The Voice
of the Free Indian
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FEBRUARY 3, 2003
COVER STORY:- Business Week
The New Global Job Shift
The next round of globalization is sending upscale jobs offshore.
They include basic research, chip design, engineering--even financial
analysis. Can America lose these jobs and still prosper? Who wins?
Who loses?
The sense of resignation inside Bank of America (BAC ) is clear
from the e-mail dispatch. "The handwriting is on the wall,"
writes a veteran information-technology specialist who says he
has been warned not to talk to the press. Three years ago, the
Charlotte (N.C.)-based bank needed IT talent so badly it had to
outbid rivals. But last fall, his entire 15-engineer team was
told their jobs "wouldn't last through September." In
the past year, BofA has slashed 3,700 of its 25,000 tech and back-office
jobs. An additional 1,000 will go by March.
Corporate downsizings, of course, are part of the ebb and flow
of business. These layoffs, though, aren't just happening because
demand has dried up. Ex-BofA managers and contractors say one-third
of those jobs are headed to India, where work that costs $100
an hour in the U.S. gets done for $20. Many former BofA workers
are returning to college to learn new software skills. Some are
getting real estate licenses. BofA acknowledges it will outsource
up to 1,100 jobs to Indian companies this year, but it insists
not all India-bound jobs are leading to layoffs.
Cut to India. In dazzling new technology parks rising on the
dusty outskirts of the major cities, no one's talking about job
losses. Inside Infosys Technologies Ltd.'s (INFY ) impeccably
landscaped 22-hectare campus in Bangalore, 250 engineers develop
IT applications for BofA. Elsewhere, Infosys staffers process
home loans for Greenpoint Mortgage of Novato, Calif. Near Bangalore's
airport, at the offices of Wipro Ltd. (WIT ), five radiologists
interpret 30 CT scans a day for Massachusetts General Hospital.
Not far away, 26-year-old engineer Dharin Shah talks excitedly
about his $10,000-a-year job designing third-generation mobile-phone
chips, as sun pours through a skylight at the Texas Instrument
Inc. (TXN ) research center. Five years ago, an engineer like
Shah would have made a beeline for Silicon Valley. Now, he says,
"the sky is the limit here."
About 1,600 km north, on an old flour mill site outside New Delhi,
all four floors of Wipro Spectramind Ltd.'s sandstone-and-glass
building are buzzing at midnight with 2,500 young college-educated
men and women. They are processing claims for a major U.S. insurance
company and providing help-desk support for a big U.S. Internet
service provider--all at a cost up to 60% lower than in the U.S.
Seven Wipro Spectramind staff with PhDs in molecular biology sift
through scientific research for Western pharmaceutical companies.
Behind glass-framed doors, Wipro voice coaches drill staff on
how to speak American English. U.S. customers like a familiar
accent on the other end of the line.
Cut again to Manila, Shanghai, Budapest, or San José,
Costa Rica. These cities--and dozens more across the developing
world--have become the new back offices for Corporate America,
Japan Inc., and Europe GmbH. Never heard of Balazs Zimay? He's
a Budapest architect--and just might help design your future dream
house. The name SGV & Co. probably means nothing to you. But
this Manila firm's accountants may crunch the numbers the next
time Ernst & Young International audits your company. Even
Bulgaria, Romania, and South Africa, which have a lot of educated
people but remain economic backwaters, are tapping the global
market for services.
It's globalization's next wave--and one of the biggest trends
reshaping the global economy. The first wave started two decades
ago with the exodus of jobs making shoes, cheap electronics, and
toys to developing countries. After that, simple service work,
like processing credit-card receipts, and mind-numbing digital
toil, like writing software code, began fleeing high-cost countries.
Now, all kinds of knowledge work can be done almost anywhere.
"You will see an explosion of work going overseas,"
says Forrester Research Inc. analyst John C. McCarthy. He goes
so far as to predict at least 3.3 million white-collar jobs and
$136 billion in wages will shift from the U.S. to low-cost countries
by 2015. Europe is joining the trend, too. British banks like
HSBC Securities Inc. (HBC ) have huge back offices in China and
India; French companies are using call centers in Mauritius; and
German multinationals from Siemens (SI ) to roller-bearings maker
INA-Schaeffler are hiring in Russia, the Baltics, and Eastern
Europe.
The driving forces are digitization, the Internet, and high-speed
data networks that girdle the globe. These days, tasks such as
drawing up detailed architectural blueprints, slicing and dicing
a company's financial disclosures, or designing a revolutionary
microprocessor can easily be performed overseas. That's why Intel
Inc. (INTC ) and Texas Instruments Inc. are furiously hiring Indian
and Chinese engineers, many with graduate degrees, to design chip
circuits. Dutch consumer-electronics giant Philips (PHG ) has
shifted research and development on most televisions, cell phones,
and audio products to Shanghai. In a recent PowerPoint presentation,
Microsoft Corp. (MSFT ) Senior Vice-President Brian Valentine--the
No. 2 exec in the company's Windows unit--urged managers to "pick
something to move offshore today." In India, said the briefing,
you can get "quality work at 50% to 60% of the cost. That's
two heads for the price of one."
Even Wall Street jobs paying $80,000 and up are getting easier
to transfer. Brokerages like Lehman Brothers Inc. (LEH ) and Bear,
Stearns & Co. (BSC ), for example, are starting to use Indian
financial analysts for number-crunching work. "A basic business
tenet is that things go to the areas where there is the best cost
of production," says Ann Livermore, head of services at Hewlett-Packard
Co. (HPQ ), which has 3,300 software engineers in India. "Now
you're going to see the same trends in services that happened
in manufacturing."
The rise of a globally integrated knowledge economy is a blessing
for developing nations. What it means for the U.S. skilled labor
force is less clear. At the least, many white-collar workers may
be headed for a tough readjustment. The unprecedented hiring binge
in Asia, Eastern Europe, and Latin America comes at a time when
companies from Wall Street to Silicon Valley are downsizing at
home. In Silicon Valley, employment in the IT sector is down by
20% since early 2001, according to the nonprofit group Joint Venture
Silicon Valley.
Should the West panic? It's too early to tell. Obviously, the
bursting of the tech bubble and Wall Street's woes are chiefly
behind the layoffs. Also, any impact of offshore hiring is hard
to measure, since so far a tiny portion of U.S. white-collar work
has jumped overseas. For security and practical reasons, corporations
are likely to keep crucial R&D and the bulk of back-office
operations close to home. Many jobs can't go anywhere because
they require face-to-face contact with customers. Americans will
continue to deliver medical care, negotiate deals, audit local
companies, and wage legal battles. Talented, innovative people
will adjust as they always have.
Indeed, a case can be made that the U.S. will see a net gain
from this shift--as with previous globalization waves. In the
1990s, Corporate America had to import hundreds of thousands of
immigrants to ease engineering shortages. Now, by sending routine
service and engineering tasks to nations with a surplus of educated
workers, the U.S. labor force and capital can be redeployed to
higher-value industries and cutting-edge R&D. "Silicon
Valley doesn't need to have all the tech development in the world,"
says Doug Henton, president of Collaborative Economics in Mountview,
Calif. "We need very-good-paying jobs. Any R&D that is
routine can probably go." Silicon Valley types already talk
about the next wave of U.S. innovation coming from the fusion
of software, nanotech, and life sciences.
Globalization should also keep services prices in check, just
as it did with clothes, appliances, and home tools when manufacturing
went offshore. Companies will be able to keep shaving overhead
costs and improving efficiency. "Our comparative advantage
may shift to other fields," says City University of New York
economist Robert E. Lipsey, a trade specialist. "And if productivity
is high, then the U.S. will maintain a high standard of living."
By spurring economic development in nations such as India, meanwhile,
U.S. companies will have bigger foreign markets for their goods
and services.
For companies adept at managing a global workforce, the benefits
can be huge. Sure, entrusting administration and R&D to far-flung
foreigners sounds risky. But Corporate America already has become
comfortable hiring outside companies to handle everything from
product design and tech support to employee benefits. Letting
such work cross national boundaries isn't a radical leap. Now,
American Express (AXP ), Dell Computer (DELL ), Eastman Kodak
(EK ), and other companies can offer round-the-clock customer
care while keeping costs in check. What's more, immigrant Asian
engineers in the U.S. labs of TI, IBM (IBM ), and Intel for decades
have played a big, hidden role in American tech breakthroughs.
The difference now is that Indian and Chinese engineers are managing
R&D teams in their home countries. General Electric Co. (GE
), for example, employs some 6,000 scientists and engineers in
10 foreign countries. GE Medical Services integrates magnet, flat-panel,
and diagnostic imaging technologies from labs in China, Israel,
Hungary, France, and India in everything from its new X-ray devices
to $1 million CT scanners. "The real advantage is that we
can tap the world's best talent," says GE Medical Global
Supply Chain Vice-President Dee Miller.
That's the good side of the coming realignment. There are hazards
as well. During previous go-global drives, many companies ended
up repatriating manufacturing and design work because they felt
they were losing control of core businesses or found them too
hard to coordinate. In a recent Gartner Inc. survey of 900 big
U.S. companies that outsource IT work offshore, a majority complained
of difficulty communicating and meeting deadlines. As a result,
predicts Gartner Inc. Research Director Frances Karamouzis, many
newcomers will stumble in the first few years as they begin using
offshore service workers.
A thornier question: What happens if all those displaced white-collar
workers can't find greener pastures? Sure, tech specialists, payroll
administrators, and Wall Street analysts will land new jobs. But
will they be able to make the same money as before? It's possible
that lower salaries for skilled work will outweigh the gains in
corporate efficiency. "If foreign countries specialize in
high-skilled areas where we have an advantage, we could be worse
off," says Harvard University economist Robert Z. Lawrence,
a prominent free-trade advocate. "I still have faith that
globalization will make us better off, but it's no more than faith."
If the worries prove valid, that could reshape the globalization
debate. Until now, the adverse impact of free trade has been confined
largely to blue-collar workers. But if more politically powerful
middle-class Americans take a hit as white-collar jobs move offshore,
opposition to free trade could broaden.
When it comes to developing nations, however, it's hard to see
a downside. Especially for those countries loaded with college
grads who speak Western languages, outsourced white-collar work
will likely contribute to economic development even more than
new factories making sneakers or mobile phones. By 2008 in India,
IT work and other service exports will generate $57 billion in
revenues, employ 4 million people, and account for 7% of gross
domestic product, predicts a joint study by McKinsey & Co.
and Nasscom, an Indian software association.
What makes this trend so viable is the explosion of college graduates
in low-wage nations. In the Philippines, a country of 75 million
that churns out 380,000 college grads each year, there's an oversupply
of accountants trained in U.S. accounting standards. India already
has a staggering 520,000 IT engineers, with starting salaries
of around $5,000. U.S. schools produce only 35,000 mechanical
engineers a year; China graduates twice as many. "There is
a tremendous pool of well-trained people in China," says
Johan A. van Splunter, Philips' Asia chief executive.
William H. Gates III, for one, is dipping into that pool. Although
Microsoft started later than many rivals, it is moving quickly
to catch up. In November, Chairman Gates announced his company
will invest $400 million in India over the next three years. That's
on top of the $750 million it's spending over three years on R&D
and outsourcing in China. At the company's Beijing research lab,
one-third of the 180 programmers have PhDs from U.S. universities.
The group helped develop the "digital ink" that makes
handwriting show up on Microsoft's new tablet PCs and submitted
four scientific papers on computer graphics at last year's prestigious
Siggraph conference in San Antonio. Hyderabad, India, meanwhile,
is key to Microsoft's push into business software.
This is no sweatshop work. Just two years out of college, Gaurav
Daga, 22, is India project manager for software that lets programs
running on Unix-based computers interact smoothly with Windows
applications. Daga's $11,000 salary is a princely sum in a nation
with a per capita annual income of $500, where a two-bedroom flat
goes for $125 a month. Microsoft is adding 10 Indians a month
to its 150-engineer center and indirectly employs hundreds more
at IT contractors. "It's definitely a cultural change to
use foreign workers," says Sivaramakichenane Somasegar, Microsoft's
vice-president for Windows engineering. "But if I can save
a dollar, hallelujah."
Corporations are letting foreign operations handle internal finances
as well. Procter & Gamble Co.'s (PG ) 650 Manila employees,
most of whom have business and finance degrees, help prepare P&G's
tax returns around the world. "All the processing can be
done here, with just final submission done to local tax authorities"
in the U.S. and other countries, says Arun Khanna, P&G's Manila-based
Asia accounting director.
Virtually every sector of the financial industry is undergoing
a similar revolution. Processing insurance claims, selling stocks,
and analyzing companies can all be done in Asia for one-third
to half of the cost in the U.S. or Europe. Wall Street investment
banks and brokerages, under mounting pressure to offer independent
research to investors, are buying equity analysis, industry reports,
and summaries of financial disclosures from outfits such as Smart
Analyst Inc. and OfficeTiger that employ financial analysts in
India. By mining databases over the Web, offshore staff can scrutinize
an individual's credit history, access corporate public financial
disclosures, and troll oceans of economic statistics. "Everybody
these days is drawing on the same electronic reservoir of data,"
says Ravi Aron, who teaches management at the Wharton School at
the University of Pennsylvania.
Architectural work is going global, too. Fluor Corp. (FLR ) of
Aliso Viejo, Calif., employs 1,200 engineers and draftsmen in
the Philippines, Poland, and India to turn layouts of giant industrial
facilities into detailed specs and blueprints. For a multibillion-dollar
petrochemical plant Fluor is designing in Saudi Arabia, a job
requiring 50,000 separate construction plans, 200 young Filipino
engineers earning less than $3,000 a year collaborate in real
time with elite U.S. and British engineers making up to $90,000
via Web portals. The principal Filipino engineer on plumbing design,
35-year-old Art Aycardo, pulls down $1,100 a month--enough to
buy a Mitsubishi Lancer, send his three children to private school,
and take his wife on a recent U.S. trip. Fluor CEO Alan Boeckmann
makes no apologies. At a recent meeting in Houston, employees
asked point-blank why he is sending high-paying jobs to Manila.
His response: The Manila operation knocks up to 15% off Fluor's
project prices. "We have developed this into a core competitive
advantage," Boeckmann says.
It's not just a game for big players: San Francisco architect
David N. Marlatt farms out work on Southern California homes selling
for $300,000 to $1 million. He fires off two-dimensional layouts
to architect Zimay's PC in Budapest. Two days later, Marlatt gets
back blueprints and 3-D computer models that he delivers to the
contractor. Zimay charges $18 an hour, vs. the up to $65 Marlatt
would pay in America. "In the U.S., it is hard to find people
to do this modeling," Zimay says. "But in Hungary, there
are too many architects."
So far, white-collar globalization probably hasn't made a measurable
dent in U.S. salaries. Still, it would be a mistake to dismiss
the trend. Consider America's 10 million-strong IT workforce.
In 2000, senior software engineers were offered up to $130,000
a year, says Matt Milano, New York sales manager for placement
firm Atlantis Partners. The same job now pays up to $100,000.
Entry-level computer help-desk staffers would fetch about $55,000
then. Now they get as little as $35,000. "Several times a
day, clients tell me they are sending this work off shore,"
says Milano. Companies that used to pay such IT service providers
as IBM, Accenture (ACN ), and Electronic Data Services (EDS )
$200 a hour now pay as little as $70, says Vinnie Mirchandani,
CEO of IT outsourcing consultant Jetstream Group. One reason,
besides the tech crash itself, is that Indian providers like Wipro,
Infosys, and Tata charge as little as $20. That's why Accenture
and EDS, which had few staff in India three years ago, will have
a few thousand each by next year.
Outsourcing experts say the big job migration has just begun.
"This trend is just starting to crystallize now because every
chief information officer's top agenda item is to cut budget,"
says Gartner's Karamouzis. Globalization trailblazers, such as
GE, AmEx, and Citibank (C ), have spent a decade going through
the learning curve and now are ramping up fast. More cautious
companies--insurers, utilities, and the like--are entering the
fray. Karamouzis expects 40% of America's top 1,000 companies
will at least have an overseas pilot project under way within
two years. The really big offshore push won't be until 2010 or
so, she predicts, when global white-collar sourcing practices
are standardized.
If big layoffs result at home, corporations and Washington may
have to brace for a backlash. Already, New Jersey legislators
are pushing a bill that would block the state from outsourcing
public jobs overseas. At Boeing Co. (BA ), an anxious union is
trying to ward off more job shifts to the aircraft maker's new
350-person R&D center in Moscow (page 42).
The truth is, the rise of the global knowledge industry is so
recent that most economists haven't begun to fathom the implications.
For developing nations, the big beneficiaries will be those offering
the speediest and cheapest telecom links, investor-friendly policies,
and ample college grads. In the West, it's far less clear who
will be the big winners and losers. But we'll soon find out.
By Pete Engardio, Aaron Bernstein, and Manjeet Kripalani
With Frederik Balfour in Manila, Brian Grow in Atlanta, and Jay
Greene in Seattle
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