IBM And The Rebirth Of Outsourcing (IBM)(INFY)(WIP)

A couple of month ago, India’s chief finance minister may have made calls to the heads of IBM (IBM) and several other large US tech companies to tell them that the huge developing nation was hemorrhaging high-end tech jobs. Whether the call happened or not, looking at statistics from India it would be easy to see that the costs of outsourcing technology work to firms based in there is dropping as unemployment in the country rise.

For a number of years, unions and members of Congress spent a great deal of time complaining about the number of US jobs being sent abroad. The bitterness about the issue seems to have receded recently, especially as the recession has deepened and large American companies have been inclined to cut jobs as much or more than they have been able to export them. Perhaps with the economy losing about 600,000 jobs a month, the need for efficiency though outsourcing has become less immediate.

But, outsourcing may be making a big comeback as word leaked that IBM (IBM) would cut about 5,000 jobs in the US and move the work to India. This may be the beginning of a new wave of exporting of American jobs to developing countries which have large pools of well-educated workers.

India’s GDP grew at a rate of 7% or better the last two years. That rate is expected to move down sharply due to the recession. The central government has the goal of continuing the growth rate it enjoyed until last year, but as GDP falls throughout the balance of the developing and developed world, it will be nearly impossible for the government to meet those goals.

The IBM news is troubling because labor costs in the US, even among highly educated adults, are falling.  American workers should be available for employment at salaries much lower than they were two years ago. But, it appears that IBM has elected to move jobs offshore rather than keep them in the US despite the trend of more tech workers losing their jobs here.

But, the cost of labor in India, which was already below that in the US, is likely to be falling even faster than it is in the US. The outsourcing business in India has been hit with a sharp drop in demand, and the major Indian employers in the sector are doing poorly.

India’s outsourcing giant WiPro (WIP) recently posted mediocre financial results, especially based on Wall St expectations.  Its stock traded for $14 a little over a year ago. Recently it was as low as $5. Wall St. expects that the situation at the firm is going to get worse. The other large outsourcing operation in India, Infosys (INFY), is also doing poorly

While labor prices drop in the US, they are probably dropping faster in countries like India and China. India’s official unemployment rate is 8.2%, but is expected to rise throughout the balance of the year. IBM clearly arbitraged the joblessness in the US and India as it made its decision about where to employ several thousand people. To put it crassly, IBM is looking for the equivalent of the lowest cost bidder.

The IBM move may be a precedent for other US companies who need to staff essential positions if the recession goes on for a long time. More jobs will be sent abroad and that could easily take hundreds of thousands of American people out of work.

Douglas A. McIntyre