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The ACM On Offshoring and Job Shifts

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The Association for Computing Machinery (ACM) released a new methodically researched report which is the result of several months of effort. The report focuses on issues and trends centered on tech job migration and how it relates to economies, governments, funding, and educational systems. The New York Times reported on it, saying, “The study concluded that dire predictions of job losses from shifting high-technology work to low-wage nations with strong education systems, like India and China, were greatly exaggerated.” The report finds four themes defining the contours of offshoring: technology, work processes, business models, and other drivers like increasing global education levels, reduced trade barriers, etc.

Some key findings from the comprehensive set of reports are:

1. Globalization of, and offshoring within, the software industry are deeply connected and both will continue to grow. Key enablers of this growth are information technology itself, the evolution of work and business processes, education, and national policies.

2. Both anecdotal evidence and economic theory indicate that offshoring between developed and developing countries can, as a whole, benefit both, but competition is intensifying.

3. While offshoring will increase, determining the specifics of this increase are difficult given the current quantity, quality, and objectivity of data available. Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations.

4. Standardized jobs are more easily moved from developed to developing countries than are higher-skill jobs.

The report also finds that issues centered around risks and security related issues need to be effectively mitigated and points out that innovation and talent development are the key to various countries/enterprises remaining competitive.

The report finds that thirty percent of the world’s largest 1000 firms are offshoring work, but there is a significant variance between countries. This percentage is expected to increase, and an increase in the amount of work offshored is consistent with the expected growth rate of 20 to 30 percent for the offshoring industries in India and China. The report makes an assessment of various national policies towards offshoring and finds almost all are reasonably progressive except China, which the report finds as the most protectionist of the countries studied here in terms of trying to protect its emerging domestic IT market from foreign competition.

The report concludes, “The future, however, is one in which the individual will be situated in a more global competition. The brightness of the future for individuals, companies, or countries is centered on their ability to invest in building the foundations that foster innovation and invention.” While I would have loved to see analysis on themes like the real cost of offshoring from the ACM study, given the efforts invested, understandably the focus of the initiative is different.

This brings to center stage the increasing importance of talent as a source of competitive advantage in global markets. John Hagel & John Seely Brown point out therein not to confuse talent development with education, as clearly education is becoming more marginal as the bulk of talent development occurs outside of traditional educational institutions. This echoes Mark Twain’s famous statement, “I have never allowed my schooling to interfere with my education.”

I recently wrote that offshoring is not based just on cost advantage or ricardian logic alone. Distinct benefits are propelling the offshoring wave into newer orbits. While the ACM study has been mostly carried out by academics, the findings from within the industry also point to similar conclusions on multiple fronts.

A recent McKinsey study finds that offshoring is unlikely to create any sudden discontinuities in overall levels of employment and wages in developed countries. Now the question from an industry perspective is this: How would different countries benefit? No doubt India would be the most dominant player in the offshoring scene. Goldman Sachs estimates suggest that the offshore model has penetrated less than 10% of Global 500 IT budgets for core application maintenance and development work and the Indian companies are expanding into new areas such as network and data-center management, consulting, and business process outsourcing of such departments as human resources and accounting.

As far the multinationals leveraging offshore, analysts widely believe there’s so much offshore opportunity that the multinationals will have little effect on Indian firms’ revenue. The growth may hinge upon the ability to attract talent. Richard Schroth, a senior fellow with Katzenbach Partners, also believes that the multinationals already have so many moving parts that adding offshoring to the mix is likely to be challenging. (I have written some articles about this; you can find them here, here, here and here.)

Clearly, seen from an industry perspective, offshoring has fully moved into the mainstream from the demand, as well as delivery capability perspective and demand will likely remain very robust. The recently released McKinsey -Nasscom report puts it so succintly: In the next five years, Indian IT services shall generate US$60 billion in revenue and perhaps sustain 9 million jobs and adds in terms of importance – like oil for Saudi Arabia, and cars for Japan, services could be of such importance to India.

Seen from a productivity perspective, offshoring is positively contributing to this productivity growth, given that all major enterprises are actively embracing it. This draft OECD paper assessing offshoring and productivity finds positive correlation between these two – at least in the service sectors. Technology’s contribution is not just the progress that we see in the conventional sense -– it is contributing highly positively to the economy and the expectation is that it should continue to do so in future. All of us – both in the developed and developing world – ought to be seized of this and appropriately prepare for the future.

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  • Bliffle

    I would certainly not advise any young person to go into programming, or any other branch of engineering. Employees are treated as wage-slaves by contemptuous managers, and consultant fees are going thru the floor. Anyone who can pass a tough engineering curiculum can get an MD (and be treated to a state-subsidized education and a Gold Pass to a monopoly) or an MBA, wherein he can sneer at mere wage-slave underlings.

  • Management, design, R&D, administration and oversight jobs are the way to go, but often the best way to get qualified for those jobs is to go through the process of learning to program first and then acquiring more advanced skills. Grunt programming work is unrewarding anyway, so better to move into design, R&D and management type jobs. And in fact, many companies will look for new hires withing the US specifically to train them to oversee operations spread around the world. Outsourcing theoretically increases the quality of the job opportunities here in the US.

    Nice to see someone use the term ‘ricardian logic’ to remind us how fundamentally true Ricardo’s laws are in every economy and every age. He doesn’t get the regard he deserves. That said, your article is damned dry. I wonder if most of those who read it will get much out of it.