Globalization and Offshoring of Software:Examining the Myths

Eric RobertsStanford Computer Forum

April 18, 2006

Maria KlaweDean of Engineering, Princeton

Former ACM President

Myths about Employment: An Example

Contrary to popular belief, career opportunities in computer science are at an all-time high. We’ve got to spread that message among students from a rainbow of backgrounds, or risk becoming a technological backwater.

Blue Skies Ahead for IT Jobs

BY MARIA KLAWE

December 1, 2005

Myths about Employment: An Example

Contrary to popular belief, career opportunities in computer science are at an all-time high. We’ve got to spread that message among students from a rainbow of backgrounds, or risk becoming a technological backwater.

Blue Skies Ahead for IT Jobs

BY MARIA KLAWE

December 1, 2005All this talk about “Blue Skies” ahead just can’t hide the stark fact that Americans who don’t wish to migrate to India and/or some other off-shore haven are going to have a difficult career.

Why would any smart American undergrad go into IT when companies like IBM and HP are talking of stepping up their off-shoring efforts in the coming years? They want cheap labor, no matter the real cost.

I have been very successful in IT, but I certainly wouldn’t recommend it today to anyone except people who are geeks. . . .

I think the latest figures from the U.S. Department of Labor are not correct.

The “No Jobs” Myth Affects Enrollments

The Crisis in Computing Education

Source: Higher Education Research Institute at UCLA, 2005

• The Computing Research Association estimates that computing enrollments have fallen between 40 and 50 percent since 2000.

• A UCLA study of students entering college shows that the number of students listing CS as a possible major has declined significantly in recent years.

Myths about Offshoring and Globalization

Most good software jobs disappeared after the dot-com crash.1.

Offshoring will soon eliminate the few jobs that remain.2.

Good IT workers will be easy to find in the new “flatter” world.3.

Companies will always seek the lowest-priced labor.4.

Globalization is either always good or always bad.5.

Myth 1: Software Jobs Have Disappeared

• There was a slight dip in IT-sector employment after 2000.

• Recent data show that this trend has reversed, and that there are now more jobs in this sector than at any time in history.

• Projections from the Bureau of Labor Statistics indicate strong growth over the next decade:

Computer and information systems managers

Computer specialists

Computer hardware engineers

Total, all professional-level IT occupations

Total, all occupations

280 353 +26.1%

3,046 4,003 +31.4%

77 84 +10.1%

3,403 4,440 +30.5%

145,612 164,540 +13.0%

2004 2014 % change

Projected Employment 2004-2014 (in thousands)

Source: Bureau of Labor Statistics. Monthly Labor Review, November 2005

IT Salaries Remain High

Continuing a pattern that has been evident for decades, recent bachelor’s and master’s engineering graduates and computer science graduates at the bachelor’s level are more likely than graduates in other fields to be employed full time after graduation, and upon entering the workforce, they are rewarded with higher salaries.

Source: National Science Foundation. InfoBrief, December 2005

Among science graduates, the median annual salaries of computer and information sciences (CIS) graduates were the highest as of October 2003. CIS graduates with bachelor’s degrees earned a median annual salary of $45,000, and those with master’s degrees earned a median annual salary of $60,000.

Source: Computing Research Association, December 2005

Myth 2: Offshoring Will Eliminate All Jobs

• Offshoring of jobs in the IT sector is certainly occurring, although good data are hard to find. The best available estimates suggest that 2 to 3 percent of IT jobs move offshore each year.

• At the same time, employment data in the IT sector suggest that new jobs are being created more quickly than jobs are being moved overseas. Thus, offshoring of software seems so far to have increased the number of jobs, not only in India and China, but in the United States as well.

• This phenomenon of being an economic boon to both countries is, of course, the basis of the theory of comparative advantage that underlies globalization.

Myth 3: Good Workers Are Easy to Find

• Good workers in the broad IT area are in fact very difficult to find. Bill Gates and other industry leaders have made this point on several occasions. They hire in India and China—not because labor is cheaper—but because that’s where the engineers are.

• Individual productivity among individual software developers varies enormously.

• There has long been an undersupply of software developers relative to what one finds in most other fields.

Microsoft on the IT Worker Shortage

By David A. ViseWashington Post Staff Writer

Microsoft Corp. Chairman Bill Gates said yesterday the software giant is having enormous difficulty filling computer jobs in the United States as a result of tight visa restrictions on foreign workers and a declining interest among U.S. students in computer science.

Gates Cites Hiring Woes, Criticizes Visa Restrictions

Thursday, April 28, 2005

Speaking on a technology panel at the Library of Congress, Gates said a decline in the number of U.S. students pursuing careers in science and technology is hurting Microsoft in the short run, and could have serious long-term consequences for the U.S. economy if the problem is not addressed.

Microsoft on the IT Worker Shortage

Gates Cites Hiring Woes, Criticizes Visa Restrictions

Thursday, April 28, 2005

Richard F. Rashid, senior vice president of Microsoft Research, said he recently told his son, who is an undergraduate studying computer science, that he would have plenty of jobs to choose from when he graduates.

“We’re hiring as many people from college campuses as we can, but there are just not enough of them available,” Rashid said.

Variations in Programmer Productivity

• In 1968, a study by Sackman, Erikson, and Grant revealed that programmers with the same level of experience exhibit variations of more than 20 to 1 in the time required to solve particular programming problems.

• More recent studies [Curtis 1981, DeMarco and Lister 1985, Brian 1997] confirm this high variability.

• Many employers in Silicon Valley argue that this productivity variance is even higher today, perhaps as much as 100 to 1.

A Long-Term IT Labor Shortage ExistsFraction of professionals with degrees in that discipline:

Source: National Science Foundation/Division of Science Resources Statistics, SESTAT (Scientists and Engineers Statistical Data System), 1999, as presented by Caroline Wardle at Snowbird 2002

Life Sciences Chemical and Physical Sciences

Mathematics Engineering Computing andInformation Science

Fraction of disciplinary graduates employed in that profession:

Life Sciences Chemical and Physical Sciences

Mathematics Engineering Computing andInformation Science

Myth 4: Companies Seek to Minimize Cost

• Minimizing cost is not the goal of a corporation; maximizing return is. This fact has critical implications for hiring decisions.

• Suppose that you are Microsoft and that you can hire a software developer from Stanford whose loaded costs will be $200,000 per year. Over in Bangalore, however, you can hire a software developer for $50,000 per year. Both are equally talented and will create $1,000,000 annually in value. What do you do?

• Although the developer in Bangalore has a higher return, the optimal strategy is to hire them both. After all, why throw away $800,000 a year?

• Any elementary economics textbook will explain that one hires as long as the marginal value of the new employee is greater than the marginal cost.

Myth 5: Globalization Is Always Good/Bad• The issue of globalization is controversial and tends to divide

people according to their political perspective. The Right tends to see globalization as the inevitable culmination of free-market principles; the Left regards it as a strategy to entrench the power of privileged nations and people.

• Globalization is far more complicated than this simple analysis suggests, both in theory and in practice. Both sides of the debate need to recognize the strengths of the other side.

$ £ ¢ $ £ ¢ $ £ ¢ $ £ ¢

Talking Past Each Other

“The economic globalization discussed here has cultural, social and political consequences (and preconditions). But those consequences and preconditions are neither part of its definition or a focus for our attention.”

—Wolf, Why Globalization Works, page 19

“The shift from the recession to the cutthroat global economy happened so suddenly I feel as if I was sick that day and missed the whole thing—as with Grade 10 algebra, I will forever be playing catch-up.”

—Klein, No Logo, page 259

Talking Past Each Other

I believe that globalization—the removal of barriers to free trade and the closer integration of national economies—can be a force for good and that it has the potential to enrich everyone in the world, particularly the poor.

Globalization and its Discontents

As his title suggests, Joseph Stiglitz is not an uncritical supporter of global trade. He does, however, criticize the one-sided thinking that both sides of the issue typically bring to the debate.

Joseph Stiglitz

But I also believe that if this is to be the case, the way globalization has been managed, including the international trade agreements that have played such a large role in removing those barriers and the policies that have been imposed on developing countries in the process of globalization need to be radically rethought.

Globalization and its Discontents

As his title suggests, Joseph Stiglitz is not an uncritical supporter of global trade. He does, however, criticize the one-sided thinking that both sides of the issue typically bring to the debate.

Joseph Stiglitz

Those who vilify globalization too often overlook its benefits. But the proponents of globalization have been, if anything, even more unbalanced. To them, globalization (which typically is associated with accepting triumphant capitalism, American style) is progress; developing countries must accept it, if they are to grow and to fight poverty effectively.

Globalization and its Discontents

As his title suggests, Joseph Stiglitz is not an uncritical supporter of global trade. He does, however, criticize the one-sided thinking that both sides of the issue typically bring to the debate.

Joseph Stiglitz

George Soros on Market Fundamentalism

George Soros

Billionaire financier George Soros argues that the future of free society is threatened as much by a dogmatic “market fundamentalism” as it is by religious fundamentalism.

In my student days . . . open society was threatened by various totalitarian ideologies—fascism, Nazism, and communism—which used the power of the state to impose their final solutions. Open society is now also threatened from the opposite direction, from what I call market fundamentalism. I used to call it laissez faire but I prefer market fundamentalism because laissez faire is a French expression and most market fundamentalists don’t speak French.

George Soros on Market Fundamentalism

George Soros

Billionaire financier George Soros argues that the future of free society is threatened as much by a dogmatic “market fundamentalism” as it is by religious fundamentalism.

My contention that market fundamentalism endangers the open society may sound rather shocking because private property and a market economy are indispensable elements of an open society. But the market fundamentalists believe that markets are perfect and governments should stay out of the economy. They base their arguments on economic theory, which claims that markets tend towards equilibrium. It so happens that that claim is false with regard to financial markets.

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Conclusions of the ACM ReportGlobalization of, and offshoring within, the software industry are deeply connected and both will continue to grow. Key enablers of this growth are information technology itself, the evolution of work and business processes, education, and national policies.

1.

Both anecdotal evidence and economic theory indicate that offshoring between developed and developing countries can, as a whole, benefit both, but competition is intensifying.

2.

While offshoring will increase, determining the specifics of this increase is difficult given the current quantity, quality, and objectivity of data available. Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations.

3.

Conclusions of the ACM ReportStandardized jobs are more easily moved from developed to developing countries than are higher-skill jobs. These standardized jobs were the initial focus of offshoring. Today, global competition in higher-end skills, such as research, is increasing. These trends have implications for individuals, companies, and countries.

4.

Offshoring magnifies existing risks and creates new and often poorly understood or addressed threats to national security, business property and processes, and individuals’ privacy. While it is unlikely these risks will deter the growth of offshoring, businesses and nations should employ strategies to mitigate them.

5.

To stay competitive in a global IT environment and industry, countries must adopt policies that foster innovation. To this end, policies that improve a country’s ability to attract, educate, and retain the best IT talent are critical. Educational policy and investment is at the core.

6.

The New York Times On the ACM Report

Computing Error

Wednesday, March 1, 2005

The outsourcing of computing work overseas may not be as bad as you think. In fact, it probably isn’t bad at all. Consider one recent study that says the problem isn’t so much the competition from high-tech workers in places as far-flung as India and Romania as it is the discouragement caused by the doomsayers themselves.

The Association for Computing Machinery, the professional organization that issued the report, says that there are more information technology jobs today than at the height of the dot-com boom. While 2 to 3 percent of American jobs in the field migrate to other nations each year, new jobs have thus far more than made up for the loss. . . .

The New York Times On the ACM Report

Computing Error

Wednesday, March 1, 2005

That picture, of course, stands in contrast with the more familiar gloomy depiction of runaway outsourcing. Perhaps that explains what the report says is declining interest in computer science among American college students. Students may think, Why bother if all the jobs are in India? But the computer sector is booming, while the number of students interested in going into the field is falling.

The industry isn’t gone, but it will be if we don’t start generating the necessary dynamic work force. The association says that higher-end technology jobs—like those in research—are beginning to go overseas and that policies to “attract, educate and retain the best I.T. talent are critical” to future success. . . .

The New York Times On the ACM Report

Computing Error

Wednesday, March 1, 2005

Information technology jobs won’t go away unless we let them. Computing in the past five years has become, according to the report, “a truly global industry.” In the next few years, jobs won’t just land in our laps. We have nothing to fear but the fear of competing itself.

The End