Programming jobs are heading overseas by the thousands

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MARCH 1, 2004

COVER STORY

Software
Programming jobs are heading overseas by the thousands. Is there a way
for the U.S. to stay on top?

Stephen Haberman was one of a handful of folks in all of Chase County,
Neb., who knew how to program a computer. In the spring of 1999, at
the height of the Internet boom, the 17-year-old whiz wanted to strut
his stuff outside of his windswept patch of prairie. He was too young
for a nationwide programming competition sponsored by Microsoft Corp.
(MSFT ), so an older friend registered for him. Haberman wowed the
judges with a flashy Web page design and finished second in the
country. Emboldened, Stephen came up with a radical idea: Maybe he
would skip college altogether and mine a quick fortune in dot-com
gold. His mother, Cindy, put the kibosh on his plan. She steered him
to a full scholarship at the University of Nebraska at Omaha.

Half a world away, in the western Indian city of Nagpur, a 19-year-old
named Deepa Paranjpe was having an argument with her father. Sure,
computer science was heating up, he told her. Western companies were
frantically hiring Indians to scour millions of software programs and
eradicate the much-feared millennium bug. But this craze would pass.
The former railroad employee urged his daughter to pursue traditional
engineering, a much safer course. Deepa had always respected her
father's opinions. When he demanded perfection at school, she
delivered nothing less. But she turned a deaf ear to his career advice
and plunged into software. After all, this was the industry poised to
change the world.

As Stephen and Deepa emerge this summer from graduate school -- one in
Pittsburgh, the other in Bombay -- they'll find that their decisions
of a half-decade ago placed their dreams on a collision course. The
Internet links that were being pieced together at the turn of the
century now provide broadband connections between multinational
companies and brainy programmers the world over. For Deepa and tens of
thousands of other Indian students, the globalization of technology
offers the promise of power and riches in a blossoming local tech
industry. But for Stephen and his classmates in the U.S., the sudden
need to compete with workers across the world ushers in an era of
uncertainty. Will good jobs be waiting for them when they graduate? "I
might have been better served getting an MBA," Stephen says.

U.S. software programmers' career prospects, once dazzling, are now in
doubt. Just look at global giants, from IBM (IBM ) and Electronic Data
Systems (EDS ) to Lehman Brothers (LEH ) and Merrill Lynch (MER ).
They're rushing to hire tech workers offshore while liquidating
thousands of jobs in America. In the past three years, offshore
programming jobs have nearly tripled, from 27,000 to an estimated
80,000, according to Forrester Research Inc. (FORR ). And Gartner Inc.
figures that by yearend, 1 of every 10 jobs in U.S. tech companies
will move to emerging markets. In other words, recruiters who look at
Stephen will also consider someone like Deepa -- who's willing to do
the same job for one-fifth the pay. U.S. software developers "are
competing with everyone else in the world who has a PC," says Robert
R. Bishop, chief executive of computer maker Silicon Graphics Inc.
(SGI ).

For many of America's 3 million software programmers, it's paradise
lost. Just a few years back, they held the keys to the Information
Age. Their profession not only lavished many with stock options and
six-figure salaries but also gave them the means to start companies
that could change the world -- the next Microsoft, Netscape (AOL ), or
Google. Now, these veterans of Silicon Valley and Boston's Route 128
exchange heart-rending job-loss stories on Web sites such as
yourjobisgoingtoindia.com. Suddenly, the programmers share the fate of
millions of industrial workers, in textiles, autos, and steel, whose
jobs have marched to Mexico and China.

"Leap of Faith"
This exodus throws the future of America's tech economy into question.
For decades, the U.S. has been the world's technology leader -- thanks
in large part to its dominance of software, now a $200 billion-a-year
U.S. industry. Sure, foreigners have made their share of the machines.
But the U.S. has held on to control of much of the innovative
brainwork and reaped rich dividends, from Microsoft to the
entrepreneurial hotbed of Silicon Valley. The question now is whether
the U.S. can continue to lead the industry as programming spreads
around the globe from India to Bulgaria. Politicians are jumping on
the issue in the election season. And it will probably rage on for
years, affecting everything from global trade to elementary-school
math and science curriculums.

Countering the doomsayers, optimists from San Jose, Calif., to
Bangalore see the offshore wave as a godsend, the latest productivity
miracle of the Internet. Companies that manage it well -- no easy task
-- can build virtual workforces spread around the world, not only
soaking up low-cost talent but also tapping the biggest brains on
earth to collaborate on complex projects. Marc Andreessen, Netscape
Communications Corp.'s co-founder and now chairman of Opsware Inc.
(OPSW ), a Sunnyvale (Calif.) startup, sees this reshuffling of
brainpower leading to bold new applications and sparking growth in
other industries, from bioengineering to energy. This could mean a
wealth of good new jobs, even more than U.S. companies could fill. "It
requires a leap of faith," Andreessen admits. But "in 500 years of
Western history, there has always been something new. Always always
always always always."

This time, though, there's no guarantee that the next earth-shaking
innovations will pop up in America. Deepa, for example, has high-speed
Internet, a world-class university, and a venture-capital industry
that's starting to take shape in Bombay. What's more, her home country
is luring back entrepreneurs and technologists who lived in Silicon
Valley during the bubble years. Many came home to India after the
crash and now are sowing the seeds of California's startup culture
throughout the subcontinent. What's to stop Deepa from mixing the same
magic that Andreessen conjured a decade ago when he co-founded
Netscape? It's clear that in a networked world, U.S. leadership in
innovation will find itself under siege.

The fallout from this painful process could be toxic. One danger is
that high-tech horror stories -- the pink slips and falling wages --
will scare the coming generation of American math whizzes away from
software careers, starving the tech economy of brainpower. While the
number of students in computer-science programs is holding steady --
for now -- the elite schools have seen applications fall by as much as
30% in two years. If that trend continues, the U.S. will be relying
more than ever on foreign-born graduates for software innovation. And
as more foreigners decide to start careers and companies back in their
home countries, the U.S. could find itself lacking a vital resource.
Microsoft CEO Steven A. Ballmer says the shortfall of U.S. tech
students worries him more than any other issue. "The U.S. is No. 3 now
in the world and falling behind quickly No. 1 [India] and No. 2
[China] in terms of computer-science graduates," he said in late 2003
at a forum in New York.

Fear in the industry is palpable. Some of it recalls the scares of
years past: OPEC buying up the world in the '70s and Japan Inc. taking
charge a decade later. The lesson from those episodes is to resist
quick fixes and trust in the long-term adaptability of the U.S.
economy. Job-protection laws, for example, may be tempting. But they
could hobble American companies in the global marketplace. Flexibility
is precisely what has allowed the U.S. tech industry to adapt to
competition from overseas. In 1985, under pressure from Japanese
rivals, Intel Corp. exited the memory-chip business to concentrate all
its resources in microprocessors. The result: Intel stands unrivaled
in the business today.

While the departure of programming jobs is a major concern, it's not a
national crisis yet. Unemployment in the industry is 7%. So far, the
less-creative software jobs are the ones being moved offshore:
bug-fixing, updating antiquated code, and routine programming tasks
that require many hands. And some software companies are demonstrating
that they can compete against lower-cost rivals with improved
programming methods, more automation, and innovative business models.

For the rest of the decade, the U.S. will probably maintain a strong
hold on its software leadership, even as competition grows. The vast
U.S. economy remains the richest market for software and the best
laboratory for new ideas. The country's universities are packed with
global all-stars. And the U. S. capital markets remain second to none.
But time is running short for Americans to address this looming
challenge. John Parkinson, chief technologist at Cap Gemini Ernst &
Young, estimates that U.S. companies, students, and universities have
five years to come up with responses to global shifts. "Scenarios
start to look wild and wacky after 2010," he says. And within a
decade, "the new consumer base in India and China will be moving the
world."

People Skills
To thrive in that wacky world, programmers like Stephen must undergo
the career equivalent of an extreme makeover. Traditionally, the
profession has attracted brainy introverts who are content to code
away in isolation. With so much of that work going overseas, though,
the most successful American programmers will be those who master
people skills. The industry is hungry for liaisons between customers
and basic programmers and for managers who can run teams of
programmers scattered around the world. While pay for basic
application development has plummeted 17.5% in the past two years,
according to Foote Partners, a consultant in New Canaan, Conn., U.S.
project managers have seen their pay rise an average of 14.3% since
2002.

Finding those high-status jobs won't be easy. Last summer, 34-year-old
Hal Reed was so hungry for a programming job that he answered an ad in
the Boston Globe for contract work at cMarkets, a Cambridge (Mass.)
startup. The pay was $45,000 -- barely more than an outsourcing
company charges for Indian labor. But he took it. Fortunately for him,
he was able to convince his new boss quickly that he was much more
than a programmer. He could lead a team. Within weeks, his boss nearly
doubled Reed's pay and made him the chief software architect. "He had
great strategic thinking skills," says Jon Carson, cMarkets' chief
executive. "You can't outsource that."

To prepare students for the hot jobs, universities may need to revamp
their computer-science programs. Carnegie Mellon University, where
Stephen now studies, has already begun that process. His one-year
master's program focuses on giving students the skills needed to
manage teams and to play the role of software architect. Such workers
are the visionaries who design massive projects or products that
hundreds or even thousands of programmers flesh out.

The key players in the drama, including these two master's students,
Stephen and Deepa, don't have the luxury to wait and see how it turns
out. Their time is now. Deepa graduates in May from the Bombay campus
of the Indian Institute of Technology, a top university nestled
between two lakes. Stephen emerges three months later from the
Pittsburgh campus of CMU.

The options they're eyeing illustrate the unfolding map of an industry
in full mutation. A software career is no refuge for the faint of
heart. Deepa, for example, could suffer if the U.S. government moves
to block offshore development or if rocky experiences in foreign lands
spark an industry backlash. And Stephen, if he misplays his hand,
could find himself competing with lowballing Filipinos or Uruguayans.

For now, their stories reflect the moods in their two countries -- one
with lots to lose, the other with a world to win. Deepa is brimming
with optimism about the future, convinced that her opportunities are
limited by nothing more than her imagination. She is thinking not only
about the next job but about the startup that she'll found after that.
Stephen, by contrast, is cautious. Even at 22, he's attuned to the
risks of a global market for software talent. While confident he'll
make a good living, he's plotting out a career that sacrifices
opportunities for a measure of safety. Self-protection, an
afterthought five years ago, is a pillar of his strategy.

Seeking a Niche
It's midday in the windowless basement labs at CMU's Wean Hall.
Stephen, tall and lanky, wearing a white T-shirt tucked into jeans,
leans back in his chair and ponders his future. He signed up for the
master's program at CMU on the advice of a professor in Omaha who told
him that graduates with an MS could land more interesting jobs and
make more money. But now the big recruiters coming onto the snowy
Pittsburgh campus -- companies such as Microsoft and Amazon.com Inc.
(AMZN ) -- are hiring cheaper undergrads, he says, and barely giving
the masters a look. Sure, other recruiters come knocking. Banks, he
says with a grimace. Insurance companies. But the idea of working in a
finance-industry tech shop leaves him cold. "I'm not even
interviewing," he says.

The 17-year-old hotshot who was ready to skip college and make a mint
has undergone quite a change. He's married, has witnessed the bumps in
the world of software, and plans to establish "an upper-middle-class
lifestyle, and maybe more" as a businessman. His plan is to carve out
a niche for himself back in Omaha. He'll gather three or four
colleagues and produce custom software for businesses in town, from
hospitals and steakhouses to law firms. Omaha is plenty big, he says,
for a good business, but it's remote enough to insulate his startup
from offshore competition -- and even from the bigger competitors in
Chicago.

Stephen understands the threat posed by smart and hungry programmers
in distant lands. He was once such a programmer himself. From his
senior year in high school all the way through college, he worked as a
freelancer for a New York software-development company, Beachead
Technologies Inc. Geoff Brookins, Beachead's young founder, spotted
Stephen's prize-winning entry in the 1999 Microsoft Web-site design
contest. He called Nebraska, sent Stephen some work, and was blown
away. "He did two months of work in three days," he recalls. Brookins
quickly signed him on at $15 an hour, ultimately paying him $45 an
hour. Like the Indians, Stephen provided a low-cost alternative to
big-city programmers -- but he had an advantage because he spoke
American English and was only one time zone away from New York.

The job let Stephen work on projects that normally would have been far
beyond the reach of a student. One was to create IBM's (IBM ) Web page
for its Linux operating-system technology -- a crucial arm of Big
Blue's business. "Stephen was lead engineer on that project," Brookins
says. The student also got to spend much of the summer of 2001 working
at Beachead's office in New York City. It was a fun contrast to
Nebraska, he recalls. But he stopped working for Beachead after he
moved to Pittsburgh last summer.

It was there that Stephen got a strong signal that the prospects were
dimming for programmers. When his wife, Amy, a fellow computer-science
student from Nebraska, began looking for programming work, she came
back to their suburban apartment disheartened. The only available
jobs, she says, "would have paid me interns' rates." She ditched the
profession and is now writing a Christian-themed novel.

Then, Stephen's old boss hammered home the dangers of coding for a
living in a wired world. Beachead's competitors were finding cheaper
labor offshore, and Brookins, to win contracts, had to match them.
Last fall, he logged on to a Web site, RentACoder, a matchmaking
service between employers and some 30,000 programmers around the
world. There, Brookins found a 27-year-old Romanian named Florentin
Badea, a star from Bucharest's Polytechnic University and the
11th-ranked programmer on the whole site. Badea was willing to charge
just $250 for a project that would have cost $2,000, Brookins
estimates, if Stephen had done it.

Those same global forces, Stephen admits, could eventually hollow out
his business in Omaha. Already, Indian tech-services outfits such as
Infosys and Wipro are competing head-to-head with U.S. companies in
this country. But Stephen is betting that by working closely with
customers, he can whip bigger firms on quality and service. He says
he'll give the venture six months to a year and then see what happens.


Ultrafast Track
Deepa sees a reverse image of Stephen's worldview. Where the prospects
for U.S. tech grads seem to narrow as they peer into the future, she's
looking down an eight-lane highway. Yet she faces her own set of
challenges, she acknowledges, while sipping tea with her classmates in
a breezy open-air cafeteria on the Indian Institute of Technology's
Bombay campus. They don't want to be cogs in a software-programming
factory -- India's role to date. Instead, they want India to be a tech
powerhouse in its own right. "Good Indian engineers can do good design
work, but we need a venture industry" so Indians can start their own
companies, says Deepa. Her pals nod in agreement.

Deepa is positioned on India's ultrafast track. The country pins high
hopes on the 3,000 students in the six Institutes of Technology. Their
alumni are stars locally and worldwide -- including Yogen Dalal, a top
venture capitalist at Mayfield, and Desh Deshpande, founder of
Sycamore Networks and Cascade Communications. Within this elite, Deepa
and her friends are a rarified breed. They aced the grueling national
exams, ranking in the top 0.2% and winning places in the school of
computer science. They're known as "toppers." The challenge for
Deepa's small crowd is to move beyond the achievements of Dalal and
Deshpande, who notched their successes for U.S. companies, and to make
their mark with new Indian companies.

That means bypassing the bread-and-butter service giants, such as
Tata, Infosys, and Wipro, that dominate the Indian stage. The jobs
they offer, says Deepa, sound boring. To get their hands on exciting
research and more creative programming, she and her friends are
banking mostly on U.S. companies in India, including Intel, Texas
Instruments, and Veritas. This summer, when Deepa graduates, she'll be
a software engineer at the Pune operations of Veritas Software Corp.
(VRTS ), a Silicon Valley storage-software maker. Her pay will start
at $10,620 a year -- plenty for a comfortable middle-class life in
India. "I'm living my dream," she says.

And thrilling her family. Her father, Arun Paranjpe, who grew up in
Mhow, a tiny army-base town in central India, could afford only a
bachelor's degree, which prepared him for work as an officer in
India's railways. He regretted not advancing further and along with
Deepa's homemaker mother, he pushed his two daughters toward advanced
professional degrees. So while she studied Indian classical vocal
music for nine years and escaped, when she could, to the cricket
field, Deepa always finished at the top of her class in mathematics.
That helped her land a plum spot in the computer-science program at
Nagpur University.

Now Deepa is ITT-Bombay's star in search technology -- and she's
hoping that this specialty will be her ticket to a rip-roaring career.
She routinely works till 3 a.m. in the department's new 20-pod
computer lab, doing research on search engines. She admits the work at
Veritas, at least initially, will involve more routine database tasks
than the cutting-edge work she's hoping for. But if Veritas
disappoints, a topper like Deepa will have plenty of other options.
Both the search giant Google Inc. and the Web portal Yahoo! are
setting up research and development centers in India this year. Deepa
hopes to manage a research lab some day, and ultimately, she says,
"I'd like to be an entrepreneur."

But she's an entrepreneurial revolutionary and family traditionalist
at the same time. It's part of her balancing act. Consider her
eventual marriage. As an attractive, professional woman, she'll make a
prize catch in India's conservative marriage market. Deepa expects she
will have an arranged marriage: Her parents will chose a suitable
husband for her from within her own caste. But she is firm: Her
husband would have to be an entrepreneur, or a tech whiz, and
preferably in the same field, "so we can have a common platform and he
can understand my work," she says.

Maybe one day the couple will be able to raise venture money together.
While venture-capital investing didn't exist in India until a few
years ago, the industry is starting to take root. In 2003, India's 85
venture-capital firms invested about $162 million in tech companies,
according to estimates from the India trade group National Association
of Software & Services Cos. That's up from zero in 1998. Still, it's
miles short of the financial support available to Stephen and his
classmates. The 700 U.S. venture firms poured $9.2 billion into tech
startups last year, according to market researcher VentureOne.

Multicultural Edge
Diversity is another advantage the U.S. has over India. Take a stroll
with Deepa through the leafy ITT campus, and practically everyone is
Indian. Stephen's scene at CMU, by contrast, feels like the U.N.
Classmates joke in Asian and European languages, and a strong smell of
microwaved curry floats in the air. This atmosphere extends to
American tech companies. With their diverse workforces, American
companies can field teams that speak Mandarin, Hindi, French, Russian
-- you name it. As global software projects take shape, with
development ceaselessly following the path of daylight around the
globe, multicultural teams have a big edge. Who better than U.S.-based
workers to stitch together these projects and manage them? "These
people can act as bridges to the global economy," says Amar Gupta, a
technology professor at Massachusetts Institute of Technology's Sloan
School of Management.

The question is whether the technology industry can respond quickly
enough to a revolution that's racing ahead on Internet time. Stephen's
former boss, Brookins, frets that the pace could overwhelm the coming
generation of U.S. programmers, including his former Nebraska star.
"He's a genius. He's the future of the country. [But] if the question
is whether there's going to be a happy ending for Stephen, there's a
big question mark there," Brookins says. Stephen is betting that
quality and customer service will offset the cost advantage of having
computer programmers 10 time zones away. He still sees software in the
U. S. as a path to wealth -- "though I won't really know until I get
out there," he says.

While Stephen is busy mounting his defenses, Deepa is setting out on
the hard climb to build Silicon India. Much like their two countries,
the leader is looking cautiously over his shoulder while the
challenger is chugging single-mindedly ahead. No matter which way they
may zig or zag, both of them are prepared to encounter rough
competition from every corner of the globe. There's no such thing as a
safe distance in software anymore.

By Stephen Baker and Manjeet Kripalani
With Robert D. Hof and Jim Kerstetter in San Mateo, Calif.