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updated 3/30/2004 6:34:45 PM ET 2004-03-30T23:34:45

Sarah Beaver rode the bubble at Cisco Systems, building her career as a Web producer in five years at the once-roaring maker of network routers. She managed to lift her salary to $60,000 a year and save enough cash for a down payment on a new condominium. She was closing on the condo last April when Cisco laid her off. "I panicked. The first person I called was my real estate agent." Beaver, 36, moved back in with her parents in Stanford, Calif.

While she was moving, a contract worker for Cisco, toiling 8,700 miles away in Bangalore, India, was busy buying his own house at age 25 — and a home for his parents, too. Now 29, Stawan Kadepurkar has put in six years with Infosys, working mostly on projects for Cisco — in Dallas, Portland, Ore., Hyannisport, Mass. and even at Cisco's base in San Jose, Calif. He could have bumped into Sarah Beaver in the hallways there. In that time his salary has risen fourfold, and it is up 15-fold since he took his first job out of college in 1995. Despite that surge and his role overseeing 25 workers on three Cisco projects, he earns all of $20,000 a year.

Beaver and Kadepurkar represent two sides of the most controversial and divisive issue in economics: offshoring. Crushed by the tech-spending crash that began in 2000, many of Silicon Valley's giants and dozens of companies elsewhere have imposed layoffs at home and hired cheaper talent in India, China and elsewhere. Suddenly this job drain is a central issue of the presidential campaign, prompting calls for new protectionism and providing fodder for the pulpits of cable news and the front pages of newspapers.

America is at war with itself
Firms here need the latitude to compress costs by shipping labor and production to ever-cheaper markets offshore. Yet American workers need to protect their livelihoods. Caught in the middle — and exploiting the hell out of it — are outsourcing firms in bootstrap markets, eager to serve U.S. companies and their customers. In the ensuing outcry, Senator John Kerry calls offshoring U.S. firms "Benedict Arnolds," while CNN anchor Lou Dobbs hammers job-exporting "offenders" nightly. Thirty-one states have proposed antioutsourcing legislation, and the U.S. Senate has voted to ban the practice for federal contracts.

Whatever the economic wisdom of such legislation, it seems unlikely to stop a powerful trend that makes many kinds of service jobs as readily exportable as factory work. "What we are really seeing is the unintended consequences of globalization," says Nandan Nilekani, chief executive of Infosys, one of India's outsourcing giants. Some benefits are clear-cut: a better bottom line for businesses, higher returns for investors, cheaper services and $80 DVD players for Americans.

Catherine Mann of the Institute for International Economics makes the case in favor of offshoring: High-tech hardware would have been 20 percent more expensive in the 1990s if not for offshoring. This spurred investment in more high-tech gear, boosting productivity and freeing up cash to plow into still more innovation. Plus, for every dollar spent on offshoring, the U.S. gets back $1.12 (and the global economy reaps another 33 cents), says a report from McKinsey consultants. Think about it: As more workers in India land higher-paying jobs, they can afford to buy more U.S. products, from processor chips to Hollywood films. By spreading the wealth, offshoring makes life a little better in some of the poorest regions of the world.

For the case against, listen to almost any politician talk about unemployment.

To examine the two sides of the coin, FORBES tracked down a dozen Americans laid off in the Valley because of offshoring, plus a like number of workers who gained some of those jobs in Bangalore, India's offshoring hotspot.

In the U.S. some casualties of the offshore wave remain bitter and financially devastated. "I could understand if this was benefiting us, but people are losing their homes," laments Odell Williams, who has applied for 300 jobs, unsuccessfully, since EDS laid him off in July 2002. At Milpitas, Calif.-based PalmOne, manager Natasha Humphries spent two weeks in India training workers in software testing — then got laid off in August, replaced by one of her trainees. (PalmOne says Humphries' work is still being done in Milpitas.) "They used us and then discarded us," she says angrily.

Some people have given up on tech
Patrick Roney, for 15 years a consultant to Apple manufacturing sites, got laid off in late 2001, displaced by Indian contract workers, he says. (Apple won't comment.) Last year he took to the road, spending three months as a truck driver ferrying things like beef from Nebraska to New York. In February he landed a temporary software job. Michael Clapperton, formerly an infotech manager at Cadence Design Systems in San Jose, saw his layoff coming. He is now selling insurance on commission. His $10,000 monthly paycheck has shrunk to $2,500. It will go up, he says, and he won't have to worry about being laid off ever again.

But other fired techies are steeled by adversity. After Cisco cut her Web-producer job last April, Sarah Beaver vowed to stick with tech. After much digging she landed a $4,500 federal grant for retraining and used it to learn Javascript and other Web-design skills. "It made a ton of difference, at the very least in my own confidence." She has landed a temporary job at a unit of Apple, earning 20 percent higher pay and hoping it becomes permanent. "I feel like I've found a place where I can use my creativity," she says.

In Bangalore the job-gainers are proud of their upward climb and eager to keep on advancing, echoing sentiments of the American Dream. Some express sympathy for the Americans whose jobs they took and say the U.S. will figure out how to navigate this wave. "The U.S. is resilient enough to get out of this," says Stawan Kadepurkar, the Cisco contract manager in Bangalore. Biotech, he says, is going to provide millions of jobs in the next few years.

In three years the U.S. has lost 400,000 service and 1 million manufacturing jobs to offshoring, Goldman Sachs says. Some 3.3 million white-collar jobs (and $136 billion in wages) will flee the U.S. in the next ten years, Forrester Research says. All told, up to 14 million U.S. jobs are vulnerable to offshoring, say researchers at the University of California, Berkeley. Another problem:Even when American employers don't move jobs to India, they have virtually stopped creating them in the U.S. when the tasks can be done more cheaply abroad. The U.S. service sector is 6.2 million jobs shy of the hiring that typically accompanies an economic recovery at this stage, in part because of the move overseas, says Stephen Roach, chief economist at Morgan Stanley.

In Silicon Valley 200,000 workers have lost their jobs since 2001, albeit only 6,000 of those jobs headed overseas, Stanford University researcher Rafiq Dossani estimates. But that number will grow, he says, as the offshoring pace accelerates for jobs in software programming and product development. Already 150,000 engineers hack away in Bangalore — 20,000 more than in Silicon Valley, the Times of India reports. Cisco used only a few Infosys workers in Bangalore six years ago; now it uses almost 300 contract staff, plus 550 full-fledged employees in its own Bangalore office. In two years PeopleSoft's Bangalore offshore force has grown to 200 freelancers and 350 full-timers.

Jesal Mehta has worked both sides of the offshore surge. Twelve years ago, fresh out of university in Gujarat, India, he landed a programming job in Bombay for a contractor serving U.S.-based Tandem Computer. He worked long hours for low pay in American terms (about $100 a month), but he was among the highest-paid graduates in his class. "It was a royal time," he recalls.

In 1994 his employer, the big Indian contract firm Tata Consultancy Services, shipped him to Cupertino, Calif. to work for three years at Tandem developing software. He went back to India for 18 months, then returned to Silicon Valley and in 1999 began working — as a full-timer on staff — for Novell in San Jose. Mehta loved the job, the people he worked with and his U.S.-scale pay: He was making $112,000 a year. He and his wife, also a software engineer, bought a house in San Jose and had a baby girl. At night and on weekends he earned an M.B.A. at Santa Clara University.

Then Novell laid him off last June. Colleagues told him his job was moving offshore — back to his home country of India. (Novell won't comment.) A day later, though, Mehta was hired by a friend to work at his U.S.-based software firm, Cignex, which in turn contracted Mehta out to a Redwood City, Calif. software company. So Jesal Mehta has come full circle. In his current duties as an implementation manager, by day he talks with customers who want to purchase the firm's legal-contract software, trying to customize the software to meet customers' needs. Then, sometime after 9 p.m., he calls Bangalore to talk to the contract developers at an outsourcing firm called VMoksha. Sometimes they call him in the middle of the night or on weekends. "When you are up against customer deadlines, you can't tell the guys in India, 'Hey, I want to go back to sleep,'" he says. Plus, he identifies with them, given his own start: "I feel like I'm one of them."

Mehta knows he was lucky to land a new job so quickly, and he empathizes with unemployed Americans. "People who are laid off are never going to be happy," he says. "They want to blame somebody." But he believes that if his adopted nation — the U.S. — opens its borders, jobs will move across them in both directions. And over all, that's good for the economy. "There's entrepreneurship in this country to create new jobs," says Mehta. "The U.S. can withstand this."

At VMoksha in Bangalore, group manager Sohraib Italia, 41, has followed Mehta's steep climb up the economic ladder. His father was the chief financial officer of a jute products maker. He now earns five times as much as his father did a generation ago. As a child Italia dreamed of going to America. In 1986, when he graduated with an accounting degree from a school in Calcutta, he got a job paying $800 a year at a big tea broker in the same city. India was still a tech backwater then; he had to wait 18 months to get his first phone installed. Now the country rings with 30 million cell phones, with 2 million more added each month. In the early 1990s Italia earned $4,000 a year as a finance manager for what is now GlaxoSmithKline. His pay quintupled when he joined Oracle in 1997, and it nearly doubled again three years later, when U.S. tech company I-Gate hired him for its Indian operations. That job fed his dream of seeing America, placing him for monthlong stints in Pleasanton, Calif. (for PeopleSoft) and in Pittsburgh (at I-Gate's base).

When VMoksha started in 2001 in Bangalore, Italia was one of the company's first hires. His colleagues are the ones who keep Jesal Mehta on the phone late at night back in San Jose. He now earns $37,400 a year, which makes him a rich man in Bangalore, where a luxury three-bedroom apartment rents for $500 a month. Full-time housekeepers and cooks, earning just $55 a month, are commonplace among the middle class. Cell phone service starts at $5 a month, cheaper than land lines.

Some of America's cash comes right back
Middle-class Indians now munch on McDonald's fries, wear Guess and Gap jeans and drive Ford sedans. In a land where a car used to be a luxury, the roads are now clogged with traffic — much of it headed to parking lots at India's tech giants of Infosys, Wipro and Tata, and to the offices of the U.S. companies that have set up shop in India.

The new jobs tend to employ nearly equal numbers of men and women, altering India's social dynamics. "Before, it was all arranged marriages. Now, we have a lot of office romances," Italia says.

What's next for Italia? Under a VMoksha contract he is supervising a pilot project for another U.S. company, Authoria, debugging software. Just 5 VMoksha employees work on it now. In six months that offshore staff will grow to 20.

Michael Huston figured his job at Hewlett-Packard in Cupertino, Calif. was safe. For seven years he had worked on software for big servers, complex stuff for which few people had the right skills. He was pulling in $110,000 a year and had survived two big mergers (Tandem got swallowed in 1997 by Compaq, which in turn disappeared into H-P in 2002). In 1998 he had his first brush with offshoring when he and a boss spent a month training a few programmers visiting from India, advising them on spooling software used to send documents to printers. His team had completed development but not testing, and that task moved to India that same year (which caused no layoffs).

But H-P wanted to squeeze 15,000 jobs out of its merger with Compaq, and in November 2002 Huston's was one. He was 59 and couldn't afford to retire. His 401(k) was weighted heavily with tech stocks that had taken a plunge. So he vowed to try anything. He took the test to become a substitute school teacher, sought work as a security guard and applied for a sales job at a new Home Depot. Home Depot told him he was overqualified.

Four months after his layoff he spotted a small ad for a job programming in the ancient computer language Cobol for a sporting goods chain. It wasn't nearly as challenging as his H-P job and it pays only $60,000 a year. "Emotionally, that was hard to accept," he says. But he counts himself luckier than colleagues who are still pounding the pavement. "For this moment in history, [management] has gone in the direction of complete business decisions. Employees be damned," he says, sighing deeply.

Ravi Trivedi, 29, is one of the workers from India who were summoned to H-P headquarters for training and work. Now he is back working full time for H-P in Bangalore, in a modern gray-and-white building with a fountain in front. If it weren't for the occasional flickering of lights caused by Bangalore's erratic electricity supply, this could be Silicon Valley.

Unlike Michael Huston, Trivedi thinks of his next raise rather than whether he is willing to take a pay cut. After college, he earned a master's degree in computer science at the Bangalore campus of the famed Indian Institute of Science. At his first job, he earned $2,665 a year. Now he earns ten times that as a software analyst. His most recent H-P project was writing Java code that creates B2B yellow pages.

With his pay rising and his job prospects ever brighter, Trivedi, like many IT Indians, is on a spending tear. "You have a lot of freedom and purchasing power," he says. He owns a motorcycle, is saving for a house and has become a bit of a globetrotter. He has worked for H-P in the U.K. and is planning vacations to Malaysia and Thailand. In his time in the U.S. working for H-P, he visited Washington, D.C., Philadelphia, Phoenix, Dallas and the Grand Canyon. "I used a lot of frequent-flier miles," he says with a grin.

But only hotshot M.B.A.s and techies earn on Trivedi's scale. A friend with a government job earns half Trivedi's salary and struggles to pay the rent on a small apartment. Though both of his parents are professors at famous universities, Trivedi earns more than their paychecks combined.

More Indians are joining Trivedi's ranks — and more Americans will be facing Huston's fate. H-P began its offshore operations in India in 1995, and its head count there has rocketed up to 10,000. By cutting costs the company is landing big service contracts, such as one to do data processing for Procter & Gamble, at $3 billion over ten years. Last year, despite the economic slump into which Palo Alto has sunk, H-P increased its revenue 29 percent to $73 billion and reported $2.5 billion in profits after a $900 million loss in 2002.

Back in Bangalore, at the humming offices of Infosys, where Stawan Kadepurkar oversees three Cisco projects, some techies are well aware of an inevitable irony: that American innovation sparked the job flight now hurting America. Back in 1998 Kadepurkar himself was the first Infosys worker to work on-site at Cisco. He wrote programs to allow voice-over-IP, a key Internet-based advance that made overseas phone calls so cheap that corporate America could serve its U.S. customers via call centers and tech labs on the other side of the world.

And now India has to watch its back. With Indian tech salaries on the rise, says Infosys Chief Nilekani, the country must build on its reputation for quality, not just price, to keep the jobs that have flooded in from the U.S. and Europe. Salaries in China are lower than in India, and Chinese companies have sent teams to India to learn how to set up their own offshoring companies to serve Western clients.

Meanwhile, what should workers in America do? Nilekani recommends pursuing careers in specialties that cannot be delivered over a wire. "If someone is a cardiac surgeon, he will not be displaced. But if you are a radiologist, somebody from Bangalore is liable to check X rays." That is cold comfort to a laid-off engineer in Silicon Valley; retraining to become a surgeon would take another nine years.

© 2012 Forbes.com

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