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Large companies in state shift to outsourcing, survey says

By Brier Dudley
Seattle Times technology reporter

Ami Vitale New employees are trained at Wipro, a large Bangalore, India-based software company that's benefiting from U.S. companies' outsourcing. Wipro reported last week that overseas work boosted its second-quarter profit 66 percent, its fastest quarterly growth in three years. Local companies that use Wipro's services include Microsoft and Weyerhaeuser.

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But the study also found that concerns about job losses are overblown.

The 10 companies surveyed are sending only a small part of their tech work abroad — at most 15 percent — and the cost savings are helping them to avoid layoffs.

Among the companies that participated, there was only a single layoff resulting from work being sent abroad, according to the principal investigator, Madhu Rao, a Seattle University business management professor.

The study is intended to help educators, tech workers and companies figure out how to cope with the changes brought about by the phenomenon known as outsourcing or offshoring. It concludes by calling for improvements in the way students are being trained for careers in technology so they can compete for work.

"It appears from the study the movement toward globalization and offshoring has now established itself as a valid, legitimate business tool. So the question now is: What needs to be done, what's the next step?" Rao said.

Rao led the state-funded study on behalf of RATEC, a job-training organization in Bellevue, and the Seattle chapter of the Society for Information Management (SIM) trade group.

Washington outsourcing Here are some key findings of a new report on 10 large Washington companies and the use of overseas companies to perform technology work. It was done by Seattle University researchers for the Society of Information Management's Seattle chapter and RATEC, a Bellevue job-training organization. • 80 percent of the companies interviewed are actively using offshore companies for information-technology work. • Cost savings is the primary reason for most companies' global sourcing programs. • By using offshore vendors to absorb fluctuations in demand for information technology work, companies are able to maintain relatively steady headcounts in their domestic IT organization. • Offshore programs now represent 5 to 15 percent of the IT budget in the surveyed companies. • Companies expect a "cautious increase" in offshoring levels over the next few years. • Cost savings from offshoring have allowed companies to redirect resources to projects that would not have been possible otherwise. • Media coverage of outsourcing has made executives more sensitive about how the issue affects employee morale, but generally it has not influenced whether they will use overseas vendors. • Declining enrollments in science and technology educational programs is a great concern, and the lack of sufficiently qualified local workers could accelerate the use of overseas IT vendors. Source: Global Information Technology Sourcing: Impacts and Implications for Washington State

Participants were 10 "keystone companies" in the state from industries including manufacturing, health care and consulting that employ from 100 and several thousand employees. None was a software company.

"It's pretty representative of what larger companies are doing," Rao said.

Some of the findings are similar to those of broader studies that have found companies are increasingly sending at least a portion of their technology work abroad.

Worldwide, companies spent $76 billion outsourcing technology services last year and the industry is expected to grow about 7 percent a year through 2008, according to an April study by IDC, a Framingham, Mass.-based research company.

The eight Washington companies found to be outsourcing by the study are spending the equivalent of 5 to 15 percent of their technology budgets overseas, using vendors in India, Russia and Ireland. Most predicted slow but steady growth in offshoring in the next few years.

Chief information officers at the two companies that were not using overseas vendors said they felt a responsibility to keep their tech jobs in the state, although one outsourced work to a vendor in the U.S. that could be subcontracting work overseas.

The company identities were kept confidential, but even so Rao said many were skittish about discussing outsourcing.

One finding was that media coverage has made executives more sensitive to how the issue affects employee morale.

The coverage also has made employees especially nervous when they hear about outsourcing, even though "the actual likelihood of them being affected is quite small," Rao said.

"They assume this is going to be me — they're sending every single job offshore, there will be nothing left, which is not the case at all, according to what we found," he said.

The study found that using offshore vendors to absorb demand fluctuations "allows companies to maintain relatively steady headcounts in their domestic IT organization."

Findings were presented at a SIM meeting yesterday in Seattle, where Bellevue Community College President Jean Floten said the tech industry is expected to keep creating new jobs. But she said the education system must improve to fill the jobs locally.

"It's going to take a lot of work to keep our jobs in the state," she said.

Floten called for more K-12 math and science education, career programs that emphasize business knowledge and technical skills, and increased capacity for four-year degrees.

"This is a crisis," she said. "The wolf is howling at the door. Our qualified transfer students are stacked up like cordwood" with no more room in state university B.A. programs.

Executives interviewed for the survey were also concerned about declining U.S. enrollments in science and technology programs. Several were concerned that as more basic technology work is done overseas, there are fewer opportunities for entry-level tech workers to get experience and training in the U.S.

RATEC and Rao hope to continue their work with additional studies of outsourcing taking place at small and medium-size companies in the state.

"We believe that we have to facilitate change rather than be victimized by it," said RATEC director Joy Howland.

Rao said it's a tricky issue for business professors who see offshoring "as a business tool, and it makes perfect business sense, which I agree with."

"But I'm also caught on the other side," he said, "where I send 50 to 100 of my students out into the workplace and I worry about their jobs as if I would worry about my own kids getting a job."

Brier Dudley: 206-515-5687 or bdudley@seattletimes.com

Copyright © 2004 The Seattle Times Company

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