Information Technology Spending - The New Reality

Not so long ago, it was easy to get funds in the budget for Information Technology projects. IT was perceived as a mission critical area, required if the company was going to compete with others who were spending heavily on IT. However, all of that has changed now. Indeed, most of the new spending in IT seems to be headed towards Outsourcing IT projects.

The Influence of Outsourcing

Outsourcing Information Technology tasks to low-wage countries such as India and China is a new phenomena in the American "jobless" economic recovery. The debate rages over whether this will ultimately result in more jobs, greater productivity and lower inflation, or less jobs, a decline in the American standard of living, and continued economic stagnation. The Information Technology Association of America in a recent survey acknowledged that the phenomena has cost nearly 3 percent of the Information Technology jobs in the U.S. technology industry. Demand for Sofware Engineers will continue to shrink through 2008. But ITAA leaders emphasized that outsourcing has damaged the job market far less than the dot-com meltdown of early 2000, when Internet startups and telecom companies eliminated a quarter of a million jobs. "The myth is that we've started this long decline into the midnight of the technology work force," ITAA president Harris Miller said. However, the end result may be an increase, provided the economy recovers in full.

Indian programmers earn roughly one-sixth the $60,000 U.S. average, and Chinese engineers earn even less. So outsourcing dramatically reduces labor costs, which in turn allows companies to sell goods at lower costs or higher profit margins. Greater profits theoretically allow companies to buy new equipment and invest in research - even in expensive Silicon Valley and other U.S. tech hubs.

Savings from outsourcing allowed companies to create 90,000 new jobs in 2003, with more than one in 10 of them in Silicon Valley or elsewhere in California, researchers said. The report predicts that in 2008, outsourcing will create 317,000 jobs -- 34,000 in California.

Companies spent $10 billion last year to outsource jobs ranging from medical transcription to nanotechnology research. The ITAA predicted the companies would spend $31 billion in 2008.

However, with all of the uncertainty goes a lot of political wrangling, especially in an election year. Democratic presidential candidate John Kerry introduced economic proposals recently which were intended to take the sting out of it for outsourced workers. More than two dozen states are considering bans on outsourcing government contracts.

Some see such protectionist legislation as unwise, since it would encourage other countries to retaliate in kind. However, the legislation certainly appeals to displaced workers.

Perhaps what is needed is some control over the outsourcing phenomenon. This would slow down the outflow of high tech jobs, while bringing some rationality to the situation. After all, companies that jump on the bandwagon are often disappointed with the results. If you outsource a problem, you still have the problem; but now you have to deal with it in a whole new context of issues. The outsourcing of the problem does not automatically solve it. The problem still has to be met with solutions that make sense and are effective.

Statement of Outsourcing Principles

The ITAA has proposed the following Statement of Principles for Global Outsourcing and Offshore Development, dated August 6, 2003.

The U.S. IT Industry must Remain Pre-eminent in World Markets
ITAA is committed to retaining the pre-eminence of the U.S. IT industry in global markets. To be the best, U.S. IT firms must continue to perform research, to generate innovative new products and services, to solve customer problems and add productivity, to enhance quality and value. U.S. firms also should have access to the tools and resources needed to fully understand market conditions and realign as necessary. The future of U.S. IT industry, and U.S. IT workers, will be determined by customers turning to U.S. IT products and services for best overall value.

The Future Success of the U.S. IT Industry will Depend on U.S. IT Workers
The future success of the U.S. IT Industry will depend on the availability of a deep pool of talented IT workers. U.S. IT workers are now and must continue to be the best in the world. “Best” and “cheapest” are not synonymous concepts, nor should they be. While low cost of labor is driving some companies now to seek better margins by sending IT services work offshore, others question whether this approach is likely to produce sustainable economies and overall “best value” for the customer. In addition to cost, the best value determination must consider business factors such as innovation, quality, productivity, total cost of ownership, suitability, and customization. Because the U.S. IT industry is a value-added industry, it will only maintain its lead in global IT services if it is able to draw on a large, diverse and richly talented domestic IT workforce.

Workforce Competitiveness Begins—but does not End—at an Early Age
Workforce competitiveness is an education issue and a training and skills retooling issue. It’s also a mindset issue. The U.S. K-12 educational system must better equip more students to pursue IT-related undergraduate and graduate degrees. College undergraduate students must be encouraged to compete for seats in advanced degree programs now filled by foreign students. U.S. IT companies must make more opportunities available for newcomers to gain meaningful work experiences and for mature workers to add skills, retool abilities and apply domain knowledge. Solutions include the use of high-speed broadband networks to make new education and training opportunities available to all workers and to make life-long learning a pre-requisite of career development.

IT is a Global Industry IT is a Global Industry, and U.S. Companies Must Retain the Flexibility to Align Operations as Necessary to Meet Customer Needs
Information technology is over a $2.5 trillion global industry. While the U.S. is the largest single customer of IT products and services, no one country has a dominant position in terms of the human capital or intellectual property needed to design, develop or produce information technology. Unlike other industries, information technology is infinitely malleable and does not directly derive its value from geography-specific natural resources. Given the availability of high speed networks and other technologies, much of information technology production is not bound by the conventions of time or physical space.

U.S. IT Customers are Demanding Higher Value Added Products and Services at Improved Cost
Information technology in the U.S. is a customer-driven industry. Unlike other industries where the rules of competition may be limited by monopoly, government sanctioned franchise, state and professional licensing, high cost of entry or other barriers, the IT industry is driven almost exclusively by customer requirements for functionality, choice, customization, quality, price and other factors. U.S. customers for information technology select solutions from a globally competitive marketplace and low cost is becoming an increasingly important discriminator not only for commodity products but for value-added products and services also.

U.S. IT Companies must be able to Base Workforce Sourcing Decisions on Many Factors
U.S. IT companies must have the ability to compete in both domestic and global markets. As the IT skillsets of foreign workforces increase, IT customers gain expanded options for lower cost access to technical talent. IT companies that ignore changing market conditions and customer expectations do so to the peril of their long-term competitiveness. As a result, IT companies must be able to make workforce sourcing decisions based on numerous considerations, including labor cost.

Localization Issues may Require Offshore Approaches
Many U.S. IT companies are global companies, generating 50 percent or more of their total revenues in overseas markets. To meet the needs of overseas customers, a high degree of product or service localization may be required. Localization involves language, style, heuristics, suitability and other factors. Offshore product development may be required to achieve adequate localization.

Continued Support of Free Trade is Vital to the Growth of IT Markets
The U.S. IT industry is committed to open global markets for information technology products and services. The industry has pressed for an open markets policy with the U.S. Trade Representative and in negotiating rounds at the World Trade Organization and other multilateral trade groups. The U.S. has a positive balance of trade in IT Services bearing testimony to its benefits for U.S. companies.

Open Markets will Level the Playing Field
Foreign governments must be encouraged to open markets to foreign competitors, to increase the transparency of government procurements, and to reduce trade barriers, such as government ownership of telecommunications and other infrastructure. Likewise, foreign governments and industry sectors must be encouraged to become active consumers of information and communications technology—and not simply the global purveyors of ICT products and services. Such steps will help level the playing field and improve the employment opportunities for all IT workers, including U.S. IT workers.

Improve the Climate for Foreign Investment
The U.S. commercial market features several “intangible” benefits to domestic and foreign businesses. These benefits include government transparency, protection of intellectual property, trade openness and reciprocity, political and geo-political stability, environmental protection laws, even-handed taxation, a model system of civil jurisprudence and the rule of law, and a sound currency. The U.S. IT industry must work through appropriate agencies of the U.S. government and multilateral organizations to foster these values in other countries and, as a result, create a more level playing field for global commerce.

National Security Safeguards Preserve Legitimate National Security Safeguards Barring Non-Citizens from Classified Government Work
Classified government work is not appropriately performed offshore. Much government work is not, however, classified, mission critical or operated in support of systems that are mission critical. Government agencies must place true national security requirements above all other business considerations. “National security” must not, however, become a catch-all to avoid the outsourcing of government workloads.

For more information, see the ITAA Web Site.

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