The “New Jobs for New York” Conference

Last week, I attended a conference entitled “New Jobs for New York” (henceforth abbreviated as NJfNY), keynoted by New York’s Senator Hilary Rodham Clinton. In addition to Senator Clinton, there were five other speakers; collectively, they had some interesting insights and perspectives on the outsourcing phenomenon — which I’ll summarize below. Curiously, the conference didn’t seem to generate much news in the media, despite the presence of various journalists and TV crews from CNN; the only after-the-fact reporting I’ve seen about the conference was a July 21st article entitled “Offshore Savings Fall Short, Says Study,” from CFO.com.

I felt that the location of the conference — the Waldorf-Astoria Hotel in mid-town Manhattan — was a metaphor for the overall theme of the conference: perspectives and proposals from top-level officials from government, labor unions, academics, and non-profit organizations about the “top-down” initiatives that could be implemented in order to cope with offshoring. There was no discussion of “bottom-up” strategies that could be pursued by individuals and small-business owners, on a day-to-day basis now, while the policy wonks continue their discussions and debates in the coming months. Indeed, most of the discussion was focused on the question of, “How can we persuade large employers not to send their jobs overseas?”, rather than “How can we help individuals and small businesses become more competitive, so they can cope with the challenges of offshore outsourcing firms?”

Still, the conference did demonstrate that government, labor, and academia is taking the offshoring phenomenon seriously — and that they do have some interesting, constructive proposals for making their overall constituency more competitive. Though this conference was officially concerned with jobs in New York state, it acknowledged the economic interrelationships with the Greater New York “metro area” that includes New Jersey and Connecticut. As a couple of speakers pointed out, there’s not much point defending New York jobs against challenges from China and India if the real competition is New Jersey, with its lower rents and salaries.

Roger Altman

The Chairman of NJfNY is Roger Altman, and he gave the introductory presentation. I must admit that I’m sufficiently ignorant of political names and faces that I had no idea that Mr. Altman was the Deputy Treasury Secretary in the Clinton administration, and that he’s a primary economics advisory for Democratic presidential candidate John Kerry, until I googled him (thereby demonstrating, once again, that Google is God). But politics aside, he gave a good introduction, which helped put the conference into a larger perspective.

Mr. Altman pointed out that today’s conference was the fourth one sponsored by NJfNY, previous ones having dealt with alternative energy, and opportunities for companies to participate in the feeding trough created by massive spending on Homeland Security. He noted that there is a great deal of sensitivity and fear surrounding the topic of offshore outsourcing, as well as a great deal of pessimism: many see it as threatening the job base of New York City and the entire State. (Indeed, a press release on the NJfNY website quotes Altman as saying that New York has lost 265,000 jobs — though it doesn’t specifically say those jobs were lost to offshoring.)

He also noted the widespread perception that the cost savings associated with offshoring in India are impossible for New York businesses to contend with — and hinted that a recent study carried out by one of the other speakers, Howard Rubin, concluded that the savings were minor, if not non-existent.

Hilary Clinton

Senator Clinton was, of course, the “main draw” for the conference — and regardless of whether one agrees with her politics, she is an excellent speaker. She noted that she was particularly pleased to see an audience of a couple hundred people interested in discussing the topic, because she worries sometimes that Washington is an “evidence-free zone.”

She said that her objective for NJfNY is to bring the financial resources and know-how of the world’s financial headquarters (aka New York City) to bear on the problem of increasing job creation and investment in New York City and update New York. But more importantly, she said, her long-term objective is to get people to think differently; to paraphrase her remarks (as accurately as I could, while frantically scribbling notes during her presentation), “We should be thinking differently to get ourselves out of the current situation. Instead of fearing competition, we should be clear-eyed about it, and look for ways to win.” Along the same lines, she said that we need to use common sense to get competitive, and to avoid the sense of fatalism that seems to accompany so many discussions of outsourcing.

She also said that some companies are located in the greater metropolitan New York area because “this is where things happen — so it’s the best place in the world to do business.” And then — in what appeared to be a message aimed at her fellow politicians at the State and Federal level — she said that “we’ve got to be smart enough to persuade the private sector that they can continue to have a competitive advantage by being here.”

Following on this political theme, Senator Clinton suggested that we need city, state, and national strategies to cope with the offshoring phenomenon. She said we need to foster more innovation, by encouraging more young people to take up careers in engineering. We need a national agenda to promote research, with tax credits to sponsor investment; and we need to eliminate “perverse” tax incentives that encourage U.S. businesses to move jobs overseas. She also said that she has sponsored a bill that closes such tax loopholes, and provides a tax cut of 10% for companies that create American jobs.

In another comment about public policy, Senator Clinton argued that we need to focus on its technology infrastructure, noting that the U.S. currently ranks 11th in the world, in terms of broadband connectivity. And finally, she said that we need to have trade agreements that allow our goods and services to compete on a “level playing field” against other countries.

During the question-answer session toward the end of the conference, Senator Clinton responded to a question that has been debated recently on the BrainDrain discussion forum: “What about abuses of the L-1 visa regulations?” someone from the audience asked. “If you eliminated those abuses, it would cut the legs out from under the offshoring movement.” Unfortunately, Senator Clinton was unable to offer anything more than the standard political non-answer: we (presumably meaning the U.S. Senate) are looking into it, we’re talking about it, we’re thinking about it. “But I can’t tell you,” she said, ”that a solution has been found.”

Howard Rubin

Roger Altman and Senator Clinton both devoted part of their presentation to previews and hints of the results of a study performed by Professor Howard Rubin. Rubin was the next speaker on the program, and he fleshed out some of those introductory hints (the basic statistics from the study can be downloaded from the NJfNY website).

Rubin, who is a well-known authority in the field of IT metrics, conducted a study of the 100 largest companies in New York, to learn how they were dealing with offshoring; these companies typically had annual revenues of $1 billion or more, as well as an IT staff of 100 or more. The “bottom line” he found was that 7 out of 10 are already doing offshoring to some extent, and that by 2005, 90% of New York-based companies will have offshored some of their jobs. While the obvious motivation for shipping jobs offshore is the “perceived cost advantage,” Rubin noted that some companies are also focusing on the availability of certain skill sets (i.e., a certain amount of training in a specialized skill), as well as the opportunity to implement more rigorous, formalized quality processes.

The primary emphasis of his study, though, was that the perceived costs advantages are often an illusion — because companies are not looking at all of the costs associated with moving jobs offshore. In response to a question from Senator Clinton during the Q&A period, Rubin said that the “myth” of cost savings persists because many corporate executives are only looking at the comparative salaries of American knowledge workers and Indian (or Chinese, etc.) knowledge workers. He then explained in details that there are actually six different cost categories that need to taken into account: planning costs (finding a vendor, selecting an offshore site), transition, startup, technology (e.g., installing videoconferencing facilities), remote management/oversight, and travel/logistics. In response to a question from the audience, Rubin said that the planning and transition costs would also include the legal costs, security-related costs, and risk-management costs that would typically be incurred by moving work overseas.

Rubin then illustrated the impact of these costs with an example demonstrating that a typical Indian knowledge worker — whose salary was 3-4 times lower than that of a corresponding American knowledge worker — actually cost only 20% less than his American counterpart. While the calculations were eye-opening for many in the audience, I must admit that I was not fully convinced: some of the costs identified by Rubin were “start-up” costs associated with the first project or work-area that an organization relocates to an overseas location. Most of the reputable offshoring firms are quick to point out to their prospective clients that the first such project is likely to provide nothing more than “break-even” economic results; it’s the second, third, and subsequent projects where the savings become really noticeable.

But Rubin certainly made an important contribution by urging corporate executives to make a careful calculation of all costs before leaping willy-nilly into the outsourcing movement. He also emphasized that it’s not an all-or-nothing decision: it may well make good sense to send some jobs overseas, while keeping other jobs at home — or in a “near-shore” location such as Canada. Indeed, Rubin suggested that we need a new buzzword for describing a “balanced” approach to this decision: instead of “offshoring,” he suggests that we use the term “bestshoring.”

Sy Sternberg

The next speaker, Sy Sternberg, is Chairman and CEO of New York Life. While his primary objective appeared to be a demonstration that big companies like his are often making conscious decisions to keep jobs in their home area, he also acknowledged another obvious aspect of big companies: by their very nature, they tend to have multinational operations. New York Life, for example, has operations in Argentina, China, India, Taiwan, Mexico, Korea, the Philippines, and a few more that I didn’t have time to write down as he rattled them off. The same is true, obviously, of companies like IBM and General Motors (which operates in over 100 countries) and General Electric and all the other familiar Fortune 500 companies.

Because of this international presence, several of these companies have many of their employees located outside the U.S.; it was considered a significant news item earlier this year, for example, when Dell announced that more than half its employees were located outside the U.S. (see “Majority of Dell Workers Overseas,” CNN.com, April 13, 2004). Thus, such companies can accomplish offshoring without breaking any laws or creating high-profile corporate relationships with Indian firms like Tata and Infosys — simply by using attrition and layoffs to thin the ranks of their domestic workforce, while increasing their overseas workforce.

But that’s not what Mr. Sternberg was there to tell us about. Instead, he noted that after September 11th, New York Life had to deal with the reality that having 4,000 employees based in New York City was an unacceptable risk. The company decided to move 1,000 of its workers out of the city — but because they wanted to take advantage of their experience and specialized know-how, and because they wanted to minimize personal inconvenience, they opened a new office site in Westchester County.

It seems to me that senior management may have been a bit naive about minimizing personal inconvenience with such an office move; when I moved the office headquarters of my software consulting firm by one block in mid-town Manhattan back in the mid-1980s, two secretaries quit because they felt it would be too inconvenient to change their public-transportation travel plans. But aside from that, Mr. Sternberg made the interesting point that they wanted to keep their business users (presumably based largely in Manhattan) as close as possible to knowledge workers like the software developers who were relocated to the Westchester facilities.

And that was a large part of his overall message to the audience: yes, some jobs can be moved to the other side of the world, and communication via phone/e-mail/videoconferencing will be acceptable. But for some kinds of knowledge work — e.g., developing new computer systems — it doesn’t work effectively to move them away from the ultimate users/customers/consumers. As a result, Sternberg said that it’s hard for him to imagine that New York Life will ever move more than 10% of its IT staff away from Galactic Headquarters; and most of the jobs that have been offshored are maintenance jobs.

Sternberg provided an interesting perspective on another aspect of offshoring. He noted that in order to make offshoring work, you need a much more formal management structure, and a set of formal, rigorous, well-defined “processes” that can be carried out by knowledge workers in some other part of the world. In the software business, this means that companies whose IT organizations are operating at SEI-CMM level 1 or level 2 will have a tough time sending their development projects to India (many of whose leading software firms are operating at level-4 or level-5 on the SEI-CMM scale).

In the area of “call centers,” this translates into “scripted” work by the people handling inbound calls, or making outbound calls. but Sternberg said that all of New York Life's call centers are located in the U.S., because they insist on “unscripted” conversations with call-center employees who really know their business. I’m not sure whether we’ll see more American companies trying to take advantage of this concept, but it does have some appeal: I must admit that I’ve frequently been frustrated by conversations with offshore call-center people who are utterly unwilling (or perhaps incapable) of breaking out of the mold of a regimented script for their conversation with me.

Denis Hughes

Next on the program was Denis Hughes, who serves as President of the 2.5-million-member New York State AFL-CIO. He proved to be an interesting and entertaining speaker, and I was glad that the perspective of labor unions was included in the conference.

Mr. Hughes said that what concerns his union the most is the potential of offshoring: if it’s bad now, will it get even worse in the future? He acknowledged — perhaps on the assumption that the audience was made up mostly of business managers — that offshoring decisions will ultimately be based on business interests; but he said that, we need to also take into account a number of “community” issues — e.g., the social cost of unemployment, lost insurance and pension plans, etc. Thus, referring to Howard Rubin’s estimate that the “full cost” of offshore workers was only 20% less than that of Americans, he suggested that we should be willing to accept that 20% overhead because of the social benefits.

Hughes made another interesting point, which has become the subject of recent debate in the BrainDrain discussion forum: the jobs that are being outsourced right now are the “low-end” knowledge-worker jobs such as data entry, call-centers, and “commodity” programming work such as software maintenance. But those are exactly the jobs that young college graduates typically use as the starting point for their career; and it’s typically the sort of jobs that we train laid-off manufacturing workers to do. Thus, if we outsource a large number of those jobs to India, veteran knowledge-workers may be able to avoid the unemployment line, but tomorrow’s college graduates may not be able to get that important first job. And if they sense that that’s the case, they may decide to avoid majoring in computer science, or electrical engineering.

It was clear to me that Hughes is worried about this issue more than several other aspects of offshoring: when asked by someone in the audience what we could do to encourage Howard Rubin’s concept of “bestshoring,” Hughes answered by saying that we should focus on protecting and preserving the entry-level jobs.

Kathy Wylde

The final speaker was Kathy Wylde, CEO of a nonprofit organization called the New York City Partnership. Ms. Wylde broadened the perspective of the offshoring discussion by reminding the audience that New York State has a difficult time competing in the global business marketplace because of its high taxes and high cost of living. And she said New York has not done as well as it should to “market” its strengths and advantages — e.g., the advantage of being in the middle of the world financial headquarters.

She also made the interesting point that if any city like New York becomes too aggressively negative about offshoring, it could backfire: after all, many of our cities are trying to persuade international companies to locate their headquarters or manufacturing facilities here in the U.S. The example that Wylde used was China: now that Chinese companies are beginning to expand beyond their own borders, they’re trying to decide where to set up operations in North America. If they perceive New York as being too hostile towards work being outsourced to China, they might decide to set up their headquarters in San Francisco — or even Toronto.

The choice of Toronto for this example is deliberate: among her examples, Ms. Wylde noted that New York is not doing a good job of competing with Canada for the choice of “locations” for movie producers. In this regard, New York has something in common with California, and Wylde suggested that we need to get together the folks in the Land of Schwarzenegger to figure out how best to deal with that competition.

As a positive example, Wylde noted that she was heartened by their success in getting Jet Blue airlines to make New York their regional headquarters. And a new discount airline associated with Virgin Air is setting up its headquarters in New York (although, as reporter Kim Curtis points out in “New Virgin-branded Airline Bases Operation in SF,” only 300 jobs will be located in New York, while 1,500 pilots, flight attendants, maintenance technicians, and engineers will be based in San Francisco. But hey, that’s okay: at least it’s San Francisco rather than Singapore.

Conclusion

If you have any thoughts, ideas, resources (e.g., books, articles, conference recommendations, etc.), or controversial topics about offshore outsourcing that you’d like to debate, visit the BrainDrain website and join the discussion forum there.