1. 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

2. Study Limitations 6 month time-frame Data limitations Specific Industry Focus Sources: –Some data analyses –Extensive literature review –Interviews

3. 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

4. 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

5. Macro Trends Facilitating IT Workforce Globalization 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

6. Macro Trends Facilitating IT Workforce Globalization 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

7. Macro Trends Facilitating IT Workforce Globalization Knowledge work can move offshore more quickly and cheaply than manufacturing Companies moving up the off-shoring learning curve

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. Russia Broad 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

17. 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

18. Rapidly Changing Landscape

19. Time FrameOnshoreOffshore Late-1990s80%20% 2000-200156%44% 2002-200343%57% 2003-200438%62%

20. Rapidly Changing Landscape 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

21. 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

22. 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

23. IT Research Capabilities Off-shore India 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

24. IT Research Capabilities Off-Shore India 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

25. IT Research Capabilities Off-Shore Ireland 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

26. IT Research Capabilities Overseas Multinationals Establishing modest “real” R&D presence Information hard to come by

27. 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

28. 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

29. 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.

30. 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

31. 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

32. 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.

33. 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

34. 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”

35. 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

36. 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

37. 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

38. Return to Growth (Modest) in Aggregate Professional IT Employment

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

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

41. Wages Continue to Rise Across All Professional IT Occupations

42. Aggregate Wages Continue to Rise

43. BLS 2002-20012 Projections