It looks like Canada may soon join the growing political firestorm raised by the transfer of information technology jobs to places such as India and the Philippines.
Last week, offshore outsourcing, as the phenomenon is called, was among several issues that placed U.S. President George W. Bush on the campaign defensive. The topic is also hotly debated in Britain and Australia. Anecdotal evidence suggests that Canada will be next.
Companies elect to go with outsourcing -- and offshore outsourcing in particular -- for good business reasons. They enjoy cost savings on application development, for example, ranging from 35 to 70 per cent. They gain access to staff with specialized skills that they may lack internally. Thanks to strong project management disciplines, outsourcing firms often deliver quality results, and fast. The downside, of course, is the impact on a company's staff. Sometimes workers are protected, because the outsourced work is incremental to what they already do. Other times, the outsourcing firm hires a company's staff as part of the deal. But there are also times when people lose their jobs. One widely quoted 2002 estimate, from Forrester Research, predicted that 3.2 million U.S. services jobs would move offshore over the next 15 years.
A striking -- and heretofore unreported -- clue to the rise of outsourcing in this country comes from Industry Canada's quarterly statistical report on the information technology and communications sector. The latest study, published in December, shows services employment in the sector fell for the first three quarters of 2003, by a total of 2.6 per cent. This loss of about 7,000 jobs is unprecedented, and occurred during a job boom in the economy. Consulting and technical support by IT firms has consistently been a growth business. Never before have so many IT services jobs vanished, nor have such losses occurred over such an extended period.
Industry Canada analysts aren't sure why. But they suspect offshoring may have something to do with it. They plan to investigate this theory over the coming months.
If this theory turns out to be true, it will be striking evidence. After all, most jobs that migrate offshore aren't exported by IT firms, but by their clients in other sectors -- banking, manufacturing, and so on. A bank, for example, concludes it can save call centre costs in India. It hires a North American or Indian IT services firm to handle it.
The problem is, no one is keeping track of this job migration. Industry Canada's survey only counts those IT services workers in the IT sector -- not IT personnel in other industries such as banking. If Industry Canada's theory that offshore outsourcing caused the decline is true, the 7,000 lost jobs in the IT sector are the tip of the iceberg. Lots more IT jobs probably moved offshore at the same time.
A second collection of anecdotal evidence is from conversations and events in a research study I'm doing with consultants at PricewaterhouseCoopers. I attended a panel discussion on outsourcing at the Canadian Information Processing Society, whose members tend to be ambitious mid-level IT professionals. The speakers -- many with a vested interest in outsourcing -- lectured the audience to be flexible, learn new skills, et cetera. Audience participants, meanwhile, were palpably scared.
Executives in IT and their clients have told me that Canadian firms have been slow to outsource IT work. But now, they say, the market is taking off.
Canada has one advantage over the United States in capitalizing on the outsourcing movement. Thanks to the dollar, lower labour costs, geographic proximity, cultural affinity, and security concerns, firms such as CGI, EDS, Hewlett-Packard, and IBM -- and even their India-based rivals like Infosys, Satyam, and Tata Group -- bring some outsourcing work from the United States to Canada. "Near-shore" outsourcing is a Canadian growth industry, though it can't compete with India on price.
Offshoring, as mentioned, has put Mr. Bush on the defensive. Espousing free-trade principles, his Economic Report published last week said that "when a good or service is produced more cheaply abroad, it makes more sense to import it than to make or provide it domestically." Democrats went on the attack, and some Republicans were quick to follow. But many of these same Democrats oppose other aspects of free trade, including parts of the North American agreement that benefit Canada.
What's the right thing to do? The answer is neither simple nor obvious. The anti-offshoring camp decries firms for caring only about profit. They shamelessly dump loyal employees. They submit them to the humiliation of training their own replacements. On a larger scale, the argument goes, we moved manufacturing jobs to China based on the theory that our economy needs more knowledge-intensive professions. Now that such jobs are moving offshore, it looks scary. We may all end up working at Wal-Mart.
The pro-offshoring camp has answers. Offshoring delivers a multiple return on investment. This creates capital for more promising ventures and demand for the next wave of innovative jobs. Consumers will pay less for goods and services. Places such as India prosper and grow as export markets for North American goods. Another line of argument says: Hey -- why should rich countries have all the good jobs? Offshoring is a step in the direction of global justice. This is free trade at its best.
Whatever the rights or wrongs, offshoring will change some of Canada's most important labour markets. Businesses need to sort out what outsourcing means for them -- the opportunities, the risks, and the impact on their important relationships. Getting through this transition smartly will be crucial to maintaining our national competitiveness.
So what do you think? Is offshore outsourcing good or bad? How should Canadian firms, governments, and technology professionals respond to this phenomenon? Drop me a line and let me know.
David Ticoll's new book is The Naked Corporation: How the Age of Transparency Will Revolutionize Business, written with Don Tapscott.
