Trend: OutsourcingBy Elizabeth Wasserman | Posted 10-01-2003
In May, after Hewlett-Packard Co. beat out IBM Corp. for the privilege of taking over the computer operations of Procter & Gamble Co., a deal worth $3 billion over a ten-year period, the 166-year-old Cincinnati-based consumer marketing giant tried making a virtue out of cost-cutting necessity. Announcing that nearly 2,000 technology workers would be leaving P&G, where many had hoped to make lifelong careers, all 2,000 of them would be offered jobs at H-P, at comparableand sometimes greatersalaries. Managers touted H-P's ranking among Fortune magazine's "Best Companies to Work For" and Working Mother magazine's "Top 100 Best Employers for Working Mothers." As part of the contract, P&G insisted that H-P agree to multiyear job protection provisions for the erstwhile P&G employees in the event of downsizing.
Executives at H-P and P&G say finding the right corporate fit for P&G's IT workers was a major priority in the negotiations, because it was crucial to keep morale high among staff during and after the transition. "It's always a difficult choice," says P&G spokesman Damon Jones. "At the end of the day, we have 2,000 employees who chose to work for P&G and now we're asking them to make a shift and work for another company. P&G is a promote-from-within company. They thought of themselves as having careers here. But when people saw the way we executed this deal, they knew we were trying to do the best thing."
The workers saw the writing on the wall. They knew that if they didn't accept the H-P offer, they would be out of work in the worst economy for technical workers in a generation. Every single one of the U.S. workers accepted the new reality for IT workers and went the H-P way, according to a company spokesman. In fact, some IT employees who weren't scheduled to make the switch actually requested it, according to other sources. "Employees inside the company were looking at an environment where other companies were sending jobs overseas and they were saying, 'This looks like a pretty good choice,' " said Paul Roy, partner in the outsourcing practice
at Mayer, Brown, Rowe & Maw LLP, an international law firm, who represented P&G. "If you want to be the manager of the SAP system or run the telecom system, there are only one or two slots at the top at P&G. But if you are working for a vendor who provides many of these services for many different companies, many slots open up."
True as that may be in the short term, the long-term outlook for IT employment in the U.S. is bleak. A mere five years ago, demand for IT skills was so strong that many were pulling down six-figure salaries, stock options andoccasionallya sports car as a bonus for signing with the exceptional Silicon Valley startup. But now, IT workers are being increasingly compared to the displaced autoworkers of the 1970s. Or worse. Ben Catanzaro, 59, who worked for Sun Microsystems Inc. for 13 years (and for Intel Corp. before that) was laid off in Oct. 2001 and has just about given up on information technology. "My dad used to tell me about the sweatshops of New York when he came here in the 1940s," says Catanzaro, the son of Italian immigrants. "High tech today is what the garment industry was in the 1940s and 1950s. Here is all this cheap labor from India and Asia and companies are reaping the benefits. Companies are also outsourcing more and more, leaving American high-tech workers with nowhere to work. I decided I needed to go do something else." Catanzaro finally found a job as a design consultant for a solar energy technology firm, but that ended within a few months thanks to poor sales.
According to a survey earlier this year by the Information Technology Association of America, a Washington, D.C., trade group, the total IT workforce in the U.S. peaked in 2000 at 10.4 million jobs, then shed more than a half million jobs before bottoming out last year at 9.9 million jobs. While some of those jobs have returned since then, the more robust rebound everyone is hoping for may never come. The survey found that managers have cut projections for adding staff this year in half. The reasons are myriad: the sluggish economy, the dot-com bust, a lingering hangover from the Y2K tech overdose and a growing sense that corporations now have alternatives to the highly skilledbut highly pricedU.S. IT worker.
Corporate America is beginning to experience a sea change in its attitude toward information technology. In increasing numbers, routine programming and business processes are being sent offshore to lower-paid but highly trained workers in other parts of the world. Technology platforms are being standardized, with fewer IT workers needed to plug-and-play any number of more and more sophisticated systems. The rise of computing as a utility, which like electricity or water can be paid for on an on-demand basis, will shift more corporate IT jobs to services companies, which themselves are threatening to send jobs overseas. H-P itself has facilities in India, China, the Philippines, Costa Rica and Poland.
On the horizon is a push toward what's being called autonomic computing, where systems autoconfigure and self-correct, theoretically freeing up IT workers from routine chores such as system administration. But some question whether that's just another way for corporations to further downsize IT staffs. "It's going to take a lot of people out of running the infrastructure," says John Parkinson, chief technologist for the Americas at Cap Gemini Ernst & Young. What is happening today in computing is comparable with what happened with the telephone system in the early 1900s. "When they first looked at residential telephony, they said they couldn't hire enough switchboard operators to make it work," he says. But once the automatic exchange was invented, most of those operators had to find other work. Parkinson estimates that the current trends in computing have the potential to cut IT infrastructure costs as much as 50 percent, including up to one-third of the IT workforce in developed countries.
There is no denying that the nature of the business is changing. The software engineer who enjoyed the craft work of designing a fix and then writing the code is becoming an endangered species, replaced by the more automated process of moving a project through an assembly line of workers who function like cogs in a machine. In this environment, we've seen the rise of disciplines such as extreme programming, a type of software development that involves the entire team working together on a daily basis in the presence of a business representative, and every contributor is an integral part of the project. Autonomic computing, for its part, takes even more people out of the equation through the development of such technologies as self-healing software and hardware, root-cause discovery, and correction and IT service provisioning. According to a new study from Gartner Inc., within the next ten years we will likely see autonomics applied to general-purpose grid computing, service billing and service policy managing systems that enable companies to shift IT resources to meet their changing business needs at the lowest cost. The only area in which CGE&Y's Parkinson predicts an increased demand for IT workers is for "IT plumbers"skilled experts who can come in and fix the automatic self-fixing systems.
Throughout history, technology has helped drive changechange that has often dislocated workers. In his 1995 book The End of Work, Jeremy Rifkin went so far as to predict that radical automation of production and services would lead to an enduring drop in the availability of jobs as we know them. But history has more aptly shown that the disintermediation of some by technological advancement often leads to new opportunities for others. One has only to look at the printing trade to see the impact. In the 1400s, scribes were displaced by the invention of the movable-type press, a technological advancement that went on to open up previously unfathomed opportunities for printers and typesetters. Those tradesmen were then displaced by cold type and desktop printing. The creation of mass-production techniques to build automobiles revolutionized manufacturing processes for other major industries, and then we found that in emerging markets production could be done faster, better, cheaper.
In the information industry, technological advancement has radically changed the way businesses do business. So it is ironic that some of the architects of these changes are now being displaced by their very own creationsthe development of software that needs fewer systems administrators, for instance, or the ubiquity of common platforms that can be tended to in India as easily as in Indiana, in San Jose, Costa Rica, as easily as in San Jose, Calif. "What's happening is that we're going through the commoditization of virtually everything. It started with hardware. It's moved to software. And now it's moving to services," says John Sculley, the former Apple Computer Inc. CEO who now sits on the board of NextSource Inc., a New York City company that develops Web-based human capital management software. Among their products is the People Blue Book. Modeled after the Kelley Blue Book, which lists average prices for certain models of automobiles, the People Blue Book shows applicants, agencies and employers current, hourly, daily and yearly rates for consultant, temporary, project-based and full-time positions. Another product, The People Ticker, collects real-time information from a variety of Web sources to provide employers with market rates for specific jobs in different locations. "Companies have to find the least-cost way of delivering their products and services," Sculley notes. "What it means for workers in the U.S. is that they need to keep refreshing and improving their skills. More and more, we're moving toward a system of certified IT workers. Certified in terms of knowing that when you hire somebody, they will be able to do the job you need them to do."
Meanwhile, the nature of IT work is changing. More common platforms have lent themselves to more modular work, pieces of which can be done by different workersoften in different parts of the globe. Thaddeus Arroyo, the CIO of Cingular Wireless, has consolidated his company's reliance on 1,400 different enterprise applications to 300 smaller, more efficient operations, and in the process developed a workforce in which new projects move from skill to skill with a project manager instead of relying on one master craftsman to tackle the entire task, from conceptualization through development. Managers can choose various combinations of full-time employees, contract workers and projects that can be sent overseas at great cost savings. Larry Smith, CTO of GTECH Corp., a provider of gaming systems to the lottery industry, says the company's technology can be viewed as concentric circles, with strategic development kept in-house, the next layer provided by partners and vendors, and another layer provided by temporary workers and consultants. As IT work gets more commoditized, Smith said, "I will look for the lowest-cost alternative"which he will probably find offshore.
The most forceful driver behind the shifts in IT staffing is the so-called "offshoring" of IT work, whose appeal in corporate boardrooms and on Wall Street is growing. A Gartner report forecasts that by next year more than 80 percent of U.S. executive boardrooms will have discussed offshore outsourcing, and more than 40 percent of these enterprises will have finished a pilot, or will be outsourcing IT services either offshore or "near shore"somewhere on the North American continent. Even companies that choose to outsource IT functions domestically with one of the growing technology service powerhousesamong them IBM Corp., EDS Corp. and now, with the P&G contract signed, H-Pwind up augmenting the offshoring trend. Many of these services companies operate subsidiaries overseas to provide lower-cost alternatives to applications development or maintenance services, or farm the work out to the growing number of emerging tech markets around the globe. IBM's plan to accelerate efforts to move up to 3 million white-collar jobs overseas caused a backlash after a recorded conference call by the company's top employee relations executives was leaked to The New York Times in July. According to the Times, the executives said that the jobs would shift to foreign workers by 2015 partly because competitors were making similar moves, shifting an assortment of service-sector jobsfrom call-center operations to software designand business processes themselves to India, China, the Philippines, Russia and an assortment of other countries that want in on the action.
To find the corporate rationale, look no further than the bottom line. A recent research report by Deloitte Consulting estimated that the financial-services industry will send $356 billion in expenses offshore within the next five years (though that total includes more than just IT jobs). According to the report, this will translate into an annual cost savings of $138 billion for the world's top 100 financial-services companies by 2008an average of $1.4 billion each. By those calculations, savings for the top 20 percent could be two to three times as big. "It's not only some of the big playersGE Capital and American Express Co. and Citibank. Virtually every financial institution is now engaged in [figuring out] how to reduce fixed costs by going offshore," said Chris Gentle, a Deloitte director of research and author of the report.
But what's good for corporate America isn't necessarily good for the professionals who run the IT operations. In the long run, many IT workers in the U.S. may have to retrain or leave the field. Global head count migration will be significant. Deloitte's study estimates that 2 million of the 13 million worldwide financial-service jobs will be relocated, primarily to India and Southeast Asia. A Gartner study in July looked at the U.S. computer services and software industry and estimated that one out of every ten jobs could shift to lower-cost emerging markets by the end of 2004. Gartner's report, "U.S. Offshore Outsourcing: Structural Changes, Big Impact," forecasts that 500,000 of the current 10 million U.S. technology jobs could move within the next year. "In our view, offshore outsourcing is an irreversible trend," said Diane Morello, a Gartner research vice president in the IT management sector. "Even when the economy rebounds, it is unlikely to bring those jobs back."
That permanence is finally starting to sink in with Tom Kilborn, 49, a father of three who lives outside Oakland, Calif. Kilborn lost his job as a Cobol programmer in December, shortly after Bank of America, his employer of 16 years, signed a ten-year, $4.5 billion deal with EDS to outsource management of voice and data networks and move to more flexible operating platforms. Kilborn wasn't among the 1,000 employees who were transferred to EDS. "In November, they told us about the advantages of global development," says Kilborn. "How the bank could save money by employing people from India, and how the workers in India could be working on programs while the IT staff in the States were sleeping. The person from HR said that by 2008 there would be a real need in this country for people with IT skills. Then, at the end of his message, he told us there would be more layoffs because of the budget." Kilborn is now getting certified as a network administrator to better his chances of finding a job. "Five years ago everybody wanted you, and now it's hard to find a job," Kilborn laments.
This paradox has implications up and down the food chain, from the people who benefit from greater choices and lower costs in IT services, to the people who are displaced, to the people who remain working at companies going through change. IT workers need to reassess their skills. "People who have only a technical toolbox are at risk," says Gartner's Morello. "They can build their value through understanding of business process through issues associated with enterprise objectives, knowledge of the business, things that are associated with the industry or business."
That understanding of how technology can help the business is even more crucial for CIOs and IT managers. "Previously, you had people who were 70 percent focused on the technology and maybe 30 percent focused on business," said Kim Perdikou, CIO of Juniper Networks Inc., a Sunnyvale, Calif., networking firm. "Most people are seeing a shift. The swing is probably to 70 percent business and 30 percent technology. And you're seeing a number of CIOs who are not technologists. They are businesspeople taking on the job of CIO because other executives don't feel the people they have been talking to in IT have any comprehension of business."
When American Express entered into a seven-year, $4 billion contract with IBM in early 2002, the company had to set up a new governance structure to manage the dealmade up of the CIO, senior vice president for IT, global corporate services president and others. Steve Karl, AmEx's senior vice president for IT, said his job has changed dramatically, becoming more about managing relations with vendors and within AmEx, and ensuring that the contract delivers what the company needs.
American Express, which is 18 months along in its contract, realized some immediate cost savings after the economy slowed down at the end of 2001 and the company was able to benefit from the flexibility in its contract to ramp down. The flip side of that was experienced by some of the 2,000 AmEx workers who were hired by IBM as a result of the agreement. Some of those employeesAmEx won't say how manywere laid off by IBM during the downturn. But now, Karl says, the company is poised to test whether the promise of utility computing can work on the other end as AmEx forecasts an upturn in its business and IT needs. "We can't assume that because we handle downturn economics," Karl notes, "that we're structured to ramp up quickly and be able to deploy technical resources. We're making sure right now that we do careful planning."
The Long View
The Long View
The prospect of outsourcingparticularly moving jobs or work offshore at a time when the U.S. economy continues to sputteris controversial, despite the reputed cost savings. Al McConnell, managing director of the Information Management Forum, a members-only, peer-driven knowledge-sharing organization for senior IT executives, says the group had a meeting on the topic in June at which representatives of 30 companies sometimes were divided.
Among the reasons for the division was the question about how all of these forcesoutsourcing, utility computing, autonomic computingare changing the very nature of IT work. "The fundamental challenge was asking these workers to transition from a master craftsman to a factory model," McConnell said. "In a lot of companies developing software is like a craft. An employee is an analyst part of the time and a developer and business process expert other parts of the time. All of this is wrapped up in single individuals. If the development function is taken away, that changes their value proposition and what their fundamental job role is. Peeling those functions out may meet with organizational resistance."
The challenge, said McConnell, is to take the displaced developers and turn them into business analysts and architects and vendor relations managerswhich some may not want to do. Workers get angry when they believe they will be replaced or forced to make a job change they didn't choose. If a decision to outsource is handled poorly inside a company, morale can plummet among the workers who remain, as everyone from human resources to accounting wonder whether they will be next. P&G started retraining tech workers, and encouraging them to earn external IT certifications, more than a year before they entered into the IT outsourcing agreement with H-P. There were company meetings. A Web site was set up on the company intranet so that employees could be kept up to date on the status of negotiations. Managers who have navigated a successful transition to an outsourcing relationship say the key to keeping the troops happy at home is to communicate honestly and respectfully. That can work to keep productivity high and defuse natural employee anger and concern.
P&G's new post-outsourcing IT schema provides a glimpse of what lies ahead. Two-thirds of the company's IT workers now work for H-P. P&G's global business services officer has taken over responsibility for IT infrastructure, desktop support, systems architecture and the backboneas well as the relationship with H-P. Worldwide, the company has standardized on one common platform. In addition to outsourcing to H-P, P&G now operates three shared-services centers abroadin Newcastle, U.K.; San Jose, Costa Rica; and Manila, in the Philippinesas well as application development centers in Singapore and Warsaw. About 1,000 IT workers remain on staff at P&G, mostly in the business units that manage research and development, sales, advertising and the like. Meanwhile, CIO Steve David, who spent nearly 30 years at P&G on the sales side before coming to IT, focuses on "breakthrough ideas," developing new technology concepts that will enable the business to be more competitive.
Like P&G, many U.S. businesses are at the beginning of a decade-long transition from IT developed on a company-by-company basis to a future where IT resources are shared and provided on demand as a utility. Most corporations don't have a separate electricity department; they buy their services monthly from a supplier and when they need to fix problems, they call an electrician. Yet there is still a role for the CIO, and for other IT workers, who will be needed to figure out how best to apply technology to further business goals. "We will end up with something for business automation that looks more like the way we provide electricity or water or other utility services," says Parkinson. "As that progresses, all the smarts go from running the infrastructure to what we should do with it."
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www.itaa.org/work force/studies/ 03execsumm.pdf
"Uncertain Futures: The Real Impact of the High-Tech Boom and Bust on Seattle's
Center for Urban Economic Development, U. of Ill., Sept. 1, 2003
"Education and Training for the Information Technology Workforce"
U.S. Department of Commerce
www.technology.gov/ reports/ITWorkForce/ ITWF2003.pdf
Elizabeth Wasserman is a Washington, D.C.-based writer. Formerly, she was Washington Bureau Chief for The Industry Standard. Please send comments on this story to email@example.com.