Who Stole the American Dream?

by Hedrick Smith

  Three upstart Indian companies, Wipro, Infosys, and Tata Consulting, provoked the exodus of American IT jobs. Initially, in the early 2000s, when they began trying to lure U.S. corporations to outsource their IT work to low-cost, college-educated, English-speaking Indian professionals, IBM and other big American IT companies laughed at them, according to Ron Hira of Rochester Technology Institute.

  Hira, who tracks global trends in IT services, said that American firms had a lock on that lucrative business back then, but Indian firms could underbid them because they were paying roughly one-tenth of U.S. salaries (engineers at $7,000 to $10,000 a year, accountants $5,000, project managers $15,000). “The Indian firms had a disruptive business model,” Hira explained—low costs and very high profits. “Wall Street spotted how profitable the Indian companies were and put the heat on American firms to match the Indians. Infosys was a $5 billion revenue company and it turned a $1.5 billion profit. So Wall Street said to the U.S. firms, ‘Why should you get 6 percent profit and Infosys gets 27 percent?’ ”

  That asymmetry sparked a corporate revolution, and the Indian IT gold rush was on. IBM adopted the Indian model, and other major U.S. players followed. In a twinkle, the Americans were rushing to hire those same Indian IT professionals at low pay, to fire much of their American workforce, and to boost their own profits.

  IBM Adopts the Indian Model

  In March 2003, IBM signaled its shift to an offshoring strategy with a company-wide global teleconference among its personnel chiefs focused on what IBM liked to call “cross border job shifting.” Tom Lynch, IBM’s global employee relations director, outlined a big personnel push out of North America and Europe. The 1990s had seen manufacturing move offshore, but from now on, Lynch said, “we’re looking at an emerging trend now to move services offshore.” Lynch conceded that the road might be bumpy given the “anemic” American recovery from the dot.com bust. Moving jobs offshore in that environment, Lynch said, “is going to create more challenges.” Besides, he added, “U.S. workers … will, in many cases, be asked to train their replacements.”

  In short, the old paternalistic IBM of CEO Tom Watson, Jr., which had carefully nurtured the security and loyalty of its employees, was about to morph into what former IBM’ers now call a New Economy “slash and burn” employer under CEOs Lou Gerstner and Sam Palmisano.

  In the 1990s, but even more in the 2000s, news headlines began to catch the shift at IBM. “Cutting Here but Hiring over There,” The New York Times reported in June 2005. Three months later, CNNMoney.com reported that IBM had hired fourteen thousand Indian workers while laying off up to thirteen thousand in the United States and Europe. TechWeb quoted IBM’s CFO, Mark Loughridge, as saying that job reductions would save IBM $1.8 billion in 2005 and 2006.

  But to reduce the unflattering headlines, IBM went sub rosa with its firings. Although federal and state laws require companies to report “material events” such as large layoffs, IBM stopped announcing large job cuts in 2006. It said that it did not have to make reports because there was not one big cutback. The cuts were being rolled out in modest batches and spread out geographically. In January 2009, without an IBM announcement, CBS reported that four thousand IBM jobs had been cut in one week at IBM sites in Tucson, Arizona; San Jose, California; Austin, Texas; Burlington, Vermont; Rochester, Minnesota; and Research Triangle Park, North Carolina. Two months later, The Wall Street Journal and The New York Times reported that IBM had fired another five thousand employees across America.

  “Sometimes People Don’t Realize They Are Training Their Own Replacement”

  Inside IBM, longtime employees watched for clues. Tom Midgley, a $75,000-a-year IT systems administrator at the large IBM operation in Fishkill, New York, tracked trends by watching the parking lot and the cafeteria. Over time, the parking lot developed hundreds of empty spaces. In the cafeteria, Midgley noticed a growing population of Indian IT workers, Chinese engineers, and other foreigners. In twenty-seven years at IBM, Midgley said, he had witnessed the Fishkill facility shrink from more than ten thousand workers to about five thousand, though he said that IBM keeps the numbers secret. Also, Midgley added, IBM managers became surreptitious in arranging training for foreign employees.

  “They used to bring the people over here and train them,” Midgley recalled, “but now they don’t even want to spend the money. You do the training over the phone. People are told, ‘You are leaving. You are fired. You have thirty days. You have to train somebody in India to take your place or you won’t get your severance pay.’ IBM is firing proven workers. These are good performers. And they are training rookies, people with no track record. Sometimes people are training someone overseas and they don’t even realize that they are training their own replacement.”

  That happened to Kristine Serrano in Colorado, who had put in sixteen years working either directly for IBM or indirectly for an IBM client, the IT department of Qwest Communications. At IBM, Serrano managed Oracle software and databases for Qwest and other corporate clients. She survived several rounds of IBM job cuts, but toward the end of 2009, she noticed something troubling.

  “I was responsible for Oracle software installation. Every request for help on Oracle came through me,” she explained. “What I saw were a lot of requests from India—twenty installations or more at once. I had to provide the software because they were going to go through training for how to do an Oracle software installation. That’s when I kind of knew something was coming. But nobody ever says anything.”

  About three months later, in March 2010, Serrano’s boss called her in and said she was being laid off. No cause, she said, “just GR”—“Global Resourcing,” IBM’s euphemism for firing Americans and moving their jobs overseas. Serrano was given sixty days’ notice and told to train a young Chinese woman in Atlanta, hired on contract. But that woman was just a fill-in; four months later, she was fired and phoned Serrano to say that the job had been permanently offshored to India.

  Serrano was offended at IBM’s explanations and its stealth firings. “When you read that the company is parroting that there is a skills mismatch, that they can’t find Americans with the right skills, that’s dishonest,” she complained. “These people who are being fired, people like me, are experienced IT workers. They know their job, and now that very same job is over in India. That’s what happened to me. My job is in India—except at a different pay level.”

  IBM’s Indian Empire

  In India, IBM was anything but covert. It was eager to showcase its burgeoning empire, which by 2006 numbered forty-three thousand strong, a sevenfold growth in just three years. In June 2006, IBM invited Wall Street financial analysts to a gala celebration of its new India-based strategy at the Bangalore Palace Hotel in India’s version of Silicon Valley. With the president of India at his side, a live audience of ten thousand IBM employees in Bangalore, and thousands more in Delhi, Mumbai, Kolkata, and Pune linked by satellite, IBM CEO Sam Palmisano spelled out India’s central role in his vision of the “globally integrated enterprise.”

  In India, Palmisano emphasized, IBM would do cutting-edge R&D, write breakthrough software, and take on back-office projects on a huge scale. “India and other emerging economies are an increasingly important part of IBM’s global success,” Palmisano declared. “In the next three years, we will triple our investment in India—from $2 billion over the last three years to nearly $6 billion in the next three years.”

  Already IBM was gearing up a campaign to market its new offshore IT capabilities to major business clients in America and Europe. Out went glossy brochures and blast emails promoting IBM’s “global centers of excellence.” Its early promotional materials did not reveal that IBM intended to take outsourced work from U.S. clients and shift it to India and other low-cost foreign sites such as Brazil or Russia. But its big pitch was low costs, going after market share from Indian firms. “We aggressively drive to new levels of cost competitiveness,” IBM told its would-be clients.

  B
ig Blue did so well marketing its low-cost IT services in America that it had to keep expanding in India, adding up to seventy thousand more employees there by 2010. It became so India-based that it often had to call in its Indian staff for clients in America. Occasionally, IBM overstepped and stubbed its toe.

  In late 2009, IBM flew in seventeen Indian engineers and computer consultants from Mumbai to analyze and update old databases at New York City’s Department of Finance and Taxation. When the New York Post heard about it, the paper ran a story headlined “NYC Hit by Nerd Job Rob; City $$ for India Hires.” One of the Indians, Sunny Amin, a twenty-five-year-old engineer from Aurangabad on his first trip to the Big Apple, was ecstatic. He told a reporter that his job was “a dream come true.” He had rented an apartment in Parsippany, New Jersey, for nine months. He was coy about discussing his pay but bragged that “I make about ten times more than I would in India”—yet still well below American salary levels.

  Local 2627, a union of city-employed computer consultants, exploded in outrage at IBM’s hiring of foreigners with taxpayer money. “It’s like a slap in the face,” said union president Robert Ajaye. “We have people in-house who could do this job.”

  IBM: Patents for Offshoring U.S. Jobs

  But IBM, unembarrassed and eager to capitalize on its own experience moving to India, moved ahead aggressively. It created a major new profit center to teach other U.S. companies how to go offshore: how to decide which jobs could be moved most profitably; what was the most efficient work flow to manage the offshore move; how to qualify for subsidies and tax breaks in the offshore country; how to hang on to tax breaks in America while walking out the door. IBM marketed its offshoring systems to such diverse clients as Disney, Hertz, Hartford Insurance, A&P grocery chain, and Accelerated Auto Parts, as well as to financial, consumer goods, and pharmaceutical giants.

  So lucrative did this business become that IBM decided to patent its offshoring blueprint. On January 3, 2006, IBM systems experts filed an application to patent a computerized “Method for Identifying Human-Resource Work Content to Outsource Offshore” in finance, human resources, logistics, infrastructure, and training. IBM claimed its unique vehicle would enable clients to develop a “migration project plan” to achieve an “end-to-end knowledge transfer.” Cost saving was central.

  In September 2007, IBM applied for another patent on what it evidently thought was an even smarter blueprint, promising clients a computerized “Workforce Sourcing Optimizer” to assess the pros and cons of moving out of one country (unnamed) to other countries such as India, China, and Hungary (named). IBM’s application boasted that its program could help clients achieve “50% of resources in China by 2010.”

  When the U.S. Patent and Trademark Office made IBM’s patent application public in March 2009, it was a bombshell. Congressman John Hall of Dover Plains, New York, a Democrat to whom IBM had made campaign contributions, denounced IBM as “downright unpatriotic and un-American.” IBM workers were in an uproar. “This is obviously outrageous—a patent on how to offshore U.S. jobs,” objected Lee Conrad of the Alliance@IBM/CWA Local 1701. “IBM is obviously doing all it can to decimate the U.S. work force, and it is all the more reason why IBM should not get any tax breaks or stimulus money. They clearly are abandoning the U.S. work force.”

  Within twenty-four hours, IBM pulled its patent application.

  Cloning the American Office in Madras, India

  Even so, losses of solid middle-class jobs now ripple throughout the knowledge economy. Banks, airlines, hotels, retailers, investment banks, law firms, and even hospitals and American states have been shipping work offshore. In Madras, India, a Los Angeles Times reporter came across an offshore operation where “task by task, function by function, the American office is being hollowed out and reconstituted in places like this….” He described a local shopping arcade where researchers, librarians, claims processors, investment analysts, typists, proofreaders, accountants, and graphic designers were churning out work for U.S. tax accountants, insurance companies, and law firms.

  Offshoring today involves brainpower jobs. Wall Street investment bankers use Indian analysts to gather information on potential merger or acquisition targets. Massachusetts General Hospital in Boston hires radiologists in India to process X-ray images of American patients. In 2002, the state of California outsourced the processing and delivery of some state welfare benefits to Citicorp Electronic Financial Services Inc., and Citicorp turned the work over to English speakers in Bangalore and Pune, India. The volume of such offshore work, not only in India but in China, Brazil, the Philippines, Russia, and Eastern Europe, has shot up exponentially since 1990, from next to nothing to roughly $100 billion a year.

  “They told all the workers when manufacturing jobs were leaving the country, ‘Train in computers. Jump to computers,’ ” protested Lee Conrad of Alliance@IBM/CWA. “Well, now computer jobs are going out of the country. These are high-skilled jobs—IT specialists, HR specialists, IT architects—college-educated. Desk jobs. Good pay. They’re just decimating white-collar people. It’s devastating.”

  Recession: Offshoring Rises; Job Cuts at Home

  Offshoring may not have been a hot issue during the booming 1990s, but in the recent recession, public opinion swung against it. In October 2010, most people blamed offshoring as the main reason for the slow U.S. economic recovery, according to a Wall Street Journal/NBC News poll. Among blue-collar workers, 83 percent cited outsourcing as the reason U.S. companies were not hiring. Even more professionals and managers—95 percent—said the same.

  And no relief is in sight. At the depths of recession in January 2009, the Hackett Group, a strategic consulting firm, reported that in the United States, “companies are clearly … accelerating the pace of their globalization efforts, particularly in finance and IT, while at the same time implementing hiring freezes and/or staff cuts for their other back-office staff positions.” In sum, job cuts at home, big hiring overseas. In the decade from 2000 to 2010, Hackett said, offshoring had been “a major culprit” in the estimated loss of 3.9 million jobs in finance, IT, human resources and business support functions in North America and Europe.

  During recession, the big Wall Street banks bailed out by taxpayers rebuffed President Obama’s pleas to “hire American.” Instead, they pushed ahead with overseas hiring, but like IBM, they kept it quiet. The Indian press broke the news that in 2011, JPMorgan Chase, Bank of America, and Citigroup had signed contracts to offshore $5 billion worth of new IT and back-office work to Indian firms. At home, the big banks were firing tens of thousands of employees.

  In November 2010, Hackett put out a report entitled “How Offshoring Could Prolong the Jobless Recovery,” predicting that offshoring of white-collar and professional jobs would be a persistent source of “net job destruction.” Hackett forecast that offshoring in the knowledge economy would keep rising, wiping out another 1.3 million jobs in North America and Europe by 2014.

  Looking over the long term, Princeton economist Alan Blinder spelled out the implications for the upper echelons of the American middle class. Roughly one-quarter of all the jobs in the U.S. economy are vulnerable to be offshored, Blinder said: That “corresponds to about 30–40 million jobs” vulnerable to loss—unless, as some business groups are now advocating, the federal government changes tax policies and investment incentives and business leaders find ways to keep more jobs at home, to prevent that massive job loss from happening.

  CHAPTER 17

  THE SKILLS GAP MYTH

  IMPORTING IT WORKERS COSTS MASSES OF U.S. JOBS

  We have seen numerous instances in which American businesses have brought in foreign skilled workers after having laid off skilled American workers, simply because they can get the foreign workers more cheaply.

  —ROBERT REICH,

  secretary of labor, 1995

  These are not Einsteins or superstars. That has always been a lot of hype. H-1B never required that they be the best and brightest
in the world. It only required a bachelor’s degree.

  —BRUCE MORRISON,

  former congressman, 2011

  We find neither an inadequate supply of STEM [scientific, technical, engineering, mathematical] workers to supply the nation’s current needs, nor indications of shortages in the foreseeable future.

  —RAND CORPORATION STUDY,

  2004

  IN AMERICA, one of the most controversial causes of job loss in the high-tech industry involves not offshoring but “onshoring”—importing college-educated foreigners to come work in the United States and replace Americans—a strategy favored by such major U.S. companies as AIG, Disney, IBM, Microsoft, and Pfizer.

  The high-tech world has long looked to recruit hot new talent through immigration, and in fact, immigrant scientists and entrepreneurs have played key roles in sparking America’s preeminence in high tech. Among them, Andy Grove from Hungary, the ex-CEO of Intel; Jerry Yang from Taiwan, a co-founder of Yahoo!; Andreas von Bechtolscheim from Germany and Vinod Khosla from India, co-founders of Sun Microsystems; Pierre Omidyar, founder of eBay, from France; and Sergey Brin, a co-founder of Google, from Russia.

  For America to stay on top, Bill Gates of Microsoft and other high-tech industry leaders have told Congress and the White House, the United States needs to recruit the world’s “best and brightest.” By the late 1980s, high-tech industry leaders were sounding the alarm that U.S. global leadership was endangered by a “skills gap” in the critical STEM fields—science, technology, engineering, and mathematics. They said there was a shortage of qualified Americans and a slowdown in the flow of foreign talent to industry from America’s premier graduate schools in the sciences, where roughly half of the students were foreign born. There was a logjam, they said, in the government’s approval of green cards to foreigners to let them work in the United States while they applied for citizenship.