Flak over offshore outsourcing swells
- By William Welsh
- Jan 23, 2004
More states eye bills to keep government tech jobs at home
George Newstrom, Virginia's secretary of technology and chairman of the World Information Technology and Services Alliance
State and local governments will continue their full-scale retreat from offshore outsourcing this year to avoid the political backlash that often accompanies the loss of government jobs to overseas sites, industry and government officials said.
A push by legislators to ban or restrict offshore outsourcing on government contracts has begun in 11 states, and groups tracking the legislation expect more states to follow.
"Once the [legislative] sessions start rolling, you may see more," said Justin Marks, a research analyst with the legislative information services program at the Denver-based National Conference of State Legislators. "This is just the beginning of the discussion on the issue."
Several bills under consideration do not call for an outright ban but require that, if a citizen asks, a call center location must be disclosed and that call rerouted to a U.S. operator upon request, said Michael Kerr, director of the Enterprise Solutions Division with the Arlington, Va.-based Information Technology Association of America.
Indiana canceled a $15.2 million contract in November with New York-based Tata Consultancy Services America, a subsidiary of Tata Ltd., for upgrades to computers processing unemployment claims when Gov. Joseph Kernan learned that no Indiana companies had competed for the contract awarded under the previous governor, said Jeff Harris a spokesman for the Indiana Department of Workforce Development.
Some integrators, including Affiliated Computer Services Inc., Dallas; Electronic Data Corp., Plano, Texas; and IBM Corp., Armonk, N.Y., have extensive offshore capabilities to support their commercial sector businesses. Datamatics Ltd., Tata and Satyam Computer Services Ltd., all based in India, are among those that have substantial offshore capabilities. But officials with these companies said they expect to rely on little, if any, offshore services on their state government contracts.
Offshore outsourcing includes everything from computer programming and software development to transaction processing and call center support. It has attracted the interest of government and industry alike because of the cost savings derived from lower labor costs overseas.
State and local governments spend about 25 percent of their $40 billion annual information technology spending on outsourcing, according to Reston, Va.-based market research firm Input Inc.
Determining how government work goes offshore is problematic, because it is buried in the pricing structure of the contracts, said Jim Krouse, Input's manager of state and local market analysis.
"It's nearly impossible to figure out, because we aren't privy to the contract structures," he said.
Lawmakers in Connecticut, Florida, Indiana, Maryland, Michigan, Missouri, New Jersey, New York, North Carolina, Wisconsin and Washington have introduced or plan to introduce legislation banning or restricting offshore outsourcing. Although none of the bills have passed, they appear to have strong support in those state capitals, Marks said. For example, the bills introduced in New Jersey and New York passed their respective senates unopposed and are being debated on the house sides.
The resistance to offshore outsourcing is strong, not only in states that have lost technology jobs overseas, but also in Rust Belt states such as Indiana and Michigan, which have lost manufacturing jobs to overseas venues, Marks said.
The support for offshore outsourcing in state and local government is "extraordinarily tenuous," said George Newstrom, Virginia's secretary of technology and chairman of the World Information Technology and Services Alliance, a consortium of industry IT associations from around the globe.
"If you're sitting in a political office, you have a hard time telling your constituents you want to send state jobs offshore. ... It doesn't play well at home," Newstrom said.
Even Virginia Gov. Mark Warner, who enjoyed a successful technology career before he was elected to the state's top office, is reluctant to have any state technology services done offshore, Newstrom said.
"Our tax base has eroded because [high-tech] jobs in Northern Virginia have been impacted," Newstrom said. "There's not a lot of interest right now in sending more jobs offshore."
For these reasons, technology companies with substantial offshore resources said they are content to wait until states have weighed the pros and cons of offshore outsourcing and are more comfortable with it.
Brian Whitfield, vice president of state and local government Americas with IBM, said Big Blue's customers vary widely in their opinions about offshore outsourcing.
"There are several [customers] that want to learn how it works, what it means and what the benefits are," he said. "Others are very succinct they want the work done only in the United States."
State lawmakers are caught in "a classic policy dilemma" over offshore outsourcing, Marks said. On one side, they are aware they can save money by tapping offshore support. On the other side, they fear any further loss of jobs in their states when the unemployment rate remains high.
In response to worries about government contracts moving offshore, most overseas companies will do the work onsite in the state alongside government employees, said Rishi Sood, principal analyst with the Stamford, Conn.-based market research firm Gartner Inc.
"State and local governments that have used offshore companies have been impressed by the quality of work delivered and the cost to perform the task," Sood said.
The large number of jobs associated with federal and state government work in particular make offshore outsourcing especially controversial, more so than at the municipal level, said Mark King, ACS' chief operating officer.
"The federal government is least likely to do it because of union issues, and that's where there is the most heat for a politician," King said. "The least heat is at the very lowest levels of city and county government."
John Kost, Gartner's managing vice president for global public-sector services, is skeptical about the private sector's claim that there is little or no offshore work is being done for state and local government.
"There's already a lot of it going on, but it's being kept under the radar screen in most states and localities," he said.
Kost said governments are going to be hard pressed to write bid evaluations that discriminate against offshore work without running the risk of explicitly discriminating against companies in other states or nations.
For their part, the integrators are optimistic that over the next decade, offshore outsourcing gradually will become part of the fabric of state and local government.
A decade ago, about 10 percent to 20 percent of commercial customers were willing to consider offshore outsourcing, King said. But now 75 percent of commercial customers are requesting, and even demanding, that contractors move work offshore so they can get a lower price.
In three to five years, it is possible that government might be where the commercial sector was a decade ago, King said. The most likely state and local customers to move work offshore will be those that face the most challenging budget problems, he said.
"There will be some mavericks. But you aren't going to see an avalanche of jobs moving offshore, only a trickle," King said.
Staff Writer William Welsh can be reached at email@example.com.