Workforce Globalization in the U.S. IT Services & Software Sector John F. Sargent Carol Ann Meares Office of Technology Policy U.S. Department of Commerce

Workforce Globalization in the

U.S. IT Services & Software Sector

John F. Sargent

Carol Ann Meares

Office of Technology Policy

U.S. Department of Commerce

Study Limitations

• 6 month time-frame

• Data limitations

• Specific Industry Focus

• Sources:

– Some data analyses

– Extensive literature review

– Interviews

IT Services and Software-related Industries Examined

• Software publishers

• Computer systems design and related services

• Internet service providers and web search portals

• Data processing, hosting, and related services

Macro Trends Facilitating IT Workforce Globalization

• Integration of national economies accelerating/expanding competitive arena– 1948 GATT: 23 countries– 2004 WTO: 147 countries

• Economic reforms and business infrastructure development in growing number of countries

• Rapid development and widespread deployment of high speed communications


• China, India, Russia, Eastern Europe joining free market system

– 3 billion people; half the world’s labor market

– Large/growing pool of skilled/education workers

– Work for wages far below workers in U.S.

– Unprecedented addition of productive labor capacity in the global free market economy


• Digitization of knowledge work and business processes

• Rapid codification of some knowledge work into rule-based procedures

• Skills training rapidly developed/made widely accessible

• Allows emerging and LDCs to truncate traditional economic development continuum


• Knowledge work can move offshore more quickly and cheaply than manufacturing

• Companies moving up the off-shoring learning curve

Trends Driving Globalization Specifically in IT Services and Software

• Surplus of low-cost, technically-skilled labor in other countries(e.g. India, Ireland, Russia, some Eastern European)

• Digitization of Work

– Business process reengineering

– Documented/digitized work processes

– Value chain of separable activities allows for appropriate, cost-effective sourcing of working

Trends Driving Globalization Specifically in IT Services and Software

• Standardization of Software Platforms (Oracle, PeopleSoft, SAP, etc.)

– Domestic and foreign workers acquire standard and portable skills useful to many employers

– Development and adoption of standard IT training programs and skill certification

Other Factors

• Increases in H-1Bs– Valuable knowledge/contacts gained

• Large Indian-American IT business community– Tapping low-wage Indian workforce

• Moving-up off-shoring learning curve

• Emergence of off-shoring broker/ consulting firms– Opens off-shoring to broader range of companies

– Aggressively promoting off-shoring

Other Factors

• Off-shoring destination nations expanding technical workforce pipeline/skills training

• Some expanding efforts to build language skills/reduce cultural barriers

• Some nations focusing on improving productivity, quality, business skills, and higher value work

• Business adoption of global sour

Complex International Landscape

• Different countries offer different skill sets/capabilities

• Varying wage rates relative to U.S.

• Different levels of cultural compatibility

• Different industry structures

• Different levels of business and project management sophistication

India

• Rapidly growing presence of software/IT services/consulting multinationals

• Indigenous IT services industry dominated by handful of large companies

• Applications development and maintenance

• Growing business skills

• Seeking to move to higher-value added work

• Indigenous firms not a player in software products or research

• Attempting to address the cross-cultural issues

Ireland

• Presence of software/IT services/consulting multinationals

• Small Irish-owned companies focused on niche software products

• High quality, English speaking workforce; cultural compatibility with U.S.; higher wages than in India

• Some leading-edge IT R&D in Irish academic institutions

Russia

• Good information hard to come by• World-class IT skill base• Very high-skills, can work on most complex projects • Comparable to U.S. skill levels• Poor English language capability• Russian IT industry:

– small and medium domestic companies; – small entrepreneurial groups getting work from x-pats, friends,

acquaintances; – revenues small but growing ($500m)

• Some presence of IT multinationals• Poor business environment/capability

RussiaBroad Range of Capabilities

• Applications develop. and maintenance

• Middleware

• Home education/ entertainment software

• Speech/natural language applications

• Electronic marketplace

• Knowledge mgt./data mining

• Data analysis tools

• Cryptography

• GIS

• More

Rapidly Changing Landscape

• Indigenous Indian firms growing rapidly/expanding staff by the 1,000s– FY04, Infosys up 9,800 (most IT)

– FY04, Wipro up 5,728

– FY03, Satyam up 4,273 (most IT)

• Indigenous Indian firms attempting to move up the food chain– Exerting greater management control

– Entering consulting


$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

1997 1998 1999 2000 2001 2002 2003 2004(in m

illion

s of

nom

inal

U.S

. dol

lars

)

TataWiproInfosysSatyam

IT Services and Software Revenues of Major Indian Companies

Tata 31% CAGR

Wipro 23% CAGR

Infosys 54% CAGR

Satyam 40% CAGR

SOURCE: Company annual filings, SEC filings


Time Frame Onshore Offshore

Late-1990s 80% 20%

2000-2001 56% 44%

2002-2003 43% 57%

2003-2004 38% 62%

0%

20%

40%

60%

80%

100%

Late 1990s 2000-2001 2002-2003 2003-2004

Onshore

Offshore


• VCs encouraging IT start-ups to use lower cost off-shore software development to reduce cash-burn rate

• Growing pressure in corporate America to offshore IT work

• Political pressure to stem the flow of jobs

Underlying Advantages for U.S. IT Workforce

• Stable nation/economy• No cultural issues with U.S. work• Strong data security/privacy protection• Knowledge transfers overseas difficult• In the time zone• Good/reliable telecom infrastructure• Strong intellectual property protection• Strong skill base• Software development benefits from market proximity

IT Research Capabilities Off-shore

• What is research vs. product development?

• Most multinational IT company overseas R&D is product development and localization

– Oracle Chinese R&D centers modify database products for Chinese market

IT Research Capabilities Off-shoreIndia

• Indigenous Indian companies not R&D players

– Develop/refine software methodologies/tools

– Implementing metrics

– Education and training methodologies

– Monitoring technical trends

– Monitoring business trends

• R&D investments a few million dollars, at most

IT Research Capabilities Off-ShoreIndia

• Indian industry signaling desire do more.

• Specific product/service-related needs or experimental development– Cryptology, digital watermarking, wireless,

systems software, middleware, smart cards, artificial intelligence, bioinformatics, embedded software

– Makes sense: next generation e-business and e-commerce technologies

IT Research Capabilities Off-ShoreIreland

• Irish government: $191 million in IT research over 3 years

• Irish industry: $113 million by IT companies

• Recruiting 50 top researchers

• Bio and IT targeted

• Academic research: context aware computing, grid computing, sentient computing, nano-scale computing, photonics

IT Research Capabilities OverseasMultinationals

• Establishing modest “real” R&D presence

• Information hard to come by

Multinationals: IBM

• India

– Bioinformatics, text mining, natural language processing, grid computing, autonomic computing, life sciences, pervasive and wireless computing, speech recognition for Indian languages

• China

– Language processing, speech and handwriting recognition, pervasive computing, mobile computing, multi-media, e-business

Multinationals: Microsoft

• China:

– Technologies expected to emerge in 5-10 year time frame

– Next generation user interfaces (interact based on speech, gestures, expressions); immersive technologies, pervasive computing

– Expected to expand the facility significantly

Multinationals: HP

• India– Research on innovations for emerging

economies

– Focus on social, cultural, economic, technology drivers

– Handwriting and speech-based computer interfaces, low cost access devices, IT that can be shared, communications concepts for small towns/rural areas, etc.

Multinationals: Google and Yahoo

• Recruiting engineers for R&D centers in India:

– Google• Next generation search engine

• Information retrieval algorithms

• Machine learning

• User interfaces

– Yahoo• Neural nets, data mining algorithms

• Data warehouse design

Some Implications

• Rapid diffusion, improved education and training delivery systems, improved knowledge capture and sharing systems mean:– Hot technical skills become a commodity—

and ripe for off-shoring– faster

– Reduction in the number of jobs U.S. can capture from its technical innovations as they mature and diffuse

Characteristics of IT Work Favorable for Performance in the United States

• Work in which there is uncertainty about what the customer wants or what the specifications should be.

• Projects that require highly iterative development processes.

• Work that crosses many disciplines.

• Work that requires a high degree of personal interaction with end-users/clients.

• Applications with complex procedures, including ones that involve substantial manual intervention and data fixes.

• Applications that involve a high degree of integration with other systems developed and maintained on-shore.

• Work involving nuances or deep cultural understanding.

Characteristics of IT Work Favorable for Performance in the United States

• Work in which much of the knowledge exists only in the minds of the on-shore IT staff

• Analytical tasks, leading-edge research and non-rule-based decision-making

• High levels of creativity, innovation, insight, “thinking outside the box”

• High management requirements

• Process design and business analysis

• Technology and systems integration (applications, hardware and networks)

• Fusion of industry knowledge, high-level IT skills, and business process expertise

• Requires U.S. security clearance

Characteristics of Work Favorable to Performance Offshore

• High wage differential with similar occupation/level in destination country

• High labor intensity

• Clearly defined requirements, little nuance

• Repetitive tasks

• Rule-based decision-making and problem solving

• Documented or easily transferred content and process knowledge

• Discreet, separable; low degree of interaction across different services, applications

• Low degree of personal interaction with end-users, clients

• Stable applications with minimum of “firefighting”

Characteristics of Work Favorable to Performance Offshore

• Long projected useful life to amortize offshore set-up costs

• Low-to-medium business criticality

• Less time-sensitive, longer transition periods

• Projects involving simple and standard hardware and software

• Digital, Internet-enabled

• Low setup barriers

• Low-to-medium technical complexity

• Not multi-disciplinary

• Projects in business areas in which offshoring is a broadly accepted concept

• Tightly defined work processes

• Stable process

A Difference Mix of Skills

• Project Development Management and Program Management (with technology skills)

• Communications, Liaison, and Relationship-building

• Technology and Systems Integration

• Business Analysis

• Business Process Knowledge

• Domain (industry-specific) Knowledge

• Business Savvy

• Broad Technology Acumen

• Process Design

• Business Planning and Management

• Technology Management

• Business Problem Solving

• Contracting

• Negotiation

• Compliance Monitoring

A Difference Mix of Skills

• Financial and Accounting

• Supply Management (such as strategic sourcing and vendor management)

• Human Capital Management

• Business Development

• Security Analysis

• Service Management

• Data Mining

• Business Intelligence

• Network Engineering and Architecture

• Internet/Web Architecture

• Middleware

• Open Standards Software (including legal, intellectual property, and industry practices in the open standards arena)

• Business Transformation

• IT Consulting

Return to Growth (Modest) in Aggregate Professional IT Employment

U.S. Professional IT Workforce1999-2003

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1999 2000 2001 2002 May 2003 Nov 2003

Employment Growth/Decline in Professional IT Occupations in Most Recent Year

- 100,000 200,000 300,000 400,000 500,000 600,000

Computer and Information Scientists,Research

Computer Hardware Engineers

Database Administrators

Network Systems and DataCommunications Analysts

Network and Computer SystemsAdministrators

Computer and Information SystemsManagers

Computer Software Engineers,Systems Software

Computer Programmers

Computer Software Engineers,Applications

Computer Support Specialists

Computer Systems Analysts

Nov 2003

May 2003

2002

U.S. Professional IT Employmentby detailed occupation, 2002 to November 2003

4%

0%

15%

-12%

15%

-3%

5%

17%

-4%

4%

-3%

Employment Growth/Decline in Professional IT Occupations, 1999-2003

- 100,000 200,000 300,000 400,000 500,000 600,000

Computer and InformationScientists, Research





Computer and InformationSystems Managers






Nov 2003

May 2003

2002

2001

2000

1999

U.S. Professional IT Employmentby detailed occupation, 1999 to November 2003

13%

4%

33%

-24%

40%

-8%

20%

59%

-4%

16%

-10%

Wages Continue to Rise Across All Professional IT Occupations

$- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 $110,000

Computer and Information Scientists, Research


Computer Software Engineers, Applications

Computer Software Engineers, Systems Software




Network and Computer Systems Administrators

Network Systems and Data Communications Analysts


Computer and Information Systems Managers

2000 2001 2002 May 2003 Nov 2003

Mean Annual Wages for U.S. Professional IT Occupations2000 to 2003

6.1%

5.4%

2.4%

3.8%

3.6%

3.1%

2.8% 4.0%

2.7%

2.2%

5.1%

CAGR2000-2003All Occupations:

Aggregate Wages Continue to Rise

$-

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

$180,000,000,000

$200,000,000,000

2003 2003

1999 2000 2001 2002 May November

Computer and Information SystemsManagers










Computer and Information Scientists,Research

18.7% 0.7% 0.9%

5.7% 1.4%

Aggregate Wages Earned by U.S. Information Technology Professionals(Employment multiplied by mean annual wages, summed over all IT occupations)

BLS 2002-20012 Projections

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0%

Computer hardware engineers

Computer programmers

Computer and information scientists, research

Computer support specialists

All IT Occupations

Computer and information systems managers

All other computer specialists

Network and computer systems administrators

Computer systems analysts

Database administrators

Computer software engineers, systems software

Computer software engineers, applications

Network systems and data communications analysts

Projected Compound Annual Growth Rate for the Professional IT OccupationsBureau of Labor Statistics Occupational Projections, 2002-2012

Total U.S. Employment Compund Annual

Documents

Workforce Globalization in the U.S. IT Services & Software Sector John F. Sargent Carol Ann Meares Office of Technology Policy U.S. Department of Commerce