Nearshore Americas

The Outsourcing Critic: Policy-Makers Just Give Lip Service to Protecting US Workers

Abuse of visas, fraud investigations, allegations of treason and the pressures – fair or not – put on politicians to ‘protect’ US jobs from going offshore were some of the topics we addressed in an interview recently with Dr. Ron Hira, a well-known detractor of offshoring and someone who has testified before Congress on the topic.

As campaigning for the 2012 presidency revs up, and the after-burn of the financial crisis still plagues US industry, Dr. Hira, an Assistant Professor of Public Policy at Rochester Institute of Technology, calls for more of a ‘managed’ approach to offshore outsourcing so the brunt of the impact is not borne by US workers.

NSAM: What effect have the H-1B and L-1 visas had on the outsourcing industry?

Hira: We have to go back five years when we were at a stage where there was a rush for H-1Bs and the quotas got filled up quickly. This in no longer the case. Companies like Infosys and Cognizant had to plan around the quota. Over the last year and a half there has been increased scrutiny of visas and applications and higher rejection rates. And the US economy has been in the doldrums, and it has been easier for companies to find American workers. Some tech companies use H-1B as “body shopping” or “job shopping.” There have also been increased civil and criminal probes into applications. This has had a chilling effect. There has never been a cap on L-1 visas, the scrutiny is on L-1B, the special knowledge visas. Now there is a higher supply and lower demand. The shortage is much more than it was during the great recession.

The problem during 2000-2007 was that the US wasn’t creating the jobs as they used to. My estimate is we are short about 17 or 18 million jobs on the macro level.  There have been some high-profile cases where Patni or Cognizant got civil fines but it is hard to say how widespread fraud is. In 2008 USCIS did a study by their fraud detection group and 1 in 5 visas were found to be either outright fraudulent or with technical violations. There is no scrutiny unless there is a whistle blower. The employer, not the employee, holds the visa. Then USCIS started doing site visits which spooked a lot of the employers. This was only on the H-1B.

The problem during 2000-2007 was that the US wasn’t creating the jobs as they used to. My estimate is we are short about 17 or 18 million jobs on the macro level.

NSAM: How has the international financial crises influenced corporate sourcing decisions?

Hira: I think the financial services companies were pretty cautious after they got the TARP bailout. Financial services are a big customer base for outsourcing. A lot of them pulled back to figure our what they were going to do, and were a little more cautious about sourcing decisions. US financial services companies are Offshoring more. After TARP was repaid, the services companies concentrated on cost savings even more than before the crisis. Even with the TARP there were no strings attached – Congress passed the Employ America Act restraining the TARP recipients from employing H-1Bs. This was more a signal than anything else and had more of a chilling effect. This seems to have subsided. The larger issue is that there is no data in terms of Offshoring. Obama ran on Offshoring, and in November 2010 he spoke about how Offshoring was a win-win game. The financial services companies have a lot of power. There is a reluctance of policymakers to address this issue in a serious way. No visibility; see no evil/hear no evil. Wachovia forced employees to train their foreign replacements while on TARP.

Obama ran on Offshoring, and in November 2010 he spoke about how Offshoring was a win-win game. The financial services companies have a lot of power. There is a reluctance of policymakers to address this issue in a serious way.

NSAM: In your opinion, are there any positives about offshore outsourcing?

Hira: Sure – it’s one of the fallacies of the debate – either good or bad. There are both positives and negatives. From a policy point of view – how do you manage so that it actually works for the American economy and American workers? Not a bad thing, it can be, it can harm workers and economy. When we shift capabilities to other places, that’s not trade, and it can have an adverse effect on the economy. It’s lower costs goods and service for American customers, some of that is captured by executives. As a global citizen I think it is great that emerging countries are benefiting from it. The way it is being managed now, all of the costs are being borne by American workers. And the lower cost goods and services don’t compensate for lost wages and jobs.

There is increased wage competition and instead of competing against someone locally, jobseekers are competing against people all over the world. That will have an effect on their bargaining capability. One of the big issues that people are trying to figure out on the US side is what jobs are “non-tradable” and will continue to require Americans? Alan Blinder at Princeton did a study that found a third of all the jobs in US are vulnerable.

(Editor’s Note: The sixth annual study on corporations’ offshoring trends was released in January 2011 by the Center for International Business Education and Research’s (CIBER) Offshoring Research Network (ORN) at Duke University’s Fuqua School of Business and The Conference Board. The report concluded that Outsourcing did not take away American jobs.)

NSAM: Has the federal government done anything about this?

Hira: Nothing is being done. The public discussion goes back to 2003 when Business Week had a cover story titled Is Your Job Next? Kerry ran on Offshoring. There has not been a single legislative act, and a little on the state level. The prior governor of Ohio said that none of the government procurement could be Offshore. You see little bits and pieces sometimes.

NSAM: Why is that?

Hira: The frame of reference people have. The power elite in both parties buy into the notion that Offshoring is a good thing. And equate it with corporate profits – if corporate profits do well, America will do well. There are minorities in both parties questioning this. There was a buy American provision in the stimulus act to buy steel and iron, that is the place where you saw some political muscle. The domestic steel industry fought for it. It’s not that corporations believe ideologically in Free Trade, they do it because it benefits them. The companies are quite happy about what is going on.

NSAM: What dangers do Free Trade Agreements pose for US jobs?

Hira: The trade agreements don’t have a lot to do with white collar or call centers. There you see the labor unions in the manufactured goods industries, an area that does have potential impact is the visas. In the case of India, and similarly Brazil, they view short-term visas as a trade issue, not an immigration issue. They have been proposing a Services Visa under the WTO called the General Agreement on Trade and Services – GATS. It is unlikely that agenda will move anytime soon. This also shows how important political organizations play in all of this; 93% of private sector workers are not represented by trade unions. No one is representing white-collar workers in Washington.

Most of it is pretty unconstrained, although Senator Charles Schumer proposed a tax or tariff on any call center call that is answered offshore. That didn’t go anywhere. Part of the dynamic is that these are “US companies” doing this. US trade reps have been trading away visas for better access into those markets. From the point of view of India or Brazil and others they have low-cost, high-skilled workers. Any kind of visa restriction is a non-tariff barrier to trade.

NSAM: How big of an issue will Outsourcing be in the 2012 election?

Hira: It is very tough to see what is going to happen there. I think if you did a pole, the American public would say they are very concerned about it, but not many politicians have picked-up on it. There is no social movement, no political movement. There is a divide between elites and populists – this is a populist issue. They know this is a problem, but are not sure what to do about it.

NSAM: Is Outsourcing gaining momentum or slowing down?

Hira: Gaining momentum. It’s not anywhere close to saturation, there is more price competition in certain fields like IT. Xerox is going to re-batch some employees of HCL. Ursula Burns, the current CEO of Xerox, is the co-chair of Obama’s Export Council and the Jobs and Competitiveness Council. Some people say that the only thing she knows how to export are jobs.

NSAM: Some consider offshore outsourcing to be treasonous. What is your opinion?

Hira: I’m not going to pass a moral judgment. There needs to be an incentive structure. In 2004 Kerry made a big deal about Outsourcing when he called CEOs Benedict Arnolds. Look at incentive structures and how firms are making decisions – use both carrots and sticks – benefit shareholders, economy and workers. There is no silver bullet – lots of little and big things that can be done.

NSAM: What do you think about Rural Sourcing?

Hira: It will always be a niche. The government should be incentivising that with training grants and tax abatements. There are a lot of unemployed people with a high skill set.

NSAM: We interviewed Professor Carlos Baradello, Associate Dean of Corporate and International Programs at the University of San Francisco who contends that when people are unemployed long enough, they will compromise and relocate for lower wages. What is your opinion?

Hira: There are factors such as geography and family connections. One thing the government could do is look at how you make Buffalo more attractive than Arkansas.  It is possible, but I don’t know if the numbers add up and how much of a differential there is between Buffalo and Arkansas.

NSAM: What is being done to “repatriate” jobs to the US?

Hira: Nothing. The Obama folks have been touting an export initiative. If you actually look at trade deficit we run a deficit that has been growing. Obama has been reluctant to talk about import substitutions, and is concentrating on the Win the Future initiative to push new technologies and new industries, rather than grabbing a market share of current technologies. It is the same narrative we got in the 1980s – back then the new stuff was IT and created a lot of jobs. This time it is nano, biotech, and green tech. It’s not clear if it will create a lot of jobs. There hasn’t been a serious discussion about trade and jobs. To just look at exports and not imports is bizarre.

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NSAM: Can Rural Sourcing be seen as a sign of protectionism?

Hira: Protectionism is a complicated word. Is it protectionist if a country puts in a tax holiday for exports? Isn’t that a reverse tariff? The language is difficult to disentangle. In the US the larger debate is if we should have an industrial policy or not. We have always had one. The whole purpose of the stimulus package was to stimulate employment, and if that leaks offshore – what have you done?

NSAM: How does BPO contribute to the creation of a worldwide stable growth economy?

Hira: The problem is if the companies don’t reinvest and keep American workers on board, they are substituting American workers for foreign workers. Could have a positive effect in that you have increased economic activity elsewhere. But that’s playing the labor arbitrage game. Look at IBM and how they grew in India from 6,000 to 200,000 employees between 2000-2011. The largest workforce is in India. This is clearly substituting.

NSAM: Can Outsourcing have a lasting positive effect on local and global communities, and by default, the US? For example, the work Capgemeni does in Guatemala.

Hira: I think it’s been a huge catalyst for the Indian economy where there are lots of different socio-economic classes. Lots of developing countries have a new model. They realize the can go into high-end services right away. There are both positive and negative effects; it depends on what the US government does. These folks who have new wealth and income – are they buying products made in the US? If you look at the trade deficit this is not the case. Andy Grove, the Chairman of Intel, took to task this narrative that we have in Washington that the US can do the high-level design stuff and the designers will do well, and then offshore the manufacturing. The problem with that narrative is that design services are being outsourced, you still need to scale-up jobs.

NSAM: Has your book, Outsourcing America: What’s Behind Our National Crisis And How We Can Reclaim American Jobs, influenced public policy?  If so, what changes have been, or are being, made?

Hira: I have testified before Congress and also worked for the House Sciences Committee. It hasn’t had the effect Tom Friedman’s book (The World is Flat) has but it has had some impact.  It’s a pretty tough hill to climb because the established view of the world is that they buy into what I call the Apple I-Pad narrative where something is designed in California but made in China. 

Kirk Laughlin

Kirk Laughlin is an award-winning editor and subject expert in information technology and offshore BPO/ contact center strategies.

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