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Offshoring is not a Choice, it's a Reality

Satwik Seshasai SB '01, ME '02

Editor's Note: As outsourcing and offshoring jobs to foreign countries continues to gain momentum in corporate America, we asked IBM Software Engineer Satwik Seshasai SB '01, ME '02 whether he thought the trend will inhibit or stimulate economic growth in the United States. Below is his response.

Is offshoring really a choice? Do companies who utilize offshore workers do so simply because they seek to send jobs offshore? Does someone in Washington have the power to decide just how many jobs are going to be "sent offshore" this year? The answer is no. Offshoring is a reality of the global economy, not a choice. Many jobs performed offshore are functions that will most likely be performed offshore whether they are being done for a U.S. firm or a foreign firm. It is true that American firms have achieved dominance in many sectors, and thus it would be hard for a foreign firm to immediately compete with a U.S. firm - however, as knowledge and capital become more distributed around the globe, it's easier and easier for a foreign firm to enter markets in which the value produced by low-wage countries is equal or better to that produced by the U.S. workforce. In the face of this global reality, Americans need to adapt, not hide, and find ways to retain jobs both in the short and long-term.

The most important and unresolved issue is clearly to maintain American jobs. We should realize that this need to preserve jobs is both a long term and short term need. It is not enough to simply enact legislation that will put an artificial barrier on jobs which can really be done offshore. Eventually our competitive edge will disappear and those jobs we protected will be held by foreign firms. Thus, the right way to protect American jobs is to understand what makes America great - a culture of innovation and high-value services - and help our workforce move up the value chain to higher level jobs which justify being located in the United States.

In pursuing a higher-value economy, it is reasonable to enact legislation which levels the playing field between the United States and foreign firms, provided it does not produce the artificial barriers discussed above. John Kerry has proposed eliminating tax advantages for going offshore - legislation such as this is reasonable, because it simply brings us to an equal starting position. Even going as far as to require call center workers to identify themselves - another piece of legislation proposed - is not going to be harmful but recent evidence suggests that the U.S. worker may not discriminate if provided with equal service from both onshore and offshore services. The eLoan Corporation recently enacted a call system whereby callers could choose to have an Indian worker process their loan in a short timeframe, or an American worker process their loan in a longer timeframe - the U.S. consumers overwhelmingly chose the Indian workers even when properly identified.

Some of the fear about offshoring has been that any and every job can be done offshore. In addition to higher-value jobs which are likely to remain in the U.S. for the foreseeable future, other factors exist to keep some jobs here. Cultural differences will keep some U.S. jobs onshore. For example, in the past year Dell has had to bring its call center operations for enterprise customers back to the U.S. because customers argued that the Indian call center employees could not properly serve customers due to language differences. Since the U.S. has one of the largest markets, the need to serve this market will keep certain jobs within our borders. These differences are not meant as a way to build walls between our countries - in fact, different cultures provide different approaches to problems and different methods of working, and sharing of these methods will be a good thing for all involved. Obviously there's something unique about America that's made us able to be a leader in innovation for over 200 years. This is most likely a cultural factor, and it will keep jobs here as long as we can provide ways for the innovative culture to influence the performance of workers at all levels, not just entrepreneurs.

Faster to Market: the "24-Hour Knowledge Factory"
Small businesses represent another unnoticed winner in the offshoring marketplace. Long seen as the vehicle of job creation in countries, small businesses in the United States can use offshoring as a means for greater innovation and faster entry to market. Any small business with a solid idea now has the potential to use an offshore workforce to bring ideas to market faster and to create a sustainable business which will create positions both in the U.S. and abroad. Offshore labor not only requires less of a capital investment from the small business, but it is also available around the clock, which enables small businesses to compete against larger firms in entering established markets.

The around the clock notion is relevant to all sectors of the economy. At MIT's Sloan School of Management, research has revealed a "24-hour knowledge factory" model being used by knowledge-based companies such as software firms. In such environments, offshore workers are utilized to create a 24-hour operation where tasks are passed from country to country based on the time zone differences. This has led to more efficient production as well as shared knowledge between countries which has led to better products being produced. For example, a U.S. software engineer has the potential of increasing their own contributions by taking advantage of an offshore labor force which can perform testing and find bugs "overnight" or help resolve customer issues in a much more efficient manner. In such a model, the engineers are also exposed to different markets, and can understand the unique requirements of the different markets at the engineer level, rather than relying on knowledge derived from other sources such as marketing. Also, the U.S. engineers have the potential to take on the higher value tasks without sacrificing the lower value jobs which have to be done - for example, a U.S. engineer can work out the design level details of the software being produced, then pass it overnight to a developer in a foreign country who can write the code and pass it back for review the next morning.

Short and Long-Term Goals
The question underlying all of these arguments is whether the U.S. can actually maintain our higher standard of living in the wake of significant wage differences. It is clear that a more equalized standard of living is not an acceptable option. Thus, we should work to make sure that the money we earn goes to the higher standard of living rather than the cost of living. Inefficiencies in our system such as huge health care administrative costs make it much more expensive in terms of overhead to hire an American worker. This is a challenging problem requiring a set of complex solutions, but it's one that will help bridge the wage gap between America and other nations. We often hear that money invested offshore will return to the U.S. to help companies grow here. While this is true, we must make sure that the money is returning to the workers in America - through jobs and through investment in fixing inefficiencies as described above - not as redistributions to the executives.

What can we do in the short term to mitigate job losses? We can legislate to make sure companies invest their earnings offshore into the U.S. labor force, since we gave them the head start against potential foreign competition, we deserve some of the earnings. This way, we're not hindering U.S. firms' abilities to compete, but we are making sure the playing field is level. Also, we can take these earnings and invest them into wage insurance for the short term, and retraining for the longer term. In all of these efforts, the focus should be on higher-value services which can only be applied to the U.S.

What can we do in the long term to mitigate job losses? First, invest in education so that our engineers can continue to compete. Broaden education so that workers are not just technical, but also know how to work with other cultures, with other time zones, and hold service and management jobs, as well as technical jobs. This education is required at all levels - primary, secondary, and college. We can also find ways to help educate our government and firms to know where their investments are. It's dangerous to have all your knowledge resources invested in a politically unstable country like China - this is bad for workers, bad for companies, bad for the countries. Thus, we should ensure that we also invest in other countries' infrastructures at the right times, much like foreign military is used to keep our country safe. This is a radical solution, but necessary and will, in itself, provide jobs. At the same time, we should invest in our own country through means such as broadband deployment in the Midwest and lower cost areas. This way, companies could have more decisions, and a wider breadth of the American workforce would have more of a chance to compete for jobs so that it's not just highly-paid city workers competing against low-paid Indian workers.

What kinds of new jobs will be created in the long term? The biotechnology sector is one particular area that is seeing growth and could accommodate new workers - but we can't expect workers who are trained in IT now to switch to this all of a sudden. The services sector requires models where core work is done offshore, but then it's customized in the US by a US engineer for a US customer. Education opportunities will be created where engineers are required to go (physically or virtually) to foreign countries and teach them about our culture, and learn about their culture as "ambassadors." Building the physical infrastructure will always need onsite people to manage networks and machines. Offshoring creates many more requirements for knowledge sharing, knowledge repositories, knowledge management. Finally, management opportunities are created by the many new organizational challenges which need to be taken care of and managed well by people who know the technology.

In conclusion, the burden of saving jobs should be distributed just as the wealth is distributed - to the companies who are reaping the benefits of the offshore workforce. Once this is done, no barriers to offshoring are necessary or useful for the U.S. Instead, if we view ourselves as a global marketplace, we can focus on what we do best and find ways to provide value to the global economy.

About the Author Satwik Seshasai '01 Satwiksai Seshasai, S.B. '01, M.Eng. '02 is a software engineer for IBM in the Messaging and Collaboration group, and is pursuing a second Masters in the Technology and Policy Program at MIT. This past year he helped start the nation's first comprehensive transdisciplinary course in Offshore Outsourcing, with Professors Lester Thurow and Amar Gupta. Details on the course, including related research materials, are available at http://web.mit.edu/outsourcing Satwik can be reached at satwik@alum.mit.edu Published June 22, 2004.

What Matters is a guest opinion column written by a different MIT alumnus or alumna each month. The views expressed in What Matters are entirely those of the author and do not necessarily represent the views of the Association or of MIT. For previous columns, please see the archives. Would you like to contribute a What Matters column?