Day 1: U.S. needs reforms, not rhetoric Day 2: Companies guarding 'secret sauce' Day 3: How India is handling backlash Day 4: The next technology battlefields

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ITAA head Harris Miller says that offshoring isn't the enemy.

How India is handling
international backlash

NEW DELHI--Manoj Kunkalienkar doesn't panic when he hears stories about a potential U.S. backlash against India over offshore labor.

The president of ICICI Infotech, an outsourcing company based in Mumbai, India, says clues to the future of India's technology industry can be found about 4,000 miles away, at the other side of Asia.

"If you recollect, there was a negative sentiment about Japanese goods during the '80s. Today, brands like Toyota, Sony, Honda and Mitsubishi are as much a part of modern America as Ford," Kunkalienkar said. "Backlash is a passing phase, and ultimately, corporations as well as people will realize the greater business benefits."

Despite the angry rhetoric and calls for protectionist legislation in the U.S. Congress and several state houses, Indian politicians and executives of companies that provide offshore services are surprisingly sanguine about the controversy. From the capital of New Delhi to the high-tech center of Bangalore, government officials and business leaders often seem genuinely puzzled about the intensity of negative reaction in the United States.

Many point out that the U.S. government has long been a strong proponent of policy reforms that have opened India's economy and led to multilateral trade agreements. The boom in outsourced services is one result of those reforms, they add, and an inevitable consequence of an increasingly global economy that will eventually benefit all who participate.

"I should mention the strange controversies that have been generated on what is called 'business process outsourcing,'" the Indian prime minister, Atal Bihari Vajpayee, said in a March speech on globalization. "The very process of liberalization, on which we have been lectured for so many years, has created competitive skills, which are available for utilization by businesses everywhere. We should not now drive a reverse process."

At the same time, Indian officials and executives are often reluctant to address the backlash issue publicly in today's hypersensitive environment. Adopting a slogan put forth by the ruling parliamentary party, many are seeking to preserve what has been dubbed the "feel-good factor": a burgeoning sense that India can compete with developed nations on a global level for the first time in modern history.

"India is an idea whose time has arrived," Yashwant Sinha, India's minister for external affairs, said at the recent India Economic Summit.

No going back?
The news media are often blamed for exaggerating American job losses and other consequences of offshore outsourcing while underreporting the benefits, such as cost savings to technology companies and the U.S. economy as a whole. Indian officials and corporate leaders have attributed much of the controversy to election year politicking and to denial by American labor organizations that outsourcing is here to stay.

"This is an irreversible process," said Ravindra Datar, an analyst with the Indian arm of industry research firm Gartner. "Once corporations start deriving significant business advantages by offshoring to India and other locations, it is unlikely that they would forsake those on insistence from political leaders."

Please roll over the map on the right to get more information about offshoring activity in that region.

Bangalore

Known as India's Silicon Valley.
Area: 100 sq. miles
Pop: 5.5 million
State: Karnataka
Development centers: Oracle, SAP, Sun Microsystems, Hewlett-Packard, Motorola, Texas Instruments. Home to IT services companies Wipro Technologies and Infosys Technologies.

Chennai

Formerly Madras. Known as the Detroit of India.
Area: 77 sq. miles
Pop: 6.5 million
State: Tamil Nadu
Base for IT services companies Cognizant Technology Solutions, Covansys and Pentasoft Technologies.

Hyderabad

Exclusive IT district called Cyberabad on the city's outskirts.
Area: 34 sq. miles
Pop: 5.5 million
State: Andhra Pradesh
Development centers: Microsoft, Oracle, Adaptec and 3Com. Satyam is the only large IT services company based here.

Mumbai

Formerly Bombay. India's main financial and commercial hub.
Area: 170 sq. miles
Pop: 15 million
State: Maharashtra
Headquarters to Tata Consultancy Services, India's biggest IT services company.

Pune

Marketed along with nearby Mumbai as the "Knowledge Corridor."
Area: 15 sq. miles
Pop: 3.8 million
State: Maharashtra
Development centers: Parametric Technology, BMC Software. Wipro, Infosys and Cognizant have IT services operations here.

National Capital Region

Consists of three cities--New Delhi (Delhi), Gurgaon (Haryana) and Noida (Uttar Pradesh).
Area: 622 sq. miles
Pop: 12.8 million
Development centers: Cadence Design Systems, STMicroelectronics and IBM. HCL Infosystems is the biggest IT services vendor. Many call center and BPO services companies.

Kolkata

Formerly Calcutta. Fast emerging as a center for technology services.
Area: 72 sq. miles
Pop: 11.8 million
State: West Bengal
IT services vendors: Companies with outlets include Tata, Cognizant and ITC Infotech. Many BPO specialists.

Yet that is precisely what some in Congress are calling on American companies to do. The Senate has approved a measure that would bar government contractors from shifting work on federal contracts from U.S. employees to staff in other countries. In the House of Representatives, Vermont Independent Bernie Sanders has proposed the Defending American Jobs Act, which would limit federal grants and loans to companies that replace U.S. employees with foreign workers.

At the state level, legislation penalizing companies that send work offshore has already been passed. Local politicians have proposed measures to curb outsourcing in at least two dozen states, sometimes through initiatives and legislation with names that sound like political bumper sticker slogans--Opportunity Indiana, the Keep Jobs in Colorado Act, and the American Jobs Act of Wisconsin among them.

A February study by the U.S.-based Washington Alliance of Technology Workers (WashTech) found that 93 percent of employees polled were worried about the effects of offshore outsourcing. About 25 percent reported that their company had moved jobs overseas, and 20 percent said they had either trained a replacement worker or knew someone who had done so.

U.S. companies are feeling the heat, both from politicians and from their own rank and file. About 85 percent of companies considering offshore contracts are concerned that new laws or political pressure might prevent them from using foreign services, according to a study released in March by research firm DiamondCluster International.

The origins of offshoring

The movement of IT services work to lower-wage countries is a relatively new trend, but it's hardly the first time an industry has shifted some production to a new location. When well-educated, relatively cheap Indian workers take on programming projects, that offshoring fits into a broader historical pattern.

For work to be shipped overseas, the labor "can't just be low wage," said Howard Bodenhorn, an economic historian at Lafayette College. "It has to be lower wage and fairly productive."

Textiles

The U.S. textile industry began in New England, but after the Civil War, manufacturers gravitated to the Carolinas in search of lower labor costs. After World War II, textile manufacturing tended to head offshore to countries such as Brazil and China, making for a kind of double migration.

Automobiles

In the early part of the 20th century, Ford began making cars in the United Kingdom for a reason that had little to do with labor costs: It wanted to base some of its operations close to British customers.

After World War II, U.S. automakers began opening plants in Mexico and Canada in pursuit of lower employee costs. But engineering work and a fair amount of auto production continues to take place in the United States--Saturn in Tennessee and Honda in Ohio, for example. Domestic auto manufacturing makes sense, thanks to factors such as relatively productive U.S. workers and the comparative expense of shipping cars from other parts of the world.

Steel

U.S. steel companies such as Bethlehem Steel faded in the face of international competition. Now, much industrial-grade steel is produced in the lower-wage nations of Brazil and China.

Some higher-income countries, including Japan and Germany, have significant steel industries that focus on highly specialized products that are generated in small batches. U.S. steel makers, by contrast, have concentrated on the mass production of industrial-grade steel.

Source: CNET News.com, Howard Bodenhorn.

"Senior management wants to take advantage of the benefits that outsourcing can offer," said Tom Weakland, a managing partner at DiamondCluster, who oversaw the study. "But they are engaged in a balancing act to ensure that they don't get locked into deals that might be threatened by new legislation, boycotts or employee sabotage."

India's public response to U.S. legislation to curb outsourcing has been notably tempered, a stark contrast to the heated language that often punctuates the debate over the issue in the United States. One of the few sharply worded statements to come out of India was made earlier this year by the Confederation of Indian Industry, a powerful business lobby, in response to the Senate legislation.

"We should not now drive a reverse process." --Atal Bihari Vajpayee India's prime minister

"The passage of the federal law barring outsourcing of U.S. government contracts given by American firms to companies located in India and other countries by the U.S. Senate is unfortunate and unwarranted," the organization said in January. "India is taking examples from the United States and other developed countries on its path of liberalization and reforms. However, such antiliberalization measures, when adopted by developed countries, will lead to greater protections in other sectors, thus impacting global trade flows."

That same month, Indian technology minister Arun Shourie expressed similar views at a summit of Asia's technology ministers in Hyderabad, India, where he said countries in the region should stand together against a growing backlash. "Outsourcing backlash is a common concern now in the Asian countries," he said. "We should take a concerted view and action on the outsourcing backlash unleashed by the United States, Europe and Australia, and face these challenges with a strong counterforce."

A day later, however, Shourie appeared to go out of his way to tone down those remarks. Calling the backlash "a minor issue," he blamed the news media for feeding the controversy and said any campaign against protectionist U.S. legislation should be done "in a low-key manner."

The revised comments reflect what seems to be a deliberately muted approach by the New Delhi government and the Indian technology industry. "The current backlash against outsourcing to countries like ours seems to be a passing phase. Impact felt till now has been minimal," said Badruddin Syed, executive vice president of vMoksha Technologies, which offers outsource services to industries ranging from banking to health care.

"The current backlash against outsourcing to countries like ours seems to be a passing phase." --Badruddin Syed executive vice president
vMoksha Technologies

Like other Indian executives, Syed believes that simple economics will eventually prevail. Although economists in the United States and India concede that American jobs will be lost initially, many argue that both countries will reap the benefits of outsourcing in later years.

For every dollar spent on outsourcing, the U.S. economy receives $1.12 to $1.14 in return, according to estimates by international consultancy McKinsey. Even if the highest offshore labor estimates hold true--such as Forrester Research's widely published prediction that 3.3 million service industry jobs will move to other countries in the next 15 years--that number would represent only 2 percent of total U.S. employment today, according to Gary Endelman, a lawyer at BP America.

"As economists around the world have been pointing out, outsourcing makes businesses more competitive; increases their exports and their profits; and places more investable surpluses in their hands, which can be deployed to create more jobs," Prime Minister Vajpayee said in his speech. "The world has spent the last decade trying to make sensible economics prevail over the temptation for short-term political gains."

Economists in the United States note that far more jobs have been cut as a result of improved productivity, a weak economy and domestic corporate restructuring than have been lost to foreign outsourcing.

"In the current hysteria about offshore outsourcing, productivity unfortunately is seen in some circles as a four-letter word," the American Electronics Association said in a March report. "The concern about offshoring is very similar to the concerns during the late 1980s and early 1990s in the United States that Japan was going to become the dominant economic and high-technology power of the world. It didn't happen."

Political overtones
Many Indian executives and politicians believe that the offshore controversy will subside after the U.S. presidential election in November. Until then, they say it makes no sense to risk aggravating tensions further, especially when it is unclear whether American protectionist sentiment will lead to any significant curbs on offshore outsourcing this year or beyond.

"It has to do with corporate restructuring in the United States but has acquired political overtones in an election year," N.K. Singh, a member of India's Planning Commission, said in a recent speech to executives on Indian competitiveness.

"India is an idea whose time has arrived." --Yashwant Sinha India's union minister for
external affairs

Those overtones may already be changing in the United States. Political analysts and others say rhetoric surrounding the subject has softened just in the last few months, since most of the Democratic challengers dropped out of the presidential primaries.

"Now, you can have a little more rational discussion on the subject than you were able to even a few months ago," said Rick White, a former Republican congressman and now chief executive of bipartisan industry lobbying group TechNet. "I do think it's an issue that has a lot of political momentum, particularly among those inside the Beltway, but it may not have as much momentum as they think it does."

Even if successful, many protectionist campaigns would likely have minimal financial impact on Indian businesses. The vast majority of measures proposed at state and federal levels involve U.S. government contracts, which account for as little as 1 percent to 5 percent of India's outsourcing industry, by some estimates.

Of more concern within many circles in India is the possibility of psychological harm or other disruption to the new national optimism that has taken root in recent years, particularly among college students and those beginning to enter the work force--young citizens who represent the future of a country that is fast approaching a trillion-dollar economy.

"So much has changed in the last five years because of high tech. Now you see 21-year-old kids full of confidence. This is not just true of engineering graduates, but also of those in commerce, literature, arts degrees," said Vamsee Tirukkala, co-founder of Zinnov, an offshore research and consulting firm with offices in Bangalore and Santa Clara, Calif. "When I came to the United States 10 years ago, I had no confidence. In India, I didn't see any future for myself."

Tirukkala sees this change all the time in his business, which advises U.S. companies how to start outsourcing and helps set up operations in multiple countries, including India. In addition to helping streamline communications, Zinnov and other companies hold seminars to help American and Indian workers understand each other better in nonverbal ways.

"We do cultural workshops for on-site and off-site teams. We teach them to understand and appreciate other customs," Tirukkala said. "In the Indian culture, for example, you don't look people in the eye--especially elders. This could be misinterpreted by Americans as a sign of disrespect."

Many companies have learned that cultural knowledge is a key to avoiding the kind of "Buy America" campaign faced by Japan in previous decades. Indian executives believe that they can bridge social gaps more easily than those from other foreign countries because of India's large English-speaking population and relatively long history of doing business with Western nations.

"The need of the hour is to present the correct picture to the American public." --Manoj Kunkalienkar president, ICICI Infotech

"At vMoksha, an employee traveling on site is briefed about daily life and work culture by peers who have worked there," Syed said. "Accent neutralization and customs familiarity workshops are very common in the industry."

Still, he acknowledges that training isn't always enough to salve concerns among U.S. workers. "People who travel to client locations do face resistance from professionals who believe that their jobs are being transferred offshore," Syed added.

Other executives say resentment sometimes leads American employees to exaggerate errors made by offshore workers--something that outsourcing firms have labeled "issue magnification." "The tolerance level is usually high for in-house team mistakes, but issues get magnified when the offshore team makes a mistake," Tirukkala said.

Whether general or personal, Indian executives agree that the best way to counter all forms of backlash is to provide accurate information. "The need of the hour is to present the correct picture to the American public," said Kunkalienkar of ICICI Infotech.

That includes the honest portrayal of India in its entirety, not just in its newly created prosperity. Despite its recent success in outsourcing, much of the country remains steeped in poverty--hardly lending itself to mischaracterizations of egregious wealth at the expense of unemployed Americans.

In its "IT Tour Guide to India," Zinnov warns U.S. clients: "It will be disheartening to see young women with small babies begging on the streets. Try to be mentally prepared for this sight."

For this reason, many executives believe that the technology industry has a much larger goal that transcends business and economics.

"I think that there is a requirement to take this job creation and wealth creation, and see how it can be leveraged to improve the quality of life for a much larger set of people," Nandan Nilekani, co-founder and chief executive of Infosys Technologies, said in recent interview with CNET News.com. "I think that is the challenge for India."

CNET News.com's Dinesh C. Sharma reported from New Delhi and Mike Yamamoto from San Francisco.