Can Outsourcing Save Jobs?

By John Moore  |  Posted 03-25-2005

Can Outsourcing Save Jobs?

Fear of job loss has always clouded the reputation of outsourcing, going back to the days when the practice was known as "doing the Kodak."

In 1989, Eastman Kodak Co. outsourced its data centers to IBM and later cut deals with Digital Equipment Corp. and Businessland for networks and desktops, respectively. Kodak outsourced to focus on core business lines.

But outsourcing took on a different flavor when it got popular with other companies in the early 1990s.

After a binge of leveraged buyouts during the 1980s and the 1991 recession, many firms went on a cost-cutting track: Outsourcing IT emerged as one more way to cut expenses.

For the most part, outsourced IT personnel ended up with jobs at various systems integration and outsourcing companies.

But still, any job change is unsettling, and in some cases, the personnel shifts were massive.

Electronic Systems Corp.'s 1994 outsourcing pact with the United Kingdom's Inland Revenue involved the transfer of thousands of employees.

Last year, 2,800 workers were relocated once again when Capgemini won the competition for a renewal of the Inland Revenue deal.

Job loss worries these days focus on outsourcers and integrators moving operations offshore.

Service providers, looking to become more cost-competitive, have moved tech support and software development functions to India and other nations with lower labor costs.

The resulting press coverage and congressional interest have generated considerable attention—most of it negative.

The backlash may have influenced some companies to open software development centers in mid-tier U.S. cities with lower real estate and personnel costs.

David Andersen, a partner and outsourcing specialist in the Los Angeles office of Bryan Cave LLP, believes outsourcing critics have taken a narrow view of the practice.

He contended that different flavors of outsourcing exist and not all of them result in a flurry of pink slips.

"I think people are not appreciating the many variations when they use the word outsourcing," Andersen said.

Click here to read about CIO Insight research that argues that job loss caused by outsourcing is real, and considerable.

Andersen termed one variation "support sourcing."

In this approach, the U.S.-based service provider opens a new business offshore to bolster its domestic operation.

An IT consultant, for example, may choose to launch a software development shop overseas, where such an operation will be more cost-competitive.

Next Page: Support sourcing can create jobs.

Support sourcing can create


Instead of losing U.S. jobs, Andersen argued that support sourcing can create jobs.

Companies may need to hire additional administrative personnel in the United States to support the new line of business overseas, he said.

In addition, high-end integration services may be handled in the United States to back the offshore business.

In another scenario, financially struggling IT services firms may be able to save jobs by moving some work offshore, Andersen said.

"One of the things that allows a lot of companies to survive is the ability to reduce costs by sending certain functions offshore," he said.

Andersen cited the example of one IT company that has been through a couple rounds of downsizing.

That company decided to perform certain functions in India, and the resulting cost reduction let the company slow the pace of layoffs, he added.

In this type of situation, the outsourcing equation boils down to shipping 20 jobs off shore to save 120 at home, Andersen said.

That's cold comfort to IT workers whose jobs end up going abroad.

But in a global economy, this type of compromise could well become commonplace.

Moore is a Ziff Davis Internet Contributing Editor who has covered the information-technology industry for 15 years, focusing on government issues, systems integrators, resellers and channel activities. He writes writes the Contract Watch column and his own column for the Channel Insider.