startup employees have been growing much faster than that, especially among top engineers in Bangalore, Shah said. A native of India, Shah paid a premium to hire experienced graduates of the prestigious Indian Institute of Technology. Unlike IBM or Infosys, a startup doesn't have the resources to train the brand-new graduates who would work for smaller salaries. "Startups aren't places where you train people from the ground up," Shah said. "They're places where either you know what you're doing or you don't. We paid to hire the best." To that end, Shah said, wage increases among his engineers in Bangalore tended toward twice the national average. "Salary increases have been 30 percent for more than a year now," Shah said; the engineers who lost a job when Riya decided to close the Bangalore office all have received multiple job offers with significant wage increases, he said. Differences in the high-tech cultures of the U.S. and India also play a part. Indian workers are less likely than their Californian counterparts to be wooed by the prospect of working for stock options instead of cash.Â  "In Silicon Valley, you see your friends from Google driving around in new Ferraris, and you think, 'Huh, occasionally this actually works,'" said Shah. "But there's no comparable value for options [in India]."Â  And without the lure of options that might someday make a software engineer wealthy, money isn't just one reason for a Bangalore engineer to join a company â it's the only reason.Â Â  "If you can't build a core loyalty with options, then you're in for a tough time," said Keerti Melkote, cofounder of wireless LAN hardware company Aruba, which went public in March. Aruba tried outsourcing to India shortly after the birth of the company in 2002 but found that it slowed down operations too much for it to be worthwhile.Â  "You need a critical mass for offshoring to work -- a whole project as opposed to part of one project -- and for a startup, offshoring might not make sense. Especially now, the loaded cost of all the late-night conference calls is high enough that it might not make sense." Melkote said that with its growth in the last few years, Aruba can now afford to support a fairly autonomous Indian operations center in Bangalore. But startups don't have that option. "We found that if you gave a guy less than a 30 percent salary increase every year, then he'd walk," Shah said. "By the middle of this year, we would have been paying [the Indian engineers] 75 percent of a U.S. salary, and at that point, it doesn't make sense because of all the other overheads that take away from productivity." What kinds of overheads you ask? "On average the power probably goes out three or four times a day," said Fran Karamouzis, a research vice president at Gartner who specializes in outsourcing issue. âYou get surges for 15 or 20 minutes, and if you don't have adequate power supplies, then that's a big issue." Thatâs a big issue for startups, whose employees often work odd hours from home, Shah said.Â  Of course, infrastructure problems are nothing new and are considered par for the course in India, but with competition from China, Russia, Eastern Europe, and even Vietnam and Africa, unreliable infrastructure is starting to cost India business, such as Intel's recent decision to locate a $2.5 billion chip plant in China. The nature of work at a startup makes them even less tolerant of those kinds of risks than companies like Intel. "If you're a startup and you're doing a lot of iterative design and you constantly need a higher level of agility, you might find it more burdensome than the cost differential is worth," Karamouzis said. On the other hand, "If you can give the Indian team things that are clearly delineated that they can own and drive on their own, then it works out pretty well," said Pejman Roshan, cofounder and senior director of marketing at Agito Networks, a wireless technology startup in Sunnyvale, Calif. that outsources software coding to a services firm in Bangalore. Roshan acknowledged, though, that the wage gap is shrinking. "I'd heard there was a five-to-one [ratio of Silicon Valley wages to Bangalore wages], and we were salivating at that notion," Roshan said. "We're seeing a three-to-one benefit, and we're still happy with that." Riya's Shah is confident that moving the company's operations back to the U.S. was the right move and expects to see more companies doing the same in the months ahead.Â  "We might be a little bit ahead of the curve in our decision -- maybe six to 12 months -- but I don't think wages are going to stop rising," said Shah, who detailed his decision in his CEO blog, Recognizing Deven. "I don't think weâre isolated." Still, despite wage increases, new startups aren't likely to rule out Indian operations any time soon, Gartnerâs Karamouzis said. In fact, they may have to consider such operations in order to get venture capital. "More often than not, what I hear is that venture companies are almost demanding that [startups] leverage India or Russia both to optimize the cost structure and to maximize a 24-hour cycle to get things done faster," Karamouzis said.
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In a new wave of global outsourcing, personal chores are moving offshore, and this is leading to some daunting challenges, both economic and cultural.
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Immigration has a positive impact on the U.S. economy and boosts wages for the vast majority of native workers, though there are "small negative effects" on the earnings of the least-skilled Americans, according to a report the White House issued yesterday.
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The U.S. government needs to do a better job of supporting and training IT and other workers who have lost jobs to offshore outsourcing, two economists on the opposite side of the offshoring debate said Tuesday.
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BusinessWeek Online - Many people fear that the availability of cheap global labor in our increasingly integrated world economy -- or "globalization," -- is prompting companies to relocate production abroad. Yet a recent study by the European Commission (EC) suggests that high labor costs aren't so much the problem as the European Union's failure to cope with increased international competition and an accelerated speed of technological change.
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Opinion: Bruce A. Stewart thinks too many companies don't manage their outsourcers properly.
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Outsourcing is a word we hear more and more these days, but according to EMC Chairman and CEO Joe Tucci, it&#39;s one that&#39;s used too much.&quot;I think outsourcing is an over-used word. I think what you are going to see more of is companies willing to outsource a business process. So for instance, in EMC we outsource all our payroll but we outsource the entire process, not just the IT process. So I think you are going to see a lot more of that. I think you are not going to see wholesale take everything. I think that market is slowing down,&quot; he said.Tucci was speaking during a news conference on the sidelines of his company&#39;s EMC Forum event.He said outsourcing of specific functions, such as PC backup which EMC offers through its Berkeley Data Systems unit, is where he sees success in outsourcing.&quot;I see business process outsourcing speeding up, I see a slowdown in wholesale &#39;take my whole datacenter, take my applications and you do it for me.&#39; I think that market is not going to be a robust market,&quot; he said.Last week the data-storage company reported a&#160;third quarter net income&#160;of $493 million, up more than $200 million over the same period last year. Revenue jumped to $3.3 billion from $2.8 billion. The company was helped during the quarter by the&#160;sale of a partial stake&#160;in virtualization software maker VMware to Cisco Systems.&#160;EMC acquired VMware&#160;in 2003.Tucci said EMC might look at further acquisitions but is now focused on companies that will help grow its existing businesses.&quot;My philosophy is that I want to stay focused on what I call these eight spheres of technology, so acquisitions that we do would basically make some of these spheres stronger rather than put another sphere on the board,&quot; he said. The eight areas he referred to are: intelligent information management, enterprise content management, virtualization, resource management, storage, availability, security, and archiving.&quot;That being said, eventually we will add a new sphere but that&#39;s not my immediate attention,&quot; Tucci said.During the news conference Tucci also confirmed that Mark Lewis has become president of the company&#39;s Documentum unit. Lewis was previously chief development officer for EMC.
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BALTIMORE - Health care organizations not considering offshore outsourcing are missing out on significant cost savings, but administrators need to be aware of potential risks, including lax handling of data security by some vendors and the effect on employee morale, a health care IT analyst said Tuesday.
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(InfoWorld) - When Microsoft made what appeared to be a minor announcement last week that it would expand its Canadian operations with the creation of the Microsoft Canada Development Centre for software development based in the greater Vancouver, British Columbia area, it went mostly unnoticed. One of the only exceptions was a story on InfoWorld, Microsoft Canada Responds to Immigration Woes, which recognized something new was afoot. What no one in the lower 48 states realized at the time was how significant this move north might be and how the Canadian immigration policy makes it all possible. Nevertheless, Canadian Katarina Onuschak, a licensed immigration consultant and owner of T&CS Canada, a consultancy for Canadian immigration, says she immediately recognized the significance of the Centre when she read the news.Â Â  "It will be a beginning of new era," said Onuschak. There are two pieces to the puzzle that, when brought together, may indeed represent a new era for Canada's high tech industry and for U.S. companies who prefer near-shoring as opposed to offshoring. Canada's far more liberal immigration policy for temporary high tech workers combined with Microsoft's stated intentions of opening the software development center to house developers "from around the world" makes it clear why Onuschak responded as she did.Â  This makes it possible for Microsoft and others to have their cake and eat it too. Near-shoring gives companies better time zone management and allows companies to hire programmers based on whatever parameters they choose, which may be skills or pay scale, while not having to face the limitations of green card and H-1B regulations. Of course it will also kick start a mostly slow-growing software development industry in Canada. As the Microsoft announcement plainly stated, "The Vancouver area is a global gateway with a diverse population, is close to Microsoft's corporate offices in Redmond, and allows the company to recruit and retain highly skilled people affected by immigration issues in the U.S." Many companies may follow Microsoft's lead say the experts.Â  The liberal Canadian policy comes from a project targeted specifically at information technology workers, who are considered a special category by Canada's immigration agency. The special category created by the Canadian government for information technology workers and the six categories under which workers must qualify was actually created back in 1997 as a pilot project to make sure Canada had enough programmers to deal with Y2K. As interpreted by the National Labor Market [Canada's equivalent to the U.S. Department of Labor], any software developers falling into the six major developer categories do not have to go to Service Canada, Canada's Immigration and Naturalization agency, to apply for a work permit. Workers can go straight to a Canadian visa office to apply. This speeds up the visa process. The ruling states that "under this process, no confirmation letter from Human Resources and Skills Development Canada (HRSDC) is necessary for specific jobs for which finding a foreign worker will not have a negative impact on Canadian or permanent-resident job seekers and workers." The six categories of software developers include the following: Senior Animation Effects Editor, Embedded Systems Software Designer, MIS Software Designer, Multimedia Software Developer, Software Developer -- Services, Software Products Developer, and Telecommunications Software Designer. The policy from Citizenship and Immigration Canada goes on to state, "This means that if you are coming to Canada to work in one of the jobs listed ... you do not need a letter from HRSDC, and your work permit application may be processed more quickly." There is little doubt that the Microsoft Development Centre will be home to software developers from around the world," as Microsoft says in its press release. Even critics who believe current U.S. immigration policy for high tech workers is too liberal agree on what this Centre will represent. "Make no mistake about it. That programming group Microsoft will set up in Vancouver won't be staffed with many Canadians ... you'll find that the programmers in that group will be mainly people on work visas, not Canadian citizens or permanent residents," said Norm Matloff, a professor of computer science at University of California at Davis. In the meantime, immigration lawyers on both sides of the border say that the leveraging of liberal Canadian immigration law by Microsoft has the potential to jump start a major move north for software development.Â  Greg Siskind, a partner at Siskind Susser Bland and an immigration attorney here in the States says that he's been warning lots of people who agree with CNN's Lou Dobbs when he rails against outsourcing at the same time that he complains about the H-1B visa program that they can't have it both ways. "I would say I am surprised it is taking this long. Companies have few choices. They can either make do without or move operations or steal workers from other companies," said Siskind Sergio Karas, an immigration attorney based in Canada, also believes Microsoft's move to Canada is in reaction to U.S. immigration policy.Â Â  "This move by Microsoft is H-1B driven. There is no cap in Canada. Depending on the country of origin, we usually prepare an application, and in three weeks, a person can be working here," said Karas. However, Karas believes the pilot program needs updating to better reflect current needs for software development -- Karas wants to see revisions in the six original software development categories -- as well as revisions in pay scales. "The pay scales required have not been revised for some time." Even at lower pay rates, however, Microsoft and others may very well be able to attract skilled workers to software development centers like Microsoft's. The fact is the U.S. and Canada are still both highly prized working environments whose standard of living and pay scales, even when low by national standards, are typically higher than what a worker can earn in his home country.Â  Karas says it is still too early to tell if the Microsoft move will create a wave of similar centers. Siskind says he is surprised it took so long to happen. And Onuschak says, "If that's Bill Gates intention, it would be great if it happens."
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Prison 'outsourcing' is linked to concerns about riots, recidivism, and family hardship.
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A key question remains: How many highly skilled immigrants does it take to fill America's needs?
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One of the proverbial back stories of IT operations has always been the battle between the "suits" and the "techies." From the techie point of view, the hapless but disturbingly powerful suits are the business guys who put more thought into picking out hundred-dollar silk ties at Nordstrom than they put into million-dollar IT decisions. Worse, the suits gravitate towards outsourcing and service firms that implement big-dollar solutions. Many techies start on the other end of the spectrum with free open source solutions that reflect a substantial DIY ethic. Will the twain ever meet?
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CAMBRIDGE -- At a sponsors' meeting of MIT Sloan School's Center for Information Systems Research this week, there was a new project on the research agenda: outsourcing.
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Outsourcing of American jobs to Asia has become a hot-button issue in the presidential election with White House aspirant Senator John Kerry promising the most sweeping reform of international tax law in four decades to halt the trend.
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By PAUL RESTUCCIA  The media are filled with stories of jobs being shifted overseas - from software programmers to call-center representatives, from insurance claim adjusters to X-ray technologists.
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Strong job outlook offset by skills shortage The outlook for jobs in the European technology sector is good but the spectre of outsourcing looms ominously, according to a new report.â¦