Quotes of the Day

Rosen Sharma is sure about one thing. His nine-month-old company, Solidcore, a start-up that makes backup security systems for computers, could not survive without outsourcing. By lowering his development costs, the 18 engineers who work for him in India for as little as one-fourth the salary of their American counterparts allow him to spend money on 13 senior managers, engineers and marketing people in Silicon Valley. If he doesn't outsource, in fact, the venture capitalists who fund start-ups like his won't give him a nickel. Sharma's Indian-American team, tethered by a broadband connection, gets his product in front of customers faster and cheaper. "As a business, you have to stay competitive," he says. "If we don't do it, our competitors will, and they're going to blow us away."

But Sharma's sharp analysis loses its edge when he thinks about what decisions like his will mean someday for his children, a 2-year-old daughter and another on the way. "As a father, my reaction is different than my reaction as a CEO," he says. He believes that companies like his will always need senior people in the U.S., like the systems architects who design new products and the experienced salespeople who close deals. "But if you're graduating from college today, where are the entry-level jobs?" Sharma asks quietly. How do you get to that secure, skilled job when the path that leads you there has disappeared?

That's an issue that economists, politicians and workers are struggling with as the U.S. finds itself in the middle of a structural shift in the economy that no one quite expected. There must be a mix-up here. We ordered a recovery, heavy on the jobs, please. What we're getting is a new kind of homeland insecurity powered by the rise of outsourcing, a bland yet ominous piece of business jargon that seems to imply that every call center, insurance-claims processor, programming department and Wall Street back office is being moved to India, Ireland or some other place thousands of miles away.

To be sure, public anxiety and election-year finger pointing have blurred some important distinctions. To set them straight: most of the jobs that have shifted to places like Mexico and China in the past several decades have been in manufacturing, which is being done with ever increasing sophistication in low-wage countries. Some have also blamed trade-liberalization deals like the North American Free Trade Agreement (NAFTA), which the Labor Department estimates was responsible for the loss of more than 500,000 U.S. jobs between 1994 and 2002. That's a significant number but modest in comparison with the millions of jobs that are created and lost annually in the constant churn of the U.S. economy. Indeed, much of the job loss during the recent U.S. recession was cyclical in nature. But in recent years, one noteworthy segment of the economy began suffering from the permanent change of outsourcing (or offshoring), particularly the movement of service-industry, technology-oriented jobs to overseas locations with lower salaries. What puts teeth into the buzz word is the sense that getting outsourced could happen to almost anyone.

Outsourcing, primarily to India, accounts for less than 10% of the 2.3 million jobs lost in the U.S. over the past three years. But the trend is speeding up, and it is quickly becoming the defining economic issue of the election campaign. The Administration learned that the hard way a few weeks ago, when President Bush's chief economic adviser suddenly found himself on the wrong side of the issue. In a casually imperious tone worthy of Martha Stewart, Gregory Mankiw declared, "Outsourcing is just a new way of doing international trade ... More things are tradable than were tradable in the past, and that's a good thing."

Many economists agree with him. Anything that makes an economy more efficient tends to help in the long run. But in reducing job losses to macroeconomic landfill, Mankiw handed Democrats an issue. His words, accompanied by an ominous drumbeat, are now immortalized on the AFL-CIO's website, just before an image of a beaming John Kerry, who won the union's endorsement last week.

Kerry is taking the opportunity to paint Bush as insensitive to middle-class job anxieties. "I don't think the Bush Administration has ever felt this or had a sense of it," Kerry told TIME. "And I think the No. 1 major issue facing the country right now is, How do you really create the jobs that we want?" With a touch of demagoguery, John Edwards has sought to get an edge on Kerry by reviving the unresolved battle over NAFTA, which Kerry voted to approve a decade ago. "When it comes to bad trade agreements, I know what they do to people," Edwards said last week. "I have seen it with my own eyes what happens when the mill shuts down." Kerry points out that at the time Edwards was in no position to put anything on the line over NAFTA: "I don't know where he registered his vote, but it wasn't in the Senate."

Unfortunately for Bush, outsourcing has become Exhibit A in any gripe session about why the economic recovery has been weak in creating new jobs. To some extent, he succeeded in making a plausible connection between his tax cuts and the robust pace of economic growth. "People have more money in their pocket to spend, to save, to invest," he has said. "[Tax relief] is helping the economy recover from tough times." But his efforts to sell a pastiche of programs to help the unemployed have had a tougher time punching through. When it comes to jobs, the numbers fail him. On the basis of previous recoveries, Bush was promising to add 2.6 million new jobs this year. That pledge is starting to look like fantasy, and the Administration has distanced itself from its own predictions.

In crafting an effective response to outsourcing, all the candidates face the same challenge: dealing with a relatively new phenomenon. Their responses are a work in progress, ranging from mild proposals of dubious effectiveness to ideas that sound vaguely like protectionism. In the meantime, voters are left to separate the myths from the realities. Some answers:

From Mexico to India: How Did We Get There?
Before acquiring its current incendiary meaning, outsourcing referred to the practice of turning over noncritical parts of a business to a company that specialized in that activity. At first it was ancillary functions like running the cafeteria or cleaning the offices. Then it started moving up to corporate-service functions. Why operate a call center if what you really do, your core competence, is run a credit-card business? So credit-card companies hired independent call centers to take over the phones, and that industry put down roots in places like Omaha, Neb., which early on had a fiber-optic hub. But as the price of information technology fell and the Internet exploded, capacity began popping up around the world. Which meant that all you needed to run a call center, or a customer-service center, was information technology (IT) and employees who spoke English. Hello, India.

From there, multinational companies began moving up the food chain. Silicon Valley, which for years had been importing highly educated Indian code writers—driving up wage and real estate costs—discovered it was a lot cheaper to export the work to the same highly educated folks over there. So did Wall Street, which employs an army of accountants, analysts and bankers to pore over documents, do deal analysis and maintain databases. The potential list gets longer: medical technicians to read your X rays, accountants to prepare your taxes, even business journalists to interpret companies' financial statements.

Jared Bernstein, senior economist at the Economic Policy Institute, says the frustration of these educated workers is what gives the debate over outsourcing such intensity. "There is no safety net for $80,000-a-year programmers," he says, and perhaps there shouldn't be. Their education is supposed to provide that. Bernstein says that after the factory closings of the 1980s and the emergence of the "knowledge economy," many liberals and conservatives alike had reached a consensus that manufacturing jobs could not be saved but the "lab coat" jobs would always stay here. "Now that vision is under siege," Bernstein says. And the white-collar middle class is feeling the sting of insecurity that manufacturing workers know so well.

Why So Fast?
It's doubly difficult for people to watch outsourcing accelerate as the economy improves. The stock market had a strong 2003, and corporate profits in many industries exceeded expectations, so why haven't companies that started outsourcing as a way to cut costs reversed course and brought the jobs back home? That might have happened after other recessions, but this shift is different. To some extent, companies are gun-shy about committing to full-time workers and the attendant fringe benefits. Instead of rushing to expand their computer systems and hiring people to maintain them, firms are keeping their outsourcing companies on speed dial.

That's why outsourcing to India has exploded during the recovery. It jumped 60% in 2003 compared with the year before, according to the research magazine Dataquest, as corporations used some of their profits (not to mention tax breaks) to expand overseas hiring. That translates to 140,000 jobs outsourced to India last year. Vivek Paul, president of Wipro, one of India's leading outsourcing companies (it handles voice and data processing for Delta Airlines, for instance), says its service business grew 50% in the last quarter of 2003.

"Companies that are emerging from the slowdown are beginning to invest some of that in India," he says. John McCarthy, author of the Forrester Research landmark study that predicted 3.3 million jobs would move overseas by 2015 (there are about 130 million jobs in the U.S. today), says last year's gains in outsourcing didn't come from new companies jumping on the bandwagon. The most dramatic changes came from outsourcing dabblers who finally made a commitment and now allocate as much as 30% of their IT budgets offshore.

Another factor speeding things up is the development of an industry devoted to making outsourcing happen, thanks to entrepreneurs like Randy Altschuler and Joe Sigelman. Just five years ago, they were junior investment bankers at the Blackstone Group and Goldman Sachs, one in New York City, the other in London. During one particularly long night of proofreading PowerPoint slides and commiserating by phone about finding yet another error courtesy of their companies' in-house document service, they had an epiphany. They would find a better way of doing that work. This was at the height of the dotcom boom, and everyone they knew was trying to figure out a way to Silicon Valley. These two had a different idea. They would go to India, set up a team of accountants and desktop-publishing experts and persuade investment banks in New York to outsource their confidential financial documents and client presentations halfway around the world.

The entrepreneurs' families, not to mention Silicon Valley's venture capitalists, "were looking at us in a crazy way," Sigelman says, especially when he relocated to Madras. Five years later, as it moves into more complex work, OfficeTiger, with $18 million from British investors, plans to increase the number of its employees in India this year from 1,500 to 2,500 and more than triple its U.S. work force, from 30 to 100.

Getting Left Behind
Billy Johnson of Altamonte Springs, Fla., is convinced that one of the tens of thousands of new jobs in India should be his. Johnson, 41, was a programmer for WorldCom when the company imploded in the wake of a massive accounting scandal. After six months of looking for a programming job, Johnson realized that the work he knows is exactly what outsourcing companies do best. "I spent $5,000 of my own money to become an Oracle [enterprise software] developer," he says. "Nobody's hiring Oracle developers." For a while, he believed it was just the economy. A lifelong Republican, he believed that when the Bush tax cuts kicked in, the jobs would follow. "I feel like I've been betrayed," he says. "I keep hearing about jobs being created, but I don't see them."

Vince Kosmac of Orlando, Fla., has lived both sad chapters of outsourcing—the blue-collar and white-collar versions. He was a trucker in the 1970s and '80s, delivering steel to plants in Johnstown, Pa. When steel melted down to lower-cost competitors in Brazil and China, he used the G.I. Bill to get a degree in computer science. "The conventional wisdom was, 'Nobody can take your education away from you,'" he says bitterly. "Guess what? They took my education away." For nearly 20 years, he worked as a programmer and saved enough for a comfortable life. But programming jobs went missing two years ago, and he is impatient with anyone who suggests that he "retrain" again. "Here I am, 47 years old. I've got a house. I've got a child with cerebral palsy. I've got two cars. What do I do—push the pause button on my life? I'm not a statistic."

Neither is Scott Kirwin, 37, of Wilmington, Del., who represents another trend. A career contract worker, he is under constant threat from outsourcing. He is the breadwinner in his family—his wife is a medical student, and they have a 7-year-old son—and he has twice lost his job to outsourcing. In both cases, he had been hired as a contractor, and he sees little opportunity for anything else. "It's really nasty if you're looking for stability," he says. During unemployment spells, his family accumulates debt and reverts to making minimum credit-card payments. Vague talk about retraining leaves Kirwin cold. "Tell me which other industry I should train for," he says. A few people have suggested his father's trade, plumbing. His father had an eighth-grade education and expected better options for his college-educated son. "My father would be outraged," Kirwin says.

Whom Will Outsourcing Affect Next?
As it proves its value to more companies, outsourcing will change the way they hire. San Francisco-based DFS Group, a division of luxury-goods maker LVMH that runs duty-free shops in airports around the world, reduced operating expenses about 40% after hiring the outsourcing firm Cognizant, based in Teaneck, N.J., to take over most of its 265-person internal IT operations in 2002. Today those jobs are being done in India. DFS reinvested the savings primarily in better software. "They can add more stores efficiently. They know more about the products in the store," says Ron Glickman, DFS's former chief information officer. DFS continues to hire in the U.S. but only for certain key functions. When it needs more IT support at peak times or for special projects, DFS is more likely to turn to Cognizant. "We're going to go to them first," Glickman says.

That shift marks another fundamental change in the way companies do business. "Intrinsic to outsourcing is the replacement of the employer-employee function with a third party," says Gregg Kirchhoefer, a partner with the law firm Kirkland & Ellis in Chicago. Kirchhoefer, who has been handling outsourcing transactions with Indian companies since the early 1990s, sees outsourcing as the logical extension of the evolutionary process that began with contract manufacturing and continued into corporate services. Thanks to technology, more kinds of work can now be spun off into contracts rather than tied to employees. Once a person's labor can be reduced to a contract, it matters little whether the contract is filled in India or Indiana; the only relevant issue is cost. And the speed of technological change accelerates the process. As soon as a job becomes routine enough to describe in a spec sheet, it becomes vulnerable to outsourcing. Jobs like data entry, which are routine by nature, were the first among obvious candidates for outsourcing. But with today's advanced engineering, design and financial-analysis skills can, with time, become well-enough understood to be spelled out in a contract and signed away.

Without a "social contract" binding employer and employee, long-term jobs are an illusion. For the past two years, the Department of Labor has reported that household employment is much stronger than payroll numbers—indicating that workers are getting by with freelance or contract work, whether or not they want to. In January, for example, there were 2.8 million more people employed than in January 2002, according to the household survey, while the payroll numbers were almost flat at 130 million.

Can Americans Learn to Love Outsourcing?
While it's small consolation to workers who lose their jobs, outsourcing has become an essential element of corporate strategy, even for small companies. "Any start-up today, particularly a software company, that does not have an outsourcing strategy is at a competitive disadvantage," says Robin Vasan, managing director of Mayfield, a venture-capital firm based in Menlo Park, Calif. He felt so strongly about "global sourcing" that Mayfield organized a daylong session for the firms it invests in to meet with outsourcing companies and experts. About 60% of them now have an outsourcing plan. "That's a good start," Vasan says.

The move to outsourcing forces a company to use its resources where they count most, like product development. "For some of them, it's almost a question of survival. If they don't develop new products, they'll fail," says Laxmi Narayanan, CEO of Cognizant. Nielsen Media Research, which rates television shows, used Cognizant's programmers in India to develop NetRatings for websites. That new line of business allowed the company to hire sales staff and analysts in the U.S. to interpret the ratings for clients and eventually to start selling the product in Asia. Lightpointe, an optical-networking firm based in San Diego, will add about 10 people to its 75-person staff this year thanks to an arrangement with a company in China. That firm will handle Lightpointe's sales and marketing there as the company expands into a huge new market. Without the local help, says Lightpointe CEO John Griffin, he could not have entered the Chinese market and would have been limited to the flailing U.S. telecom market. "Some of my competitors were not as flexible," Griffin says. "They're dead. All those employees are gone."

Should Outsourcing Be Controlled?
As the rhetoric of the campaign heats up, so does populist sentiment that there ought to be a law against outsourcing—or at least something to slow it down. Various schemes have been proposed, such as tax initiatives or trade barriers to keep jobs from moving. Some companies may feel political pressure. Dell has moved some call-center support for business-enterprise customers back to the U.S., but the company cited poor service as the reason.

Analysts doubt that any protectionist strategy will slow what appears to be a permanent shift in the way the U.S. does business. As Mankiw tried to explain before he was shouted down by fellow Republicans, structural change like this is inevitable and recurring. It's just that the transition can be ugly. New England was a textile center until that business went south, to the Carolinas, then east, to China. Software supplanted steel in Pittsburgh, Pa. In both places, high-tech companies later occupied some of the old mill buildings. Now some of those companies' programmers have gone the way of loom operators and steel rollers.

The Economic Policy Institute's Bernstein says businesses ought to find a way to "share some winnings with those who lose" by creating funds for wage insurance or retraining. Otherwise there is a risk that the benefits of outsourcing will widen the gap between the rich and everyone else. The McKinsey Global Institute, a think tank run by McKinsey & Co., recommends that companies sending jobs abroad contribute about 5% of their savings to an insurance fund that would compensate displaced workers for part of the difference in wages paid by their old and new jobs. During the 1980s and '90s, most workers displaced by trade found only lower-paying jobs. Those displaced by outsourcing are likely to share the same fate.

As demand for Indian workers increases, their prices are rising, just like anything else. Wipro's Paul says that even though his sales soared 50% last fall, his margins are shrinking, mostly because of rising labor costs. "India has been discovered," he says. "It's something that is as susceptible to global competition as anything else." Wipro, in an effort to rein in expenses, is pushing workers to be more productive. But at some point in the future, the trend that is pulling jobs out of America will catch up with India. Somewhere a lower-wage alternative will develop—Central Asia, the Philippines or Thailand—and Indian politicians and workers will be clamoring about foreigners taking their jobs. It's not pretty wherever it happens, but it's just the way the business world turns.

• Jyoti Thottam