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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications (2008)

Chapter: Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney

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Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
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Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
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Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
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Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 52
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 53
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 54
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 55
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 56
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 57
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 58
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 59
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 60
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 61
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 62
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 63
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 64
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 65
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 66
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
×
Page 67
Suggested Citation:"Implications of Globalization for Software Engineering--Rafiq Dossani and Martin Kenney." National Academy of Engineering. 2008. The Offshoring of Engineering: Facts, Unknowns, and Potential Implications. Washington, DC: The National Academies Press. doi: 10.17226/12067.
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Implications of Globalization for Software Engineering Rafiq Dossani Stanford University and Martin Kenney University of California, Davis, and Berkeley Roundtable on the International Economy ABSTRACT is programming, where employment decreased from 570,000 in 1995 to about 450,000 persons in 2005. Programming The offshoring of software engineering, which is more requires less training than some other software work, and than three decades old, has been at the leading edge of the programmers, on average, earn less than software engineers offshoring of information-technology services. Over the past and computer scientists (Table 3). Whereas software engi- decade, the pace of offshoring has increased dramatically. neers and computer scientists should see job growth of over This has been due in large part to new communications 45 percent and 27 percent respectively between 2004 and technologies and the emergence of India as an offshore loca- 2014, the Bureau of Labor Statistics forecasts less than 5 tion. This report describes the evolution of the globalizing percent job growth for computer programmers. This rate is software supply chain. We predict that higher value-added below even the economy’s average job growth. work will be an increasing component of offshored software This reflects two trends. First, much routine programming and discuss its implications for employment and innovation is now automated. This has both reduced the programmers’ in developed countries. share of work in software creation and increased the average sophistication of the work. Second, even as this has hap- INTRODUCTION pened, the growth of online collaboration via the Internet and higher capacities at lower costs offshore has increased By the end of 2005, 2.9 million people (2.2 percent of the the offshoreability of programming. U.S. workforce) were employed in the software industry. The This may be seen from the following information on annual growth rate was 7 percent over the previous decade, India, which is now the largest exporter of software after well ahead of average workforce growth of 1 percent. The the United States, accounting for 60 percent of non-U.S. Bureau of Labor Statistics (BLS) predicts that the software software exports. Programming accounts for 60 percent of industry will be among the fastest growing employers in the Indian software exports, down from 90 percent in 1995. coming years. Six of the 20 most rapidly growing jobs from Programming is, of course, not a stand-alone function. The 2004 to 2014 are likely to be in high-value software work, work done by the Indian software industry is part of a supply including network systems, data-communications analysis chain, with most of the components still being fulfilled in the and administration, software applications, and systems developed world. engineering. Indian software employment has grown by 35 percent The significant exception to high growth within software per annum over the past decade. Software-exporting firms   located in India employed 706,000 people in 2006, up from Data for this section is from Bureau of Labor Statistics http:// www.bls.gov/oco/oco1002.htm and http://www.bls.gov/oes/current/ 513,000 in 2005. In 1995, the comparable numbers for the oes_nat.htm#b15-0000; GAO, 2005; Heeks, 1996; Nasscom, 2006; Ellis Indian and American software industry were 27,500 and 1.5 and Lowell, 1999. million (1.3 percent of the U.S. workforce of 118 million). 49

50 THE OFFSHORING OF ENGINEERING Two-thirds of India’s software exports are to the United ing software and software-service work to . . . low-wage States, a share that has remained nearly steady over the past countries.” The report concudes that “the globalization of, decade. and offshoring within the software industry will continue The impact is perhaps better appreciated by calculating and, in fact, increase” (ACM, 2006). the Indian share of employment within the American supply As Bhagwati et al. (2004) and Mankiw and Swagel (2006) chain of software. The share of Indian employment has risen have pointed out, the offshoreability of the software industry from 3 percent of the programmer pool used in American means, first, that software services are now tradable, whereas software production in 1995 to over 30 percent in 2005. in the past they were not. Second, given that international Meanwhile, work besides programming has also been trade is usually beneficial to both trading partners, they offshored. Some of this newer work is even lower-end work conclude, ipso facto, that globalization will have positive than programming, such as installation of software and main- implications for the U.S. economy. They argue that workers tenance of software programs. This has happened largely in the services sector of developed nations will shift to jobs because of the Internet. However, as will be shown below, in which they have a comparative advantage, thus ensuring new tasks, hitherto considered both difficult to offshore and full employment in the long run. As Mankiw and Swagel high value-added relative to the programming function, such (2006) note, “Economists see outsourcing as simply a new as product development and contract R&D for the software form of international trade, which as usual creates winners industry, have been offshored over the past decade, particu- and losers, but involves gains to overall productivity and larly to India. For example, as of 2006, the world’s largest incomes.” By contrast, Samuelson (2004) has cautioned contract R&D firm in software, employing 14,000 persons, that these gains may largely be captured by developing is the Indian firm, Wipro. A decade ago, Wipro, like others countries; and Gomory and Baumol (2000) have argued that in the Indian software industry, did not do such work. nationally located high-growth industries are important for This paper fulfills two objectives. First, it explains the national growth because of their spillover effects on overall genesis of software offshoring. This includes a consideration productivity. of why programming was the function that was most com- To some, these latter cautions suggest potentially dra- monly offshored right from the earliest stages. Second, it matic negative impacts for software-related employment in examines the scope for offshoring software work other than developed countries. These argue that if software develop- programming. This includes a consideration of whether the ment overseas increases in quantity and, especially in scope, additional scope is higher or lower value-added, how it is to include the most highly skilled work, the result may be linked to the earlier phase of programming offshoring, and unemployment, even for the most highly skilled software its likely evolutionary trajectory. engineers in developed countries (Hira and Hira, 2005). The paper proceeds as follows: in the next section, we The ACM report and other evidence points to the fact that discuss the current status of the debate on software offshor- higher skilled work is already being moved offshore in some ing. The following section provides a historical overview of fields of software, such as computing research (ACM, 2006; developments that led to offshoring in the software industry, Dossani, 2006; Sridharan, 2004). with a focus on developments in India. This is followed by a There is no comprehensive empirical evidence on soft- theoretical framework for analyzing how skilled work may ware offshoring, primarily because of the poor quality of be offshored. We conclude with a discussion of the impact primary data. See Figure 1 for an example of contradictory of software offshoring on employment and innovation in the data reported by the U.S. Bureau of Economic Analysis United States and other developed countries, and the implica- and the Indian software industry association, Nasscom. As tions for policy on education. far as we can tell, there is no systematic evidence yet of significant losses of high-value jobs in the United States to services offshoring. As noted in NAPA (2005), “The number THE CURRENT STATE OF THE DEBATE of jobs impacted (by services offshoring in general) appears A lively discussion is under way about the impact of glo- relatively small, when compared to total annual job losses balization on employment and productivity in the American in the United States.” software industry. An assessment published in 2006 by the Other empirical studies offer indirect evidence in support Association for Computing Machinery (ACM) notes that of the NAPA findings. For example, Mann (2006) shows that “attracted by available talent, work quality and, most of the elasticity of demand for U.S. exports of services is lower all, low-cost companies in high-wage countries, such as the than for U.S. imports of services. If this finding is applicable United States and United Kingdom, are increasingly offshor- to software, it would imply that globalization could have positive implications for the U.S. balance of payments.   This has happened even as the number of programmers in the total Landefeld and Mataloni (2004) show that the share of software pool has stayed relatively steady (rising from just under 600,000 in 1995 to 650,000 in 2005), while declining in share of software employment from 38 percent to 21 percent.   Technically, the correct term is “offshoring.”

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 51 US Software Imports from India 5 4 U.S. $ billions 3 2 1 BEA Nasscom 0 1998 to 2004 FIGURE 1  BEA and Nasscom figures for software sales from India to the United States ($ billions). Sources: www.bea.gov and Nasscom (various years). Dossani Figure 1 imports from subsidiaries of U.S.-based multinationals to This does not, however, mean either that the most skilled the parent country (as a percentage of sales) did not increase work will shift from the United States or that American soft- from 1997 to 2001. They also find that job creation by the ware employment will decline. More than one type of outcome expansion of multinationals overseas is no different from is possible. First, the capacity of other countries may be con- overall job creation. Both findings imply that multinationals strained by the quality of their educational systems or other that offshore work to their subsidiaries are not responsible for factors that hinder labor supply; by their infrastructure, such as job losses in the United States. Of course, the destination for telecommunications; or by institutional barriers, such as weak offshored work might be unaffiliated firms, for which these intellectual property laws. Second, the history of technologi- data have no implications. cal change suggests that new opportunities will emerge. The According to Hanson et al. (2001), the evidence of off- software industry in the United States might discover higher shoring of manufacturing has shown a positive, complemen- value-added opportunities, even as existing operations are tary effect on American jobs from high-value offshoring and increasingly offshored. In an era of high rates of technological a negative, substitution effect from low-value offshoring. change, both offshore and domestic software work can become In the software industry, the lower value work consists of more highly skilled. Third, assuming that the first and second programming and the higher value work consists of design, outcomes are both true, developed countries other than the consulting, system integration and managed services (Table United States could capture the new opportunities. This pos- 3). Hanson’s findings—if applicable intra-sectorally to sibility is not investigated in this paper. software—imply that the export of low-end work, such as The actual outcomes of offshoring will, therefore, depend programming, could reduce industry jobs. As Table 2 shows, on the evolving capabilities of developed countries vis-à-vis this is the field with the highest market share in India, sug- the capabilities of developing countries. New opportunities gesting by extrapolation that job losses in the United States will depend on the pace and location of innovation, which may indeed occur as a result. could be affected by the development of clusters of technical This kind of indirect evidence has obvious limitations. excellence offshore, such as those in Bangalore, Beijing, and Quite simply, we do not know if it is applicable to software. Shanghai. Or, perhaps, as Apte and Mason (1995) and many From our interviews with firms that have offshored work, others have argued, the need for proximity to consumers to we learned that fulfillment of various aspects of software determine their needs will be the determining factor in the development can be accomplished in spatially distant loca- location of innovation. Perhaps the open economy and ex- tions. Many of these firms state that they will increasingly cellent educational system in the United States will enable shift their operations to lower cost countries like India and American firms to innovate at a pace that keeps them ahead China. This suggests that the logic for software development of China and India. If so, the American software industry, at any particular location may be being eroded. The data we though possibly not specific groups of workers, may thrive provided in the introduction on the programming function by keeping the innovative, highest value-added work onshore may be only the first wave of software offshoring. and offshoring the rest.

52 THE OFFSHORING OF ENGINEERING Predicting the outcome of offshoring requires an under- TABLE 2  Global Spending on Software Products by standing of (1) the software industry and its evolving supply Categories of Work and Israel’s Market Share, 2004 chain and (2) the ecosystem for innovation in the United Israel’s Share of States vis-à-vis other countries. To simplify our task, we Global Spending on the Global Product have focused on India and the United States. Data on other Software Products Software Market countries are used primarily to illustrate the challenges and Revenue Category ($ billions) (percentage) opportunities in these two countries. We have chosen India Systems and tools software $93.7 1.1 as the alternative to the United States for the following rea- Application software $120.0 1.3 sons: first, because of its position as the largest exporter of Total $213.7 1.2 software after the United States; second, it has the size of Sources: U.S. and global data: http://www.siia.net/software/resources. labor force that can pose the most significant threat to U.S. asp#stats. Data for Israel http://www.iash.org.il/content/SoftwareInds/ employment; third, its current stage of overall economic IsraeliSectors.asp. Israel’s share of global markets are estimated from data development is likely to keep labor costs low for several for Israel for 2000 and comparable data for the United States for 2001. years, thus adding to its attractiveness as an offshore soft- ware destination; and, finally, because as our case studies, presented below, show, Indians have the capability of doing (NAICS 5415). Software publishers such as Microsoft fit highly skilled work. under the NAICS 5112 description of publishers of packaged software, “establishments primarily engaged in computer software publishing or publishing and reproduction. Estab- HISTORICAL OVERVIEW OF THE lishments in this industry carry out operations necessary SOFTWARE INDUSTRY for producing and distributing computer software, such as designing, providing documentation, assisting in installa- Product and Custom Software tion, and providing support services to software purchasers. Software is usually classified either by its uses or its de- These establishments may design, develop, and publish, or gree of customization. We use the North American Industry publish only.” Similar in some respects to mass manufac- Classification System (NAICS) definitions to differentiate turers, enterprises in this category create software products product software and custom software. The attributes, the or packages for the general consumer market and capitalize size of the market, and the market shares of the two key on economies of scale. Software products may be shrink- players other than the United States, India, and Israel are wrapped and transported physically or made available for summarized in Tables 1 through 3. downloading over the Internet. Types of software defined by usage are listed below: The second category, computer systems design and related services (NAICS 54151), comprises “establishments primar- • system-level software (i.e., programs that manage the ily engaged in providing expertise in the field of information internal operations of the computer, such as operating- technologies through one or more of the following activities: system software, driver software, virus-scan software, (1) writing, modifying, testing, and supporting software to and utilities) meet the needs of a particular customer; (2) planning and • tools software (i.e., programs that make applications designing computer systems that integrate computer hard- work better, such as database-management software) ware, software, and communication technologies; (3) on-site • applications (i.e., programs that deliver solutions management and operation of clients’ computer systems to the end user, such as word-processing software, and/or data processing facilities; and (4) other professional search-engine software and financial-accounting and technical computer-related advice and services.” software) In contrast to the one-size-fits-all software products in the first category, custom software is used when no packaged We define two categories of software by their degree of software products are available, as in highly specialized customization: (1) publishers of packaged software (NAICS processes, or to integrate disparate software products into a 5112) and (2) computer systems design and related services cohesive system. The latter process is common when large software products, such as Enterprise Resource Planning (ERP) or Customer Relationship Management (CRM) suites, must be integrated into already existing enterprise systems. TABLE 1  Uses of Product and Custom Software Custom software may be constructed by using traditional Product Software Custom Software programming languages and tools or proprietary scripting or Operating system All users None configuration languages. Because custom software is made- Tools Most users Some users Applications Small and large users Large users See   ttp://www.census.gov/epcd/naics02. h   ibid.

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 53 TABLE 3  Spending on Global Software Services by Categories of Work and India’s Market Share, 2003 Global Spending on Software India’s Global Market Share U.S. Wage Rate Services ($ billions) (percentage) ($/hour) Consulting 41.5 <1 80–120 Applications development 18.4 16.4 25 System integration: hardware and software deployment and support 91.7 <1 18–25 System integration: applications, tools, and operating systems 62.4 <1 40 IT education and training 18.5 0 40 Managed services 124.9 1.6 60–120 Total 357.4 Definitions: Consulting includes IT strategy, system conceptualization, information systems (IS) consulting, architecture, design, and network consulting and integra- tion. These services require the highest level of skills, including system design and understanding of clients’ requirements. Applications development includes creating applications programs. These require programming skills. System integration: hardware and software deployment and support includes making software and hardware components compatible and interoperable, hardware deployment and support, and software deployment and support. The skills required vary, but are not as high-level as programming or consulting skills. System integration: applications, tools, and operating systems includes the integration of software components (both products and custom software) in a software project. The required skills include understanding clients’ requirements and programming skills. Managed services include managing applications either on site or remotely over the Web, managing networks, applications management, IS outsourcing, network and desktop outsourcing, applications service provision, and systems-infrastructure service provision. The skills required vary greatly. Sources: Nasscom, 2004 (pp. 19, 36, 106) for columns 1 and 2; Nasscom, 2001 (p. 24) and authors’ interviews for column 3. to-order, it is more geographically constrained than product software. Table 1 compares the uses of product and custom software. Proximity to the stakeholder is often crucial, es- software. pecially if tacit (uncodified) knowledge is involved. Thus, The United States is the market leader in software product software products are more readily exportable than custom development, accounting for 41 percent of the total. The software. U.S. share of exported software products is probably even Nearly every computer needs systems software, and the higher because many countries only produce software prod- mass market provides very favorable conditions for creat- ucts for protected local markets. For instance, data on Brazil ing systems software as packaged products. Hence, systems and Japan (Table 6) show that while Brazil’s annual output software is now marketed almost exclusively as packaged of product software earns revenue of about $3 billion and products. And, over time, the need for compatibility among Japan’s annual output earns about $21 billion, these products operating systems has become a critical requirement of both are only available to domestic markets. Western Europe and enterprise and retail users; this need has increased with the Israel, like the United States, develop product software for advent of the Internet. As a result, a few operating systems global markets. now dominate the computing landscape and have consider- Custom software is part of a larger category called soft- able pricing power. Compared to the demand for applications ware services, as defined in NAICS 54151. Software services software, the demand for systems software has relatively are described by type and size in Table 3. little “give” in terms of pricing. Consumers of systems soft- ware, such as high-availability server-operating systems and Independent Software Vendors real-time embedded operating systems, are willing to pay high prices for quality and interoperability. Consequently, The independent software-vendor (ISV) industry was the producers of systems software are less sensitive to pro- created by two events, both related to market leader IBM. duction costs than product quality and the need for people First, in 1956, IBM settled a long-standing antitrust suit with highly specialized skills. by the federal government by agreeing, as part of a con- Although product software is designed to meet a wide sent decree, to stop offering computer-consulting advice range of customer requirements, it can incorporate only a (McKenna, 2006). With IBM out of the picture, leading limited number of variations. Beyond this limit, software accounting firms, such as Arthur Andersen, then began of- must be written to a customer’s specifications. Industries fering computer consulting services. Second, in 1969, IBM such as banking, in which customer requirements vary sig- nificantly, need custom software. In general, the more varied   See www.siia.net. the needs of different end-users, the more likely software is   When the consent decree was lifted in 1991, IBM immediately created to be customized. And, because needs vary most at the ap- an IT consulting group, which, within five years, had annual revenues of plications stage, most customized software is applications $11 billion (McKenna, 2006).

54 THE OFFSHORING OF ENGINEERING decided to unbundle its mainframe operating system, appli- only raw material, apart from a workstation, was a specified cations software, and hardware by creating open standards. software system. Programmers did not even have to know Subsequently, some end-user firms set up in-house software which firm’s hardware a program would work on or the type development and maintenance operations and some began of application the program would support. outsourcing work. As a result, ISV businesses were created The workstation also had sophisticated graphics and (Table 4). enough computational capacity to satisfy the needs of The columns in Table 4 do not describe mutually exclu- small enterprises, which now shifted from outsourcing sive choices. For example, a firm might purchase system- data-processing services to running their own workstations. level software products and develop its own applications. In the early 1980s, the first workstation-based local area The columns are arranged by sequentially dominant work networks were established, increasing the demand for more types over the decade, starting with the shift from external sophisticated software for running these networks and for data processing and managed services (Column A) to in- applications compatible with networked users. house hardware at the beginning of the decade. Initially, In the 1990s, the success of database software packages firms developed their own software (B), but as hardware and further simplified the creation of applications software. Plat- software became more complex, in-house software develop- form independence, combined with the rise in demand for ment and management became increasingly difficult. This custom software by small firms, resulted in the growth of a led to the outsourcing of system integration (C) and then large custom software industry. system-level and applications products (D). The outsourc- Also in the 1990s, PCs with more computing power were ing of customized applications (E) was an indication that able to process programs written in Unix/C, thus making industry-specific products did not meet the needs of sophis- them more acceptable to small enterprises. As costs for PCs ticated users, particularly large banks (Steinmuller, 1996). fell in the mass market, PCs superceded workstations as the In the 1980s, the IBM PC was introduced, but within a hardware platform for programming. Later in the decade, decade, IBM had lost control of the operating system to Mi- PC-based networks made applications accessible to many crosoft Windows, which combined with the Intel micropro- more users in an enterprise. cessor (Wintel) to became a market-created standard by the The spread of the Internet beginning in the mid-1990s was late 1980s. The result was a decline in hardware prices and accelerated by declining costs for bandwidth and storage. an increase in demand for applications. Unlike mainframes, The Internet provided a platform for networked development PCs were made for individual users who relied on product of software and software installation, hosting, and mainte- software. PCs in the 1980s had neither the programming nance. At this point, data no longer had to be on servers lo- capacity nor the performance capabilities necessary for mid- cated on the premises of an enterprise but could be housed in sized and large enterprises. Hence PCs did not impact the remote data centers. The Internet also significantly reduced custom software business. However, they did create a mass the cost of collaboration among remote teams. These factors market for retail product software. further reduced the need for the proximity of user groups or The workstation, which was introduced in the early 1980s, of developers and users. provided many end uses for enterprises but could also be With the establishment of the Internet, several new used for stand-alone programming for mainframes. The models of preparing and delivering software appeared. adoption of Unix as the operating system for all computers, These include service-oriented architecture that provides a combined with the workstation (in short, the U-W standard), standards-based environment for sharing services indepen- revolutionized the ISV industry. An ISV could now own a dent of development technologies and platforms; network- workstation made by any manufacturer and write programs based access to and maintenance of software (software-as- for a client with a different brand of installed hardware a-service); and open-source software (i.e., software based on (including a mainframe). In other words, software creation nonproprietary code) developed by voluntary contributions became modularized, or platform independent. of networked developers. With the exception of the Linux With the simultaneous widespread adoption of Unix/C open-source operating-system software, which is believed to as the programming language, other functions of software have about a one-third share of the server market (although creation, such as system architecture, design, and integration, less than 2 percent of all operating systems), the new models could be done separately from programming, thus modular- described above have not impacted the spatial distribution of izing the programming component. Programming could software development. now be done anywhere in the world by programmers whose The first three columns in Table 5 show the major changes and driving forces in the software-services industry in the United States described above. The two right-hand columns   Modularization is the conversion of a component of the production show (for later reference) developments in the Indian and process with one or more proprietary inputs, design, or fulfillment tech- niques into a component with standardized inputs, design, and fulfillment techniques.   See www.idc.com/getdoc.jsp?containerID=202388.

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 55 TABLE 4  Independent Software-Vendor Industry, 1970–1979 External Data Processing Clients That Own Hardware Clients’ Options Managed services Develop and Buy bundled software and outsource Buy software Buy custom maintain software maintenance services products from ISVs software services ISV Services Managed services None Integration of hardware and software Systems-level and Custom applications Electronic data processing Software maintenance applications products software A B C D E Source: Adapted from Steinmuller, 1996. Israeli software industries. Note that this table does not in- the category of software services. Russia, the Philippines, clude information on the product-software industry. and Vietnam, like India, primarily export software services. Countries in Eastern Europe and Russia export mostly to Europe. Other countries export mostly to the United States. Offshoring of Software Development Israel is the only significant non-American producer of soft- American IT firms began to offshore software develop- ware products for the U.S. and other global markets. ment to India, Ireland, and Israel (the 3 I’s) in the 1970s, As Table 6 shows, the most significant producers of about a decade after the offshoring of IT hardware manufac- offshored software for global markets are India and Israel. turing. Siwek and Furchgott-Roth (1993) argue that the lag Israel focuses on software products for the global market between hardware and software offshoring was because soft- and India on custom software for the global market. Ireland ware development, unlike hardware manufacturing, required is the largest provider of localized products and services for close coordination with clients throughout the process. Europe. A widespread knowledge of English and relatively low labor costs were common attractions of the 3 I’s. Small do- Ireland mestic markets and the lack of domain knowledge (less so for Israel) were common disadvantages. Beginning in the 1990s, Hardware offshoring began in Ireland after policy makers many other countries, including China, several countries in offered export incentives following Ireland’s entry into the Eastern Europe, Brazil, Mexico, Russia, the Philippines, and EU in 1973 (Enterprise Ireland, http://www.enterprise- Vietnam, began exporting software to developed countries ireland.com, downloaded 1/20/2007; Torrisi, 2002). Software (Table 6). offshoring, which began in the 1980s, followed hardware off- As Table 6 shows, China and Brazil sell software services shoring (Torrisi, 2002). The main clients initially were, and mostly to their domestic markets. Ireland develops software continue to be, American transnational corporations (TNCs). products and services for Europe, mostly by customizing These use Ireland to localize their software products for U.S. software products. This should properly be included in European markets (Torrisi, 2002). American TNCs account TABLE 5  New Work Types and Driving Forces in the U.S. Software-Services Industry and Their Impact on the Software Industry in India and Israel New Work Types in the U.S. New Work Types in the New Work Types in the ISV Industry Market Change Technology Change Indian ISV Industry Israeli ISV Industry 1960–1970 Software maintenance Mini-computers Electronic data Software maintenance Electronic data processing processing exports Electronic data processing 1971–1980 Custom applications IBM unbundles software Programmers exported No change and hardware 1981–1990 Software system integration Increased complexity of Unix-Workstation (U-W) Custom applications Custom applications for applications standard adopted exports domestic market 1991–2004 Managed services Internet, database Managed services, Contract R&D exports, management systems, contract R&D exports products for global PC-based networks markets Source: Adapted from Steinmuller, 1996; Mowery, 1996; and http://www.siia.net/software/resources.asp#stats for columns 1–4. Columns 5 and 6 are the authors’ analyses.

56 THE OFFSHORING OF ENGINEERING TABLE 6  Software Exports from Developing Countries, 2001 Sales Exports Labor Force Sales per Country ($ billions) ($ billions) (2000) Employee ($) Primary Work Type Brazil 7.7 0.1 220 35 P/S = 40/60b China 7.4 0.4 186 40 Domestic (15.0) a (2.0) (750) (20) EE5 0.6 0.5 75 8 Services to Western Europe (Bulgaria, Czech Republic, Hungary, Poland, Romania) India 8.2 6.2 350 23 Services to U.S. (22.3) a (17.1) (878) (25) P/S = 25/75 Ireland 7.7 6.5 24 160 Localization of U.S. product software for Western Europe Israel (2000) 3.7 2.6 35 106 P/S = 70/30 Japan 85.0 0.07 535 159 P/S = 25/75 Philippines 0.2 0.15 0.05 12 Services to U.S. Russia 0.2 0.1 0.1 13 P/S = 30/70 United States (2002) 200.0   n/a 2,600 77 P/S = 40/60 Notes: aFigures in italics are for 2005. bP/S = the ratio between revenue from software products and revenue from software services. Sources: Arora and Gambardella, 2005 (pp. 45, 77, 101); Sahay et al., 2003 (p. 17); Nasscom, 2006 (pp. 46, 47). TABLE 7  Software Exports from India, Ireland, and products for the European telecom and financial sectors. In Israel (in $ millions, except where otherwise noted) 2003, the indigenous sector in Ireland employed 40 percent India Ireland Israel of the total software workforce (Sands, 2005). 1990 105 2,132 90 2000 6,200 8,865 2,600 Israel 2002 7,500 12,192 3,000 2003 8,600 11,819 3,000 As in Ireland, though a decade earlier, hardware firms 2005 17,100 18,631 3,000 were established in Israel during the 1960s first in response Number employed (2003) 260,000 23,930 15,000 to export incentives.11 Software TNCs followed in the early Revenue/employee (2003) 33,076 493,988a 273,000 Number employed (2005) 513,000 24,000 n/a 1970s (Torrisi, 2002). These initially undertook software Revenue/employee (2005) 33,333 776,000a n/a product maintenance and, later, R&D. aNote: Sands (2005, p.45) argues that the revenue/employee for Ireland In the 1980s, domestic firms were established, funded is overstated because of in-country transfers and should be about $160,000. by government research contracts. They initially provided If so, total exports in Table 7 are overstated by a factor of three. software services to the defense industry. Key labor was Source: Data for India are from Heeks (1996) and Nasscom (2003–2006). drawn from the Israeli defense industry. In the 1990s, with Data for Ireland are from http://www.nsd.ie/htm/ssii/stat.htm, downloaded support from global venture capitalists, security product September 26, 2006. Data for Israel are from http://www.iash.org.il/Content/ firms were established. These offered products for global SoftwareInds/SoftwareInds.asp, downloaded August 31, 2003, and http:// www.israel21c.org/bin/en.jsp?enDispWho=InThePress&enPage=BlankPa markets (Teubal, 2002, see also Table 5). TNCs currently ge&enDisplay=view&enDispWhat=Zone&enZone=InThePress&Date=0 account for about 25 percent of total employment in the 8/11/05, downloaded September 26, 2006. Data for Ireland prior to 2003 Israeli IT industry and focus on R&D, but growth is being are in euros (converted at 1 euro = $1.043, rate on January 5, 2003). From driven by local firms producing software products for export 2003 on, data are converted at 1 euro to $1.26, the rate in January 2004. markets (Torrisi, 2002). The three largest software firms in Most recent figures for Israel are for 2001. Israel are product firms that jointly account for 60 percent of the industry’s revenue (Bresnitz, 2005). for about 90 percent of Ireland’s software exports (Arora and Gambardella, 2005).10 Since the 1990s, an indigenous India software sector has developed in Ireland, initially provid- ing support services for TNCs but subsequently developing From Tables 6 and 7 above, we note that the most sig- nificant increase in offshoring to global markets is in India. 10  By contrast, in India, only 15 to 20 percent of the work since 1990 is Unlike in Ireland and Israel, where fiscal incentives were estimated to be done by TNCs. According to Enterprise Ireland, the official state website, http://www.nsd.ie/htm/ssii/stat.htm, Irish-owned companies generated about 11 percent of software exports in 2002, with the rest com- 11  For example, Motorola’s first offshore manufacturing subsidiary was ing from TNCs. set up in Israel in 1964 (Ariav and Goodman, 1994; Sahay et al., 2003).

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 57 critical for private-sector entry, the software industry in India the country’s commercial and industrial capital, became the began when government policy was hostile to all private in- center of the business. In 1980, five of the top eight export- dustry. State policy at that time was appropriately described ers (including the top four) had large-firm pedigrees. Seven as “statist, protectionist and regulatory” (Rubin, 1985). An of the eight, all headquartered in Mumbai, had a 90 percent industrial licensing regime and state-owned banks strictly market share (Table 8). regulated private-sector activity. In IT, the state was the main The industry changed when the global industry adopted producer of products and services. The strategy was to create the U-W standard in the 1980s and, as we discussed earlier, “national champion” state-owned enterprises, which were software creation and, within it, programming were modular- granted monopolies (Sridharan, 2004). ized. Beginning at that time, coincidentally, the state gradu- A key protectionist policy was the Foreign Exchange ally abandoned its protectionist, anti-TNC stance. The New Regulation Act of 1973 (FERA-1973), under which a foreign Computer Policy of 1984 (NCP-1984) reduced import tariffs firm could only have a minority interest (up to 40 percent) in on hardware and software to 60 percent; reclassified software a company operating in India. Many foreign firms, including exports as a “delicensed industry” eligible for bank financ- IBM, closed their Indian operations, citing concerns about ing and not subject to the intrusive licensing regime (Heeks, the protection of intellectual property (IP). FERA-1973 ef- 1996); gave foreign firms permission to set up wholly owned, fectively closed the door to software development by TNCs export-dedicated units; and initiated a project to set up a in India. chain of software parks that would offer infrastructure at Domestic firms found an innovative way to benefit from below-market costs. In 1985, all export revenue (including global opportunities for ISVs. Because software develop- software exports) was exempted from income tax. ment could not come to India, Indian programmers were sent The new policies encouraged TNCs to introduce new to developed countries. This began in 1974 when Burroughs, businesses and new business models. Some TNCs (e.g., an American mainframe manufacturer, asked its Indian sales Texas Instruments and Hewlett Packard) did R&D and agent, Tata Consultancy Services, to supply programmers wrote product software using cross-country teams; others for installing system software for a U.S. client (Ramadorai, (e.g., ANZ Bank and Citigroup) wrote custom software for 2002). Other firms followed suit, including foreign firms in in-house use, again using cross-country teams. Thus TNCs joint ventures with Indian firms.12 used approaches that had been successful in other environ- Initially, the exported Indian programmers worked for ments, such as Ireland and Israel. global IT firms. Later in the decade, as IBM gained a larger Although the initial entrants, such as Texas Instruments, share of the total global market, end-users such as banks persuaded the government to improve the infrastructure,13 hired Indian firms to convert existing applications software TNCs still faced daunting communications costs and intru- to IBM-compatible versions. sive regulation (Parthasarathy, 2000). Thus product-focused The state remained hostile or, at best, indifferent to the TNCs remained small. Domestic firms (e.g., Wipro) that software industry throughout the 1970s. Import tariffs were tried to imitate the TNC product-software model also failed high (135 percent on hardware and 100 percent on software). because (1) the domestic markets could not supply adequate Software was not considered an “industry,” which meant that domain expertise (Athreye, 2005), and (2) there was no exporters were not eligible for bank financing. Even over- venture capital industry to speak of.14 By 1990, product seas sales offices were disallowed until 1979 (Ramadorai, development accounted for less than 5 percent of exports 2002). (Heeks, 1996), and, by 1999, it had only increased to 8 per- Such protectionism interfered with learning and pre- cent (Nasscom, 2002). vented Indian-based programmers from moving up the value However, the combination of the U-W standard and chain. Programmers returning from overseas assignments lower costs engendered a successful new business model, were the main source of learning about new opportunities, pioneered by TCS. Domestic firms began to supply software but because of their short assignments overseas—typically programs coded entirely in India, while relying on foreign less than a year—their learning was also limited (Ramadorai, co-vendors for program design and specification. This ap- 2002). In addition, many chose to remain overseas after com- proach succeeded because it matched the expertise of Indian pleting their assignments. As a result, the software industry firms (programming) with the expertise of overseas vendors during its first decade was mostly limited to the recruitment (client understanding, design, and integration) and because of engineers. it reduced costs by keeping programmers at home—although It being easier for established private conglomerates than for small firms to navigate anti-private-sector policies, large firms became the dominant players in the industry. Mumbai, 13  According to Naidu (2002), Texas Instruments’ decision to enter India was conditional on the state providing adequate power and telecommunica- tions bandwidth. 12  These included Datamatics (a joint venture between Wang, the U.S. 14  Through the 1980s, domestic venture capital was concentrated in state- minicomputer maker, and ex-employees of TCS), Digital, and Data run firms. Two of today’s leading IT firms, Wipro and Infosys, were both General. turned down by state-run venture capital firms in the 1980s.

58 THE OFFSHORING OF ENGINEERING TABLE 8  Top Eight Indian Software Exporters Firm, HQ Firm, HQ Firm, HQ Rank 1980 1990 2004 Founder, Education, Experience 1 TCS, Mumbai TCS, Mumbai TCS, Mumbai Kanodia (MIT) 2 Tata Infotech, Mumbai Tata Infotech, Mumbai Infosys, Bangalore Murthy (U. Mysore, IIT Kanpur) 3 Computronics, Mumbai Citibank, Mumbai Wipro, Bangalore Premji (Stanford) and Soota (IISc) 4 Shaw Wallace, Kolkata Datamatics, Mumbai Satyam, Hyderabad Raju (Loyola College, Chennai; Ohio U) 5 Hinditron, Mumbai Texas Instruments, Bangalore HCL, Delhi Nadar (PSG College, Coimbatore) 6 Indicos Systems, Mumbai Dell, Mumbai PCS, Mumbai Patni (MIT) 7 ORG, Mumbai PCS, Mumbai i-Flex, Mumbai Hukku (BITS, Pilani) (TCS, Citicorp) 8 Systime, Mumbai Mahindra-BT, Mumbai Mahindra-BT, Mumbai Mahindra (Harvard) Total Market Share 90% 65% 38% Notes: 1.  BM was probably in the top eight firms in 2004 (it was ranked 6th in 2002), but the company has not given permission for its name to be displayed in I subsequent Nasscom rankings: http://www.nasscom.org/artdisplay.asp?art_id=4413#top20 (downloaded August 26, 2005). 2.  olumn 5 data is for firms listed in Column 4. C Sources: Heeks, 1996 (p. 89), for columns 2 and 3; Nasscom, 2005 (p. 76), for column 4; company websites and authors’ interviews for column 5. TABLE 9  Exports of Indian Software Total Exports Exports/Total Revenue Year ($ millions) Number of Firms Average Revenue per Firm ($) Average Revenue per Employee ($) (percentage) 1980 4.0 21 190,476 16,000 50.0 1984 25.3 35 722,857 18,741 50.0 1990 105.4 700 150,571 16,215 n/a 2000 5,287.0 816 7,598,039 32,635 71.8 2004 12,200.0 3170 7,003,154 35,362 73.9 Notes: 1. Data for 1980, 1984, and 1990 are from Heeks, 1996 (pp. 72, 73, 87, and 88). 2. Data for 2000 (financial year ended March 2001) are from Nasscom, 2002, and Nasscom, 2004 (pp. 23, 26, and 64). 3.  ata for 2004 (fiscal year ended March 2005) are from Nasscom, 2005 (pp. 75–76). 2004 data for number of firms and average revenues are based on D figures for software, software services, and IT-enabled services combined because disaggregated data are not available. 4.  umber of employees for 1980, 1984, 1990, 2000, and 2004 was 250, 1,350, 6,500, 162,000, 260,000, and 345,000, respectively. Data for 1980–1990 are N from Heeks, 1996. Data for 2000 and 2004 are from Nassscom, 2004 and 2005. the number of personnel dispatched overseas declined slowly as a center for software development. Several new firms, at first.15 including Infosys and Wipro decided to locate their facilities Thus Indian firms gradually shifted from exporting pro- in Bangalore (Premji, 2003). The first software technology grammers to programming outsourced custom software in park under NCP-1984, with a reliable supply of electricity India. The shift, though gradual, induced many domestic and telecommunications bandwidth, was also located in firms to enter the market. The number of software firms Bangalore. Another advantage of Bangalore over competing increased from 35 in 1984 to 700 in 1990, and the share of locations was low labor costs. Unlike Mumbai and Delhi, smaller firms also rose (Table 9). which had histories of large firms and militant labor unions, This shift raised the standards required for physical infra- small companies in Bangalore had relatively few problems structure in India. It also marked a turning point in the role with unions (Heitzman, 1999). of Bangalore, where real estate was cheaper than in Mumbai, In addition, Bangalore, the capital of Karnataka, is located at the center of the four southern states, Karnataka, Tamil 15  By 1988, 10 percent of the Indian software industry’s labor force was Nadu, Andhra Pradesh, and Kerala, which together produce located in India; this had risen to 41 percent by 2000 and 71 percent by 2004 52 percent of India’s engineering graduates. Bangalore’s (Nasscom, 1999, 2002 [p.28], 2005 [p.58]). best known academic institution, the elite Indian Institute of

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 59 Science (IIS), was established in 1909. Most IIS graduates TABLE 10  Share of Foreign-Firms’ Revenue and Share and most research were directed toward the public sector, of Custom Programming and Applications Management but some indirectly supported Bangalore’s development in Work in Indian Software Exports software. This was because the government had decided to Financial Year 2001 2002 2003 2004 2005 2006 (E) locate several high-technology state-owned enterprises there, CAD and AM 3.65 4.40 4.87 5.98 7.67 10.16 thus creating a trained labor force (Balasubramanyam and ($ billions) Balasubramanyam, 2000). However, according to some in- Total software 5.3 6.16 7.1 9.8 13.1 17.1 dustry observers, the quality of that labor force was dubious exports and could meet only a small part of the software industry’s ($ billions) needs (Ramadorai, 2002). The biggest success related to IIS, Share of CAD/AM 68.9 71.4 68.6 61.0 58.5 59.6 (percentage) Wipro Technologies (India’s third largest software exporter), Share of foreign 14.5 22.0 26.0 31.0 31.0 n/a was founded at IIS by a group of engineers working under firms’ revenue Ashok Soota (Parthasarathy, 2003). (percentage) Policy reforms in the 1990s and 2000s reduced import Notes: CAD = custom application development. AM = applications tariffs to near zero16 and regularized foreign ownership, in- management. tellectual property protection, venture capital, stock market Sources: Nasscom, 2006 (pp. 47, 59, 60, 70); 2005 (pp. 50, 51); 2004 listing, and telecommunications policies to global best prac- (pp. 36, 40); 2003 (p. 39); 2002 (pp. 29, 30). tices. In addition, technological changes during this period, particularly the Internet, led to a sharp decline in data storage and transmission costs. These changes attracted a new round employing about 25,000 engineers in R&D work by 2001 of TNCs, particularly foreign outsourcers and U.S.-based and an estimated 30 to 40 chip-design start-up firms all over start-ups, and provided new opportunities for existing firms India between 1999 and 2002. in remote software services, such as e-mail management and Of course, several domestic firms also do high-end work. remote software maintenance (Table 4). Wipro, the third largest domestic firm, with 14,000 employ- Interestingly, TNCs initially focused on programming ees, provides contract R&D services and filed 68 U.S. patents only, which was the approach adopted by domestic firms. on behalf of overseas clients in 2005 (Premji, 2006). The TCS remote-programming method was used for in- As the share of routine programming work declined, the house product development by Texas Instruments, Agilent, share of engineering services, R&D, and product develop- Hewlett Packard, Oracle, and General Electric, as well as ment rose from 8 percent in 1999 to 23 percent in 2005 for services by ANZ Bank, ABN Amro Bank, Accenture, (Nasscom, 2002, 2006). IBM, and Dell. During this phase, TNCs and foreign start- ups overwhelmingly chose Bangalore for their IT operations Case Studies of Software Products Offshoring (Naidu, 2002). Over time, the level of sophistication of work done in Although a comprehensive study of value-added work India rose. As Table 10 shows, routine programming work in offshored software development is not presented here, and maintenance accounted for 68.9 percent of total export evidence from case studies is provided to support the sec- revenue in 2001, but fell to 58.5 percent by 2005. During this toral shift discussed above. In this section we present some period, foreign firms earned 14.5 percent of total revenues examples based on our interviews. From these descriptions, in 2001 and 31 percent in 2005. We believe that there was the key constraints in performing higher value-added work a causal relationship between the declining share of routine appear to be the recruitment and retention of qualified per- work and the entry of foreign firms doing more sophisticated sons and the small size of domestic markets. work.17 Data provided by Sridharan (2004) supports this Problems with recruitment and retention derive from inference; he notes the presence of 230 TNCs in Bangalore earlier problems with educational policy and minimal in- teractions between universities and industry (Parthasarathi 16  The reduction of import tariffs was a key feature of the 1990s reforms. and Joseph, 2002). Until recently, faculty at even the best These tariffs had risen to 110 percent by 1991 but were reduced to 85 per- engineering institutions, almost all of which are public uni- cent in 1993, 20 percent in 1994 for applications software and 65 percent versities, were not required to conduct research. Those who for systems software, and to 10 percent for all software in 1995 (Heeks, 1996). Duties on hardware ranged from 40 percent to 55 percent in 1995, chose to do so faced, according to the government’s own but by 2000 they had come down to 15 percent for finished goods, such reckoning, severe problems: “obsolescence of facilities and as computers, and had been eliminated for components (microprocessors, infrastructure are experienced in many institutions . . . the storage devices, ICs, and subassemblies, display screens, and tubes, etc) IT infrastructure and the use of IT in technical institutions (Indian Ministry of Finance, 2000). is woefully inadequate . . . the barest minimum laboratory 17  Unfortunately, data on employment in foreign firms is not available, so causality cannot be proved. In 2001, the only year for which data are facilities are available in many of the institutions and very available, foreign firms employed 13 percent of the workforce (Nasscom, little research activity is undertaken . . . engineering institutes 2002). have not succeeded in developing strong linkages with indus-

60 THE OFFSHORING OF ENGINEERING try . . . the curriculum offered is outdated and does not meet house rather than outsourcing it (although some software the needs of the labor market” (Indian Ministry of Human maintenance and programming work was outsourced). To Resource Development, 2001). Until very recently, nearly all address these concerns and concerns about reversibility in of the best students migrated (Siwek and Furchtgott-Roth, the event of failure, there was a six-month overlap in staffing 1993), although this may already be changing as opportuni- between the United States and India. ties at home increase. The work began with simple activities and moved to more Small domestic markets have also limited the ability of complex activities over time (see Figure 2). The engineering- Indian engineers to move up the value chain. As Rosenberg services group was the first user of the Indian operations. The and Mowery (1979) have argued (in a more general con- initial work was providing parts lists to customers worldwide text), vendors become technologically sophisticated through and data entry for the CAD group in the United States. Over understanding customer preferences. D’Costa (2002) has time, most support services were moved to India. criticized the dependence of the Indian software industry on I n e a r l y 2 0 0 2 , t h e s e c o n d A g i l e n t u s e r, t h e exports. He argues that international outsourcing of software, communications-solutions group, established a 10-person although lucrative, discouraged domestic firms from doing team to automate test suites for Netexpert, one of Agilent’s more complex projects at home because “excessive depen- projects. However, a lack of coordination between the In- dence on outsourcing limits the synergy between vibrant dian and U.S. teams led to the initial failure of this experi- domestic and foreign markets.” ment. The situation improved after the time allocated for For purposes of this discussion, we consider software coordination was increased and a quality-enhancement pro- product development by two types of firms, start-ups and es- gram was introduced in the Indian operations. By 2005, the tablished firms. The former are dependent on venture capital development and maintenance of Agilent’s EDA software and tend to be staffed very tightly. For start-ups, coordination products were being done jointly by multicountry teams costs are a large share of total costs. Established firms have located in both countries. sources of revenue, a more reliable labor pool, and, perhaps, an interest in establishing a base in China or India for access- Case Study: Broadcom ing domestic markets. In consequence, established firms may use offshoring as a non-integral part of product development, Broadcom, a Silicon Valley-based fabless chip firm, for purposes such as product upgrades and second-generation acquired an India operation through the acquisition of Ar- product maintenance. media Labs, another Silicon Valley-based company founded Both types of firms also are known to use outsourcing as in 1997 to develop a single-chip (popularly, system-on- a strategy rather than doing work in house, despite concerns a-chip [SOC]) for high-definition TV. From its inception, about the protection of intellectual property, labor force Broadcom’s work in Silicon Valley was tightly integrated control, and management efficiency (Mukerji, 2006). Off- with work at its Bangalore subsidiary, except for market shoring of product development (including engineering and development, for which the Silicon Valley team took respon- R&D services), whether outsourced or done in house was sibility (Khare, 2006). All other work, such as the design estimated to be an $8 billion industry in 2005 (Nasscom, and development of embedded software and libraries was 2006), about 4 percent of the software product industry. shared. In 2005, India was the largest participant, generating rev- When Broadcom acquired Armedia in 1999, its 25-person enue of $3.9 billion in this segment. Israel came next, with Indian subsidiary became Broadcom India. Broadcom sub- $750 million.18 sequently expanded the team and brought in complementary technology for SOC work, such as in graphics and digital conversion and processing. By 2006, the team in Bangalore Case Study: Agilent Technologies19 had grown to 190. Employees were, as in the firm’s San Agilent Technologies, which produces test and measure- Jose offices, divided into functional teams, each of which ment equipment, chose India as a base for software develop- was part of a global team consisting of engineers in San Jose ment in 2001. India offered a potential talent pool, a mature and Irvine, California; Israel; Andover, Massachusetts; and judicial system, favorable protections for intellectual prop- Singapore. erty compared with other developing countries in Asia, and As of 2006, product development was driven by the mature management talent. Nevertheless, because of some engineering director of the project, based in San Jose, and concerns about intellectual property protection and manage- the marketing team, based in Irvine. The team might consist rial control, the company decided to do most of the work in at any one time of more than 100 people located in various places who travel, as needed, from one location to another. 18  The final chip-integration design (tapeout), which may take Sources: Nasscom, 2006 (p. 47), and Torrisi, 2002 (pp. 9 and 18). Torrisi’s data are extrapolated for Israeli exports in 2005 and may not be as long as two months, is always done at one location because entirely accurate. of the need for close coordination. Tapeout was initially done 19  Based on Dossani and Manwani, 2005. either in San Jose or in Irvine, but is increasingly being done

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 61 Product development ASIC design and electronic Increasing sophistication design automation QA product development CAD support Data entry engineering services Nov 01 Feb 02 Nov 02 Nov 03 Nov 04 FIGURE 2  Activity transfer to Agilent’s Indian operation, by date. Source: Dossani and Manwani, 2005. in Bangalore. Early in the chip-development process, one of from competitors. Because of low attrition rates, however, these three locations takes the lead. Dossani Figure 2 work experience of engineers at Broadcom India the average The logic for Bangalore sharing the lead position in prod- is now more than nine years. Thus the company can now uct development, a status not granted to other locations (such recruit from universities and offer internships to university as Andover, Israel, and Singapore), is a logic of scale and students. capability. From 2003 to 2005, the Indian team had filed for This hybrid approach has two major payoffs. First, de- 140 U.S. patents and been granted 10. From 2006 onward, spite the recruitment of expatriates, costs in India average the firm expected that the Indian team would be granted 25 one-third of costs in the United States. Second, the center of to 30 patents annually. According to the CEO of Broadcom expertise is growing not only in Broadcom India, but also in India, these numbers are comparable to U.S. patent rates Bangalore generally, in embedded software and very large (Khare, 2006). chip development. Despite the progress of the Bangalore team, proxim- ity still matters in some cases. Once a chip has been fully Case Study: Hellosoft designed (after tapeout), software libraries and firmware = unplanned" this was in white at the bottom "Bold are necessary to accommodate the specific requirements of Hellosoft is a Silicon Valley start-up established in customers, which may change considerably after the product 2000 and funded by U.S., Taiwanese, and Indian venture is released. Understanding customer needs turned out to be capitalists. The company provides high-performance com- difficult from Bangalore. Hence, in the event that the project munications intellectual property for VoIP and wireless is led by Bangalore, one member of the Bangalore team is devices. From the beginning, the firm intended to use Indian sent to the United States for an eight-week rotation after the engineers to create its intellectual property. All R&D is first release and until maturity (Khare, 2006). conducted by a subsidiary located in Hyderabad, India, that The CEO also noted that the main challenges to having employs more than 100 digital signal-processing engineers operations in different locations is the time it takes to estab- (Yarlagadda, 2005). The Hyderabad center develops soft- lish respect among teams and to build a large enough team ware for advanced cell phones and networking technologies. with the high level of skills necessary for chip development. Marketing and sales are located in the company’s headquar- By comparison with Silicon Valley, where putting together ters in San Jose. a 100-person skilled team of ASIC designers might take up to 18 months, putting together a similar team in India might Case Study: Ketera Technologies20 take a good deal longer. To improve skill levels, Broadcom India recruits engineers from the United States, mostly of Ketera Technologies, headquartered in Santa Clara, Cali- Indian origin, as a result of which about 5 percent of its fornia, provides inventory-management software on demand Indian workforce is Indian expatriates. Initially, the Indian recruits were experienced engineers who were hired away 20  Information based on a case study compiled by Shah (2005).

62 THE OFFSHORING OF ENGINEERING (i.e., software-as-a-service). As of 2005, the company had The reason Netscaler formed a subsidiary rather than 150 employees worldwide. Its objectives for having subsid- continuing to outsource was to increase the number and so- iaries in India was to cut costs and speed up time-to-market. phistication of projects done in India and encourage tighter In 2002, the company established a relationship with an In- engineering integration (Tillman and Blasgen, 2005). After dian vendor, which had a peak of 105 workers in June 2004. its initial foray into India, Netscaler offshored high-value The engineers in the India operations worked on software work to its subsidiary and outsourced some lower level development and mundane tasks, such as configuring soft- engineering support to local Indian vendors. Having Indian ware for customers and other support services. and U.S. internal engineering teams made it possible for The relationship with the vendor turned out to be un- Netscaler to provide all levels of support 24 hours a day. As satisfactory because the engineers there were relatively the Indian team grew, it became feasible to add a technical unproductive and attrition rates were high. In addition, the writer in India to provide software documentation. U.S. operation was understaffed as a result of the 2001–2003 downturn. For example, there was only one architect for Case Study: Tensilica 22 about 80 engineers, less than half the norm. In late 2004, the firm created its Indian subsidiary and Tensilica is a Silicon Valley start-up established in 1997. transferred the work in phases, beginning with software The company, which has 120 employees worldwide, de- programming. The company also decided to shift its product velops and licenses its embedded processor technology to management to India. To ease coordination problems, staff SOC suppliers. The downturn of 2001 affected demand for was added in the United States. Tensilica’s products and led the firm to consider shifting It took about nine months for Ketera to hire 75 engi- second-generation work, such as adding features and im- neers in Bangalore. Close coordination was essential to the proving product reliability, to India, thus freeing up expen- company’s success; product management was divided be- sive U.S.-based engineers for new-product development. To tween the U.S. and Indian teams, with the U.S. team taking save on initial setup costs, and because the firm did not have responsibility for market requirements and the Indian teams a brand name in India to help recruit the best talent, Tensilica converting those into product specifications. decided to begin working with a vendor, eInfochips, and then A key challenge in new-product development is measur- transfer to a subsidiary over time. ing team productivity. Unlike well specified software, for The initial work involved adding features to an existing which productivity can be measured by error rates or lines product, such as improving the graphical user interface. An of code, a “new level of complexity” (Shah, 2005) is always experiment with quality assurance was unsuccessful because associated with the release of a new product, which makes it required too much U.S. management time. In general, coor- measuring productivity difficult. dination costs were much higher than expected. e-Infochips agreed to let Tensilica handle recruitment, but this turned out to be much more difficult than expected because the level Case Study: Netscaler 21 of skills available was too low. In addition, some qualified Netscaler was founded in 1998 to redesign a specific engineers were unwilling to work for an outsourcer. component of infrastructure used in regulating traffic flow In January 2006, Tensilica transferred engineers from on the Internet. After Netscaler had developed the product, e-Infochips to its own subsidiary, which, as of September the company realized some functionality had to be added 2006, employed 15 persons, or 12 percent of Tensilica’s to attract customers who were wary of moving from legacy workforce. Without the veil of an outsourcer, recruitment products to the Netscaler product. Because Netscaler was became much easier, and attrition rates have fallen. After constrained financially and needed to cut costs, in 2001 it working with the India team for a year, the company has also hired an Indian outsourcing firm, NodeInfoTech, to help greatly reduced coordination costs. The company now does develop the new features. work that involves much more complexity in India. The success of this contracting arrangement convinced the company to establish Netscaler India, which was staffed Case Study: SAP by many of the developers from NodeInfoTech (Tillman and Blasgen 2005). In 2004, Netscaler India employed SAP, a large German applications software firm, began its approximately 60 engineers to develop other features and offshoring operations to Bangalore in 2000. Initially, a CRM planned to grow to 200 employees by 2005 (Hindu Business project was supported from India. About 40 percent of the Line, http://www.thehindubusinessline.com/, downloaded programming work for the project was done in Bangalore. 1/13/2006). At that point, however, it was purchased by The work was done on an ad hoc basis. Project managers Citrix Systems for $300 million. based in SAP’s German offices would request programming 21  This discussion of Netscaler is based on Tillman and Blasgen (2005) and Jagadeesh (2006). 22  Based on Dixit (2005, 2006).

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 63 support from the Bangalore operations when needed, on a both models is for the India business to become an integral short-term basis. part of the company. Despite the success of this approach, SAP found that attri- Interestingly, both start-ups and established firms often tion rates in its Bangalore operations rose to over 30 percent. begin by using an outsourced provider rather than establish- A workforce analysis revealed that its Bangalore team would ing their own facilities. One advantage of outsourcing is have to be given more responsible and long-term work in or- that operations can be ramped up quickly. In addition, the der to induce them to stay on with SAP. The firm responded company may learn about the Indian environment through in 2003 by shifting all the programming work for selected the operation of the outsourcer, thereby facilitating the later projects to Bangalore, while retaining the management of the establishment of a subsidiary. project in Germany. This approach enabled Bangalore-based There are also risks to this approach. First, as a company engineers to offer all the programming support for a project cedes control over the labor force to an outside vendor, it through the life of the project. risks losing control of its intellectual property and also its While this approach led to a reduction in attrition, the ability to respond directly to attrition. Second, because the coordination required to manage complete projects globally ultimate goal for both new and established firms appears to was proving to be very high. In 2004, SAP shifted the work be that the India operations become integral to the business, of some project and sub-project (component) managers to a subsidiary must be established at some point. Integration Bangalore in order to ensure that engineers only reported into the company may sound like an irrevocable end point, locally. This approach proved to be so successful that, by but we have observed cases of firms that later contracted 2006, SAP had grown to 3,200 persons in Bangalore. The out routine in-house work. Established firms have less criti- Bangalore operations were given the status of a “Global cal cost concerns and are, therefore, more likely to create a Development Center” (i.e., it had achieved across-the-board subsidiary and begin in-house work right away. Third, in capabilities to support any of SAP’s projects globally). This all cases, coordination costs have been surprisingly high, is a status hitherto granted by SAP only to its operations in not because of inadequate communications facilities, but Germany, Palo Alto in the United States, and Tel Aviv, Is- because of the complex nature of the work. Fourth, finding rael. SAP Bangalore was also designated as SAP’s center of and retaining qualified persons for higher value-added work excellence for several verticals, including oil and gas, steel is difficult, most likely because of the small size of India’s and telecommunications. Attrition rates by the end of 2006 domestic markets and its inadequate educational system. were at industry-standard rates of 12 percent. Table 11 provides a summary of the stages of offshor- ing described in the case studies. Undoubtedly, evolution will continue. For example, Agilent India plans to increase Lessons from the Case Studies outsourcing once the offshoring process is stabilized. Extrapolating from this admittedly small base of infor- mation, we found two basic models: (1) offshoring as a THEORETICAL FRAMEWORK supplement to onshore operations (i.e., the purpose of the offshore facility is to lower costs and/or accelerate product A framework for offshoring of software services in in- or product-line extensions); and (2) offshore operations as ternational trade requires some definitions, some as basic an integral part of the business model. The ultimate goal in as a definition of “service.” Most people agree that “manu- TABLE 11  Stages of Software Offshoring to India by U.S. Firms Initial Stage Offshoring Reason for Stage 1 Offshoring Reason for Stage 2 Firm Type of Work Onshore Stage 1 Offshoringa Stage 2 Offshoring Agilent Embedded software In house In house, Control In house, Coordination stabilized in not integral integral Stage 1 Broadcom Chip design In house In house, Scale integral Hellosoft IP development Offshoring operations Integral from the start Ketera Software-as-a-service In house Outsource, In house, To improve coordination and not integral integral resolve labor-quality issues Netscaler Router software In house Outsource, In house, To undertake more complex not integral integral product development Tensilica Embedded processor In house Outsource, Rapid ramp-up In house, To improve coordination and not integral not integral resolve labor-quality issues SAP Applications development In house In house, Cost and scale In house, To improve coordination and not integral integral resolve labor-quality issues ain addition to labor cost arbitrage

64 THE OFFSHORING OF ENGINEERING facturing” is a process that involves the transformation of a The first fundamental change with digitization was that tangible good. Most people also agree that, in many cases, service flows could be converted into stocks of information, manufacturing does not require face-to-face contact between making it possible to store a service. For example, a consul- the buyer and seller. Usually, manufacturing creates a good tant’s assessment that once had to be delivered to a client in that can be stored, thereby allowing a physical separation of person could now be prepared as a computer document and the buyer and the seller. transmitted via e-mail or, better yet, encoded into software. “Services” have been defined as the opposite of manufac- Easy storage and transmission allowed for the physical sepa- turing in many respects. Services are transactions that involve ration of client and vendor, as well as their separation in time. intangible, non-storable goods, and client and vendor must In addition, services could be separated into components that be face-to-face when the service is being delivered. For ex- were standardized and could be prepared in advance (such as ample, Gadfrey and Gallouj (1998) define services as goods a template for the assessment) and components that were cus- that are “intangible, cosubstantial (i.e., they cannot be held tomized for the client (such as the assessment itself), which in stock) and coproduced (i.e., their production/consumption were non-storable. By taking advantage of the subdivision requires cooperation between users and producers).” This of tasks and the economies of the division of labor, costs is obviously true when the service requires customization, could be reduced by having lower cost laborers prepare the such as receiving a haircut, but is also true when the “service standardized components, possibly at another location. experience” does not require customization, such as when a The second fundamental change was the conversion of bank client wants to check the bank’s home loan offering, or non-information service flows into information service flows. even proximity, as when a customer wants to check a bank For example, the assessment of information-technology balance. needs for an automobile assembly line, which had required Thus certain services are intrinsically more difficult to a site visit to make the assessment, can now be made through offshore than manufactured goods. When a service activity virtualization models of the assembly line delivered over the is considered as a totality, it indeed appears to resist reloca- Internet. Once converted to an information flow, the service tion. In fact, very few service operations can be done only on may then be converted into a stock of information, which can the computer (the modern form of “mundane work”). Most reduce costs through the standardization of components and services require at least some level of face-to-face interac- remote production. tion, either among coworkers or with persons outside the Third, by enabling the low-cost transmission of digitized organization, such as vendors and clients. material, digitization accelerated the offshoring of services. Following Bhagwati’s (1985) framework, we divide ser- Early on, services, such as the writing of software programs, vices that require proximity between user and provider into which were offshored to India in the early 1970s, were en- three categories: abled by digitized storage, and, in the 1980s, by the standard- ization of programming languages. Later, in the 1990s, as the 1. Mobile user-immobile provider (e.g., a cell-phone user cost of digital transmission fell, even non-storable services, who visits a service center for a software upgrade). such as customer care, could be offshored. 2. Immobile user-mobile provider (e.g., a software The events that enabled software offshoring did not consultant who visits a client prior to designing an happen all at once and may not even have happened in the IT system to understand the information flows in the same way in every country. Israel, for example, was able to client’s business). move quickly to product development for global markets by 3. Mobile user-mobile provider (e.g., two delegates at a domestic firms. India, by contrast, until a few years ago, had conference who exchange information through Blue- offered only routine programming work for more than two tooth-enabled laptops). decades. As of 2006, there was no evidence of successful product development that originated in India, although work For software services, the required interaction between to support product development conceived in developed seller and consumer has been substantially reduced. Ad- countries was being done. vances in information technology have made possible the Thus moving to higher stages of work is not automatic, parsing of the provision of certain services into components sequential, or time bound. Based on the available evidence, requiring different levels of skill and interactivity. Besides we cannot specify the conditions for movement to higher the standardization of hardware and software platforms stages or predict that an exporter will capture a rising share and the reduced cost of computing power, new language- of the economic rents (income in excess of cost). structuring mechanisms, such as object orientation, have At the very least, our case studies suggest that one fac- been developed. In addition, the Internet allows for the tor that can hinder movement to higher stages is the cost standardization of data-transmission platforms. As a result, of global coordination, whether it be between a developing certain portions of serviced activities—that might or might country vendor and a developed country consumer or a team not be skill-intensive and that require little face-to-face in- of vendors located across the world. For this reason, the teraction—can now be relocated offshore. Digital technology developed-country firm can be compensated for being the has made this possible. middleman. Much of the market-related coordination and

IMPLICATIONS OF GLOBALIZATION FOR SOFTWARE ENGINEERING 65 networking requires developed-country institutions, enabling term for a series of changes) has increased the scope of work the capture of value by the developed-country firm. However, in the software supply chain that can be spatially disaggre- competition is likely to force price compression on devel- gated and outsourced. Even when a customer interface is oped-country firms, especially if it comes from developing necessary, it is possible (as the case study of Broadcom India countries. This is happening now with major Indian software showed) to manage customer interfaces remotely through services firms, which are evolving into systems integrators as “body-shopping” that focuses on understanding customers they develop the requisite skills and customer confidence. rather than, as in the old days, accessing customers’ software The inference is that certain aspects, such as deciding and hardware. In the case of Broadcom India, offshore work- on a product and its specification, design, marketing, and ers are substitutes for U.S. workers. sales, are usually retained by the importer. But there is Lowering the costs of some aspects of software develop- no guarantee that developed-nation firms will continue to ment lowers total costs and makes a company more com- maintain this privileged position. For the time being, how- petitive globally. It can also make possible the creation of ever, the exporter’s ability to rise to new stages of growth is new firms that would otherwise not be economically viable, limited, and developed-country buyers will continue to reap as the case study of Netscaler showed. Jobs created by this the rewards. entrepreneurship can be counted against jobs lost to offshor- ing. As Rakesh Singh, Netscaler’s general manager of Asia operations, said, “The cost savings through outsourcing have CONCLUDING THOUGHTS helped us become more competitive and experience rapid It is tempting to view software offshoring as the cause of growth as a company. As a result, we have a lot more em- unmitigated job losses for U.S. workers. Software offshor- ployees in the United States today than we did when we set ing raises fears that, as a result of digitization, skilled jobs up the India operations” (Tillman and Blasgen, 2005). In this will rapidly disappear from U.S. shores. This would not case, offshore workers are complements to U.S. workers. only leave the United States digitally divided from other Ongoing technological development typical of the soft- countries, but would centralize demand for U.S. workers ware industry can both speed up and slow down job losses. in non-offshorable jobs. In software, the argument is often For example, prior to the establishment of the Internet as a made that U.S. workers will ultimately do only those jobs reliable medium of digital communication, installing soft- that are impossible to offshore, a few of which will undoubt- ware or fixing a software problem required an on-site techni- edly be highly skilled but most of which will require lesser cian. In most cases, these tasks can now be done remotely, skills, such as information-technology training and hardware thus reducing the need for on-site work and increasing the and software systems integration. demand for offshore maintenance. Similarly, the invention Our analysis of the software industry shows that the ef- of the router led to the creation of remote data centers, thus fects of offshoring on employment in developed nations vary, reducing the need for on-site storage hardware and support even though the impact of software offshoring on developing services. countries is to generate increasingly high levels of employ- At the same time, the Internet enables access to many ment. The kinds of work initially offshored typically have more software applications that are developed elsewhere, low entry barriers and are subject to automation. Thus ser- including open-source applications. Raza (2005) notes that vices exported from developing countries initially lack brand chip designers who used to offshore components of chip value and thus are very different from services exported from development to vendors in India can now usually find some developed countries. In consequence, there is likely to be components already available in open source, thus reduc- competition and price compression in these sectors. ing the need for offshoring (although this does not increase However, over time, the level of sophistication of work demand for U.S. software developers). being done offshore has risen rapidly. This can be a subtle An alternate view of the impact of technological change is process. As Shah (2005) notes in his discussion of Ketera’s that, because the developers of new technology are mostly in offshoring, “The primary challenge [of offshoring most of developed nations, a faster rate of technological progress is the head count to India] was the lack of informal communi- advantageous to employment in developed nations because cation in our Silicon Valley office. We missed the informal it makes it harder for developing countries to catch up. From hallway and coffee station side chats. We missed going to this point of view, anything that helps developed-country en- the white-board and brainstorming an idea.” After observing gineers innovate more quickly and efficiently is a plus for the the progress of the Indian operation, he concluded, “We then developed country. Hence, offshoring software development realized that the hallway discussions and white-board brain- that is a step behind the work being done in the developed storming are still happening [in our firm], but in India.” country enables engineers in developed nations to innovate In summary, there is little doubt that work that is modular- even more and is good for both developing and developed ized and standardized and does not require regular customer nations. contact is more likely to be moved offshore. This was evi- As we noted in our introduction, scholars concede that the denced by the rapid offshoring of the programming function. effects of offshoring on the quality of work done in devel- As our case studies show, the digital revolution (a catch-all oped nations are uncertain, because we do not know whether

66 THE OFFSHORING OF ENGINEERING the productivity gains will be captured by the developing TABLE 12  Share of Employment in Manufacturing country or the developed country. This depends on their Employment in the United States relative productivity gains. Hence many would concede that 1970 1980 1990 2004 the jobs left for workers in developed nations will certainly Employment in manufacturing 18.9% 19.8% 18.7% 14.1% include low-wage work that cannot be done remotely (such as the physical installation of a hard-wired network). Many Source: BLS statistics (http://www.bls.gov) accessed 10/6/05. would also agree that short-term unemployment is possible. However, they also argue that most of the new work will require higher skill levels than are available in developing shored services can be set up almost as rapidly as workers countries, will pay more, and will even leverage work being with the requisite skills can be hired. Certainly the growth done in developing countries. rate of the Indian information-technology industry has been Based on the experience of offshoring in the manufactur- much, much faster that in manufacturing offshoring. ing sector, a second issue is the speed with which services This raises the question of whether the digital revolu- offshoring takes place. The decline in manufacturing in the tion has done more than provide a one-time boost for Asian United States happened gradually and was accompanied competitors. Apart from the labor-cost advantage, develop- by rising revenue per employee, reflecting in part that, as ing countries will continue to have a comparative advantage the more commoditized parts of manufacturing were being for two reasons: (1) economies of scale and scope, and outsourced offshore, the more customized or specialized (2) specialization. parts and some service components, such as design and Countries such as India have large labor pools that could integration, were still being done onshore (Figure 3 and offer significant economies over smaller labor pools or Table 12). The slow pace of manufacturing offshoring also country-specific labor pools. In addition, by locating soft- gave displaced workers time to acquire skills to shift to other ware developers in India, the vendor can supply services occupations. for clients in different time zones, thus making efficient use As the rate of offshoring in the Indian software industry of capital and real estate. Or, vendors can manage episodic shows, some aspects of software offshoring may be rapid, peak requirements, such as when a new upgrade of software leaving little time for labor-force adjustment. The reason is released, more efficiently. for the rapid rate can be attributed to digitization, which has Many efficient practices for offshore software develop- been firmly established since the mid-1990s (the Telecom ment that resulted from the remote software-programming Regulation Act of 1996 is often considered a turning point). businesses were developed in India. Thus remote manage- Digital technology has been crucial to the rapidity of services ment is emerging as a specialized skill that is applicable in offshoring. Unburdened by the need for large factories, off- a variety of other offshoring situations, such as providing Share of employment in the US economy, 1970–2004 (selected years) 70 60 50 Percentage share 40 30 20 10 0 1970 1980 1990 2000 2004 Manufacturing Service Government Agriculture FIGURE 3  Share of employment for various economic sectors in the United States, 1970–2004. Source: BEA Statistics (http://www.bea. gov/bea/dn/nipaweb/) Table 6.5, accessed 10/6/05. Dossani Figure 3

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The engineering enterprise is a pillar of U.S. national and homeland security, economic vitality, and innovation. But many engineering tasks can now be performed anywhere in the world. The emergence of "offshoring"- the transfer of work from the United States to affiliated and unaffiliated entities abroad - has raised concerns about the impacts of globalization.

The Offshoring of Engineering helps to answer many questions about the scope, composition, and motivation for offshoring and considers the implications for the future of U.S. engineering practice, labor markets, education, and research. This book examines trends and impacts from a broad perspective and in six specific industries - software, semiconductors, personal computer manufacturing, construction engineering and services, automobiles, and pharmaceuticals.

The Offshoring of Engineering will be of great interest to engineers, engineering professors and deans, and policy makers, as well as people outside the engineering community who are concerned with sustaining and strengthening U.S. engineering capabilities in support of homeland security, economic vitality, and innovation.

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