First it was manufacturing jobs in the '80s. Then it was textile positions in the '90s. And now, in the 21st century, IT posts are flooding out of this country. But as the U.S. unemployment rate inches toward seven percent-and New York City's hovers at 7.7 percent-financial firms are defending themselves from the national backlash against overseas outsourcing of technology jobs.
The trend is showing no sign of abating for at least the next decade, say analysts as hypercompetition forces banks, brokerages, insurers and credit card firms to trim costs and boost profits. That's a difficult argument to lose, when outsourcing can mean savings of up to 50 percent. "Financial services will go exactly the way of manufacturing and textiles," observes Raja Gopalakrishnan, Chicago-based vp of insurance and retail banking at ICICI OneSource, India's largest outsourcer for financial services. "Over the next 10 years, we will see much, much more. A bank may get data-entry work done out of Ghana in Africa and application processing out of India. And they could be doing call-center work out of both India and the Philippines."
He points to aeronautics giant Boeing, which once manufactured and assembled every part of a plane on American territory, while 90 percent of that work today is done overseas. "It can take 65 people to put together a 747 here, but it takes thousands and thousands across the world ,building the parts in factories," he says. "And typically that's what is happening with services. We'll have people doing different tasks in different places and it comes together with a front-end in the U.S."
Deloitte Research's survey of 100 of the globe's largest financial services companies found they expected to shift $356 billion worth of operations and about 2 million jobs to developing countries by 2008. Consultant A.T. Kearney estimates North American brokerage firms spent $417 million on offshore contracts in 2002 and will spend $1.31 billion annually by 2005. The firm also predicts 500,000 IT financial services jobs-8 percent of all jobs in banking, brokerage and insurance-will be gone by 2008.
From high-paying software design jobs to low-paying call center jobs, IT positions are flowing to India, China, the Philippines, Russia, Malaysia, Vietnam, Egypt, Thailand, Ukraine, Russia, Ireland, Canada and other countries. But the next generation of financial-industry jobs overseas, says A.T. Kearney, will be analysis and research, regulatory reporting, human resources, and accounting. Indeed, JP Morgan's announcement that it will create an equity research office in Bombay raised more than just a few eyebrows in the industry, since these are six-figure jobs typically reserved for Ivy League graduates posted in pricey Manhattan offices.
Near-shore locations are also a minitrend: Mexico or Costa Rica for U.S. firms; Ireland or Eastern Europe for European firms; and China for Japanese firms. Moreover, Gartner Inc. is seeing increased interest among U.K. and U.S. financial service providers in outsourcing to English-speaking countries like Canada, Ireland and South Africa.
Banks have long been aggressive off-shore outsourcers, with GE Capital, American Express and Citigroup pioneering projects since the 1980s. But in the last five years, the number of IT financial services jobs flowing overseas has skyrocketed, with deals inked in the last year alone by Prudential, Merrill Lynch, J.P. Morgan Chase, Lehman Brothers, MetLife, Sallie Mae, Guardian Life Insurance Co. of America, Conseco and Bank of America.
A Gartner report says most of the migration thus far in financial services has included lower-level clerical and call-center jobs or back-office transaction processing. Higher-end managerial and professional jobs, including more sophisticated relationship-oriented customer contact work are likely to remain in the U.S. Indeed, work like financial-product modeling, risk analysis and decision support are unlikely to be outsourced.
Shifting jobs overseas is hardly new. Just as lingerie is sewn and packaged in the Dominican Republic, Big Wheels are spit out of Chinese factories and Volkswagens roll out of Mexican plants, so it goes with technology. Tech tasks have become more easily commoditized, thanks to high-speed digital connections and a plethora of well-educated, lower-paid technicians overseas. But what's different about this debate is that these are educated, white-color jobs flowing out-and Washington legislators are hopping mad.
The momentum in Washington against the export of IT white-collar jobs has been escalating for months. Congress in early June began considering bills to close an immigration-law loophole. In the last five years, requests for the number of H1-B and L-1 visas has exploded, as more than 1 million foreign guest workers have entered the U.S., predominantly for high-tech jobs. Representative Nancy L. Johnson (R-Conn.) has asked that large insurance companies disclose how much of their IT work is being done by foreign workers in the U.S. And state legislatures in Maryland, Washington, Connecticut, Missouri, and New Jersey are weighing laws banning outsourcing of government tech-services contracts to low-wage developing countries ven if these initiatives don't pass, however, they're prompting U.S. banks and insurers to think twice before outsourcing jobs abroad.
The Washington Alliance of Technology Workers, a Seattle-based group seeking to unionize high-technology workers, wants that cap to drop to 65,000 annually. "This really raises issues about long-term job growth and creation in this country," says Marcus Courtney, president of the WATW, an affiliate of the Communication Workers of America. "How is that going to happen in the face of unfair labor competition? ...People need to start standing up and fighting back in order to keep these jobs in this country. It's outrageous what's going on."
Many industry officials contacted declined to discuss the potential public relations nightmare. "Our members don't see offshore outsourcing as an isolated issue," argues Steve Bartlett, president and CEO of the Financial Services Roundtable, an association of 100 financial services firms with about 1.8 million employees. "Our companies finance the American economy, which is an integrated part of the global economy. And in the aggregate, outsourcing creates jobs in the U.S." That's true, in part. Some studies have shown that for every 10,000 jobs lost overseas, another 12,000 are created-although not in the same industry. 'We find ways to lower the cost of credit and the cost of capital for our customers, both consumers and corporations. And outsourcing helps reduce that cost," he says.
Harris N. Miller, president of the ITAA, the Information Technology Association of America, an association of 400 firms, says it's been difficult fighting a battle that doesn't have enough soldiers. "The financial services industry wants to have the flexibility to hire a skilled workforce and certainly oppose any efforts to restrict that," he says. "They would prefer a mobile, global blended workforce. ...But some companies are beginning to see that it's more than just about dollars and sense. It's more complicated than that."
But is it? "Cost is the driving factor," says Susan Cournoyer of Gartner Inc. The biggest appeal of outsourcing is the savings: a $100-an-hour project in the U.S. costs only about $29 an hour in India.
Indeed, that firm draws nearly 70 percent of outsourcing jobs from financial services firms, and is certainly the jewel in the outsourcing crown. India has an enormous pool of English speakers, two million new college graduates every year, and one of the world's largest clusters of engineers and programmers. And many Indian firms are SEI CMM-compliant, an acronym referring to the Software Engineering Institute's Capability Maturity Model, which ensures the quality levels akin to those in the U.S.
Often called the "birthplace of offshore outsourcing," India was chosen the No. 1 outsourcing choice for financial firms by A.T. Kearney, which considered issues from labor costs to political stability. It says the next best nations are Canada, Brazil, Mexico, Philippines, Hungary, Ireland, Czech Republic, Australia, Russia and China.
India sells more than $5.75 billion worth of software services to the U.S very year. American and European financial services firms dominate the Indian outsourcing landscape, says ICICI's Gopalakrishnan, who worked at Bank of America in the U.S. for nine years and at ABN Amro in India for two years. Today, GE Capital employs nearly 15,000 people in that country in various-back office tasks. ABN Amro employs 500 in trade finance and commercial banking tasks; in commercial banking services, HSBC and Citibank both employ about 4,000 each, while Standard Charter employs about 2,000. ICICI last year tripled its workforce to meet U.S. offshore outsourcing demands.
Many Indian firms worry about the recent wave of protectionist measures in Washington asscom, an Indian software association, recently launched a lobbying effort in Washington, with aid from U.S. public relations firm Hill & Knowlton, and New Delhi appointed a representative in its embassy there as part of India's campaign against the protectionist wave. "There has been some amount of backlash," agrees Nasscom president Kiran Karnik. "But market forces of supply and demand are operating well."
But Washington's attempts to stem the flow of outsourced tech jobs via proposed bills or amendments to existing laws hasn't had much traction. "The reason it's not getting anywhere is that you cannot pass a law by the government that outlaws economics, because economics-the marketplace- will prevail every time," says the Financial Services' Roundtable's Bartlett. "You just can't legislate it. It doesn't work. Global economics provide better quality of life and standards of living and more jobs for Americans than any kind of protectionist legislation could ever hope to."
Even though IT outsourcing remains "politically sensitive," Chantilly, VA-based market research firm Input Inc xpects the new congressional leadership to foster a "generally favorable atmosphere for outsourcing vendors in 2003. And why not? Federal spending on tech outsourcing services will increase from $6.6 billion in fiscal 2002 to nearly $15 billion by fiscal 2007, an 18 percent jump, it says.
Gartner analyst Diane Morello also doesn't see much success in legislatively limiting outsourcing jobs. "I can't quite imagine that happening, given the history of capitalism in this country," she says. "Most financial services firms are so heavily investing in information technology that you can't separate it (from other IT job outsourcing)." And IT outsourcing is exploding in all other industries, too.
And not only will financial services firm continue to outsource more jobs, say analysts, but the trend will only escalate in the next 10 years, as globalization fuels the ghettoization of various services. "Financial services companies will continue to look for ways to increase convenience for customers and lower their cost of credit," says Financial Services Roundtable's Bartlett.
Still, A.T. Kearney's research indicates that the effectiveness of these moves is far from certain, and many banks are addressing risk-management issues-particularly political risk-by spreading outsourcing contracts over several countries. Global IT services provider EDS predicts it will employ 20,000 employees delivering services by the end of 2004.
But U.S. Rep. Donald A. Manzullo, an Illinois Republican who is the chairman of the House Small Business Committee, which held a hearing on June 18 to look into the outsourcing issue, doesn't say that to his constituents. "Increased global trade was supposed to lead to better jobs and higher standards of living," he muses in his testimony. "The assumption was that while lower-skilled jobs would be done elsewhere, it would allow Americans to focus on higher-skilled, higher-paying opportunities. But what do you tell the Ph.D., or professional engineer, or architect, or accountant, or computer scientist to do next? Where do you tell them to go?"
What Bartlett would tell them is that they should find other jobs, some of those extra 2,000 created for every 10,000 that evaporate-even if they have to change professions. "The financial services industry, particularly the large companies, are financing the American way of life and increasing standards of living and they seek ways to reduce costs in order to do that," Bartlett says. ... It's about competition, but it's competition that benefits the American consumer. That's the way of a global economy." And, increasingly, the American way is the global way.
