Outsourcing: Reforms not rhetoric

By Mike Yamamoto, News.com
Posted on ZDNet News: May 4, 2004 11:37:00 AM

As a senior Silicon Valley executive, Bob Denis hears a lot of talk about the exportation of jobs overseas--but little that addresses the real problem.

Instead of blaming black-hearted CEOs or predatory foreign countries, he contends that the root of the issue has always remained within U.S. borders, in an institution often not mentioned in today's political rhetoric: the classroom.

"We spoiled an entire generation with the '90s. The expectation was: You go to college, find a product, get venture capital money and, boom, you're a millionaire," said Denis, the chief information officer at Trimble Navigation, a satellite software company based in Sunnyvale, Calif., that has more than 2,000 employees. "The realism is missing: Unless they're in the top 5 percent of schools, they haven't got any hope. The very jobs we're training students to do are the ones we're exporting."

As the the merits of "offshoring" American labor are debated this presidential election year, the fact is that some jobs in manufacturing, customer service and other established U.S. sectors may never return. But for the high-technology industry, the more pressing concern is the labor force of tomorrow, not current losses. Job security in the future will be defined largely by the future of research and development--the intellectual capital that has always kept the country at the competitive forefront.

These issues go far beyond immediate economic concerns and challenge some fundamental principles of American culture. Many believe that U.S. society, which has always placed a premium on breakthroughs by individual achievement, must redefine its notion of success to include incremental advancements, often produced by committee in relative anonymity.

"The killer app is killing us. Heroes are made only when there's a need for one," said Sam Gill, chair of the Department of Information Systems at San Francisco State University's College of Business. "Technology moves in quantum jumps, then you have to backfill. We're now in the backfill phase of this period."

Companies emphasize the need to cultivate and advance new technologies that will expand their own businesses and, in turn, continue the cycle of U.S. innovation that began with the Industrial Revolution. Yet this fundamental issue has been largely absent from the national campaign platforms in the presidential race, often drowned out by simplistic platitudes and tiresome finger-pointing.

In scores of interviews with government officials, business leaders and academics, CNET News.com has identified three points that are crucial to any national agenda devoted to keeping advanced R&D in the United States: education reform, professional retraining and research investment. If these areas are neglected, the nation could face dire consequences that transcend the outsourcing issue and threaten to undermine the country's historical status as the world leader in technology:

• Educators and students concede that university curricula are often hopelessly obsolete, and enrollment in computer sciences has plummeted since the dot-com bust. In a survey of Ph.D.-granting computer science departments in the United States, the Computer Research Association found that the number of new undergraduate majors dropped 18 percent last year. Prospects appear even bleaker at the high-school level, where only 17 percent of 12th grade students scored at the "proficient" level in mathematics in 2000, according to federal research.

• Government programs to train workers have generally failed. For example, a federal program funded by fees from H-1B foreign worker visas was deemed ineffective in training workers for high-skilled jobs--one reason President Bush has proposed ending it. Local organizations that run training programs are viewed largely as career networking opportunities for executives at smaller companies, which often have nothing to do with high tech.

• R&D in all fields grew just 1 percent last year to $284 billion, according to the National Science Foundation, a steep drop from its average annual growth of 5.8 percent between 1994 and 2000. Federal budgets have arguably shortchanged technology, given its contribution to the overall economy. Life sciences, for instance, received more than half of the estimated $53.4 billion in federal research funding handed out last year.

A public-policy professor at the Rochester Institute of Technology in New York, Ron Hira, has argued that government incentives for R&D should be aimed at workers, rather than companies, to ensure that work remains in the United States. Businesses are tending "to move more and more of that research out to the center of production, not in a centralized lab," he has said.

That movement is precisely what many fear most. While manufacturing, basic programming and other types of commoditized work have already left the country, the U.S. technology industry has traditionally viewed its advanced research as the secret ingredient that keeps it at No. 1.

"R&D budgets are migrating offshore. These are red flags, because this is the heart of our business," said George Gilbert, the managing partner of the Tech Strategy Partners consultancy and a former market analyst at Credit Suisse First Boston. "It's not just labor arbitrage. Now, it's being called 'distributed development.'"

Just as the number of overall jobs moved offshore is impossible to pinpoint, it is unclear how many technology R&D positions have been exported. But major U.S. companies such as IBM, Microsoft and Oracle are establishing overseas research centers with thousands of employees.

Forrester Research has projected that about 473,000 computer services jobs will go offshore by 2015. In addition, research firm Gartner has estimated that 1 out of 10 jobs at information technology companies will move to emerging markets and that 1 out of 20 jobs in internal information systems departments will move overseas by the end of this year.

To counter that trend, some in government and industry say America must get back to basics. And in this case, that means kindergarten.

"The most intelligent thing the U.S. government can do is to beef up the education system. The K-12 system does a good job of weeding out any students interested in math and science," Intel CEO Craig Barrett, a former university professor himself, said in a widely publicized speech late last year. "We prepare them to be lawyers and consultants, instead."

EDUCATION

Calls for improvements in the U.S. education system have kept coming for decades, but they have taken on renewed urgency where technology is concerned.

Although academic achievement in mathematics and science subjects has improved since the 1970s, the National Science Foundation reported in 2002 that few students are attaining levels deemed "proficient" or "advanced." Citing an international study, the foundation said 17-year-old American students tended to perform worse than their counterparts in other countries.

"In considering the issue of expanding our skilled work force, some have a gnawing sense that our problems may be more than temporary and that the roots of the problem may extend back through our education system," Federal Reserve Board Chairman Alan Greenspan said at an offshore-outsourcing conference at Boston College in March.

An estimated 1.2 million students quit high school each year, according to a study by the nonprofit Education Trust, and the jobless rate among these dropouts is rising. About 2.4 million dropouts between the ages of 16 and 24 were unemployed last year, 9 percent more than two years previously, the research found. And the problem may be even worse, because states routinely inflate their graduation numbers--in some cases by more than 30 percent, the report contends.

President Bush has touted the No Child Left Behind Act he signed into law in 2002, which calls for more accountability in schools. His administration has also proposed improving math and science education through a program that would link elementary and secondary schools with technology-savvy colleges and universities.

Democratic challenger John Kerry has a number of high-tech education proposals, as well. He backs after-school programs that focus on math and science, and he plans to increase education funding, partly through a "State Tax Relief and Education Fund" that would allocate $25 billion over two years. He has also put forward a plan for a tax credit on the first $4,000 of tuition for each year of college, to make higher education "as universal as high school."

But all these ideas may be thwarted by a problem that no amount of political rhetoric can fix: a lack of teachers. An independent commission chaired by former IBM chief Louis Gerstner recently published a report indicating teacher quality is the most important factor in education, but also noting a shortage of qualified math and science instructors. About 56 percent of high-school students taking physical science are taught by educators without a background in the field.

The commission recommended that funds for teacher salaries in public schools should be raised by $30 billion and that educators' pay be based partly on performance. Each teacher should get a 10 percent raise, the panel recommended, and the top-performing half should receive a 30 percent increase.

"The situation is in some ways like in 1957, when President Eisenhower mandated a national program to improve math and science education, pursuant to the launch of Sputnik," the American Electronics Association trade group said in a recent report. "The U.S. needs a 'son of Sputnik' mandate today."

Hands-on education is a cornerstone of the Gary and Jerri-Ann Jacobs High Tech High Charter School, a small San Diego public school that has recorded some impressive results. The 400-student school has racked up top scores on California's academic performance index--10 out of 10.

The key to the school's approach is not training students in a particular skill that could soon become obsolete, but rather helping them develop critical-thinking and project management abilities through work with local businesses and other real-world assignments. Students have even pitched start-up company plans to venture capitalists and, in two cases, are getting patents for their ideas.

"What you want to do is make the school place and the workplace more permeable," Principal Larry Rosenstock said. "You want a lot of scientists and engineers coming into the school on a regular basis."

Educators hope that such programs will revive flagging interest in technology at the college level as well.

The U.S. Bureau of Labor Statistics estimates that demand for software engineers will grow by nearly 50 percent between 2002 and 2012. But if the number of computer science graduates at U.S. universities continues to fall, a rising percentage of those jobs will likely go overseas.

The enrollment decline is most striking in California, home to Silicon Valley. Preliminary figures from San Jose State University, which counted 765 students in its computer science program in spring 2002, show a drop of about 30 percent, to 535, in the same period this year. Similar decreases have been reported throughout California State University's 19-campus system, including the one in San Francisco, which had recently considered closing its School of Engineering altogether.

SFSU's Gill is taking action to reverse this trend. After canceling three classes this semester as a result of waning student interest, the frustrated professor began recruiting executives such as Trimble Navigation's Denis for a joint corporate-university program that employs students on actual projects for participating companies.

"It's better for us, as a university, to let the industry lead it and commit to it, because then it will happen," Gill said, acknowledging that the situation needs to be tackled more quickly than academia, with its bureaucratic pace, usually does. "It will upgrade what's being taught in the classroom to reflect the needs of industry. We hope that our program can serve as a model for campuses across the country."

Not surprisingly, such emphasis on practical skills is welcomed by the industry. Gartner analyst Linda Cohen says universities must shift their emphasis from pure computer science to management and business skills, such as how to finance technology operations, how to supervise partnerships and how to assess the risks of adopting a cutting-edge technology.

Cohen argues that many IT jobs sent offshore are not worth trying to preserve in the United States, because they are increasingly done through automation and will dwindle over time. "It's basically the industrialization of IT," she said. "As technology matures, job functions will be replaced by automation--with or without outsourcing."

Students confirm that university curricula are often based on yesterday's technology. "There is definitely a lag time," said Jim Seeto, the president of a student group at SFSU that helps members acquire technology skills beyond the classroom. "In one of our projects, we try to focus students on different operating systems. The prevalence throughout the school is Windows as opposed to Linux, which is up-and-coming. School seems to be a couple of steps behind what's out there."

RETRAINING

No one has proposed any magic formula to keep advanced technology work from flowing offshore. But misdirected efforts in government-sponsored programs show there is room for improvement in retraining American workers who have been displaced or are at risk of losing their jobs.

"For too long, most federally funded training programs were not focused on employer skill needs," conceded Mason Bishop, a deputy assistant secretary for employment and training at the U.S. Department of Labor.

Federal law now calls for billions of dollars in annual training funds to be directed by local organizations, whose leadership boards include many industry representatives. Yet these Workforce Investment Boards generally attract smaller businesses, not those that lead industry trends. Case in point: The 42-member Workforce Investment Board for Oakland, Calif., includes just one major technology company--SBC Communications.

Workforce Investment Boards are "perceived by members to be a good networking activity," said Mike Wilson, CEO of the Bay Area Technology Education Collaborative, an Oakland-based training group also known as BayTEC. "Large organizations don't care about that, necessarily."

Although Oakland's board devotes much of its energy to nontechnology efforts, such as helping local residents get jobs at the city's expanding airport, it also is trying to aid displaced tech workers. For example, a $400,000 program dubbed "Tech to Teachers" is assisting 43 laid-off technology workers become math and science teachers in urban areas.

Much of the work force investment board money gets funneled into federally mandated "one-stop career centers," which provide resources for job searches, said Al Auletta, the Oakland board's executive director. "There's not a heck of a lot of funding left for training," he said.

Industry organizations want more funds to be specifically designated for technology workers. The Institute of Electrical and Electronics Engineers (IEEE) and some lawmakers are pushing to pushing to expand the federal Trade Adjustment Assistance program, which gives workers up to two years of income support and training services, if they lose their jobs to foreign competition. Today, however, many technology professionals are ineligible for the program, which provides a package worth an estimated $34,000.

The Bush administration has proposed spending $14.6 billion next year on training programs and grants for technical and two-year postsecondary schools--a 6.7 percent increase on this year's budget. The plan would earmark $250 million for a new grant program for training in community and technical colleges.

Wilson says such federal support is critical to programs that help not only those who have already been displaced by offshore outsourcing, but also those who may need protection against it in the future. BayTEC is running a $3 million, three-year effort to train 759 workers at local companies, including IBM, to move up the ladder and therefore help safeguard them from losing their jobs to overseas labor.

For such programs to succeed, the organizations that run them need to make an important shift from a social-services mentality to an economic-development mind set, Wilson believes.

"It's really like turning a tanker in the water," he said. "The ship's finally turning in the right direction."

Some companies aren't waiting for that ship to come in. IBM, which has been criticized for moving jobs overseas, recently declared it would devote $25 million over two years to training its employees and business partners. "There are lots of government programs, but they train people for jobs that don't exist--in the past," CEO Sam Palmisano said at the time. "This is for future jobs."

Others say entirely new government approaches are needed to retrain workers for the next major cycle of technological innovation. Harris Miller, president of the Information Technology Association of America trade group, has outlined a plan that would allow a displaced worker to receive a $10,000 grant and $10,000 in a subsidized loan to obtain a masters degree or otherwise improve skills. The proposal would cover 20,000 workers for $200 million annually, Miller estimates--"just a slight diversion from other multibillion-dollar programs."

Various researchers have put forward other types of government incentives with similar goals. Catherine Mann of the Institute for International Economics has proposed a "human capital" investment tax credit that would allow companies to recoup "more than 100 percent" of the cost of training their employees.

Hira, of the Rochester Institute of Technology, has modeled a training suggestion on the current federal R&D tax credit. But he and others recommend that any such tax breaks be linked explicitly to employees, to ensure companies use the resources for programs that benefit the work force.

"If we're going to come up with a program to help people make the transition from jobs that are now becoming competitive elsewhere, I'd rather see the benefits go directly to the people, not just the companies," said Rick White, a former Republican congressman and now president and CEO of bipartisan industry lobbying group TechNet.

RESEARCH

Regardless of the retraining issue, research and development in general is widely viewed as key to the future of the technology industry in the United States.

American R&D investments are far greater than those in any other nation in total numbers, but other countries can show a greater commitment to research and development, when looked at as a share of their economy. A European Commission study last year found that R&D investments amounted to 2.8 percent of gross domestic product in the United States in 2002, compared with 2.98 percent in Japan in 2000 and 3.4 percent in Finland 2000, the last year data were available.

Duane Shelton, president of the World Technology Evaluation Center, a nonprofit research group, points to the number of publications in research journals as a worrisome barometer of declining R&D efforts in America. In 1981, the United States led in publications in 17 of 20 research categories, when compared with papers from the European Union and the Asia-Pacific region. However, it was first in only 7 categories in 2001, according to data from Thomson ISI.

"By this measurement, the U.S. really wilted in the 1990s," Shelton said. "The investment in physical sciences has been fairly flat over the last 10 years or so."

Shelton and others are concerned about the direction of both government-sponsored and corporate R&D efforts. Industry accounts for the majority of R&D spending, but its inflation-adjusted investment dropped in 2001, according to the National Science Foundation, which estimates the downward trend continued in 2002 and 2003.

Bush's 2005 budget calls for raising federal R&D spending by 4.3 percent to $132 billion, but the increase is focused on weapons development and homeland security, according to the American Association for the Advancement of Science. The plan leaves "all other federal R&D programs collectively with declining funding," according to the association.

Phillip Bond, President Bush's under secretary of commerce for technology, said much of the work in the Defense and Homeland Security departments involves physical science and engineering. He also suggested the federal focus on life science research will pay off in the realm of information technology. "There is a kind of wet-dry, life science-physical science convergence that is taking place," he said.

Industry groups say the federal government can encourage companies to spend more on R&D by granting permanent status to a current federal tax credit for research and development. The credit was introduced in 1981 and has been extended 10 times through tax legislation.

Without a permanent law on the books, companies can't factor in the credit as they assess the value of their long-term research investments, TechNet contends. "Yet it is exactly this sustained, long-term investment in research and development that will ensure continued innovation and the next generation of critical technologies," the group has said.

President Bush and likely challenger Kerry agree that the R&D tax credit should be made permanent. Kerry also calls for increased funding for "key research programs and agencies," such as the National Science Foundation and the National Aeronautics and Space Administration.

Others argue for a more direct form of government help, such as public investment in start-ups. A leader of the Council on Competitiveness, a group of U.S. corporate, academic and labor leaders, has argued that the government can act as a kind of venture capitalist for next-generation companies.

Foreign countries are already doing more to attract cutting-edge R&D, according to Curt Carlson, CEO of SRI International, a nonprofit research institute based in Menlo Park, Calif. Carlson said Taiwan and Singapore are offering to subsidize 30 percent to 40 percent of the costs of new technology-focused companies for up to five years.

"We don't have anything that's nearly as aggressive as what's going on there," Carlson said. "I don't see the urgency yet in the U.S. about how fast the world is moving and how fast the other countries are moving to catch up to us."

Still, at least some industry veterans are banking on a secret weapon to maintain America's leadership in technology: Yankee ingenuity. And they caution against overreacting to outsourcing and other trends, concerned that government regulation will backfire by stifling the creative process that breeds innovation and entrepreneurialism.

"In recent decades, this country seems to possess some magic talisman that tells us what will become important to society around the world and to provide what they want," said Andy Oram, of technology publisher O'Reilly & Associates, who is a member of activist group Computer Professionals for Social Responsibility. "Our position may be defended by short-term boosts, such as retraining workers and granting tax credits for research and development. But let's not forget to protect the source of this magic itself: a society excited by change and open to a diversity of experience."