Ottawa Citizen
Thursday, March 25, 2004

THE GLOBAL JOB: THE OFFSHORING ISSUE
Peter Hum

Diju Raha, the former Nortel executive whom view as the patriarch of outsourcing to India, has his own take on nearshoring.

Raha, who oversaw Nortel's outsourcing of IT work to Indian companies a decade ago, believes that an outsourcing business could be created that combines the best of what Canada and India have to offer.

Raha, who now heads EximSoft International, a 200-person software services and product company, contends that a business could combine Canada's geopolitical stability, infrastructure, and free flow of people, technology and capital with India's immense supply of knowledge workers.

"Indian companies haven't done it," Raha says. "They're pure play. They have a tremendous tax incentive in India, they're not taxed on their profit. Their price-earning ratio is tremendously better. They've got better capitalization in the marketplace." Canadian companies have not moved in this direction "because Canadian companies are very happy doing what they're doing," Raha contends.

"This is a tremendous opportunity," Raha says. "You integrate the best of Canada, with the best of India."

Thousands of U.S. tech jobs are bound for India and abroad. Should Canadian IT workers fear the same? Or can Canada grab more of the outsourced American work?

It's a good thing that Howard Rosenblum survived his third layoff in four years with his sense of humour intact.

Jobless since last September, the 41-year-old Kanata software engineer masters a joke about losing his job at the Siemens Telecom Innovation Centre, even if the details might be maddening for a less accepting individual.

While Rosenblum and 17 or so other Siemens employees were laid off last fall, their project lived on, taken over by tech workers at a Siemens outpost on the other side of the world, where salaries cost the company a fraction of what Rosenblum and his peers earned. For the Kanata-based team members, final duties involved training the Indian engineers who inherited their work.

Rosenblum, who had lost his Newbridge Networks job at the end of 1999 and was laid off again a year later from a doomed startup, says of his run at Siemens: "I tell people, 'I didn't lose my job. I know exactly where it is. It's in India.'"

Talk about turning the other cheek. Rosenblum even has kind words for his replacements. "Most of them were really good. They're bright people," he concedes.

But he does not minimize the impact that the tech world's great global job shuffle has had on him. Married, with a wife who is unemployed and two children, Rosenblum is succinct and dead-serious: "We're suffering."

U.S. Job Exodus

In the United States, tens of thousands of unemployed tech and white-collar workers tell similar, sorrowful stories. One estimate by Forrester Research is that 80,000 tech jobs have migrated from the U.S. in the last three years. Analysts at Gartner posit that by the end of this year, more than 80 per cent of U.S. companies will consider moving IT services, including software development, to countries such as India, Pakistan, Russia and China, and that 10 per cent of the jobs at U.S. tech companies will move offshore.

Because of their discontent, offshoring, in which companies relocate facilities in low-wage locales, and offshore outsourcing, in which companies contract out the work to services companies in those same low-wage locales, have become hot-button issues for politicians and the media. Democrat hopefuls assail U.S. President George W. Bush and his administration because they support offshoring. U.S. lawmakers introduce protectionist bills and legislation, sometimes trying to prevent corporations from outsourcing abroad. Business periodical headlines decry "India's Onslaught." On CNN, renowned business journalist Lou Dobbs spins diatribes against "exporting America," and his website lists more than 400 companies, from Adobe Systems to Yahoo!, "either sending American jobs overseas, or choosing to employ cheap overseas labour, instead of American workers."

In comparison, the offshoring phenomenon in Canada is less well understood. Anecdotal evidence suggests that Rosenblum and his Siemens colleagues are far from alone as companies pursue different offshoring and outsourcing options -- often various forms of a so-called "India strategy."

The websites of Indian outsourcing giants list Canadian clients such as Nortel, JDS Uniphase, Corel, Entrust and the Royal Bank of Canada. Corel, in fact, has been outsourcing to Wipro Technologies for more than a decade -- the relationship carried over when it acquired Ventura desktop publishing software from Ventura Software Incorporated. Graham Brown, Corel's executive vice-president of software development says that outsourcing makes sense when it offloads routine work. "If it's a key product, you don't want to be doing it," he adds.

Companies as small as Ottawa's Sigpro Wireless, a 45-person system-on-chip and software startup, have invested in facility and staff in India.

Other companies, perhaps because of the U.S. outcry against sending work abroad, decline to discuss their offshoring tactics. But what Canadian company would opt out of a key tenet of globalization if it was likely to make it more competitive? "No society can pass on the savings," says Bernard Courtois, the new president and CEO of ITAC, the Information Technology Association of Canada.

That said, Canadian high-tech's use of offshoring and outsourcing is still in its early days, with plenty of room to grow. Jason Bremner, IDC Canada's senior analyst for outsourcing services, pegs the annual earnings of foreign services companies in Canada at a bit more than $100 million -- "not really all that much." Bremner explains that Canadian companies spend much more -- almost 50 times more -- outsourcing to North American services companies such as IBM and CGI. "The full impact of offshore in Canada is less than two per cent of the Canadian market place," Bremner says. CGI, he notes, has a long-term outsourcing contract with Canada Post, and earns more than $150 million a year in revenues, topping all the money taken in by its foreign competitors.

Yes, American companies are flocking to India, Bremner says. "Maybe we should expect to have more Canadian companies do the same. They very well may," he says. However, he notes that the big Indian firms have made only "limited investments" to woo Canadian business. "They are not planning on, based on my understanding, my discussions, my viewpoint on the market, they're not planning on increasing those investments, tenfold," Bremner says. That suggests that offshore services companies find the larger American and Western European markets more appealing.

In fact, a 2002 report from India's National Association of Software and Services Companies frankly admitted that by focusing on the U.S. and United Kingdom, Indian companies had largely ignored the potential of Canada.

Still, a September 2003 ITAC report includes observations from association members that IT outsourcing and offshoring is increasingly top-of-mind for Canadian tech companies.

"Presidents of Canadian subsidiaries tell of ongoing battles with headquarters abroad to maintain and grow R&D centres in Canada," the report notes. "The high quality of Canadian graduates has helped win these battles, but many of those (Canadian tech executives) interviewed see India and China, as well as Eastern Europe, increasingly threatening Canada's ability to compete for skilled people.

"As one respondent put it, 'The really scary phase of migration is yet to happen. I sat and watched 'blue collar' jobs migrate to Asia. It will start to happen at an alarming rate in the next five years in knowledge jobs as well. A big time bomb is ticking," the report says.

Reminded of this passage, ITAC president Courtois cautions against taking an "alarmist" stance on offshoring. "You don't lose your cool, but you don't go to sleep either," Courtois says.

The offshoring issue for Canadian tech may boil down today to a matter of how companies deal with the inevitable -- just as manufacturers had to adjust to globalization decades ago.

"If you looked at the apparel, shoe and toy industry over the last 30 years, there was a very clear trend of production -- it moves to where you can do it at the least possible price," says James Toccacelli, vice-president of communications for Electronic Data Services Canada. "To me, this is just the same phenomenon in the IT industry, 20 or 30 years behind the times. It kind of comes as no huge surprise to me... it's not a huge leap to anticipate it will continue.

"If you look at it as part of as a larger global economy trend, it's less shocking," he continues. "It is simply work looking for the most efficient use of capital."

One factor which mitigates the impact of offshoring on Canadian tech workers is that Canada also benefits from the offshoring dynamic. Thanks to the differential between currencies, Canada qualifies as a lower-wage country for U.S. companies. American works comes here, even if Canada offers moderate savings compared to deeper Indian discounts because proximity and common culture are pluses too. Wired magazine ranked Canada just behind India as a destination for U.S. work, ahead of Ireland, China, Israel and the Philippines (Bear in mind, however, that the bulk of outsourced U.S. work is call-centre labour rather than software development or higher-order knowledge work).

"We get more outsourcing from the U.S. than we give out to the rest of the world," Courtois says.

He and others wonder then what is the best way to roll with offshoring's punches -- or even prosper, if globalization can work in Canadian tech's favour.

If Canadian services companies could compete more aggressively with the Wipros and Bangalores of the world, America's job losses could increasingly be our gain.

Nortel's Early Role

Some studies of India's outsourcing boom assert that Western companies jumpstarted the country's tech services sector when they hired Indians in droves to de-bug software in anticipation of a Y2K disaster.

However, others contend that years earlier, none other than Nortel Networks had already planted the seeds for staggering growth. In the early 1990s, Nortel invested a small fortune in Indian firms that are now offshoring leaders -- Wipro, Infosys Technologies, Tata Consultancy Services and Sasken Communications Technologies. Nortel introduced Indian programmers to big-league telecommunications projects and supplied them with state-of-the-art gear, including India's first videoconferencing network.

This year, Nortel entered into talks with Singapore-based contract electronics manufacturer Flextronics International to divest all its manufacturing operations in Canada, Brazil, Northern Ireland and France. The move is expected to allow Nortel to shed 2,500 jobs.

In an exclusive interview with the Citizen earlier this year, Nortel chief executive Frank Dunn said: "We need now to focus on partnering with world-class players. There are a lot of other players from outside the telecom industry that we need to work with."

In addition to giving work to foreign companies, Nortel continues to restructure its company across the map -- in September, the company announced plans for doubling its R&D staff in China, building a 55,000-square-metre campus in Beijing in the process.

"We need to have a global network of our core capability and we need to have the diversity. I need to put people in China, in India and other places. I need to get close to my customers. I need to have a global reach and partner closely with customers where they are. That's my model," Dunn said.

JDS Uniphase's restructuring, which eliminated about 10,000 jobs in Ottawa, also included an offshoring component which sent a fraction of those jobs out of Canada, including manufacturing work to China and management, finance and human resource processes to San Jose, California.

That's not to say that outsourcing appeals only to tech industry giants. A company as small as Ottawa's Guardian Mobility Corp., a 12-person company that makes a GPS-based monitoring and tracking device, makes a go of it thanks to outsourcing. It contracts manufacturing and marketing to nearly a dozen companies, of which most are Ottawa-based and one is Taiwanese. "Try to subcontract everything which isn't your core competency," Guardian's CEO Jean Carr told a meeting of the Ottawa Manufacturers Network this year. "Outsourcing is the only way to be the best you can be as a company." Carr pointed out that the appropriate concentration of tech and marketing strength in Ottawa allowed his company to complete its project largely with local skills.

Sigpro Wireless, however, has taken a more global tack, outsourcing to Wipro and even opening its own facility in India.

In March 2001, less than a year after the Sigpro was created, it struck a deal to employ Wipro software design engineers to speed development of Sigpro's next-generation wireless chip. Sigpro founder and CEO Sundara Murthy says he partnered with Wipro not to save money but to snare the most suitable talent. "It's unfortunate we don't have a Wipro in Canada," he says.

Last summer, Sigpro opened a tech centre in Coimbatore, the South Indian city where Murthy grew up, to handle labour-intensive jobs such as testing and verification of chip designs. Fifteen people work there now, and Murthy hopes the facility will grow to employ 50.

Murthy cites several reasons for Sigpro's offshoring measures.

First, there's the bottom line. "Startup companies like us cannot afford to spend a lot of money on verification," he says. "We felt a reasonably low-cost resource available for a longer duration, maybe with people working two (back-to-back shifts), could really help us save us cost and reduce our time to market.

Sigpro outsources tasks that Canadian tech workers might find beneath them, Murthy adds. "In terms of time, you cannot expect Canadian engineers to work two eight-hour shifts back to back, working to midnight and stuff... it is a reasonably low-end job."

He also stresses that Sigpro has set up shop in India because the move will allow the company to enter the Indian wireless market. "We need to do this," he says. "No company in Canada, with the exception of one or two, would be able to buy and use our chips. But the fastest growing market for our chip is India." With its Coimbatore facility, Sigpro can brand itself as an Indian company to potential customers. "The presence in India increases our ability to sell in that market," Murthy says.

He contends that many venture capitalists strongly support offshoring, helping to drive it as a business strategy. "I have talked to many U.S. VCs, and many of the U.S. VCs will not invest in a startup company that doesn't have some low-cost overseas operation such as in India, or in China, or Ireland, or Israel," he says. "People who give us money, they direct how we need to spend and maximize the return for them."

Murthy contends that ultimately, offshoring will transform North American tech industries for the better.

"In my view, our high-tech philosophy should be looking at the higher-layer functionalities to be retained in Canada, and lower-layer functionalities to be outsourced so that we can maintain a cost-benefit and competitive edge for our products," he says.

He insists that if North America's innovative minds rise to the challenge, they will make up for the vacuum left as jobs migrate.

"Canadian companies and local talent shift to the higher level of expertise," Murthy says. "We do things the Indians and Chinese cannot do. This transformation is essential for the growth of future high-tech to become higher-tech."

There's no reason to resent offshoring, Murthy says. "An ox that is pulling a cart is not taking a job from you," he says. "You're sitting on the cart, enjoying the journey. Let him pull the cart."

Despite losing his job to an Indian, Rosenblum recognizes that offshoring could one day help him. While looking for employment, he has also been working on an idea for his own business and product. Floating it here and there, he has met with the natural question: What are your thoughts on production? "I said, you know, I might end up sending stuff to India, when the product is actually built and designed and I just need to have it manufactured as cheaply as possible... I may have 40 people in India working for me."

The 'Nearshore' Option

Another option for Rosenblum: he could try to get on the receiving end of outsourced work.

While Canadian tech workers cost more than their Indian peers, ITAC president Courtois and others insist that Canada can better position itself as a "nearshore" option for American companies looking to save money.

Indian tech services companies themselves use their Canadian outposts to serve U.S. clients. Take the example of Infosys, which became the first Indian company to open a Canadian outpost when it opened a development centre in Toronto in 1999. "One of the key strategies of Infosys' presence in Canada is its nearshore capabilities for U.S. companies," says Ashok Vemuri, vice-president and head of banking and capital markets at Infosys.

He notes that during last summer's mammoth electricity blackout, the Toronto development centre was leveraged as a recovery centre for clients that lost power. "All data was backed up in Toronto, so clients did not need to fear their business information was in danger," Vemuri says.

EDS Canada communications vice-president Toccacelli and Courtois say that American tech clients will outsource some work to Canadian companies -- even if Indian companies are cheaper -- because of selling points other than the bottom line.

While Chinese, Russian and Indian tech services companies can undercut the prices of Canadian counterparts, their contracts come with geopolitical risk such as the India-Pakistan clash over Kashmir. "Canada is obviously a safe haven in terms of stability," Courtois says.

"One of the ways that they (American companies) choose to mitigate that risk is to develop a balanced portfolio, if you will, of doing some work in the third world countries, some work in Canada, and sometimes some work in the U.S. as well," says Toccacelli, whose company has 200 applications development personnel working for non-Canadian companies. "By manipulating the relative proportions of that work, you can minimize the risk."

EDS and other companies chasing American business cited other factors in their favour over competitors in India, Russia or elsewhere: Canada's common culture with the U.S., its proximity, and of course, the favourable currency exchange.

Add the calibre of our infrastructure to the selling points, says Courtois. "Canada's connectivity -- everything from telephone to high-speed Internet access, is world-class -- a claim that India cannot make," he says. "This means outsource activities can occur virtually anywhere."

The racial diversity of Canada's workforce is an "incredible advantage," adds Penny Gurstein, a University of British Columbia researcher who is studying global outsourcing trends.

Canada's multicultural mix affords links to other countries and cultures, Gurstein says. "The Canadian advantage is that we can actually think globally."

British IT analyst Alan Pelz-Sharpe wrote last year that "Canada has the potential to be one of the best locations for technology outsourcing, a hub for great R&D, cost-effective, well-educated and a great cultural match with the U.S."

Pelz-Sharpe, vice-president of research and consulting, North America, for the U.K.-based firm Ovum, asked: "Why aren't there any Canadian Wipros and Tatas?" He cited Canadian tech services firms CGI and ACS as potential leaders, but suggested they need help.

"The bottom line is that the Canadian government should be jumping on this opportunity to promote its technology prowess and the benefits of the location," Pelz-Sharpe wrote.

Courtois says that ITAC is working on a detailed position on offshoring and could look in the future for government support.