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Insurance Networking News/Offshore Outsourcing Takes A Hit By Therese R. Rutkowski, Managing Editor

Nearly half of the top 200 U.S. insurance carriers are using offshore services. But try to get an insurance executive to talk about outsourcing these days--especially offshore outsourcing--and you won't find many takers.

April 1, 2004 - Nearly half of the top 200 U.S. insurance carriers are using offshore services, according to Celent Communications Inc., Boston. Among the carriers working with outsourcing firms that provide at least some offshore services are: Guardian Life, Manulife, Sun Life, Fireman's Fund, Farmer's Insurance Group, Allmerica, PacifiCare Health Systems, Abbey Life and Royal & Sun Alliance.

But try to get an insurance executive to talk about outsourcing these days--especially offshore outsourcing--and you won't find many takers. Several large insurance carriers declined to be interviewed for this article. And, at a recent Insurance Networking News outsourcing conference in Tampa, Fla., several IT managers from smaller insurance companies said they did not want their employees to know they were attending.

That's because offshore outsourcing is taking a beating in the political arena in this election year. And, like any company in any industry, carriers that outsource-or are even thinking about it-are trying to avoid the bad publicity and employee demoralization that can go along with sending work overseas.

"I've never seen as much (concern) as I've seen (recently) where regions around the world are starting to buck this offshore outsourcing trend," according to Diane Morello, vice president, in the research division of Gartner Intelligence, Stamford, Conn. "This is going on worldwide. It's not just the U.S. that's being affected."

Gaining votes

In the United States, however, those who are among the most affected by offshore outsourcing are IT professionals. They worry about the 3.3 million jobs--from all industries--that will move offshore over the next 15 years, as predicted by Cambridge, Mass.-based Forrester Research Inc. Will those jobs be theirs?

Not surprisingly, presidential and Congressional candidates have jumped on this issue to gain populist votes in the upcoming elections.

In particular, Senate Minority Leader Tom Daschle (D-S.D.) introduced a bill in February that would require companies that lay off 15 or more workers and send their jobs overseas to provide at least three months' notice. Daschle's bill followed comments made by Gregory Mankiw, chairman of the Council of Economic Advisors, in support of outsourcing, in a testimony before the Senate's Joint Economic Committee.

The "Jobs for America Act"-backed by Democratic presidential candidate Sen. John Kerry (D-Mass.)-would also require companies to notify the Department of Labor and state agencies responsible for helping laid-off employees, as well as local government officials.

State legislators are also entering the battle. Indiana, for example, cancelled a contract in November with Indian firm Tata Consultancy Services for processing unemployment claims. As of February, about 80 bills that would limit offshore outsourcing in some way had been introduced in more than 30 states, according to The Wall Street Journal.

"Clearly, the public relations aspect of offshoring is a major concern for carriers," says Celent senior analyst Craig Weber. "As a matter of fact, most carriers label that as one of their major concerns-not just external PR, but internal PR. Employees are justifiably concerned about their jobs going overseas, and the public is concerned about the economy taking a hit."

Futhermore, says Weber, public concern about the issue has not peaked. "We predict offshoring will continue to grow-and concern will mirror that growth." But the cost savings and strategic benefits are simply too compelling for carriers to ignore, he says.

"Carriers will have to deal with this problem, but most of them don't have the luxury of saying, 'We're not going to do this because the public and employees are concerned about it.'"

The primary reason

In fact, Celent predicts offshore outsourcing spending among U.S. carriers will grow from $869 million this year to $1.46 billion by 2006 (see "Insurance Offshore Spending," page 27). The primary reason for this growth is cost savings (see "Top Drivers for IT Outsourcing," page 28). For IT maintenance projects done by offshore firms, savings of 40% are typical, and for application development, savings of 25% to 30% are typical, according to Celent.

A case in point: Guardian Life Insurance Co. of America, the fourth-largest mutual insurance company in the United States, is saving $12.5 million per year with no identifiable loss in productivity due to outsourcing IT work to India, according to a 2004 industry report from New York-based consulting firm Deloitte. (At press time, Guardian had not confirmed this information.)

Indeed, when it comes to offshore IT outsourcing, salaries of U.S. workers dwarf their foreign counterparts. While the average annual salary of a U.S. programmer is $63,331, a programmer in India makes $5,880. Similarly, the average salary for a call center agent in India is one-tenth that of a U.S. agent's-or approximately $300 per month.

What's more, the quality of IT work by Indian firms-which currently dominate the offshore IT market-is high.

According to Jim Thomas, vice president of marketing for the North American arm of Tata Consultancy Services, TCS' technology scored the highest among the three final contendors for the Indiana unemployment claims contract, and its bid was the lowest-$10 million less than the next nearest bid.

More than 250 of the top 400 Indian IT services companies are ISO-9000 certified, according to India's National Association of Software Services Cos. (Nasscom). And, more than 40 have been certified at the Capability Maturity Model (CMM) Level 5-the Software Engineering Institute's highest level for measuring an organization's software development and maintenance processes.

Despite the current populist backlash, "I see offshore outsourcing growing," says Eric Miller, senior principal at Highpoint Partners Inc., a Charlotte, N.C.-based consulting firm.

"Companies are trying to get the best value: high-quality individuals at a reasonable cost-whether that's on the technology or service side," he says.

With the Internet and high-bandwidth telecommunications enabling the rapid movement and sharing of data anywhere in the world, insurers are weighing their global sourcing options.

"They're trying to take a very precise look at what makes sense," Miller says. "They're not saying, 'Yes, were doing it-or no, we're not.' Rather, they are becoming more selective as to the functions they'll send offshore. It's more of a blended concept," he says.

Different approaches

Insurers can take different approaches, Miller continues. They can retain internal people to maintain their old IT systems and go overseas to obtain state-of-the-art resources to handle new development. But this may breed discontent among employees. "Employees may ask, 'Why are you letting those people do all the fun stuff and we get stuck doing COBOL?,' " says Miller.

On the other hand, a carrier may send tedious or routine IT maintenance work offshore and use internal employees for their new development. "Ideally, that's the best-because IT development is the value-add," he says. "You're going to have people knocking down your door to work for you."

Indeed, it may make sense for U.S. carriers to consider sending IT maintenance to lower cost offshore destinations--not only to please U.S. employees--but because maintenance typically accounts for the lion's share of an insurer's total IT budget, sources say.

Although Celent research indicates that carriers spend more for new application development than for maintenance done by offshore providers ($382 million vs. $139 million in 2003), "one of the most promising strategies is to communicate very clearly with employees that the intellectual capital of the business will stay local," says Celent's Weber.

For that strategy to work, however, U.S. IT workers need to update their skills, Weber adds. "For example, IT requirements-development is a task that typically stays onshore. So employees who are accustomed to just coding may need to think about adding project management to their skill set."

In addition, keeping application development in-house also may protect a carrier's intellectual property, says Gartner's Morello.

"Insurers ought to be concerned about whether or not they adequately understand the future innovation they may lose as a result of turning over certain activities and processes to other parties-particularly because some areas of the globe have little or no patent or intellectual capital protection," she says.

Moreover, compliance issues are requiring insurers to be much smarter and methodical about their outsourcing decisions in general. Sarbanes-Oxley is forcing boards of directors to demand more insight into these arrangements, sources say. "They need to know what risk you're putting yourself in if you're dealing with companies that are not equally attuned to keeping data integrity in line," says Morello.

"It doesn't matter if your data is in a box in Illinois. If a person offshore is accessing that information, privacy and security issues remain," says Patrick Hatfield, partner at Lord Bissell & Brook LLP in Atlanta. "Privacy is a high-risk issue for insurance companies," he told attendees at the recent Insurance Networking News Outsourcing Forum.

"If you're a life and health institution (that has to comply with HIPAA), this is more significant than for personal lines. But privacy is a topic that keeps insurance executives awake at night. They're not confident that they have it nailedz-so they even have less confidence in vendors' abilities to protect their customers' privacy," says Hatfield.

Although the current backlash against offshore outsouring makes it appear as if the practice is widespread, less than one out of every eight companies across industries is outsourcing any application maintenance or development offshore, according to a 2003 survey conducted by Financial Executives International and Computer Sciences Corp., El Segundo, Calif.

Of those firms that are sending work offshore, only 9% had been using offshore providers for more than one year.

When asked how satisfied they were with offshore development and maintenance, 26% of these companies said they were highly satisfied and 44.2% were somewhat satisfied. Only 6.4% were somewhat or highly dissatisfied.

Generally, companies are satisfied with IT work at offshore firms, says Rebecca Scholl, principal analyst, business process outsourcing, at Gartner Inc. "But when it touches customer interaction, there's a lot more work to be done to ensure process consistency and compliance," she says. "And some companies are not good at managing the offshore relationship."

Communication is a huge issue when companies outsource anywhere, says Highpoint's Miller. "You have to be extremely precise about what you want the outsourcer to do for you," he says.

"We have enough trouble communicating when we sit in cubicles next to each other; getting people to write precise product and systems specifications is difficult. They say, 'This is going to take twice as long as it should.'"

From that perspective, along with costs associated with ensuring compliance, security and privacy, companies are questioning the hidden costs associated with outsourcing, sources say.

"I may be able to obtain a cost savings on per-hourly basis, but if it takes me twice as long, that's not the true cost," says Miller.

In addition, some companies that have sent customer-service work overseas are bringing it back onshore. Carmel, Ind.-based Conseco Inc. brought its call center operations back to the United States from India in 2002, for example.

"We learned we could deliver higher quality customer service here," says Jim Rosensteele, Conseco spokesperson. In 1999, Conseco had purchased exl-Service, an India call center operation, expecting to save $60 million per year.

"People aren't willing to put up with companies that move call center operations offshore," says Miller. "That's the part that the customer sees, and customers are not going to stand for it."

In fact, Round Rock, Texas-based Dell Inc. in November decided to shift corporate tech support for two of its computer lines back to U.S. call centers from India because the company had received complaints from corporate customers about language barriers and delays in getting issues resolved. But Dell's small-business customers and consumers will continue to be routed to India-based tech support.

In the consumer market, people fall into consumer segments, says Mike Hail, CEO of Yankelovich Partners, a Chapel Hill, N.C.-based marketing consulting firm. Some American consumers have a high demand for personalized service and are willing to pay a premium for it, while others are willing to go to a company's Web site, use e-mail, or bear with a scripted response from a call center representative and pay less.

"When you're dealing with that segment of the population that expects customization and a personal response, scripted responses from call center reps don't work," he says. "As a result, you'll see high levels of dissatisfaction."

Furthermore, he says, American consumers make their purchasing decisions based on price and quality. "If Toyota can build a better product, we're going to buy it," he says. "'Buy American' sentiment doesn't alter that scheme."

Offshoring good for the future of U.S. economy, supporters argue
Statements made in February by Gregory Mankiw, chairman of the Council of Economic Advisors, ignited the already-brewing debate over offshore outsourcing. "The benefits from new forms of trade, such as in services, are no different from the benefits from traditional trade in goods," Mankiw said in his testimony before the Senate's Joint Economic Committee.

"Outsourcing of professional services is a prominent example of a new type of trade," he told the committee. "The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane."

Indeed, not only does offshore outsourcing help U.S. insurers reduce costs, convert fixed costs into variable costs, spread operational risk, and respond quickly to market opportunities, it may also enable them to establish "beachheads" in emerging markets that will foster their future growth, says Anupam Rajvanshi, a consultant with Andrus Consulting Services, a division of Dwight Andrus Insurance, Lafayette, La.

"Growth has slowed down in the Western world since Western countries have reached an advanced level of economic growth," Rajvanshi says, citing a report from Goldman Sachs & Co., New York, titled "Dreaming with the BRICs: The Path to 2050."

According to that report, over the next 50 years, Brazil, Russia, India and China-the BRIC economies-could become a much larger force in the world economy. In 2003, the Chinese economy grew at an annual rate of 9% and the Indian economy grew at a rate of 8%, compared with 3% to 4% growth in the Western world.

"BRIC nations represent future markets for just about any company in the West," Rajvanshi says.

"And businesses that have the foresight and vision to perceive this--and have ongoing and existing relationships with the BRIC nations--will be in the best position to reap the rewards."

[Oct 9, 2004] Outsourcing Risks Worry the Wary - Treasury and Risk Management -

Given that some changes are quite recent, companies are scrambling to comply. For example, the FDA is currently implementing an electronic signature regulation under which all electronic records must be documented in accordance with FDA guidelines. Christopher-Paul Milne, assistant director of the Tufts Center for the Study of Drug Development, says that since the new rule probably extends to all data in New Drug Applications and to the personal records of investigators and patients, it heightens concerns about outsourcing HR and IT operations.

Adjusting to the Sarbanes-Oxley Act. Some CFOs pause before outsourcing finance and accounting functions until they understand the ramifications of the Sarbanes-Oxley Act, which holds senior management accountable for the accuracy of financial statements. To outsource finance activities now requires great confidence in the vendor's controls.

David McGirr, chief financial officer at Cubist Pharmaceuticals, reflects this wait-and-see attitude. "Sarbanes-Oxley has just tightened the focus on financial control and processes. While we're all learning to live with Sarbanes-Oxley - and the rules are still being written - it's going to be very hard to outsource some finance functions," he says. "When it all settles down, and people become comfortable, maybe that will change. But for now, speaking very personally, I would not want to be outsourcing much from the finance function because it's too delicate."

This article is excerpted and adapted from Outsourcing among Pharmaceutical and Biotech Firms, a report that summarizes the findings of interviews with executives and professors at 13 companies and institutions. CFO Research Services and A.T. Kearney, a global management consulting firm, developed the hypotheses for the research jointly. A.T. Kearney funded the research and the publication of the findings; CFO Research Services produced the final report. You may download a copy of the full report by filling out a brief form.

[Feb 18, 2004] - Fast Forward - Rage Against Offshoring Is Very Real Most of America's unemployed seem to think their situation is due to companies sending jobs overseas.

Wednesday, February 18, 2004
By David Kirkpatrick

To rephrase my opening sentence of last week: Seldom have so many been so angry at a writer they felt understood so little. My column on the offshoring of jobs (online last week [,15704,
] and in the current issue of FORTUNE) elicited the biggest outpouring of letters ever. While a reasonable number of readers commended my view that the trend may not be damaging to the economy, far more called me an idiot or worse.

I've been given a sudden and bracing education in just how angry Americans are about what's happening with jobs. Regardless of whether they understand or agree with the economics, they are hurting and they wanted me to know it. Most of America's unemployed seem to think their situation is due to offshoring. I was disturbed to see a barely concealed racism embedded in some angry replies, directed at Indian workers in particular. And it's clear that the widespread corruption recently revealed in corporate executive suites and on Wall Street is taking its toll-people are getting fed up with business. In the letters I sense the rumblings of an incipient anti-corporate revolt. Here are excerpts from a few emails:

* "I don't give a hoot how much you and other pseudo-intellectuals write about paradigm shifts or globalization or offshoring or whatever tired clichй you're recycling this week: American white-collar workers are going to fight against offshoring with their votes. A jobless, highly educated, and angry voter doesn't give a rat's ass what you and the other windbags at consultancies like McKinsey or Gartner have to say...This is not an intellectual exercise, Dave: offshoring takes a real human toll...Who knows, FORTUNE might decide to quite paying for your boondoggles to Switzerland and offshore [your] column. Chances are, it'll be a better read."

* "I am a network engineer. I have worked as hard as I could to gain my education, and then earn my certifications. Now, due to outsourcing I have lost my job...What do you say to my family when their dad/husband has worked hard and achieved something not many people can attain, yet fails to provide for them?...I want you to think about us over here, waking up scared, living scared, searching for work terrified."

* This from a computer engineer laid off from a government agency in late 2002: "I want to find a political party or movement that will try to save American jobs. I am ready to vote for the Communist Party, the Nazi Party, or whatever it takes. The system we have now is a disaster. The system we have now is KILLING ME...If an enraged laid-off American engineer were to go up to his Indian replacement, and shoot him dead-if I were on the jury the verdict would be NOT GUILTY."

* "I have been unemployed for two years after 25+ years in the workforce as a hard-working, productive team member of many companies...When I have a list of companies who have turned their backs on Americans, I will no longer do business with them."

A large number of readers said something like this: "Maybe it is time for FORTUNE to offshore their writers and perhaps put Lou Dobbs in charge of your magazine. He gets it. You don't."

Another: "The working stiff is not a white-collar writer rubbing elbows with a covey of billionaires. Do take care. Writing is not beyond the capacity of talented Indians, Malays, and Chinese."

Or the tersest letter of all, which said simply: "I wish they outsource your job."

When I asked my colleague Justin Fox what he thought about my column, he said it was sometimes too easy for people like us to talk about how "we" all will benefit from the macroeconomic outcomes of offshoring and other disruptive economic changes, when the reality is that the changes are felt personally and painfully by real people. "It's inaccurate to say we all benefit," says Justin. "In aggregate, the economy probably benefits but within that upward trajectory a lot of people are permanently hurt while many others gain." In retrospect I wish I hadn't taken such a stern tone in the column, though I still hold that offshoring is unstoppable and not, in itself, disastrous. For those who want to learn more about this phenomenon, read Justin's amazing recent FORTUNE article about working in Bangalore, India. (,15114,538786,00.html)

Several readers who addressed the policy challenges posed by offshoring noted, as have several Democratic presidential candidates, that tax policy currently treats offshoring benignly. It may make sense at least to create tax incentives that encourage companies to keep workers here as the economic pressure to outsource continues to grow. Another good proposal, advocated by McKinsey's Diana Farrell, whose economic analyses in the column were so roundly rejected by many readers, is legislation to make pensions and health-care benefits portable. That way workers displaced by offshoring or the other rapid-fire changes of technologized society at least will have a better chance of staying in the game.

Make no mistake, this is the issue of the year. President Bush's chief economic adviser Greg Mankiw said last week that " something that we should realize is probably a plus for the economy in the long run." It was a milder version of what I wrote in this column. Like me, he was immediately under siege. He had to publicly back down. And Democrat John Kerry didn't take long to respond. While I doubt that he really disagrees with Mankiw in his heart, he condemned "Benedict Arnold CEOs" who ship U.S. jobs overseas.

The economist Jagdish Bhagwati, who wrote "In Defense of Globalization," replied to Kerry on the New York Times op-ed page last Sunday. "In a world economy," he wrote, "firms that forgo cheaper suppliers of services are doomed to lose markets, and hence production. And companies that die out, of course, do not employ people." A similar point was made in a recent interview by Lee Kuan Yew, Singapore's founder and senior minister []. Speaking of the competition between nations, he said, "If you deprive yourself of outsourcing and your competitors do not, you're putting yourself out of business."

Like many readers, I fear that the impact of globalization could easily pull us down toward the level of the world's poorer economies rather than pull them up to our currently prosperous level. But my friend Joe Schoendorf, a venture capitalist at Accel Partners, makes a good point. He notes that if you had asked Americans in 1900 how they felt that almost all the farmers would lose their jobs over the coming century, they would have been just as outraged as today's workers are when they think about outsourcing. Yet Americans are still well-fed while only about 2% of the population works in agriculture. And the people of the U.S. found jobs doing other tasks, most of which didn't even exist until recently. It's at least a mildly reassuring thought.

David Kirkpatrick is senior editor for Internet and technology. E-mail him at [email protected].

InformationWeek Outsourced Security Report says Virtually All Big Companies Will Outsource Security By 2010 August 23, 2004

Report says Virtually All Big Companies Will Outsource Security By 2010 The need to stay ahead of the hacker curve will drive nearly 90% of big U.S. companies to outsource their security to managed service providers by the end of the decade, a report released Monday suggested.

According to the Yankee Group, businesses will hand over security--initially for perimeter defenses but eventually for inside-the-firewall protection--to managed security service providers to the tune of $3.7 billion by 2008, a jump from 2004's estimated $2.4 billion.

"Enterprises are outsourcing more technology in general," said Matthew Kovar, a VP at Yankee Group's security solutions group. "But we'll see a lot more in the security space. Enterprises know what they have to do, but more of them will see that [security] isn't a core competency," he added, and will hand the reins to a managed security service provider.

Security outsourcing will prove attractive, said Kovar, for reasons other than the cost savings typically cited by companies that farm out business processes. Among the drivers toward managed services are the accelerated attacks of today's threats--giving enterprises virtually no time to put up defenses on their own before an attack infiltrates a network--legislative requirements such as HIPAA and Sarbanes-Oxley, and the trend toward pushing out the network perimeter to include partners and remote workers.

"The well-defined perimeter just doesn't exist anymore," Kovar said.

These and other factors are outpacing the average company's ability to keep up with the latest counter-measures and techniques to thwart attacks, Kovar said in his report. At the same time, security is moving from the network perimeter to protecting critical network links, key servers, databases, and end-user desktops, in part because of worms that other exploits that managed to sneak through the perimeter on laptops or through remote sessions.

While managed services biggest number of customers are currently those subscribing to anti-spam services, managed firewalls aren't far behind, said Kovar. And as the trend continues, other security defenses now solved by hardware, such as intrusion detection and intrusion prevention, will also be shipped out for others to handle.

"One of the easiest managed services to see success is E-mail anti-spam services," Kovar said. "People saw the pain and saw that they needed to outsource the solution."

Companies such as Brightmail and MessageLabs have capitalized on the anti-spam managed approach, grabbing part of the $140 million business that Kovar said "cropped up almost overnight."

The outsourcing of security will follow other IT outsourcing trends by going offshore, said Kovar, who expects that "security will be the next to go to Ireland, India, and beyond." Services such as application code review, he said, simply can't be done cost effectively in North America.

The vendors that Yankee Group sees in the top tier include TruSecure and Symantec, with Unisys, Netsec, Solutionary, Internet Security Systems, and RedSiren close on their heels. Notable by its absence, said Kovar, is McAfee. "That would concern me if I was an enterprise investing in their technologies," he said.

In the end, the winners will be the vendors with the best security gurus, or as Kovar put it, "the best knowledge gatherers. The real intellectual property for security is in advanced algorithms, intelligence, and the ability to rapidly deploy new security countermeasures in real time to a large installed base of enterprise customers and their global networks."

Return of a Conundrum -- Greatly increased productivity has been at the expense of more workers being marginalized into part-time employment or given their pink slips. A shrinking workforce, however, means diminished income, reduced consumer demand, and an economy unable to grow. This is the new structural reality that government and business leaders and so many economists are reluctant to acknowledge.

As Technology Devours Jobs at an Increasing Rate, the Conflict at the Heart of the Market Economy is Becoming Irreconcilable

We are losing jobs all over the world. It has reached crisis proportions. In 1995, 800 million people were unemployed or underemployed. Today, more than a billion fall into one of these categories.

Even in America and Europe, millions of workers find themselves under- employed or without jobs and with little hope of obtaining full-time employment. The US has lost 12% of its factory jobs since 1998, while the UK shed 14% of its manufacturing jobs in the same period. Manufacturing jobs continue to disappear in the UK, even though the sector is growing at its fastest pace in four years.

Where have all the factory jobs gone? It has become fashionable, of late, to blame the high unemployment on companies relocating their production facilities to China. It is true that China is producing and exporting a far greater percentage of manufacturing goods, but a new study by Alliance Capital Management has found that manufacturing jobs are being eliminated even faster in China than in any other country. Between 1995 and 2002, China lost more than 15m factory jobs, 15% of its total manufacturing workforce.

There's more bad news. According to Alliance Capital, 31m manufacturing jobs were eliminated between 1995 and 2002 in the world's 20 largest economies. Manufacturing employment has declined every year in the past seven years and in every region of the world. The employment decline occurred during a period when global industrial production rose by more than 30%.

If the current rate of decline continues - and it is more than likely to accelerate - manufacturing employment will dwindle from the current 164m jobs to just a few million by 2040, virtually ending the era of mass factory labor.

Now the white-collar and services industries are experiencing similar job losses, as intelligent technologies replace more and more workers. Banking, insurance, and the wholesale and retail sectors are introducing smart technologies into every aspect of their business operations, fast eliminating support personnel in the process. The US internet banking company Netbank has $2.4bn in deposits. A typical bank that size employs 2,000 people. Netbank runs its entire operation with just 180 workers.

The UK and US jobs being lost to call centers in India, while important, pale in significance compared with jobs lost every day to voice recognition technology. Consider the US phone company Sprint, which has been steadily replacing human operators with this technology. In the year 2002, Sprint's productivity jumped 15% and revenue increased by 4.3%, while the company reduced its payroll by 11,500.

As far back as the late 1980s, industry analysts were warning that automation would eliminate more and more jobs. Because their forecasts proved somewhat premature, the public was lulled into believing that automation was not a problem. Now, however, the software, computer and telecom revolutions, and the proliferation of smart technologies, are finally wreaking havoc on jobs in every country.

Industry observers expect the decline in white-collar jobs to shadow the decline in manufacturing jobs during the next four decades, as companies, whole industries, and the world economy become connected in a global neural network.

The old logic that technology gains and advances in productivity destroy old jobs but create as many new ones is no longer true. The US is enjoying its steepest rise in productivity since 1950. In the third quarter of 2003, productivity soared by a staggering 9.5%, yet the ranks of the unemployed remain high.

Economists have long argued that productivity allows firms to produce more goods and services at cheaper costs. Cheaper goods and services, in turn, stimulate demand. The increase in demand leads to more production and services and greater productivity, which, in turn, increases demand even more, in a never-ending cycle. So even if technological innovations throw some people out of work in the short term, the spike in demand for the cheaper products and services will assure additional hiring down the line to meet expanded production runs.

The problem is that this theory appears to be no longer applicable. The US steel industry is typical of the transition taking place. In the past 20 years, steel production rose from 75m tonnes to 102m tonnes. In the same period, from 1982 to 2002, the number of steelworkers in the US declined from 289,000 to 74,000. "Even if manufacturing holds on to its share of GDP," says University of Michigan economist Donald Grimes, "we are likely to continue to lose jobs because of productivity growth." He laments that there is little we can do about it. "It's like fighting a huge headwind."

Herein lies the conundrum. If dramatic advances in productivity can replace more and more human labor., resulting in more workers being let go from the workforce, where will the consumer demand come from to buy all the potential new products and services? We are being forced to face up to an inherent contradiction at the heart of our market economy that has been present since the very beginning, but is only now becoming irreconcilable.

Greatly increased productivity has been at the expense of more workers being marginalized into part-time employment or given their pink slips. A shrinking workforce, however, means diminished income, reduced consumer demand, and an economy unable to grow. This is the new structural reality that government and business leaders and so many economists are reluctant to acknowledge.

Jeremy Rifkin is the author of 'The End of Work: The Decline of the Global Labor Force and the Dawn of the Post-Market Era'. He is president of the Foundation on Economic Trends in Washington.

NOW with Bill Moyers. Politics & Economy. Foreign Service . Overview PBS


The numbers are startling: 3.3 million jobs in less than 15 years. That's the number of U.S. jobs expected to be lost overseas by 2015 according to a recent report by Forrester Research. But the sheer size of the exodus isn't what's worrying analysts the most - it's the type of jobs. Some critics are worried that this time it's the corporate main office is getting ready to shut down and head out of the country, packing up cubicles and all. As reported on NOW, a new wave of jobs are leaving U.S. shores: software development, customer service, accounting, back-office support, product development and other white collar endeavors.

In late 2002, computer giant Oracle announced that it would double its workforce in India. Texas Instruments already employs over 1,000 engineers at a Bangalore campus, and has made plans for a much bigger presence in the near future. In November of 2002, Microsoft Chairman Bill Gates announced that the company will be making investments of approximately $400 million in India.

And, It's not just technology jobs that have ended up in India. Charles Schwab recently moved part of its information technology division to a contractor in Bangalore, India. AOL already has a large presence in India. American Express and British Airways have ramped up their employment in the country during the past year as well.

FRONTLINE WORLD reported last year that over half of Fortune 500 companies have moved jobs offshore, including famous names from many fields: Oracle, Dell, HSBC, Delta Air Lines, Novartis, J.P. Morgan Chase, Hewlett-Packard, American Express, British Airways. More are expected to follow.

According to the U.S. Bureau of Labor Statistics, jobs separations due to overseas relocation are at their highest level since 1995.*
Projected Number of U.S. Jobs to Move Overseas (Source: Forrester Research, Inc. November, 2002 ):

And where are those jobs going? Many are indeed going to India, as portrayed in NOW's story, but others are heading to China, Russia, Vietnam, the Philippines, Malaysia, and the Czech Republic. In short, they are moving toward cheaper labor costs.

In November, 2003, Bangalore will be hosting a huge IT job conference, Bangalore 2003, the largest IT conference in all of Asia. Intel and IBM are among the sponsors.

It should be noted that while salaries are much lower in India and other BPO hot spots, that does not mean that the companies are providing inadequate compensation - the cost of living is significantly lower in India. However, as both THE TIMES OF INDIA and THE ECONOMIST have recently noted, some jobs are in turn leaving India for even cheaper locales.

Salary Comparisons

Source: Paŕras Group, 2002; International Labour Organization

Posted on Thu, Jan. 08, 2004 story:PUB_DESC

Offshore labor drove firm to brink
By Matt Marshall
Mercury News

Go ahead, join the lemmings in the rush to India.

But if you're a Silicon Valley entrepreneur or venture capitalist still considering it, contemplate the over-the-cliff tale of Ishoni Networks.

Last month, the Santa Clara start-up filed for bankruptcy, a victim of moving to India too quickly.

Backed with more than $68 million from venture capitalists from the United States and elsewhere, Ishoni once was branded a rising star. It was developing a cutting-edge chip to allow voice and data services over a single Internet connection -- and was valued as high as $200 million and employed 170 people.

Seeking to cut expenses, Ishoni created a subsidiary in Bangalore, India, and hired software engineers there on the cheap.

Weirdly, though, the subsidiary stopped returning phone calls from Ishoni's Santa Clara-based chief operating officer, Amin Varis, early last year.

Varis made a surprise visit to India in May and learned a big lesson about how much damage 12,000 miles of distance -- even when connected by Internet and phone lines -- can do.

Indian executives, he found, had forced their engineers to join a rival firm, Ample Wave Communications, apparently in a scam to scoop up Ishoni's intellectual assets and then bankrupt it.

Ishoni notified police, and three Ishoni India executives were charged with illegally copying Ishoni's software -- a fiasco first reported in August by online optical networking publication Light Reading and followed by Private Equity Week.

The outcome of that case is not known.

Neither Ishoni nor any of its dozen or so venture investors -- including names like Credit Suisse First Boston, Deutsche Bank, Infinity Capital, Lucent Venture Partners and John Grillos, formerly of MVC Capital, who is the sole VC board member listed for the company -- returned phone calls.

However, a spokesman for electronics giant Philips, which owned 51 percent of Ishoni after a $25 million investment in 2002, confirmed Ishoni is being liquidated.

It won't take very long: A blue padlock already hangs on Ishoni's Santa Clara office door. Inside are empty cubicles, deserted desks and disconnected phones.

So, what's the lesson?

The growing hysteria and hand wringing over job loss to India sounds similar to the worries during the rise of the Japanese threat in the 1980s.

But soon after gobbling up U.S. companies and real estate, Japan hit its own internal limitations -- namely bad credit, cronyism and market interventionism. Japan foundered, and has never been considered a danger since.

True, India's vast, cheap labor supply poses a different, more permanent threat. Skilled Indian engineers who speak great English won't be going away anytime soon.

But increasingly, VCs say outsourcing to India has limitations.

Ravi Chiruvolu, a partner at Charter Venture Capital, wrote a column for Venture Capital Journal in March titled: ``Tech Start-ups Should Be Entirely Built in Asia.'' However, Chiruvolu, 35, has since been eating his hat. While he's still keen on doing business with India, the challenges were greater than expected, he says.

Foreign companies are considered easy targets by Indian technocrats and power brokers, he explains. They'll charge for leases and other services up to 10 times the amount they do for local companies. Companies like Intel and i2 took baths on their long-term leases, with i2 paying 100 rupees per square foot for its 10-year lease, compared with the going rate of 10 rupees, says Chiruvolu.

And prices are heading up. Land prices have gone up three-fold over the past few years, Chiruvolu notes. Labor in Bangalore -- India's Silicon Valley -- has even become scarce, and you have to pay the average head-hunter about $500 an employee just to do a search, he says. You pay up front, and sometimes hear nothing back.

Many Indians will forsake start-ups and flee to a brand-name company -- say Intel, Oracle or Sun Microsytems -- the first chance they get.

Even getting the electricity turned on in an office is a chore, Chiruvolu says, estimating that it takes about six months to get an office registered with the government and ready to use -- far more than the eight to 10 weeks promised by the Indian government. Bandwidth can cost more than four times than in the United States, he adds.

Chiruvolu reached a conclusion: Don't go to India for cost reasons alone. ``You should go to India being committed for the longer term, not buckled for a one-year cost reduction.''

Dell and a few other companies have already moved work back from India to the United States.

Dick Kramlich, a partner at Menlo Park's New Enterprise Associates, and one of the valley's most experienced venture capitalists, has a few start-ups with business in India, but he says: ``If you're doing it for labor arbitrage, you're making a mistake, because it's only a short-term gain. You'd better do it for quality.''

Termsheet -- a name drawn from the formal proposal that a venture capitalist offers to an entrepreneur -- is a biweekly column about venture capitalists and the companies they fund. Beginning Jan. 27, the column will be published Tuesdays. Contact Matt Marshall at [email protected] or (415) 477-2518.

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