At a recent Information Age conference, Srinjay Sengupta, a vice president at the Indian offshore software company Infosys, was asked if he thought that the build-up of negative sentiment against offshore outsourcing activities should be counted as a ‘risk factor’ by organisations thinking of using such services. Aware that in both the US and Europe, offshore outsourcing has become a political hot potato – a business service that some in power would discourage or even cap, Sengupta answered carefully: Big companies, especially those on Wall Street, already depended so heavily on on offshore outsourcing that they would not allow any political expediency to limit the competitive advantage they derive from such a capability. These customers would, he said, vigorously – and successfully – defend offshore outsourcing against any protectionist measures.

But Sengupta, and all those involved in offshore outsourcing, know they are facing a long and heated battle if the practice is to continue to spread at its current rate. On both sides of the Atlantic, a debate is now raging between those politicians who find it unpalatable, even dangerous to see their country’s jobs going abroad, and who want to legislate to prevent this, and those who believe global competitiveness and wealth are best achieved by allowing free markets to take their course.

At present, the free marketers are winning the political and ideological battle. Accepted wisdom is that businesses, and economies, will fare much better if they access

the cheapest resources available – even if they are offshore. But increasingly, that position is being challenged – and that challenge is becoming much more serious.

In the US, the political storm is, so far, much stronger than in Europe – not least because it is an election year. In many states, public concerns have prompted legislators to take action to prevent the jobs of well-paid local call centre or IT workers going to highly-motivated and cost-efficient workers in countries such as India, China, the Philippines and the Czech Republic.

The State of Tennessee, for example, now has a law that requires state procurement officials to favour contractors that employ US workers only. Similar bills have been put forward in many other states, including North Carolina, Michigan, Colorado, Mississippi and New Mexico. The State of Indiana, for example, recently cancelled a $15 million offshore call-centre contract – even though that decision cost it an extra $8 million to keep the jobs in the US.

To date, most of this protectionist activity has not amounted to much. Colorado, Mississippi and New Mexico have quietly shelved their bills, and in many states, such as North Carolina and Michigan, bills have been pending for months, but no decisions are being made.

This stalling partly reflects the fact that economic recovery – and in particular consistently improving new job generation numbers – has made the issue seem less urgent. But it is also because no decision can please everyone. Many business leaders, who generously fund the political parties, are fiercely opposed to anti-offshore outsourcing legislation, while many populist politicians in the US are in favour. Some states are waiting for the national government to take a lead – and that will depend on who wins the presidential election in November.

At the federal level, the debate is also raging. President Bush, who intervened to protect the US steel industry immediately after he was last elected, has taken a free-market stance, with no legislation planned. But that stance is not necessarily popular: his economic adviser, Gregory Mankiv, was heavily criticised earlier this year when he described offshore outsourcing as “a good thing” for the US economy in the long-term. Democratic Presidential candidate John Kerry, has taken the opposite line to Bush. If elected, he says, he will implement a four-point programme to ensure that US jobs go to US workers. He proposes to stop government contracts going to companies that use offshore workers; those contracts going to companies that have a history of accounting fraud or that are moving offshore; to give consumers the right to know which country the call-centre operator they are talking to is working in; and to end tax credits for those moving jobs offshore.

This line might be popular with some, but it has angered some high profile business leaders. Former General Electric chief executive Jack Welch is one of them. “It’s the dumbest argument ever…Don’t stop two jobs from going abroad, you will kill 20 here,” he told a meeting of the World Business Forum in New York.

Kerry has also alienated some natural supporters in the IT industry. In 2000, Netscape founder and Opsware CEO Marc Andreessen, for example, donated $250,000 to Al Gore’s democratic campaign, and even held a dinner in support of Kerry’s senate campaign. Now he says: “If they’re going to run on an anti-business message, forget me.”

The privacy card

The political controversy building up around outsourcing isn’t just about jobs – at least not directly. New opposition to offshore outsourcing is also mounting from the privacy lobby in the US.

Privacy campaigners say that some foreign companies that process sensitive financial and data records do not reach the high standards of the US. New York senator Hilary Clinton has responded, proposing legislation to address security and privacy issues. (This is a little ironic: in the past the US has complained that Europe’s attitude to personal privacy was too stringent.)

Her law would force companies to tell customers if sensitive records are being sent offshore. And, importantly, it will give them the right to keep data onshore. This last clause, if passed, would be devastating because it would undermine the economies of scale involved in offshore data management.

Many critics think that Clinton’s law is unnecessary. But her allies cite the case of a worker in Pakistan who, in a dispute with her employer, threatened to post sensitive US medical records on the Internet. That scare prompted the University of California at San Francisco Medical Centre to bring its data back to the US.

These fears have spread. Some financial companies are worried that unless they can guarantee acceptable standards of privacy and of corporate governance at offshore subcontractors, they will be in breach of existing laws, or open to lawsuits. All this has made businesses very touchy about offshore. Google, in the build-up to its IPO, for example, withdrew mentions of its own interests in outsourcing from its weblogs. And one PC maker is advertising its PC support as “outsourcing free”, with the slogan “Buy MPC, Support America”.

In the UK, the offshore outsourcing debate mirrors that in the US, but is much more muted. Most of the attention has centred on call centres, rather that IT workers. Trade union Amicus claims 200,000 call-centre and business services jobs will leave the UK by 2008. In December 2003, the union described insurance company Aviva’s plans to send 2,350 administrative jobs to India as “deplorable”.

This prompted Prime Minister Tony Blair to clarify his stance: “Of course I feel desperately sorry for anyone whose job is at risk as a result of this change, but that is the way the world is today… We have not tried to pretend to people we can stop what is happening in the global economy”.

But the UK’s hands-off stance is complicated by European legislation and, in particular, the privacy issue. Most offshore jurisdictions do not have data protection laws stringent enough to meet EC requirements for handling the data of EC citizens. This, technically, makes it illegal to send most data processing jobs offshore to most other countries – although there are several ways that organisations can still outsource outside the EC and still comply with the law (for example, they can protect individual privacy by including standard, EC-approved clauses in the contract).

Privacy is not a big political issue in Europe – yet. But one company, Alliance &Leicester, decided not to move its call centre offshore after a poll suggested more than half of bank customers were concerned about their data being held offshore and nearly nine out of ten did not want their accounts managed offshore. Amicus is campaigning to have offshore security rules tightened even further.

These mounting concerns may force some businesses to adopt a compromise, sending routine and labour-intensive operations to countries that offer low-cost labour such as India or the Philippines, and sending more sensitive operations to countries nearer the organisation’s home country in terms of political stability, business practice and legislation, such as Canada, Spain and Ireland.

Where next?

What happens next? Will offshore outsourcing be rendered uneconomic through heavy legislation or will Western economies stand back as jobs move east, putting their faith in the free market? As ever, the truth lies somewhere in between.

In politics and economics, it is difficult to predict anything with certainty. But a few likely outcomes can be confidently stated.

First, all economies will globalise further, helped by telecommunications and liberalisation. That means that successful businesses will increasingly seek out the lowest costs on a global basis. No Western government can seriously hope to completely deny their businesses the freedom to source globally, so any legislation will inevitably be partial and controlled.

Second, it is equally clear that if tens of thousands, or even hundreds of thousands of workers lose their jobs in the West, people will get angry and start to apply political and commercial pressure.

The strength of that pressure will depend on the scale of the problem. Official US figures, for example, suggest that offshore outsourcing has so far had little impact on the number of jobs lost. Fewer than 2% of US jobs lost in the first quarter of 2004 went offshore. That won’t lead to legislation.

But job loss forecasts for the IT sector are more alarming. Gartner estimates that up to 25% of traditional IT jobs will be in emerging markets by 2010. This signals a major shift in industry structure and as this trend accelerates, political measures may be taken. That is not necessarily protectionist. Some politicians and commentators in the US point out that, in the long term, the west must compete – and that means, at the very least, creating a better educated population.

“Attempting to rig the game won’t work. Only education, innovation, investment, trade, training and hard work will give us the growth and jobs we want,” said Senator Joe Lieberman, who plans to introduce legislation calling for a bi-partisan panel to resolve the problems of offshore outsourcing. “The American economy is failing to adapt to fundamental changes and to growing competition in the global economy.”

But long term strategies may be coupled with measures to protect the IT industry. “In a Darwinian context, we are not entitled to anything we can’t win on the merits of our offers,” wrote respected IT industry strategist Geoffrey Moore in July. But he went on to argue that governments can “retard the speed” of the revolution by taking measures to avoid excessive disruption in sectors that are hit particularly hard.

Another moderating factor is that, over time, the economic case for offshore outsourcing, while still strong, will gradually be diluted as developing economies become wealthier and, hence, more costly. Even now, many CIOs have reported the total savings from offshore outsourcing to be nearer 30% than the frequently cited 60% to 80%.

Solutions such as those suggested by Moore and Lieberman may be acceptable to both sides – so some limited intervention is likely. But whatever attempts are made to legislate, the wave of globalisation of IT and business services is unstoppable and the influence of politicians is limited.