Sunday, June 10, 2007
Jobs are increasingly going abroad


By Richard Craver
JOURNAL REPORTER







The shadow of outsourcing is hanging over the information-technology department at R.J. Reynolds Tobacco Co.

Reynolds employees were told recently that the company is evaluating its IT division, and that it is likely that some operations will be transferred to a vendor next year.

"We have no idea at this point how many jobs could be impacted," Reynolds spokeswoman Carole Crosslin said. "This decision stems from our internal evaluation of the best options to handle certain processes and service in the years ahead, so that we can continue to help shape the company's growth and success."

In a clarifying comment later, Crosslin said that Reynolds has not begun negotiations with potential vendors, and that the process of evaluating the IT department for outsourcing would take months.

Reynolds employees told the Winston-Salem Journal that as many as 100 IT jobs could be affected.

Reynolds is not alone among major area employers pursuing cost savings through outsourcing and offshoring IT services. A short list includes Aon Corp., BB&T Corp., Dell Inc., GMAC Insurance and Wachovia Corp. Employment officials said that thousands of jobs could be at stake, either locally or within companies' domestic operations.

And economists caution that the pace of outsourcing and offshoring of IT jobs is accelerating beyond back-office data entry and call centers to positions once thought immune to such strategies.

According to a Princeton University study, released in March, IT jobs are among the top occupations most vulnerable to outsourcing and offshoring, with computer programmers ranked first and computer-systems analysts ranked third.

"Elements of IT jobs are just like factory jobs in that you do the same task over and over," said Peter Morici, a business professor at the University of Maryland. "Jobs that are considered as commodity rather than expertise have been vulnerable for years to outsourcing.

"What's different is that the labor pool for knowledge jobs has built up enough in India and other countries that those jobs have become commoditized."

White-collar woes

Economists and employment officials said that it should not come as a surprise that white-collar jobs are becoming as vulnerable to outsourcing and offshoring as blue-collar manufacturing jobs.

The Triad has lost at least 27,627 apparel, furniture, textile and tobacco manufacturing jobs since January 2000, according to the N.C. Employment Security Commission.

The big difference between displaced manufacturing workers and service-sector workers is that only people who make a product are eligible for additional income support beyond unemployment benefits through the U.S. Trade Adjustment Assistance Act.

"There is no distinction when it comes to job training or retraining benefits, though the amount can vary by county," said Curtis Morrow, the work-force unit manager for the N.C. Employment Security Commission.

"Because the TAA Act is up for renewal, there is talk in Congress about extending the income-support benefits to service-sector jobs workers where it can be certified that they lost their job through it being taken overseas. If that happens, you'll likely see more TAA applications from the service sector."

Alan Blinder, an economics professor at Princeton, ranked 800 occupations, as listed by the U.S. Bureau of Labor Statistics, by how easy or hard it is to offshore the work, either physically or electronically.

"Using that ranking, I estimate that somewhere between 22 percent and 29 percent of all U.S. jobs are or will be potentially offshoreable within a decade or two," wrote Blinder, who was a vice chairman of the Board of Governors of the Federal Reserve System in the Clinton administration.

"In my view, service-sector offshoring is in its infancy at present," Blinder said.

"It is found that there is little or no correlation between an occupation's 'offshorability' and the skill level of its workers as measured either by educational attainment or wages."

Companies are outsourcing or offshoring productions and services for two main reasons - cost and competency, said Peter Tourtellot, the managing director of Anderson Bauman Tourtellot Vos & Co., a turnaround-management company with an office in Greensboro.

"It's understandable why Reynolds, and VF Corp. before them, is turning to a vendor for non-core operations," Tourtellot said. "That vendor typically can provide an IT service at a lower cost and offer technological upgrades sooner than the company could itself.

"For those jobs requiring an expertise or dealing with customers, there tends to be less vulnerability to job loss because some employees go to work for the vendor."

But Tourtellot said that the end result in some cases is a loss of jobs at the company doing the outsourcing. Some of them farm out that work to consultants from other countries here on a work H1B visa or L1 visa.

Those visas enable foreign workers to work in white-collar jobs in the U.S. when there is a natural shortage of local workers. But some employment officials said that some visas have been issued for occupations where there is no shortage.

Morici's conclusion rings all too true to Matt Combs, a Lewisville resident who is struggling to find a full-time computer-programming job despite having 19 years as a software developer and consultant.

Combs said he made a good living serving as a self-employed consultant to two technology companies for several years. But the work dried up in 2005, and one of his employers hired foreign consultants with U.S. work visas.

In November 2005, Combs moved his family to Lynchburg, Va., for two IT jobs that lasted a combined nine months. Family illness led the Combses to move back to Lewisville last fall. Combs said that his family was fortunate that they hadn't sold their home and had savings.

"Searching for IT work in the Triad has been getting more difficult," Combs said. "More people are applying for a limited number of available positions because of layoffs of IT staff at Triad area companies and the reduction of the IT work being done locally because of work being outsourced or offshored to India, China, etc."

Combs said that the layoffs have reduced the networking opportunities for computer programmers, which he called "a traditional means of acquiring an IT position. "There's also a lack of empathy by those who are not affected, as long as everything does OK and we reduce costs and make money," he said.

'Blame the worker'

Ron Hira, an assistant professor of public policy at Rochester Institute of Technology, said that for most displaced IT workers, there is no special retraining program to help them.

"They aren't being told anything, so they simply enter the normal government-service programs that any unemployed worker does," Hira said. "No one has a good answer for them, even the proponents of offshoring. They generally blame the worker for not keeping his/her skills up-to-date.

"Right now, the IT job market is OK, so there is a better chance to get back in the profession. This may not hold, though."

Hira said he is not surprised that Reynolds plans to outsource some IT jobs.

"Many firms have decided that IT is not within their core competency," said Hira, a co-author of the book Outsourcing America: What's Behind Our National Crisis and How We Can Reclaim American Jobs. "For example, Procter & Gamble, Disney and General Motors have outsourced IT work.

"What's relatively new, since 2004, is there are now firms, such as Cognizant, Tata Consultancy, Infosys and Wipro, that specialize in offshore outsourcing.

"These firms, with revenues in the low billions of dollars, are growing 30 percent to 40 percent a year by capturing more U.S. clients. Their profitability and growth rates mean that IBM, Accenture and EDS have to offer offshore outsourcing to compete," Hira said. "Accenture will have more workers in India than the U.S. by August. IBM is laying off 13,000 here while staffing up aggressively in India."

Hira said that large contracts, such as Reynolds, could require both on-site and offshore workers at "blended" rates. "The major offshore outsourcing firms, like Cognizant, use foreign guest workers for on-site work," he said. "This spells doom for most of the current U.S. workers."

Officials with the U.S. Bureau of Labor Statistics and economists said that it is difficult to get an accurate count of the number of national jobs affected by outsourcing and offshoring, much less in North Carolina or the Triad.

But the bureau reported that 23 percent of relocation announcements in the first quarter of 2007 - 12 out of 53 - involved jobs being transferred to other countries. Those announcements affected 1,830 workers.

"The government has dropped the ball on collecting this information, in part because it doesn't want to call attention to the issue," Hira said. "In fact, it suppressed a congressionally mandated study with this kind of data.

"The private sector has very rational reasons not to reveal what is going and staying - public relations backlash; employee backlash; don't want their customers to know because customers will demand price breaks. So, we have a market failure, where workers aren't getting the proper labor-market signals."

Charles McMillion, the president and chief economist of MBG Information Services in Washington, said that "in our dynamic economy almost everyone's job description changes every year or two even if they stay in the 'same' job.

"So what is outsourced is rarely a precise, existing job. Rather, the business or the function is reorganized with different jobs remaining - whether more or less than before - and different jobs set up in Bangalore or Shanghai."

The Reynolds IT job cuts would be on top of 80 salaried management positions that the company said it would eliminate by spring 2008.

"We understand that the unknown is unsettling to our employees," Crosslin, the Reynolds spokeswoman, said. "Our people are very important to us, and we are trying to do everything possible to keep our employees' needs top-of-mind as we move through this process."

But "morale is very, very low as you can imagine," one employee told the Journal, signing a letter as someone "who will lose their job next year."

Dell's recent announcement that it plans to cut 10 percent of its global work force, or about 8,800 employees, has added to the local tension over technology jobs. Dell has not said whether the reduction would affect the 1,100 employees at its computer-assembly plant in Forsyth County.

Still, financial institutions have led the way in taking service-sector jobs offshore, and momentum is building for more even as the cost of labor increases for vendors based in China and India.

For example, BB&T said at its shareholders meeting April 24 that it plans to outsource internationally some of its back-office operations.

'To remain competitive'

In January, the bank said that it planned to eliminate 700 positions throughout its 11-state territory, including 20 at its corporate operations in Winston-Salem and 10 more in its Triad network, as part of streamlining operations. Bob Denham, a company spokesman, said that 300 jobs would be cut.

"We have no choice but to internationally outsource if we're going to remain competitive for the long term," John Allison, the chairman and chief executive of BB&T, said at the shareholders meeting.

"We can do things like human systems, accounting, those types of things can be outsourced internationally. I don't think we're going to have a lot of employee dislocation out of that process, but we could have some."

Wachovia is implementing a three-year plan, called Operational Efficiency Improvement, which started in January 2005. The goal is to reduce annual costs between $600 million and $1 billion. Part of the plan is to cut up to 4,000 positions by the end of 2007, including sending technology jobs overseas.

In November 2005, Wachovia signed a seven-year agreement with Genpact, an Indian technology vendor, which would transfer some services of its business-processing units to India. Genpact said in a May 11 regulatory filing that Wachovia has taken an ownership stake in the vendor.
Christy Brown, a spokeswoman for Wachovia, said that it is focusing on its ACH payments unit, which has about 100 employees. Genpact officials have toured Wachovia's local IT operations.

The Genpact filing described how it provides services in every major division of the bank, including speeding up branch openings. "We began by managing a number of discrete and diverse processes across several of Wachovia's lines of business," Genpact said. "We have since further expanded the breadth and depth of services we provide to Wachovia.

"Our relationship with Wachovia today covers a wide range of services including finance and accounting services, financial modeling and comparables analysis for Corporate and Investment Banking, mutual-fund services for their Capital Management Group and analytical services for their General Banking Group."

Wachovia still is evaluating whether to let Genpact handle the processing. Brown said that the bank could eliminate up to eight ACH payment jobs - seven in Winston-Salem - if outsourcing occurs.

Some local employees believe that those jobs would represent just the first turn of the spigot.

Ken Thompson, the chairman and chief executive of Wachovia, said at a panel discussion at Wake Forest University on April 10 that every division of the bank is either outsourcing or sending parts of its work overseas to "make the kind of profits we need to make" to compete.

"It's a way of life," Thompson said.

Charles Iacovou, an assistant professor of information technology at Wake Forest University, said that smaller organizations, by outsourcing to large IT vendors, "can tap into their large operations and reap efficiency-based benefits through them."

Morici, the Maryland professor, said that one argument against offshore IT jobs is concerns about identify theft or security breaches. But officials with BB&T and Wachovia said they are confident that offshore security meets their domestic standards.

Tony Plath, a finance professor at UNC Charlotte, said that as technology improves and costs are lowered, more service jobs are likely to be exported.

"Just look at how we're starting to outsource surgical services to Southeast Asia," he said.
"Simply put, we're all vulnerable to outsourcing."

? Richard Craver can be reached at 727-7376 or at rcraver@wsjournal.com.
http://www.americaneconomicalert.com/ne ... ID=2669859