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The Line Government Won't Cross

Some say governments could save money through offshore outsourcing, while others say the benefits don't justify eliminating jobs.

by / October 2, 2006
It's difficult to find a government executive who endorses the politically suicidal measure of moving state jobs overseas. But some analysts say the practice is too financially advantageous to pass up -- particularly in this time of expensive new state integration projects.

The question set off a firestorm of legislative attempts to ban the practice in 2004. Indiana canceled a contract that might have sent some government work overseas in 2003. During 2004 alone, 40 states introduced more than 200 bills restricting offshore outsourcing, according to the National Association of State Procurement Officials.

All but five bills failed because states didn't want to sour relations with foreign countries, said Michael Kerr, director of the Enterprise Solutions Division for the Information Technology Association of America (ITAA).

Kerr said legislators now try to guard against offshore outsourcing in more subtle ways, like passing laws requiring vendors to disclose upfront in contracts where they will perform services.

Most private-sector contracts now include some offshore outsourcing -- a fact repeatedly pointed to by those advocating that governments follow suit. Many economists and organizations like the U.S. Chamber of Commerce say offshore outsourcing and the resulting global economy ultimately increase employment in the United States. Some supporters argue that government offshore outsourcing would advance the rising trend of privatizing government functions and providing taxpayers more for their money.

At the other end of the spectrum, critics say offshore outsourcing contradicts one of governments' primary goals -- promoting citizen employment. And several prominent state CIOs say they can save money and produce better results by using internal staff or domestic labor.

Too Cheap to Pass Up?
Sid Pai, a partner at TPI, a group that advises governments and the private sector on procurement matters, said state and local governments should think of themselves as businesses and their citizens as shareholders when considering offshore outsourcing. Pai runs TPI's India office.

"Governments cannot really afford to rule out such a successful approach as [offshore] outsourcing. They would be giving their shareholders -- the citizens -- a bad deal. They would not be considered good stewards of their stakeholders' interests," Pai said. "I am a U.S. citizen who has worked around the globe. I have learned that allowing the best talent to rise to the top by following free market norms is the best way to go -- whether in the U.S., India, or elsewhere."

Pai argues that offshore outsourcing frees up sections of the American work force to perform new and more useful services. That process grows the domestic economy further, generating more jobs in the United States, he said.

Thomas Siems, senior economist and policy adviser for the Federal Reserve Bank of Dallas, calls that process "creative destruction." He said private-sector firms outsource functions like human resources, payroll, recruiting and IT so they can focus on their areas of expertise.

"Outsourcing is not new," Siems said. "What is new is the fact that today we can outsource more and more white-collar work because we can share information in real time over the Internet and other telecommunications devices. Suddenly it's not just manufacturing jobs or low-skill jobs."

A 2004 Forrester Research study claims that the U.S. economy gained 390,000 jobs for the 300,000 that recently went overseas.

"It is true that there may be a short-term redistribution of jobs while the outsourcing nation's work force moves on to better things, but this redistribution of jobs that may take place is in fact a net positive to the nation that outsources," Pai said, citing the study.

Furthermore, the McKinsey Global Institute estimates that for every dollar spent offshore, the United States gains $1.12 to $1.14 back.

The U.S. Chamber of Commerce also contends that outsourcing fears are overblown. The organization cites a recent Federal Reserve Bank of San Francisco study reporting that the United States insourced $130 million in office work, like IT and data processing, and outsourced $77 million for a surplus of $53 million.

"The alarms being sounded about the loss of jobs to foreign countries are motivated by political need rather than by facts," said Tom Donohue, president and CEO of the U.S. Chamber of Commerce, in a statement.

Direct foreign investment exceeded $487 billion and supported 6.4 million jobs in the United States in 2004, according to a Chamber report called Jobs, Trade, Sourcing, and the Future of the American Work Force.

On the other hand, recent studies from TPI and Deloitte Consulting say that many companies find the transition to offshore outsourcing more expensive and complicated than anticipated. These difficulties are prompting some CEOs to move their operations back to the United States, according to Calling a Change in the Outsourcing Market -- The Realities for the World's Largest Organizations, a study by Deloitte Consulting.

Other companies found that outsourcing didn't yield large savings until the company had gained roughly five years of experience at offshore outsourcing, and implemented various adjustments during that period, according to State of Global Service Delivery, a study by TPI.

Teri Takai, CIO of Michigan, said she doesn't approve contracts unless the bidding vendor agrees to use Michigan's resources to perform them. Takai left a career in the state's auto industry four years ago to become the state's CIO. She said the Deloitte and TPI studies reflect her experience with outsourcing in the private sector.

"It is a very different way of doing business. It requires a very different approach to the way you develop your specifications -- the way you do your testing -- the way you manage projects," Takai said. "It is definitely a huge learning curve, and the question really is, 'Can you offset the difficulties of the logistics, conference calling, and all of the other expenses that go with working with an offshore work force?'"

Keeping it in the Family
Offshore outsourcing took a wrecking ball to many Michigan private-sector jobs in recent years -- most notably the auto industry. As a result, the state's politics demand that in-state resources be used for government projects.

Takai said she hasn't had a problem finding either Michigan parent companies or large integrators with Michigan-based subcontractors to satisfy the state's requests for proposals.

"We're really not in a situation where we feel we need to offshore to reduce our costs," Takai said, adding that Michigan strongly promotes keeping all state tasks in the hands of state employees, which she said costs the state less in the long run.

"We actually have done very little true outsourcing of our IT functions," she continued. "Any major project we do -- while we will bring in a vendor partner to handle what I call the 'bubble' of the development -- we always have included in our contract that at the end of that contract, that work will be turned over to state staff."

Takai said she avoids outsourcing on an ongoing basis because it gives the vendor an advantage that's problematic for the state. "The vendor is basically holding you captive. They have all the knowledge, so it's very difficult to stay price competitive."

Michigan state employees are involved in all developmental phases of projects that vendors start for Michigan, which thoroughly prepares those employees to take over when the vendor leaves, she explained.

Years ago, Texas successfully experimented with offshore outsourcing when it hired Infinite Computer Solutions, an Indian company, with offices in Dallas. The company produced an application that converted remittance claims from paper forms to an electronic data interchange format.

However, current state Chief Technology Officer Larry Olson only supports outsourcing to companies that hire Texans to do the work.

"On our projects we are not [even] supporting offshoring to exotic places like New Mexico, Oklahoma, Arkansas, etc.," Olson said. "We strongly support the concept of 'bestshoring,' and clearly the best shore is Texas."

A Middle Ground Idea
Peter Iannone, president of Avanti Advisory, also opposes offshore outsourcing for state and local government.

Iannone said offshore outsourcing typically only saves large amounts of money when an organization moves operations overseas and hires cheap labor to perform functions under essentially the same status quo method. Instead governments should rethink how they serve citizens, which can cut costs differently than offshore outsourcing. Governments need to accelerate processes, streamline bureaucracy and create new interactive tools for citizens, like online driver's license renewals, tax returns and other automated interfaces, he said, before considering outsourcing offshore.

Iannone said inefficient governments usually suffer from high turnover, which kills productivity by forcing a department or agency to continually retrain employees. Methodologies are usually wrongheaded and inconsistently followed, he explained, adding that he prefers a three-step approach to saving money by increasing productivity, improving demand management and then outsourcing offshore if the government insists.

The offshore outsourcing component, however, saves the least amount of money of the three components, he said, recommending governments skip that third component all together.

For the first step, governments can make changes that reduce the number of staff needed to perform various jobs, Iannone said. It is easier to hire a vendor to make those changes, he added, but governments can do it on their own if necessary. Better training and motivational incentives can boost productivity by helping agencies retain experienced employees. And IT standardization also can cut staffing needs and other costs.

"Rather than every brand of server that ever existed [I'd] standardize on the top five -- then I don't need as many people to run the environment," Iannone said. "[I might] go from 100 operators down to 30 operators."

The second step involves what Iannone calls "demand management" -- purchasing software that satisfies more government needs, saving technical workers from numerous extra projects to meet all of those needs.

"If I am constantly being bombarded with change requests, and I'm constantly being bombarded with, 'Can you build me this little system? Can you build me that little system?' I'm spending a lot of time answering all this stuff," Iannone said. "Maybe there's packaged software that will do 90 percent of what I'm asked to do."

Those first two steps would dramatically increase efficiency and decrease employees, Iannone said. Outsourcing some remaining jobs overseas for an additional savings could be a third step, he said, but it becomes a small portion of the overall cost savings after the first two steps of the three-pronged approach are implemented.

"I can't take everybody offshore," Iannone said. "I need people onsite who are going to work with the users -- who are going to understand what the agencies or the companies are doing. So it's really the back end of this thing -- the coding stuff that I could send offshore."

Iannone said the resulting layoffs leading to more unemployment benefits payments would likely offset much of the savings the government would have achieved from offshore outsourcing.

Stimulating Economic Development
Some say sending jobs overseas undermines one of government's primary goals -- encouraging and advancing citizens' employment. Others argue that job creation is not the government's job.

Iannone said offshore outsourcing would counteract many states' efforts at inviting businesses into their states.

"States are going out like crazy to get economic development. They're giving tax breaks and incentives to bring companies in," he said, adding that a state benefits more by outsourcing work to vendors that create new private-sector jobs in that state to service the contract. Government also could negotiate for vendors to partner with nearby colleges to create learning opportunities for students.

Virginia applied that philosophy to its recent IT outsourcing contract with Northrop Grumman. The vendor's proposal promised a 25 percent savings on expenses and the elimination of up-front costs to fund the transformational process -- all without sending any functions overseas, according to the proposal.

The project will contribute to community revitalization efforts in Richmond, Va., by partnering with the Virginia Bio-Technology Research Park to build and manage a new consolidated IT facility.

The contract aims to increase high-paying IT jobs in Newport News, Va., by performing some of the state's services at the Herbert H. Bateman Virginia Advanced Shipbuilding and Carrier Integration Center. Northrop Grumman will also create a unified IT communications center in the Virginia Southwest Promise region, which the vendor says will help bridge the technology gap between southwest Virginia and other regions of the state.

But Siems said he'd prefer that the government maximize its savings by offshore outsourcing and allowing market forces to create new benefits for the states' economies.

"The government shouldn't be thinking that it's in the business of job creation for job creation's sake," Siems said, adding that its sole focus should be on spending taxpayers' money as efficiently as possible.

Still, he said Iannone's argument was the perfect middle ground position and probably the optimal solution, given political realities.

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Andy Opsahl

Andy Opsahl is a former staff writer and features editor for Government Technology magazine.

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