A report about outsourcing trends provides a disquieting picture for U.S.-based IT services providers.
First, lets look at the good news for U.S.-based IT services providers.
The Global Services Location Index, published by international consulting firm A. T. Kearney, ranks countries in terms of their attractiveness as IT services providers. For each country, the Index ranks three components: cost, people skills and business environment.
If you look only at the skills list, the U.S. sits squarely on top. The Kearney numbers indicate that if a customers biggest concern is skill level of a countrys IT professionals, that customer should source their tech projects in America.
Note that this report divides the skills sector into four sub-components:
(Source: A.T. Kearney Global Services Location Index 2007)
Yet while the U.S. scores highest in the skills list, customers, of course, chose IT providers only partially based on skill level. Cost is often more important, so its no surprise that India, the global outsourcing magnet, grabs No. 1 in Keaneys 2007 Index. Based on combined factors of cost, skills and business environment, India's hold on No. 1 is commanding:
So far, neither of the two preceding charts rock the boat. They simply confirm the common wisdom about global outsourcing trends. Yet a close comparison between the 2005 and 2007 Kearney Index is likely to cause heartburn among U.S.-based IT firms.
First, the aggregate ranking of the U.S. (skills, cost and environment) fell from 11th to 19th. More important, the U.S. lost ground versus India in its strong suit, people skills.
In 2005, the U.S. earned a people skill score of 2.7, a score it earned again in 2007. Yet in India, between 2005 and 2007 the people skill score increased from 2.1 to 2.3.
If this trend of Indian tech skills gaining ground over their U.S. counterpart continues, it will only be a number of years before customers are outsourcing to India not just for lower cost, but for greater IT expertise. Were that to happen, a dark cloud would settle over the American tech industry.
And thats the direction things seem to be heading. India and China, as well as some lesser players, are increasingly getting talent profiles that look almost as good as the U.S., says Simon Bell, a director with Kearneys Global Business Policy Council, which helps clients with issues related to globalization. Bell notes that, while these international up-and-comers are far behind the U.S. in terms of economic and political stability, their business environments are steadily increasing.
So, put all that together, it isnt a pretty picture for virtually any activity that can be performed remotely, as far as the US and [Western] Europe is concerned, he says.
In the next few years, India will have [not only] the population and size, but also the emphasis on education. Theyll actually be able to beat us on skills, not just on wages.
Searching for Tech Expertise
From what Bells clients tell him, buyers of IT services are already looking to India not just for cost savings but for tech skills.
The initial wave [of Indian outsourcing], maybe five years ago, was all about Gosh I can save a lot of money, he says. But now, clients "cant grow the function the way they would like to in the U.S. and Europe, and theyre looking at places like India and China and the Philippines to add capacity that they simply cant add here.
For example, Bell consulted with a large computer hardware manufacturer last year. In their R and D function they cannot get enough R and D PhD engineers in their major locations in North America, he says. Theyre not planning on scaling back any of those locations, but all the extra capacity theyre putting in is in India and China and Malaysia and couple of other places.
Sophisticated Work vs. Commodity Labor
Low level IT tasks, the so-called commodity work, doesnt have much future in the U.S., Bell says.
For the more commodity-type activities, the [wage] gap will stay quite large. Because you can pay a kid with a mediocre degree in India there are so many of them to do basic application maintenance. Increasingly, that kind of stuff will just disappear from North America. It will all be done over there.
Yet for advanced work, projects that require true upper-level expertise, the cost difference between India and the U.S. narrows.
The sophisticated stuff that a U.S. programmer might want to compete for, I think the Indian wages will raise particularly fast, because the people who are good at that stuff in India will be globally tradable. And they could get the $150,000 salary doing it here in America, too. All they need is an H1.
As a result, the competition for this sophisticated work will be more about skill level than wages. The U.S. vs. India competition will be closer to a level playing field in terms of cost. At that point, the pressure will truly be on domestic tech service firms to prove their worth.
A Bright Note for the U.S.
Amid gloomy prognostications for U.S. IT providers, at least two factors suggest better fortunes.
One is that the rise of offshore IT companies isnt necessarily a detriment for American tech concerns. The most notable example of this is IBM. The tech giant has approximately 125,000 workers in the U.S., and in excess of 50,000 in India (up from just a few thousand several years back). So this American IT company is able to source projects from multiple locations it straddles both worlds. In the same sense that a Toyota automobile assembled in a Kentucky auto plant has a mixed parentage, so the IT projects of the future will likely be international hybrids. Its less America vs. India than it is American and India.
The other bright note for the U.S. is the continued strength of the domestic tech industry. Despite whatever outsourcing clouds loom, at present the U.S. boasts a robust ecosystem of highly skilled IT experts.
If, wages aside, you sat down and said, Where am I going to find the most PhDs, the most engineers, and not just the sheer number, but the skill level of those people, the applied skills, the soft skills, the sophistication of the universities, obviously the language skills because all of this requires English in all of these aspects, the U.S. is still head and shoulders above the rest, Bell notes.
Furthermore, in a country known for its voracious appetite for international imports, IT continues to be a valued commodity that American exports.
The U.S. is still, by far, the largest exporter of IT and business services, of any country. Which is the fundamental measure of this, Bell says. There are people sitting in the U.S. exporting their services to other parts of the world. The U.S. has been a great beneficiary of offshore services for the last couple of decades.