There are at least two factors at play. First, small, entrepreneurial firms are far more likely to offshore innovation services than large companies. They need engineers. In some cases, the skills they need -- like VSLI [very-large-scale integration] design -- no longer exist in the U.S. In other cases, the venture capitalists ask the new firm, "What is your innovation outsourcing strategy?" So even though the talent might exist in the U.S., the VCs believe that for speed to market, cost, or some other reason, the startup firm ought to find a way to get the work done abroad. And they find that the passion and commitment to get work done offshore is higher than hiring someone in-house or on a part-time basis.
Second, there is a structural shift going on in the employment of technical talent. Companies are learning to substitute full-time positions with hiring engineers, programmers, and technical personnel on-demand for a particular project. That decreases the desirability of the profession to young people.
Another problem is that American companies no longer invest in keeping up the skills of their technical personnel. Unlike other countries who understand the importance of keeping up the technical skills of their people, they'd rather let them go. So unless the affected employees invest in themselves, at some point in their careers they become not employable.
We used to have a proud tradition of companies investing in maintaining their human capital. Some of the things I see are crazy. We have an example of a major technology company in this country that, rather than hire new people to replace those who are retiring, is engaging an Indian engineering company to insource the engineers do the work. When those people leave, where does that intellectual property go? Back to India in the brains of those people. Such practices only solve a short-term problem.
From a long-term point of view, the statistics are clear that fewer Americans are entering science and engineering careers as indicated by the number of advanced degrees awarded. The trend began in 1995. Part of our research approach is to look for "small, initiating events" whose impact may not be seen for a number of years. In 2003, Congress allowed the H-1B quota to lapse, which greatly reduced number highly skilled workers that companies could bring in. The H-1B shortage was about 130,000 visas. In addition the cumulative shortage of American nationals earning advanced degrees in science and engineering reached about 49,000. Indeed, in 2004, the unemployment rates in almost all engineering subfields were at historical lows.
In 2008, something else has happened. Companies began to realize the strategic importance of entering new markets like Brazil and China, and they needed learn how to do product development and other work in those countries. If you're Boeing, where is your source of major top-line growth? It's not in the United States. Companies are facing the challenge of creating an organization and processes that are aligned with their new markets.
CIO.com: When you asked service providers about their biggest concerns, pressure on margins was number one. Should that concern customers at all?
Lewin: Customers will benefit greatly. The new variables [putting pressure on provider profits] are that some countries have developed national policies to attract the outsourcing industry. Go to Dalian, China, and there are at least 200,000 Japanese-speaking Chinese doing work for Japanese companies. According to KPMG, the current value of executed contracts is $5 billion -- just in Dalian. Many countries are following the lead of China to establish national aspirations to attract the outsourcing industry: Sri Lanka, Morocco, and Egypt.