Offshore Drilling for Cheap Labor

Corporate Research E-Letter No. 40, October 2003


By Philip Mattera

It’s not true that large U.S. companies are refusing to take on new employees, now that there are signs the economy is improving. The Fortune 500 are hiring—but they are doing so in New Delhi, Manila, Shanghai, Moscow and other places with large pools of educated young people who are willing to work at wage rates that are a fraction of U.S. levels.

Overseas outsourcing of white-collar work is all the rage in corporate America these days. A widely cited November 2002 report by Forrester Research estimated that, over the next 15 years, 3.3 million U.S. service sector jobs representing $136 billion in wages will move abroad. Particularly hard hit is the information technology sector, in which formerly well-paid workers who never expressed interest in unions and solidarity are now flocking to organizations that are fighting the “offshoring” of their livelihood.


The uproar over foreign outsourcing has a familiar quality to it. It sounds very much like what happened in the manufacturing sector starting more than two decades ago. Corporate executives, complaining about high U.S. labor costs, began shifting jobs to low-wage enclaves as far away as Southeast Asia and as close as the maquiladoras right across the Mexican border. Hundreds of thousands of blue-collar jobs, many of them unionized, permanently disappeared from the United States. 

To the defenders of capitalism, this was a healthy example of what economist Joseph Schumpeter once called “creative destruction.” In 1982 Forbes magazine wrote: “The decline of old industries is sad. But it is not a tragedy.” The purported reason for optimism was that new and better jobs were going to emerge to replace those that were lost—and those jobs, it was widely asserted, would be white-collar ones.

Even during the Reagan Era, there were already signs that the service sector might not be a source of permanent salvation for U.S. workers. During the early 1980s, U.S. companies began to shift certain types of office work to facilities in the Caribbean. A company called Satellite Data Corp. (SDC) set up an operation in Barbados to keyboard large quantities of data for U.S. firms such as insurance companies and magazine publishers.  After shutting down a ticket processing facility in Tulsa, American Airlines shifted the work to a subsidiary also located in Barbados.

These early examples of the runaway office had to contend with the technological limitations of the day. American Airlines had to fly in crateloads of ticket coupons for processing, while SDC resorted to faxing huge numbers of documents to Barbados. Apparently, it was worth the trouble. The head of SDC told Business Week: “We can do the work in Barbados for less than it costs in New York to pay for the floor space.”

Although a 1985 report on office automation by the U.S. Office of Technology Assessment included a chapter on offshore outsourcing, the practice attracted limited attention. This was just as well for companies that that did not want to draw attention to their involvement in repressive countries such as China. Also, there were still many skeptics who thought  it was not possible to coordinate widely dispersed white-collar activities.

Those doubts largely dissipated with the growth of the internet and high-quality telecommunications links in the 1990s. Suddenly it was possible to move data, documents, images and other digital content seamlessly across the globe. For example, once it became possible to have toll-free phone calls answered abroad as easily as at home, the call-center business began moving overseas in a major way. Young workers in places such as Bangalore, India were recruited to answer U.S. help-line calls from customers who had no idea that they were talking to someone 12 time zones away. The illusion was aided by the fact that workers were trained to use a U.S. style-name when answering the phone and to speak with an American accent. They also invented U.S. biographies for themselves to satisfy inquisitive callers. “We’re living in a make-believe world,” one Indian manager told a U.S. reporter.


As long as foreign outsourcing of white-collar work involved relatively unskilled jobs such as data entry and call center staffing, it was possible to argue that it was not doing too much harm to the U.S. economy. After all, the experts told us, the really good opportunities—high-wage technical and professional positions, for instance—would continue to be available to qualified Americans. Yet the logic of labor-cost reduction knows no bounds. U.S. companies also ended up looking to poor countries to provide inexpensive talent for jobs higher up on the employment hierarchy.

This phenomenon started in the late 1980s when firms such as Texas Instruments and Citibank realized they could find qualified computer programmers in India. By the early 1990s the Indian software industry was booming. In 1994 the industry’s trade association took out a 12-page advertising supplement in Forbes that was headlined: “How Companies Around the World are Gaining Competitive Advantage by Outsourcing their Software Requirements to Indian Software Companies.”

Apparently recognizing that outsourcing was becoming a lightning rod in the West, the supplement suggested that the process be called Smartsourcing. That term didn’t catch on, but the growth of the business began to be noticed in the United States. A 1998 New York Times article described India’s Tata Sons Ltd., which had 5,000 software developers on payroll at the time, as “a maquiladora of the mind.”

Perhaps the biggest believer among U.S. companies in outsourcing information technology to South Asia was General Electric, which is not surprising, given that GE was also fond of outsourcing blue-collar work. During the 1990s GE chief executive Jack Welch reportedly would tell his managers who complained about the difficulty of meeting his cost-cutting dicta: “Have you been to India? Don’t talk to me until you’ve been there.”

GE’s managers took heed, even after Welch retired. Today GE not only has thousands of call-center and software employees in India; it has also invested $80 million in a research center outside Bangalore—GE’s largest outside the United States—at which more than 1,600 engineers are working on the next generation of the company’s medical equipment, jet engines and appliances.


GE is not the only major U.S. corporation that is locating highly skilled technical and professional jobs in India and other low-cost countries. The business press over the past year has been filled with examples. Many of them were contained in a February 3, 2003 cover story in Business Week with the alarming headline: IS YOUR JOB NEXT?

These days architects in the Philippines are producing blueprints for Fluor, electronic engineers in India are designing cell-phone chips for Texas Instruments,  computer programmers in Russia are writing code for Intel, software developers in China are working on new products for Microsoft, and radiologists in India are interpreting CT scans for Massachusetts General Hospital. Investment banks such as Lehman Brothers are starting to farm out number-crunching to Indian financial analysts, who presumably will produce favorable assessments of corporations that engage in foreign outsourcing.

The only check on this outflow of high-quality jobs is a growing backlash among tech workers in the United States. This is already having an impact. Faced with the threat of a walkout by its unionized engineers, Boeing had to cut back on its plans to transfer technical work to Russia. Industry conferences on outsourcing are being targeted by protesters. Groups such as the Washington Alliance of Technology Workers (WashTech), an affiliate of the Communications Workers of America, successfully pressured members of Congress to order the General Accounting Office to perform a study that would, for the first time, measure the extent to which offshoring has occurred.

Even before the GAO finishes its work, bills aimed at curbing offshoring have been introduced in Congress by Republicans as well as Democrats. The House Committee on Small Business has already held two hearings on the subject. At the state level, reports that some contractors outsourced government work overseas have prompted legislators to initiate efforts to bar that practice.

It remains to be seen whether these efforts can put a sTop to offshoring. The compulsion of corporate executives to cut labor costs often seems unsToppable. Perhaps the only thing that will deter them is for their own jobs to be at risk. This possibility was captured in a recent cartoon by David Horsey in the Seattle Post Intelligencer. Headlined “If there was justice in the world,” it showed three corporate directors telling a chief executive: “Sorry, the board is outsourcing your job to a guy in India who’ll be CEO for a tenth of your salary.”