Q&A: The facts on offshoring

Forrester Research's John McCarthy, publisher of a controversial report on the number of US service jobs expected to move overseas, sits down for an interview with silicon.com sister site CNET News.com.

John McCarthy, a vice president at Forrester Research, predicted in a 2002 research report that 3.3 million service jobs would move abroad by 2015.

Earlier this year, McCarthy updated his original report, defending the original forecast as largely on the mark, though bumping up the 3.3 million projection to 3.4 million. More significantly, the report increased the estimate of near-term lost jobs by some 240,000. In other words, the new report predicts that a total of 830,000 positions will have moved offshore by 2005.

Here McCarthy discusses his frustration with the press, which he feels has often misunderstood his analysis, and describes why businesses, fearing the potential public relations backlash, have stopped talking about their offshoring plans.

Q: What was your reaction to the recent US Department of Labor report that only a small fraction of mass layoffs earlier this year stemmed from offshore relocations? Does it contradict your projection of 3.4 million services jobs going overseas by 2015?
A: No. People do not suddenly do mass layoffs around most offshore activities. They involve a series of pilots. They cut people who are contract employees, who therefore they don't even have to report in that model. So I think it underreports the overall offshore activity. It accurately reports the number of large-scale kind of layoffs that are part of it.

So there could be a lot of these dribs and drabs of jobs going offshore.
Right. We know what people do - they cut contractors. Those technically aren't full-time employees. So even if they cut 100 contractors, they wouldn't have to report those. And it grows much more incrementally, where most people probably don't hit that threshold of 50, where they have to report it. Or they may not even know they were supposed to report it.

You said the reception of your initial report of 3.3 million services jobs going offshore by 2015 had been frustrating at times. How so?
What was frustrating is that people instantly gravitated to that 2015 number and in many cases reported it like it was the number today. People were portraying that number like it was almost the number today, which overstated what was going on.

Were there actually cases where people talked about 3.3 million jobs going overseas but didn't add the qualifier?
There was some of that.

What about the response to your latest report? Can you summarize how that's been treated?
You know, because we put in more incremental numbers and we put in some of the percentages of what was lost, it seems to have muted some of the debate.

A big part of that is because of what's happening in Iraq. The coverage of the offshore issue is directly in proportion to how much Iraqi coverage there is. When it looked like the war was going well in the January-February time frame, offshore coverage was way up. Since then, it's way down.

Do you expect that it will come back to be a significant issue?
I don't think so. The clients have stopped announcing what they are doing, which is minimizing triggers for press.

IBM seems to have stopped talking about outsourcing when it describes what is essentially outsourcing work. It talks about "business process transformation services" as opposed to "business transformation outsourcing".
Right.

Do you think that fits into that pattern of outsourcing being kind of a four-letter word these days?
I think so. I think they are also trying to differentiate themselves.

Right. But you are saying overall there is just less willingness for companies to discuss what they are doing?
People aren't doing any less offshore work but they are sure as hell talking about it less.

Are your clients saying that that is becoming a policy for them?
Oh, yeah. For sure.

What about within their own organizations - even to their own employees?
Companies take different strategies. The smart ones talk much more clearly about what is driving their strategy, why they are doing it, what jobs are going to be impacted, what jobs are not going to be impacted and what they are doing to retrain the people who are impacted.

There is [also] a set of companies that I would put in the 'ostrich' category. They hope by not talking about offshore, the whole issue will disappear. I think that is a strategy that is going to get them on the front page of their business section of their local papers sooner rather than later.

You might think it is the opposite there: If you are going to tell your employees what you are doing, they might leak news. But on the other hand, the employees are probably respecting you for doing that - giving them a fair heads-up.
They are going to leak stuff either way. If you have an effective, articulated strategy and then [a] communication strategy around that, you are going to look a lot better when you talk to the press than when you are going to get five people talking about five different aspects of it.

I also want to ask you about a recent report from Boston Consulting Group that says the advantages will persist and may actually deepen with regard to going out and setting up a shop in lower-cost countries. In other words, it makes sense to be more aggressive in your offshoring strategy. Is that something that makes sense to you?
That may be the theory, but doing this well is extremely hard to do. My big concern is that companies are jumping on the kind of offshore-fad bandwagon with unrealistic expectations about how quickly they are going to be able to do it and what realistically they are going to be able to save.

Give me an example of the unrealistic expectations.
Most people do not do a good job of managing IT downstairs. You know, 50 per cent of the projects are late, over-budget and underperforming.

That is just generally in the industry?
It's just generally, yeah. What makes them think that adding 10 and a half hours and 8,000 miles is suddenly going to be the silver bullet for those management processes? And then to make things really interesting, we are throwing a whole new culture [into] it.

Surveys that we do show that the number one issue is lack of project management skills from the customer to manage the vendor.

What percentage of your clients in your surveys do you find that actually lost money in doing an offshore project?
About 2 per cent. About a third of them say that it's too early to tell, about a third of them say that they have hit the savings that they expected. Twenty per cent see savings, but not what they expected. Two per cent see no savings at all.

So only a third are actually getting exactly what they wanted up till now.
Right. But, you know, this is an evolution that they go through. You do not wave a magic wand and suddenly a thousand people go offshore and you are saving 70 per cent of their salary. You transition project by project. You have to put the governance structure in place. There are some initial ramp-up, due diligence efforts that you have to put in place.

So it's the learning curve, essentially, for these companies.
There is a learning curve. Also, to reach the ultimate level of offshore experience - what we would define as 'full exploiter' - the client ultimately ends up upgrading and modifying and improving their own internal IT practices in order to better manage work offshore and to move more work offshore.

It's a classic example of 'outside-in adoption', where as a result of seeing the more disciplined processes of the Indian vendors in particular in action, the client ultimately adopts those capabilities themselves, which then allows them to better manage their own IT and better manage their outsource provider at the same time.

And that's kind of similar to the way the Japanese economy kind of adopted the Deming principles?
Exactly. The Japanese adoption of Deming ultimately became a catalyst for an improvement of manufacturing processes worldwide. The same thing is going to play out around the Indians in IT processes.

Ed Frauenheim writes for CNET News.com