On the outsourcing hot seat

Infosys Technologies CEO Nandan Nilekani is a founding father of overseas outsourcing, one of the most controversial topics in the technology world.

Ed Frauenheim Former Staff Writer, News
Ed Frauenheim covers employment trends, specializing in outsourcing, training and pay issues.
Ed Frauenheim
6 min read
Nandan Nilekani is at the center of one of the most controversial topics of debate roiling the tech world: Overseas outsourcing.

As co-founder and CEO of India-based information technology services company Infosys Technologies, Nilekani is spearheading the burgeoning movement to shift IT work offshore that has corporate leaders seeing green and U.S. tech worker advocates seeing red.

Market research firm IDC recently estimated that by 2007, 23 percent of all IT services jobs will be offshore, up from 5 percent in 2003. The figures refer to IT work done for U.S.-based companies.

Companies argue that so-called offshoring can save money and preserve U.S. jobs, but critics say the practice undermines U.S. tech leadership and hurts IT workers already reeling from job cuts during the recent downturn.

Nilekani can be seen as a founding father of overseas outsourcing. He helped launch Infosys in 1981. In the fourth quarter of 2003, Infosys' revenue hit $275.9 million, up 38 percent from the year-ago period.

I think that innovation will always be led by the United States.
The company and its subsidiary Progeon, which focuses on business process outsourcing, now employs more than 23,000 workers.

A significant number of Infosys' workers hold temporary visas in the United States. In a recent filing with the U.S. Securities and Exchange Commission, Infosys said that about 2,600 of its employees in the United States held H-1B visas, while about 800 workers held L-1 visas as of Sept. 30, 2003. Use of those visas has drawn fire, given the job market troubles of U.S. tech workers.

In a recent interview with CNET.News.com, Nilekani defended the visa programs and said the debate over offshore outsourcing misses a wider picture: Global free trade has advantages and disadvantages on both sides of the Pacific Ocean.

Q: Who wins and who loses from offshore relocations?
A: The Indian companies and Indian employees win, and so do the American companies that outsource. For the American companies, this clearly is an instrument for them to improve their productivity, reduce their cost and have higher quality. And that is required for their financial longevity and the robustness of their business models.

And for the Indian companies, it creates not only growth but also a tremendous amount of jobs, which are required in a country like India and is helping spur its overall economic growth. So I think it is a healthy development; it is part of globalization. For the last several years, we have all been talking about lowering the barriers of protectionism between countries, and this is part of that process.

What is the average compensation difference for a job that gets moved from Santa Clara, Calif., say to Bangalore?
I think it would vary. It would vary by maybe a factor of three times, four times or five times.

And what about the overall cost for clients? I gather that is not necessarily the same.
Yes, because there are other costs related to remote development. So, I would say that the cost of offshore development would be about a little more than half of what it could cost on-site.

What kinds of technology jobs are safer in the United States?
I think that the U.S. technology industry is the fountainhead of innovation, and I think that innovation will always be led by the United States. There is going to be a continuous stream of new technologies coming in and new companies coming to exploit that technology. That innovation cycle, I think, is the strength and heart of the U.S. model.

Tell me how that will work, though, if a lot of basic programming work gets sent overseas. Can't you imagine that there won't be a pool of talent that gets started in the lower ranks of the IT world and then gets a chance to develop those higher-level skills?

Offshoring is really a means to an end, which is to redesign the architecture of IT within large companies.
Innovation requires people who are both very close to the technology trends and people who understand customer needs--and especially customer needs that are unmet and that they can meet. So it requires both very strong technology knowledge as well as customer access and customer intimacy. So I think the United States will always lead in those matters.

What do you tell clients--if anything--about how to deal with the labor issues of offshore outsourcing? Do you recommend any particular way for them to deal with laying off employees when work is sent?
First of all, a lot of this has really nothing to do with laying off employees. For example, in many situations, there may be other companies to whom they are outsourcing.

The second thing is that companies are also looking again at how their IT strategy should be and are coming to the conclusion that the main function of the IT department in a firm is really to focus on business solutions--to focus on the strategy, architecture, quality, project management, program management and governance.

They are really saying that the actual act of heavy lifting of writing code and testing it should be something that can be effectively outsourced. Offshoring is really a means to an end, which is to redesign the architecture of IT within large companies.

Let me come back to what you said about benefits to a country like India from the offshoring trend. How has the country changed? Can you give me some examples, even in your own community or city?
If you had to come to Bangalore today, you would see very significant signs of development, a lot of new construction, a lot of young people, a lot of energy, a lot of shops and restaurants. I think you get a sense of economic vitality. And I think that economic vitality can largely be traced to the IT explosion, which is happening in parts of India like Bangalore.

Are we talking about, in some ways, a shift of wealth overseas from the wealthier (countries) that is actually kind of fair on the global scale?
When we talk about globalization, we're talking about countries opening up their economies, and they do not try to do everything themselves. They import products and services from different parts of the world. India has been encouraged to open its borders and allow foreign banks, foreign insurance companies or foreign airlines to come in. Obviously, the same argument could be put forward that when the foreign bank comes to India, some people in an Indian bank are probably losing jobs.

We have all been brought up to sort of argue that what the world needs is good free trade, and we should allow countries to open up their borders and import products. Once we accept that, I think it cuts both ways.

Are there some negative consequences that you see in India from globalization? People losing jobs in some industries or a change in the culture toward perhaps a more materialistic one?
This industry has created a lot of young people who are reasonably well off, compared to the rest of society. The risk is, of course, that while this will cause development across the nation, it will still be people in the IT industry. 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. I think that that is the challenge in India.

Let me ask a little bit about the H-1B and L-1 visa issue, which is another big issue for U.S. workers. Infosys uses both kinds of visas. Do you think that that program needs to be revised or changed, given that it--at least the H-1B visa--was initially intended to bring in needed workers? What are your thoughts about those programs?
I think that these programs have played a very important role in getting very good talent from across the world to the United States--very highly educated talent from many countries, including India. I think that it has been one of the reasons for the immigration of high-quality global talent to the United States, which, in turn, has contributed to the technology development and productivity. So I think that it has been a good program for the United States.

Do you see the H-1B visa program having increased the amount of offshoring because of connections Indian workers may have made with U.S. companies while they were in the United States and have since brought back?
I really do not know how much of that would be caused by that. I think what could have happened is that with Indian workers in the United States and companies being satisfied with the quality of work they have done, it may have given some companies confidence to offshore. I would say it is more of that.