U.S. political and business leaders are in a state of denial over the impact of offshore outsourcing, brothers Ron and Anil Hira argue in a new book, Outsourcing America (American Management Association, 2005), that they co-authored. Ron Hira, an assistant professor of public policy at the Rochester Institute of Technology in New York, said in an interview with Computerworld that some actions need to be taken in response to the offshoring trend. Excerpts follow:

The India-based offshore firms, in particular, have been growing their workforces by thousands of employees each quarter. Their profitability is high. What impact does that have on U.S.-based service providers, such as EDS (Electronic Data Systems Corp.) or IBM? I think they are acting rationally. If you look at Infosys" (Infosys Technologies Limited) profit margin over the last five years, it"s been about 31 percent. IBM is about 9 percent now. If you are IBM, you are going to be under pressure to adopt some of Infosys" business model because it"s obviously much more profitable. Same with EDS. The leading U.S. companies like ACS (Affiliated Computer Services Inc.) and CSC (Computer Sciences Corp.) have much lower profit margins then even Cognizant (Cognizant Technology Solutions Corp.), a U.S.-based IT services firm with an offshore services model.

So this puts pressure on U.S. firms to move more of their work overseas? Sure, because that"s the business model that seems to be working right now. They are acting in response to that.

U.S. companies that move IT jobs overseas say it frees up capital for investment in new products and in research and development, and generally allows them to grow their business. Do you see evidence of that? It"s not as though it"s growing revenues in a significant way. But to be clear about who shares in the spoils and the gains from this, some of it goes to shareholders, some of it goes into the pockets of senior managers who are compensated based on how the share prices perform, some of it goes on to customers and some to the current employees. It is true that there is cost savings; there is some dispute as to how much. But the idea that it only grows the business is the wrong way to think about it.

Offshore supporters argue that America"s strength is in its ability to innovate, such as in biotechnology and nanotechnology. Can the U.S. maintain its innovative lead and offshore too? I think we can. I think we need to be adapting to some of the changes, but I also think we have to be pretty cautious about betting on nanotechnology. For example, China is the No. 2 producer of scientific papers on nanotechnology. It shouldn"t be any surprise that even if we get a breakthrough here in the U.S. that a lot of wealth, and in particular jobs, are created in China as a result of those breakthroughs.

By offshoring a lot of our IT work, is the U.S. losing its ability to innovate? I personally think that is true in a number of respects. You"re creating the next generation of entrepreneurs overseas. If you look at the IT services firms in particular, who are sort of the first movers in all of this, they don"t do a lot of research and development, but that doesn"t mean they"re not innovative. What they"re doing is incremental innovation, and a lot of the capabilities are built into the learning the workers actually gain (on projects). And a lot of these companies are started by people who have worked at other companies. I think you are going to be losing that next generation of potential entrepreneurs.

Are you worried that the U.S. is going to lose its ability to stay ahead of the global IT marketplace? I don"t think we can sit on our hands. I"m worried by the inaction. We"re at a state where essentially nothing has happened. U.S. companies may succeed, but they won"t necessarily succeed with U.S. workers, and that really concerns me about our future. I do think we need to take some responses here.

What responses can be taken? I think there are some no-brainer responses. (For example,) extending trade adjustment assistance to services workers. Software workers who are displaced by trade -- and they are clearly being displaced by trade -- are not eligible for trade adjustment assistance. It"s extended unemployment insurance, health care benefits and retraining money.

What else should be done? The first step is that we acknowledge that this causes problems. There are a lot of people out there who say that this really isn"t a problem. One of the other things that we could be doing is collecting objective data on this. The McKinsey Global Institute (an independent economics think tank within McKinsey & Co.), which benefits from outsourcing and which consults and helps companies figure out how to outsource more, just came out with another study two weeks ago. I don"t think that we should be relying on their data in order to have a public discussion. We don"t even collect the data on this. And it"s not as though we can"t do it; it"s a question of having no political will to even collect the data on it.

China recently made a bid for a U.S.-based oil company, Unocal Corp., which has set off some alarms among policy makers. But what"s to stop India or Chinese based firms from acquiring U.S. tech vendors and what would that mean? I don"t think there is anything to stop them. For the India-based IT services firms, what they are trying to do when they are looking to purchase companies is not to capture U.S. workers; they"re interested in capturing U.S. customers. Their comparative advantage is the lower-wage, high-skilled workers. So that"s why you haven"t seen major acquisitions here in the U.S., even though their price/earnings ratios are much higher than their U.S. equivalents. The reality is that their profitability is based on taking advantage of that lower-wage, high-skilled labor. What they are running into right now is just trying to capture more U.S. customers so that they can grow their business and move up higher on the value chain. There is this kind of myth that this is a simple division of labor and the U.S. will always do the high-level work. I just don"t think that"s true. It"s pretty clear that high-level work is moving offshore.

Will a combination of business and technical skills be enough to ensure future employment for U.S. IT workers? I think that the labor market here is going to be flat or shrink to some extent in response to (offshoring), unless there is a real increase in demand, and I don"t see that. I"ve heard a lot of people talk about the need for a mix of business and IT capabilities -- just being a good programmer is not enough. If that were true, we would expect to see MIS programs in business schools booming because there would be so many companies knocking on their doors trying to hire their graduates. The reality is enrollments are down very significantly in those MIS programs, too. The labor market signals aren"t there, yet that"s where you need to be.

Is there anything that can reverse the offshoring trend? I don"t think there is anything that can really reverse the trends. Can we pull a policy lever that"s going to stop it? I think there are ways we can slow things down.

One way is by reforming this H-1B program, which I think is really accelerating the process of offshoring. Is there anything that can stop it? I don"t see that outside of some of kind of war or something like that. Businesses are acting rationally; they"re taking advantage of lower labor costs, their perception is that they are going to save money, and it seems clear, in many cases, they are able to save money. But workers are also reacting rationally by saying this is a bad deal for us, and the labor market is still very slack and I"m being laid off and I"m not going to be able to get a similar job.