A few weeks ago, an information technology executive of a large Canadian corporation returned from his first tour of India. He expressed boundless enthusiasm about the quality of its people and the capabilities of its firms. He now believes that his company could, theoretically, keep only 30 per cent of its current IT staff — to do creative work and manage projects — and send the remaining jobs to India. Furthermore, he thinks many non-IT jobs could also be offshored. "I used to say we should consider the risks of offshoring," he says. "Now I believe we should consider the risks of not offshoring — we could easily become a brand-name company, with most of the work done overseas."
Asked what these changes mean for his children, he said: "I'm terrified. I don't know what careers I should tell them to prepare for."
This is the emerging reality of Canada's IT industry, according to a study released yesterday by PricewaterhouseCoopers partner Robert Scott and yours truly.
Canada has 550,000 IT workers. About 75,000 or more of these jobs, we believe, could move offshore by the end of the decade.
And it's not just IT jobs that are moving offshore. Any knowledge-based function that does not require direct personal interaction is a candidate.
Conclusion: We are in the early days of a shift that will have profound implications for companies, their market offerings, competition, the careers of millions and the competitiveness of nations. If the globalization of manufacturing was the wave of the 1990s, today is about the technology-enabled globalization of knowledge work.
Until now, Canada has lagged the offshore trend. But this is about to change. Today, Canada's biggest firms are seriously examining this option.
Many will take action. The rising Canadian dollar, growing media coverage, active marketing by Indian and global players, and successes with initial pilots are all contributing to the shift.
Cost is not the only reason companies send activities offshore (although respondents said that without cost savings, other factors did not matter; vendors claimed average cost savings for Canadian firms that sent work to India were in the range of 30 to 50 per cent, while buyers said 20 to 30 per cent).
While cost is fundamental, quality is also a big motivator. Indian IT companies, in particular, apply rigorous quality management. Many, like the Japanese car industry, use quality as a competitive strategy.
Domestic suppliers take note: Some buyers said their decision to use offshore suppliers was motivated, in part, by the poor service quality and account management of incumbent vendors.
Companies may reduce costs and improve IT productivity and quality. But employees will lose jobs, and the IT job market may shrink. Entry-level jobs are already in decline, slashing the apprenticeship stream for tomorrow's IT managers. Wages will fall.
Montreal and Toronto lost textile factories, and coal mines shut down in Cape Breton. Then a new generation created industries based on knowledge and creativity. Be confident that we are on the eve of another wave of economic innovation.
But knowledge work looks like the end of the line. We knew millions of knowledge jobs would appear in the wake of manufacturing job losses. It's hard to see what's next.
Is protectionism the answer? No, for several reasons:
·It won't work. It is practically impossible to prevent global corporations from seeking workers where they choose to. Barring domestic firms from offshoring would force them to compete on an uneven playing field.
·It's not the right thing to do. Workers and firms in emerging economies deserve to enjoy the fruits of innovation, growth and globalization. The alternative is a threat to peace and security.
·Offshoring does reduce the cost of products and services. This is beneficial to consumers and shareholders, and contributes to innovative development of the Canadian economy.
Canada must bring to bear the wherewithal to respond to this challenge. The era in which knowledge work was domestic by default is over. Now, the study argues, we must pick our niches, and fight hard to keep them.
This battle entails a variety of strategies.
First, Canada should build its advantages as a "near-shore" outsourcing provider. About 15,000 to 20,000 Canadians provide offshore IT services to the United States and other countries. Our overall labour costs put Canada midway between the United States and India, and we have other advantages, such as geographic proximity to the U.S. market. If Canadian-sited firms build on these strengths and capture only 3 per cent of the projected global outsourcing market, we will create more than 200,000 jobs by 2010. This could more than offset the 75,000 Canadian IT jobs we expect to move offshore.
Second, advanced software development methods are fast-paced, requiring frequent exchanges between technologists and business people. Such projects can best be done locally.
Third, Canadian IT industries and job markets should get focused. We recommend advanced and specialized technologies like animation, bioinformatics, nanotechnology and security; industry applications like retail banking, health informatics and telecom; and business processes that have a Canadian twist.
None of this will be easy. Canada has a thriving, growth-oriented IT services industry, but compared with India's, it's modest. Many firms active in Canada are headquartered in other countries. The federal government is stuck in neutral, seemingly for the foreseeable future. On the other hand, these very same forces seem to recognize that action on these issues is urgent. Good. It's time to get going.
David Ticoll's new book is The Naked Corporation: How the Age of Transparency Will Revolutionize Business, written with Don Tapscott.
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