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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Implications of Offshoring for the Engineering Workforce and Profession Ralph Wyndrum I am pleased to speak today on the implications of offshore outsourcing for engineering. I speak not only as a representative of the engineering profession, but also as an engineer with high-level management experience at AT&T/Bell Labs, as an entrepreneur, and as a consultant. The views I express today are my own, but they are based on my experience in the global engineering-services marketplace, my interactions with the engineering profession as 2006 president of IEEE-USA, and various studies and analyses of offshoring. THE BIG PICTURE Let me start with some observations about the large picture as I see it: Offshore outsourcing of engineering services is an almost inevitable outcome of the globalization trends created by the basic economic forces of shareholder value, efficiency, productivity enhancement, and the free flow of capital. These trends are enabled by the very technologies engineers created and are continually improving, such as broadband communications and the Internet. Offshore outsourcing occurs for a number of reasons, all of which are grounded in basic business logic. Much emphasis has been put on wage differentials and labor arbitrage as the principal driving forces behind offshoring, and labor costs are undoubtedly the major factor at present. But offshoring is much more complex than that, and business decisions are also motivated by other considerations, such as market access and market development, access to talent, the cost of capital, government economic incentives, special or lower cost infrastructures and capabilities (e.g., subsidized telecommunications or Internet), access to universities and research centers, government regulations, and a host of other factors. Therefore, even if labor-cost margins can be narrowed, there will still be strong incentives for offshoring. The engineering profession in the United States is not monolithic. Thus offshoring does not affect all engineering disciplines in the same way, at the same pace, or to the same degree. New opportunities for engineers are constantly being created by challenges arising from circumstances, such as hurricanes Katrina and Rita, increases in oil prices, and military operations abroad. Technologies mature and become obsolete, along with the academic disciplines that rose up around them. Although some electrical and computer engineering disciplines are still maturing and in transition in many ways, new disciplines are emerging and other disciplines, such as bioengineering and nanotechnology, are experiencing growth and creating new opportunities. If the United States maintains its leadership in emerging technology fields, the U.S. engineering profession will continue to create new engineering opportunities and be somewhat insulated from offshoring. Even then, however, engineers in affected disciplines will continue to struggle as individuals to make career transitions. Ralph Wyndrum is CEO, Executive Engineering Consultants, and the 2006 president of IEEE-USA.
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications Prior to the emergence of offshoring, the U.S. engineering profession was already wrestling with significant challenges, not the least of which were the dot.com and telecom busts, which led to major contractions (estimated at a half-million jobs or more) between 2001 and 2003 in the high-tech sector, particularly electrical engineering. These busts came on the heels of the major downturn in the U.S. aerospace industry after 1998, another engineering-intensive sector. Other structural issues in the profession are contributing to the problem: The post-WWII/Cold War technology boom that fueled America’s high standard of living was based on amazing improvements in productivity that drove the nation’s economic growth, while at the same time automating and streamlining many engineering-intensive tasks. Engineers joke, and with good reason, that they are the only professionals who work hard to put themselves out of a job. That translates into professionals who are, by necessity, highly mobile, moving from assignment to assignment and employer to employer. Engineering is a profession whose members are challenged to keep up with the latest developments in technology, and continuing education has become critical for engineers in mid/late career. At the same time, employers are becoming less and less likely to invest in training or to support time off for professional activities. Electrical and computer engineers increasingly face early obsolescence (as early as their mid-30s or early 40s) unless they continually reinvent themselves. With most engineering Ph.D.s leaving school in their early 30s, the productive lifespan of a research or design engineer is shorter than ever before, making the opportunity-cost calculation less than compelling for bright students weighing their career options. The educational barriers to entry in the engineering profession are constantly getting higher and more expensive as more and more content is squeezed into traditional four-year degree programs, which typically take nearly five years to complete. Recently, the National Council of Examiners for Engineering and Surveying voted to amend the model state engineering licensing law to require “30 credits of acceptable upper-level undergraduate or graduate level coursework from approved course providers” in addition to a B.S. degree as a prerequisite for licensure. The change would not take effect until 2010 at least. The additional work, however, does not seem to be paying off in terms of future compensation. According to the National Association of Colleges and Employers, beginning salary offers for electrical and computer engineers at both the B.S. and M.S. levels were flat, or actually fell, between 2001 and 2005. In other engineering disciplines during the same period salaries varied. Some underwent seesaw fluctuations, some remained flat, and some experienced modest growth. We are also facing a demographic issue. As the U.S. engineering workforce ages, a high percentage of baby-boom-generation engineers will reach retirement age in the next 10 to 15 years. The losses will be felt most strongly in mature engineering sectors, such as aerospace and power. The National Science Foundation’s most recent Science and Engineering Indicators reports that 29 percent of all science and engineering (S&E) degree holders and 44 percent of all S&E doctorate holders in the workforce are now 50 or older. Among S&E doctorate holders in the labor force, 44 percent are over 50. We see the same demographic trend in IEEE, where the average age is now 47 for regular members (up from 44 in 1997). Employers taking the long-term view are looking to secure labor resources to meet future needs (hence their interest in tapping the global services market), as well as to shed pension and other overhead costs that make it difficult for them to compete. As engineering labor becomes more and more of a commodity, the fundamental relationship between engineers and employers is changing. As a consequence, a significant percentage of the U.S. engineering workforce is becoming increasingly apprehensive about their careers and the future of the profession. Some feel they have been used and discarded. Many want or need to keep working in their later years but feel the environment is neither receptive nor enabling. A small percentage is challenging apparent discrimination in employment. Against this somewhat troubled backdrop, the offshore outsourcing trend gained high-profile attention after 2001, on a par with the related trends of guest workers and domestic outsourcing. Many companies have reduced their engineering payrolls and moved engineering work to services firms, thus creating new jobs in those services firms, but often at lower pay, with fewer benefits, and with less job security. Some of those firms rely almost exclusively on in-sourced guest labor (with H1-B and L-1 visas) as their business model, using labor arbitrage to gain a competitive edge. In many instances, in-sourcing has been used to facilitate planned offshoring of business operations; in other cases, it had that consequence as in-sourced managers used their business contacts to offshore engineering services. Nine of the top 10 engineering-services firms that use L-1 visas to bring foreign high-tech workers to the United States are also engaged in offshore outsourcing. In the three years since offshoring in the information-technology (IT) services sector began in earnest, the whole IT industry has been transformed. Virtually all bids for commercial work now include an offshore component, and the
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications “global delivery model” has become THE business model in the IT sector. The potential for equally rapid and far-reaching transformations exist in IT engineering as well. In this environment, engineering jobs tied to manufacturing (which was already moving overseas) and lower level service work have become ripe for offshoring. Many displaced engineers are considered too expensive or not qualified for the new, often more limited opportunities that are available. Those who cannot find new jobs often turn to consulting or contract work or made transitions to non-engineering jobs. A few are chronically unemployed. As president of IEEE-USA, I hear from all of them with some frequency. For a while there was almost irrational exuberance about the anticipated benefits of offshoring. Now, companies have learned a few hard lessons and are much more thoughtful in implementing their global strategies and in communicating their plans. Offshoring remains a business priority, especially for smaller entrepreneurial start-ups for which investment capitalists and Wall Street require that business plans include an offshore component. Although the public rhetoric has softened, the pace of offshore outsourcing appears to be steady or growing. IMPACTS ON ENGINEERS, THE ENGINEERING PROFESSION, AND OUR NATION An article of faith for many proponents of offshoring in the public dialogue is that only low-level service-sector jobs, such as call centers and business-process support, will be offshored. IEEE-USA disagrees and notes that there is already considerable evidence that high-level research and design work are also moving overseas. The Commerce Department’s 2004 report on workforce globalization concluded that “long-term trends in the structure of the (semiconductor) industry suggest that employment in manufacturing by U.S. semiconductor companies will decline, both in the United States and abroad, and employment in research and development (R&D) and design work will increase at a faster rate outside the United States.” Innovation, R&D and Offshoring, a report by Ashok Deo Bardhan and Dwight Jaffee (for the Fisher Center at the University of California, Berkeley) published in fall 2005, based on a survey of industry R&D offshoring practices, concludes that “the emerging situation with offshoring of R&D related activity is going to pose a series of challenges to white collar workers, engineers, designers and scientists, to U.S. firms, as well as to policy makers. It is possible that the future of R&D offshoring will include continued innovation and R&D in the U.S … leading to a win-win situation where the U.S. develops/markets the “new” good, and the now “routinized” goods and services are offshored. On the other hand, there exists the distinct possibility of major innovations originating abroad.” In a February 2006 report, the Association for Computing Machinery found that “globalization of, and offshoring within, the software industry are deeply connected and both will continue to grow.” The report goes on to note, “one example of a higher-skill area now subject to global competition is computing research. Historically, the bulk of this research was carried out in only a few countries … this situation is changing rapidly and the trend looks inexorable.” Innovation Offshoring: Asia’s Emerging Role in Global Innovation Networks, a July 2006 report by the East-West Center, notes that “it is time to correct earlier claims that only low-level service jobs will move offshore and that there is little ‘evidence’ of a major push by American companies to set up research operations in the developing world. Innovation offshoring goes far beyond the migration of relatively routine services like call centers, software programming, and business process support … beyond adaptation, innovation offshoring in Asia now also encompasses the creation of new products and processes.” The National Academies 2005 report, Globalization of Materials Research and Development, cautions that globalization in the materials area could threaten U.S. access to advances in materials science and engineering (MSE). The report notes that the effects of globalization on U.S. leadership in MSE R&D vary by field and subfield and warns that the emergence of new centers of high-value research around the globe is challenging the ability of the United States to attract top research talent. In another recent report on offshoring implications for the U.S. semiconductor and software industries, the Government Accountability Office concluded that “recently U.S. firms have offshored more complex research and design activities; they have also sought to take advantage of Asian engineering talent and to target the rapidly growing Asian market.” The report adds that “as firms experienced cost savings and observed high-quality work in these offshore locations, they expanded offshore operations to include more advanced operations, such as software design and systems integration.” The Insight 2005 study of U.S. technology innovators conducted by McClenahanBruer Communications, CMP, and Electronic Engineering Times, reported that 64 percent of respondents “worry about the future of the engineering profession in the U.S. because of the impact of outsourcing.” Of the survey respondents, 46 percent indicated that their companies have sent electronics design work overseas; 70 percent was at the low end of software development, hardware design, or manufacturing; and 30 percent was characterized as high-end software or hardware design. Last May, Booz Allen Hamilton and Insead surveyed 186 companies operating in 19 countries and 17 industry sectors to assess trends in the dispersion of innovation in R&D. They found that companies are increasingly siting R&D operations outside their headquarters market (45 percent in 1975 and 66 percent in 2004). Foreign R&D sitings have shifted toward China and India and away from the United States
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications and Western Europe. The survey respondents suggested that the pace of offshoring will increase, with 77 percent of new R&D sites planned through 2007 slated for either China or India. By the end of 2007, China and India’s share of global R&D staff is projected to jump from 19 percent to 31 percent, replacing Europe as the most important location for foreign R&D for U.S. companies. A more recent study by Booz Allen Hamilton conducted for the National Association of Software and Service Companies in India highlights growing demand for engineering services. The study estimates that $10 to 15 billion of engineering services is currently being offshored, with projected growth to $150 to 225 billion by 2020. This summer, Electronic Engineering Times conducted a survey of its electrical-engineering readers to gauge their thoughts on offshoring. What they found was described as a “grim acknowledgement” of the trend and a sense that the United States has been complacent. The authors concluded that “American EEs [electrical engineers] fear that U.S. companies are looking for equally smart, but cheaper, engineers in developing markets who can be future stars once they gain experience. Moreover, they wonder if America is trading away its future industrial leadership for short-term gains in the bottom line.” If both low-level and high-level engineering work is being offshored, what are the prospects for U.S. engineers in the future? Engineering jobs tied to creating and maintaining geographical infrastructures will clearly still be in demand. Large companies will retain some level of R&D and design work close to their U.S. markets and manufacturing enterprises even as they shift their investment priorities to opportunities abroad. Engineers with entrepreneurial sensibilities and bright ideas will create their own opportunities. Higher level research jobs will remain around federal laboratories and academic research centers as long as federal R&D dollars continue to flow. For the foreseeable future, it seems likely that job opportunities that involve sensitive or classified work will remain in the defense and homeland security sectors. As new and emerging technologies are commercialized, they could also drive job creation in the United States. According to most macroeconomic projections, the overall size of the U.S. engineering workforce will increase in the short term, keeping pace with the growth of the U.S. economy. It is not clear, however, how the U.S. engineering workforce will fare if the United States is unable to retain its leadership position in technology innovation over the longer term. POLICY IMPLICATIONS In a talk in October 2003 reported by Forbes, Andy Grove, then chairman of Intel, described the cost benefits driving offshore outsourcing and acknowledged that he was torn between his responsibility to shareholders to cut costs and increase profits and his responsibility to U.S. workers. He concluded that the government must help establish a proper balance between the two. Otherwise, he cautioned, companies will revert to their obligation to increase shareholder value. So far, government has not risen to that challenge, and, in effect, Grove’s cautionary note is increasingly becoming the reality. IEEE-USA believes that offshoring is inextricably tied to the broader issue of preserving our national competitiveness and technological leadership in an increasingly global economy. IEEE-USA also believes we need a coordinated national strategy to sustain U.S. technological leadership and promote job creation in response to the concerted efforts of other countries to capture U.S. industries, jobs, and markets. Rising Above the Gathering Storm, a recent National Academies report, draws attention to the competitiveness challenges facing the nation, challenges that are inextricably linked to engineering and the engineering profession and to offshoring and other trends. In response to the report, a number of advocacy coalitions have been formed, more than a dozen bills have been introduced in Congress, and the president has announced the American Competitiveness Initiative focused on reprioritizing federal R&D appropriations. For all this talk, however, relatively little has actually been accomplished so far in the policy sphere. Some common points of consensus are being advanced, however, most of them supported by IEEE-USA and other professional engineering societies, as well as by industry and other groups. We collectively endorse the following points: a renewed federal commitment to support front-end research and development to encourage innovation permanent extension of the federal R&D tax credit programs or tax incentives to assist in the development of human capital and worker training improvements in K–12 science, technology, engineering, and math education in the United States to ensure the availability of a technologically literate workforce I believe these are necessary policy responses, but not nearly sufficient to the challenges of the situation. It may be that how effectively expenditures are made, rather than how much we spend on R&D, makes the real difference. R&D geared toward product/process improvement helps drive incremental innovations that fuel commercialization and promote prosperity in the short term. But to remain competitive over the long term, the United States (both in the public
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications and private sectors) must invest more of its resources in both exploratory and applied research in the physical sciences, particularly in high-risk areas of new and emerging technology that can lead to new technology-based industries. We must also find ways to capture the benefits of that research, protect the intellectual property, and commercialize it so that we create high-value jobs here in the United States that will drive our economic prosperity and sustain our national standard of living. As for K–12 math/science education, we must advance technological literacy and expand the pool of prospective scientists and engineers who can fill the gaps when the engineers in the baby-boom generation retire. At the same time, we must be wary of shortsighted reactions that encourage individuals to enter the engineering “pipeline” in numbers disproportionate to realistic projections of workforce demand. Our policies must align the employment opportunities and career prospects for those individuals when they reach the end of the pipeline. Some have suggested that we should aggressively promote engineering training as a pathway to nontechnical careers. Their argument is based on data suggesting that 24 to 40 percent of recent engineering graduates end up in nontechnical fields, such as investment banking, law, medicine, and management consulting. I endorse the view that a degree in engineering can lead to a variety of careers, but I’m not convinced that engineering is likely to become a popular degree choice for entry into nontechnical professions because of the high threshold requirements and comparative difficulty of obtaining an engineering degree combined with the current career outlook for professionals in our field. I worry that engineering graduates are opting out of technical careers because of the financial incentives to go elsewhere or the perceived lack of opportunities in their preferred fields. We must be wary of the potential for “hollowing out” the profession if the flow of jobs overseas translates into fewer entry-level jobs here that will enable new engineering graduates to gain the experience necessary for them to move to higher level jobs. With the probable exception of new Ph.D.s, who have research backgrounds, most newly graduated engineers are not equipped to apply their academic backgrounds to innovative solutions to engineering problems. We are already starting to read about U.S.-born electrical and computer engineering graduates going to India to build up their resumes. IEEE-USA’S POSITION ON OFFSHORING IEEE-USA’s position on offshoring rests on several specific proposals for action: Prudent steps should be taken to determine the implications of offshoring for the nation and the engineering profession. The federal government must collect and publish reliable statistics on the kinds and numbers of manufacturing, R&D, and service jobs that are being moved offshore. IEEE-USA was pleased to work with Congressman Frank Wolf in supporting the appropriation for the National Academy of Public Administration’s series of studies on offshoring. We also worked to secure the release of the Commerce Department’s offshoring study to the House Science Committee. Although these reports are useful, they are essentially snapshots of trends taken at particular points in time. Only a thoughtful, continuous examination of offshoring and its implications for the engineering profession and for the national interest will provide a basis for a strategic approach to national policy making. New U.S. workforce assistance programs should be created to help displaced high-tech workers find productive employment and ensure that employed workers can acquire the knowledge and skills they need to remain competitive. This is an extremely challenging and potentially costly problem, compounded by the fact that employers can no longer be counted on to invest in their technical workforce. New, or more effective, incentives are necessary to help engineers and other professionals tackle the challenges of mid-career education. It is appropriate for government procurement rules to favor engineering work done in the United States, absent compelling reasons to do it elsewhere. Government often purchases products and services that “stretch the envelope” of the market, and firms that win those contracts accumulate knowledge and capabilities that give them competitive advantages. Policy makers should take a systematic look at U.S. immigration policy and its implications for the global trade in services. To meet the competitiveness challenges of the future, the United States will benefit more from an open, competitive labor market that encourages the permanent immigration of the best and brightest individuals than from increasing reliance on the in-sourcing of guest workers through a regulatory system that suppresses wages, limits opportunities, and then sends those same guest workers home to use what they have learned here to benefit our competitors overseas. This problem must be resolved before large numbers of baby-boomer-generation engineers retire to avoid creating another incentive for offshoring engineering services. Additional Considerations I want to emphasize this last point because it has become increasingly apparent to me that Congress is so caught up in the politics of immigration policy that it is not thinking carefully about the consequences of its proposals, particularly for skilled workers. As a case in point, IEEE-USA commissioned a study by Dr. Lindsay Lowell of the Georgetown
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications University Center for International Migration. Dr. Lowell concluded that current legislative proposals would, conservatively, allow the entry of 1.88 million high-tech workers to fill the 1.25 million new computer and engineering jobs (as projected by the Bureau of Labor Statistics) that will be created in the next 10 years. Therefore, I would add three points to the IEEE-USA list: Although I endorse immigration as a positive means of building our talent pool, I believe that as a nation we need to do more than “poach” the world’s best and brightest engineers. We need to look more closely at providing incentives for qualified American students to pursue technical careers. The offshoring trend is now a disincentive for many of those students that is prompting an undetermined number of engineers/parents to actively discourage their children from following in their footsteps. Consider this quote from James Finkel, an engineering manager for B.E. Wallace Products, from “Engineering Becomes a Perilous Career Choice,” an editorial in the Wall Street Journal on April 29, 2006. When asked about recommending engineering as a career option, Finkel responded, “Given the time and effort of becoming an engineer, who wants to be unemployed every few years? … why choose your lifetime salary the day you graduate from college?” The global labor market in engineering services ought to work both ways. As a nation, we need a better understanding of the barriers facing U.S. engineers seeking work abroad so we can prepare them to work in the global engineering-services market. One final critical point. Engineers, as individuals and as a profession, must be more effective and more proactive participants in the public policy process and in public discourse about technology-related issues. A little bit of active citizenship will go a long way toward ensuring that public policy is better informed and more responsive to the competitiveness challenges we face. POSITIONS TAKEN BY OTHER ENGINEERING SOCIETIES Other engineering societies have emphasized different points in their offshoring position statements: The American Society of Mechanical Engineers rightly points to the need to secure America’s job-intensive manufacturing base. According to one estimate, nearly 48 percent of American engineers work in the manufacturing sector, which also currently accounts for 62 percent of the total U.S. R&D investment. Because the prevailing management practice is to locate R&D as close to manufacturing production as possible, and because manufacturing is increasingly moving overseas, engineering design and R&D will inevitably follow. The American Society of Civil Engineers frames offshoring as a homeland-security issue because non-U.S. architects and engineers are increasingly gaining access to information about U.S. facilities and infrastructure. The National Society of Professional Engineers notes the difficulties offshore engineering raises for administering the engineering licensing system used by states to protect the public safety. CLOSING THOUGHTS In closing, I would observe that there are limits to what policy can or should do when it comes to the free market. Much of what needs to be done is the responsibility of engineers and the engineering profession. We must attend to our own needs and our own best interests. Professional engineering societies, including IEEE, will quickly become irrelevant unless we enable our members to thrive in their profession and provide them with the necessary tools and direction to deal with the challenges posed by globalization. We must be ready to respond to members who ask how they can be more “innovative,” what it means to be “entrepreneurial,” and which technologies they must master to remain competitive for the next five years. We must also break down our disciplinary barriers and expose our members to the intersections of technology, where innovation is most likely to occur. This is why during my tenure this year as IEEE-USA president I have pressed our Board of Directors to shift the focus to increasing our value to members, emphasizing mid-career education and the importance of lifelong continuing education, providing innovative leadership, and enlisting engineers to support K–12 education for future technologists. We are developing new programs, such as a proposed innovation institute, where we can tap the expertise of our members to help promote the profession. Carrying out these policies will require a modicum of “tough love” at times to change the thinking of established engineers about their careers. And it will take time to effect changes and to see the results. But I am convinced we’re moving in the correct direction. The offshoring challenge is real, as is the challenge to continued U.S. technological leadership in the face of growing global competition. We must move beyond simplistic “win-win” rhetoric to a thoughtful and deliberative understanding of the effects of the phenomenon and respond accordingly. We have many advantages as a nation and as an engineering profession, but we do not have a monopoly on bright people, technical know-how, or investment capital. We will lose our competitive edge if we are not focused and persistent. The U.S. engineering profession is in the early stages of a painful transition as it adapts to the hard realities of globalization. There will be some who are unable to make the
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The Offshoring of Engineering: Facts, Unknowns, and Potential Implications transition and some who will need help. As a profession, we must be prepared to help all of them rise to the challenge. As a nation, we must find a way to preserve and support a vital domestic engineering capability that can sustain the technological leadership and innovation that underpins America’s economic and national security. My thanks to the National Academy of Engineering for sponsoring this discussion and my appreciation to the United Engineering Foundation for funding it. I hope this is the start of an ongoing dialogue in the engineering community that will help us reach an actionable consensus on sustaining a strong U.S. engineering profession for the future. ACKNOWLEDGMENTS I’d like to thank Dr. Ron Hira, Rochester Institute of Technology and IEEE-USA vice president of career activities, and other members of the IEEE-USA Board of Directors and staff who reviewed my comments and provided valuable input.