Outsourcing: Where to draw the line

SAN JOSE, Calif.--Like many technology executives, Rhonda Hocker sawoffshore outsourcing as an ideal way to stretch her budget and speed thedevelopment of new systems.

		Outsourcing Reforms not rhetoric Special report

The chief information officer at San Jose-based software maker BEASystems contracted with an Indian outsource company six months ago tohandle maintenance and support of internal enterprise software fromPeopleSoft, Siebel Systems and Clarify. She then outsourced help-deskwork and made plans to do the same for the development of Web servicescomponents.

But even Hocker, a fan of outsourcing by any measure, has herlimits.

"We'll never outsource any of our IT architects," she said of her"rocket scientists," BEA's top information technology developers. "Iwould never envision putting them over there or outsourcing that toanyone."

Therein lies the dilemma for many technology executives confronting theissue of offshore outsourcing: U.S. companies are increasingly turningto other countries to reduce labor costs, but they must decide how farthey can go without risking security breaches, communication lapses oroperational breakdowns, when moving work thousands of miles awayoverseas.

At the heart of that decision is the elusive definition of intellectualproperty--the "secret sauce," or the proprietary knowledge that givescompanies their competitive advantage. Although the threshold variesfrom company to company, the basic description of this crucialtechnology usually falls under one of two categories.

For businesses that maintain systems for other companies, it means thedetails of internal architectures that help their clients stay ahead ofcompetitors. But for those that create technology such as software,hardware, chips and network gear, intellectual property is the vitalresearch and development work that ultimately yields the new productscapable of changing entire industries overnight.

"At a recent discussion we had, executives were unanimous in saying theyare very, very careful about what they offshore and what they don't,"said Rick White, a former Republican congressman and now head ofindustry lobbying group TechNet. "They tend to sendthings overseas that don't compromise their intellectual property, forobvious business reasons."

Many executives appear to support that assessment, for now. "I worryabout security and intellectual property being compromised. You haveother people coming into your house, if you will, so you have to extendyour logical boundaries to someone else's organization," said RafaelSanchez, the CIO at fast food restaurant chain Burger King.

The flow abroad
But as offshore outsourcing becomes more prevalent, and the skill levelof foreign labor rises, economists and others say it is inevitable thathigher-level work will move overseas.

Several U.S. companies declined to comment on their offshore plans,seeking to avoid the highly charged political topic in this election year. However, programmers at somecompanies told CNET News.com that the movement of higher-skilledpositions overseas has already begun.

Speaking on the condition of anonymity, one developer at a large Silicon Valley software maker said his company has sent many programming jobs to India and is considering more-skilled positions for a potential move.

"If they find smart people who can code and design well over there, whywouldn't they move the whole shebang?" he said. "Right now, they'rekeeping the 'rock stars' and hiring grunts overseas. But they know thatoverseas will have a decent amount of rock stars, too."

Indeed, the ambitions of other countries are not confined to servicingproducts made elsewhere. The success of outsourcing and otherhigh-technology business has created more Western-styleentrepreneurialism in many parts of Asia and Eastern Europe.

Many former Soviet republics have a wealth of physicists andmathematicians who were products of the military-industrial complexbuilt up during the Cold War. Epam Systems, a New Jersey-based outsourcing company, maintains offshore software development centers in Moscow and in Minsk, Belarus.

"Eastern Europe has long held the reputation of producing high-calibersoftware with unmatched quality," said Bill Gargano, a senior vicepresident of sales and marketing at Epam. "At the heart of anysuccessful organization is the ability to cultivate its internalknowledge base. Epam each year reinvests in its core technology."

Such reinvestment may have been made easier this year because ofa decision by the Russian government to allow state scientific agencies to grant patents and otherintellectual-property rights to inventors. "We want to tell them that asa result of their work, they will be the ones--not the state--that willown it. It is a big motivation," said Andrey Fursenko, the nation'sacting minister for industry, science and technologies.

That motivation is already at work in Asia, where foreign companies have either set up their ownresearch centers or are experimenting with advanced R&Doffshore.

"In recent years, more and more foreign companies have realized thebenefits of carrying out significant R&D work in India. According toa study conducted by the Administrative Staff College of India(ASCI), 77 globalcompanies have established R&D centers as direct subsidiaries;several others have formed R&D alliances with or have contractedresearch to local firms," said Manoj Kunkalienkar, the executivedirector and president of ICICI Infotech, an outsourcing company based in Mumbai.

"What is surprising is the list of industries doing R&D work out ofIndia is varied, ranging from telecommunications service providers andequipment manufacturers, chip designers and IT hardware companies toplastics and pharmaceuticals producers," he added. "I believe it's justa matter of time before India is recognized as 'the world's R&Dcenter' or 'the knowledge hub.'"

A safe place
Still, many U.S. companies are wary of outsourcing high-leveldevelopment, partly because they are not yet fully comfortable withtheir offshore partners. They do not want outsourcing businesses to "owntoo much of their competitive differentiation--their crown jewels, ifyou will," said Stephanie Moore, an analyst at Forrester Research.

Sanchez said Burger King outsources to Perot Systems between 30percent and 40 percent of its IT operations, including data centermanagement, hosting, help desk work and telecommunications management.None of that work currently goes offshore, but Sanchez said he'sevaluating "how to take advantage" of the trend. "We think (offshoring)is something that can potentially give us benefits," he said.

The CIO said he can't foresee outsourcing his most important positions."You will always need enterprise architects that understand all of theplatforms," Sanchez said.

Security remains a serious obstacle to offshore operations, particularly in developing countries, where lawenforcement standards can be dubious. Although trade secrets cantheoretically be stolen anywhere, in physical or digital form, the U.S.legal system is believed to be far more rigorous than that of many ofits foreign counterparts.

		Outsourcing Where tech giants are offshoring

Allegations of attempted extortion by offshore workers have beenreported in at least two cases in recent months--one in Bangalore andthe other in Pakistan. The Indian case involved two Bangalore employeesof an Ohio-based outsourcer who allegedly threatened to divulgeconfidential patient records, unless the company met their demands. Inthe Pakistani incident, a Karachi transcription worker was accused ofthreatening to expose files from the University of California at SanFrancisco's Medical Center, if she was not paid fees owed for herwork.

"India has intellectual property and other security laws, but policingis not very effective," said Vamsee Tirukkala, the co-founder andexecutive vice president of Zinnov, an offshore researchand consulting firm with offices in Bangalore and Santa Clara, Calif."Every company says they're secure--we all have BS77099 certification,which basically means you can't get a fly though your door, unless it'sbeen cleared--but theft still occurs."

On a domestic level, the concept of technology outsourcing long predatestoday's offshoring controversy. In the technology business, it firstcame into vogue in the 1980s and 1990s, when large companies, hoping toshed expenses, contracted with services companies like IBM andElectronic Data Systems to handle their internal systems.

Those arrangements were essentially an exercise in "rebadging"employees: The affected workers often would stay at the same desks andwork on the same projects--just under different supervision.

"Outsourcers would come in and take over the employees in IT,"Forrester's Moore said. "So the employees still maintained the domainknowledge that they always had--they just now worked for IBM orEDS."

Offshore outsourcing is a different story. In those operations, thatknowledge of how companies do business literally goes out the door--andacross the ocean. That's the point of contention, when it comes to manyoutsourcing arrangements, that has kept top developers in-house.

Industry veterans compare today's situation with the construction ofJapanese auto plants in the United States in the 1980s. The Japaneseautomakers sent work offshore to America but made sure to retain theircore R&D back home.

"The Japanese recognized that you need to partner, so they came overhere and created jobs. They opened plants," said Bob Denis, the chiefinformation officer at Trimble Navigation, a positioning softwarecompany in Sunnyvale, Calif. "But they're not going to build theirtransmissions here, because that's the secret of their sauce."

Security concerns extend beyond those companies working on advancedR&D that is aimed at creating the next big thing. Others thatmaintain networks, databases and other internal systems are alsoconcerned about confidentiality, especially if their outsourcingpartners are working with rivals.

Some companies are exploring offshore expansion rather than outsourcing,either through regional development centers or through partnerships with foreign businesses.Oracle, Sun Microsystems and many smaller companies have taken thisroute, though that approach has its downside, too.

Even though many technology makers and IT departments staff offshoreoperations with their own people, the link to headquarters can becomestrained by distance. And information that was once closely guardedwithin headquarters begins to flow across continents and onto the harddrives of overseas workers.

That's why many executives worry about the movement of high-powered,intellectual-property work overseas as a consequence of outsourcingarrangements. "You would never offshore unless you were sure you weregoing to get the same kind of quality as you would get elsewhere--andeven then, you wouldn't do it if you weren't sure you could protect yourintellectual property," TechNet's White said.

These issues of quality and security are among the chief factors weighedby Inovant, a subsidiary of credit card conglomerate Visa, in makingdecisions about offshore work. Inovant is the world's largestconsumer payment processor, serving 21,000 financial institutions,almost 20 million merchant locations and 1 billion Visa cardholdersworldwide.

The company has shifted 150 maintenance and support positions to Indiain the past few years and will probably continue that trend. But Inovantwill keep close to home its most skilled workers: the system architects,technology experts and researchers that design and build the company'smost important and complex software.

"Nothing that is critical in any way, shape or form will ever gooverseas," Inovant spokeswoman Elvira Swanson said.

Besides worries over trade secrets, many companies are encounteringbasic problems, ranging from communication to operational knowledge.Programmers in Bangalore or the Ukraine often can't sit downface-to-face with business executives in San Jose to hash outproblems--and that costs valuable time and resources.

"We found that we have to provide a lot of direction," BEA's Hockersaid. "That's difficult over a long distance, through many times zonesand in different languages."

Hocker notes that offshore technology workers have the education andprogramming skills but often have an inadequate knowledge of a company'sinternal business processes--what she, Sanchez and others call "domainexpertise." That means that they are less efficient at building highlyspecialized new applications.

Whether it's handled within the United States or abroad, such extra"hands on" management that is needed to complete complex projects withoutsourced workers can nullify any perceived cost advantage, Hockeradded. "I cannot afford for that stuff to not work perfectly," shesaid.

For reasons such as this, analysts say, companies are beginning toreassess the value of outsourcing before rushing abroad.

"As jobs and entire functions ebb further away from management's directcontrol, executives are becoming more aware of the inherent risks andcomplexities of managing outsourcing relationships," Tom Weakland ofDiamondCluster International, a consulting and research firm, said in aMarch report. "Executives have become more realistic in theirexpectations and are now more likely to implement outsourcinginitiatives incrementally."

But the lure of skilled workers earning a third or even a quarter of thesalaries of their American counterparts could prove too hard forcompanies to resist, and not all IT companies and departments object tosending their most sensitive work offshore. As the skill level amongIndian and Eastern European programmers increases, many businesses seemoving high-level work overseas as a natural extension of theoutsourcing agreements they already have in place.

General Motors outsources its entire IT process, a move that has enabledthe automaker to trim its technology budget from roughly $4 billion in1996 to $2.9 billion last year, according to Tony Scott, the chieftechnology officer of GM's information systems and services group. Someof that work is sent offshore by the company's outsourcers, whichinclude IBM and Hewlett-Packard.

Doreen Wright, chief information officer at Campbell Soup, said she usesoutsourcing wherever it fits, to give her company an edge. "We're a soupcompany, not a technology company," she said.

Development centers
For their part, the companies that create technology are taking adifferent approach to offshore work. Systems administrators are morelikely to contract for routine maintenance with outsourced servicescompanies, such as IBM and Keane in the United States, and WiproTechnologies and Tata Consultancy Services in India. However, technologymanufacturers typically open development centers abroad and staff them,in part, with their own people.

Microsoft, the world's largest software maker, has an R&D budgetthat is also one of the world's largest--some $6.8 billion for fiscal2004. It operates research labs in China and the United Kingdom, but thebulk of its work takes place in the United States.

"We will push some product development projects to India and China, butthe lion's share will stay where it is, because we think the best workforce is here," Microsoft's chairman and chief software architect, BillGates, said in an interview with CNET News.com.

At the same time, Microsoft and other companies have shown far lessreluctance to send entry-level jobs overseas. Opponents of outsourcingsay this is a short-sighted practice that raises a difficult questionfor the future: If lower-level jobs move offshore, how will companiesdevelop their next "rocket scientists"?

"One of the strengths of this country has always been innovation andcreativity in the world of software," Denis said. "Now, companies arebeginning to worry about intellectual-property drain."

The U.S. technology industry will lose the natural farm teams that havecreated architects, analysts and innovators for generations, criticswarn, leaving companies little alternative but to outsource anever-rising number of important jobs.

"Here's my biggest challenge," Sanchez said. "Let's talk about 10 yearsfrom now. Where am I going to get my systems architects? I work with anumber of CIO organizations and with academia, and that is the No. 1question. I started in code development on mainframes, on COBOL, Pascaland Fortran. If all of the entry-level jobs go offshore, where is theentry point? How do you become a good business analyst?"

Given the political opposition and early operational problems, some industry veterans believe thatthe current wave of offshore outsourcing may already have begun tosubside.

"Like any other good idea, at first, offshore outsourcing is gettingpushed too far too fast," said Andy Oram, of technology publisherO'Reilly & Associates, who is a member of activist group Computer Professionals for Social Responsibility.

"Until the right balance is struck," he said, "a lot of jobs will washback with the tide."

CNET News.com's Dinesh C. Sharma in New Delhi and Michael Kanellos inSan Francisco contributed to this report.
 

SAN JOSE, Calif.--Like many technology executives, Rhonda Hocker sawoffshore outsourcing as an ideal way to stretch her budget and speed thedevelopment of new systems.

		Outsourcing Reforms not rhetoric Special report

The chief information officer at San Jose-based software maker BEASystems contracted with an Indian outsource company six months ago tohandle maintenance and support of internal enterprise software fromPeopleSoft, Siebel Systems and Clarify. She then outsourced help-deskwork and made plans to do the same for the development of Web servicescomponents.

But even Hocker, a fan of outsourcing by any measure, has herlimits.

"We'll never outsource any of our IT architects," she said of her"rocket scientists," BEA's top information technology developers. "Iwould never envision putting them over there or outsourcing that toanyone."

Therein lies the dilemma for many technology executives confronting theissue of offshore outsourcing: U.S. companies are increasingly turningto other countries to reduce labor costs, but they must decide how farthey can go without risking security breaches, communication lapses oroperational breakdowns, when moving work thousands of miles awayoverseas.

At the heart of that decision is the elusive definition of intellectualproperty--the "secret sauce," or the proprietary knowledge that givescompanies their competitive advantage. Although the threshold variesfrom company to company, the basic description of this crucialtechnology usually falls under one of two categories.

For businesses that maintain systems for other companies, it means thedetails of internal architectures that help their clients stay ahead ofcompetitors. But for those that create technology such as software,hardware, chips and network gear, intellectual property is the vitalresearch and development work that ultimately yields the new productscapable of changing entire industries overnight.

"At a recent discussion we had, executives were unanimous in saying theyare very, very careful about what they offshore and what they don't,"said Rick White, a former Republican congressman and now head ofindustry lobbying group TechNet. "They tend to sendthings overseas that don't compromise their intellectual property, forobvious business reasons."

Many executives appear to support that assessment, for now. "I worryabout security and intellectual property being compromised. You haveother people coming into your house, if you will, so you have to extendyour logical boundaries to someone else's organization," said RafaelSanchez, the CIO at fast food restaurant chain Burger King.

The flow abroad
But as offshore outsourcing becomes more prevalent, and the skill levelof foreign labor rises, economists and others say it is inevitable thathigher-level work will move overseas.

Several U.S. companies declined to comment on their offshore plans,seeking to avoid the highly charged political topic in this election year. However, programmers at somecompanies told CNET News.com that the movement of higher-skilledpositions overseas has already begun.

Speaking on the condition of anonymity, one developer at a large Silicon Valley software maker said his company has sent many programming jobs to India and is considering more-skilled positions for a potential move.

"If they find smart people who can code and design well over there, whywouldn't they move the whole shebang?" he said. "Right now, they'rekeeping the 'rock stars' and hiring grunts overseas. But they know thatoverseas will have a decent amount of rock stars, too."

Indeed, the ambitions of other countries are not confined to servicingproducts made elsewhere. The success of outsourcing and otherhigh-technology business has created more Western-styleentrepreneurialism in many parts of Asia and Eastern Europe.

Many former Soviet republics have a wealth of physicists andmathematicians who were products of the military-industrial complexbuilt up during the Cold War. Epam Systems, a New Jersey-based outsourcing company, maintains offshore software development centers in Moscow and in Minsk, Belarus.

"Eastern Europe has long held the reputation of producing high-calibersoftware with unmatched quality," said Bill Gargano, a senior vicepresident of sales and marketing at Epam. "At the heart of anysuccessful organization is the ability to cultivate its internalknowledge base. Epam each year reinvests in its core technology."

Such reinvestment may have been made easier this year because ofa decision by the Russian government to allow state scientific agencies to grant patents and otherintellectual-property rights to inventors. "We want to tell them that asa result of their work, they will be the ones--not the state--that willown it. It is a big motivation," said Andrey Fursenko, the nation'sacting minister for industry, science and technologies.

That motivation is already at work in Asia, where foreign companies have either set up their ownresearch centers or are experimenting with advanced R&Doffshore.

"In recent years, more and more foreign companies have realized thebenefits of carrying out significant R&D work in India. According toa study conducted by the Administrative Staff College of India(ASCI), 77 globalcompanies have established R&D centers as direct subsidiaries;several others have formed R&D alliances with or have contractedresearch to local firms," said Manoj Kunkalienkar, the executivedirector and president of ICICI Infotech, an outsourcing company based in Mumbai.

"What is surprising is the list of industries doing R&D work out ofIndia is varied, ranging from telecommunications service providers andequipment manufacturers, chip designers and IT hardware companies toplastics and pharmaceuticals producers," he added. "I believe it's justa matter of time before India is recognized as 'the world's R&Dcenter' or 'the knowledge hub.'"

A safe place
Still, many U.S. companies are wary of outsourcing high-leveldevelopment, partly because they are not yet fully comfortable withtheir offshore partners. They do not want outsourcing businesses to "owntoo much of their competitive differentiation--their crown jewels, ifyou will," said Stephanie Moore, an analyst at Forrester Research.

Sanchez said Burger King outsources to Perot Systems between 30percent and 40 percent of its IT operations, including data centermanagement, hosting, help desk work and telecommunications management.None of that work currently goes offshore, but Sanchez said he'sevaluating "how to take advantage" of the trend. "We think (offshoring)is something that can potentially give us benefits," he said.

The CIO said he can't foresee outsourcing his most important positions."You will always need enterprise architects that understand all of theplatforms," Sanchez said.

Security remains a serious obstacle to offshore operations, particularly in developing countries, where lawenforcement standards can be dubious. Although trade secrets cantheoretically be stolen anywhere, in physical or digital form, the U.S.legal system is believed to be far more rigorous than that of many ofits foreign counterparts.

		Outsourcing Where tech giants are offshoring

Allegations of attempted extortion by offshore workers have beenreported in at least two cases in recent months--one in Bangalore andthe other in Pakistan. The Indian case involved two Bangalore employeesof an Ohio-based outsourcer who allegedly threatened to divulgeconfidential patient records, unless the company met their demands. Inthe Pakistani incident, a Karachi transcription worker was accused ofthreatening to expose files from the University of California at SanFrancisco's Medical Center, if she was not paid fees owed for herwork.

"India has intellectual property and other security laws, but policingis not very effective," said Vamsee Tirukkala, the co-founder andexecutive vice president of Zinnov, an offshore researchand consulting firm with offices in Bangalore and Santa Clara, Calif."Every company says they're secure--we all have BS77099 certification,which basically means you can't get a fly though your door, unless it'sbeen cleared--but theft still occurs."

On a domestic level, the concept of technology outsourcing long predatestoday's offshoring controversy. In the technology business, it firstcame into vogue in the 1980s and 1990s, when large companies, hoping toshed expenses, contracted with services companies like IBM andElectronic Data Systems to handle their internal systems.

Those arrangements were essentially an exercise in "rebadging"employees: The affected workers often would stay at the same desks andwork on the same projects--just under different supervision.

"Outsourcers would come in and take over the employees in IT,"Forrester's Moore said. "So the employees still maintained the domainknowledge that they always had--they just now worked for IBM orEDS."

Offshore outsourcing is a different story. In those operations, thatknowledge of how companies do business literally goes out the door--andacross the ocean. That's the point of contention, when it comes to manyoutsourcing arrangements, that has kept top developers in-house.

Industry veterans compare today's situation with the construction ofJapanese auto plants in the United States in the 1980s. The Japaneseautomakers sent work offshore to America but made sure to retain theircore R&D back home.

"The Japanese recognized that you need to partner, so they came overhere and created jobs. They opened plants," said Bob Denis, the chiefinformation officer at Trimble Navigation, a positioning softwarecompany in Sunnyvale, Calif. "But they're not going to build theirtransmissions here, because that's the secret of their sauce."

Security concerns extend beyond those companies working on advancedR&D that is aimed at creating the next big thing. Others thatmaintain networks, databases and other internal systems are alsoconcerned about confidentiality, especially if their outsourcingpartners are working with rivals.

Some companies are exploring offshore expansion rather than outsourcing,either through regional development centers or through partnerships with foreign businesses.Oracle, Sun Microsystems and many smaller companies have taken thisroute, though that approach has its downside, too.

Even though many technology makers and IT departments staff offshoreoperations with their own people, the link to headquarters can becomestrained by distance. And information that was once closely guardedwithin headquarters begins to flow across continents and onto the harddrives of overseas workers.

That's why many executives worry about the movement of high-powered,intellectual-property work overseas as a consequence of outsourcingarrangements. "You would never offshore unless you were sure you weregoing to get the same kind of quality as you would get elsewhere--andeven then, you wouldn't do it if you weren't sure you could protect yourintellectual property," TechNet's White said.

These issues of quality and security are among the chief factors weighedby Inovant, a subsidiary of credit card conglomerate Visa, in makingdecisions about offshore work. Inovant is the world's largestconsumer payment processor, serving 21,000 financial institutions,almost 20 million merchant locations and 1 billion Visa cardholdersworldwide.

The company has shifted 150 maintenance and support positions to Indiain the past few years and will probably continue that trend. But Inovantwill keep close to home its most skilled workers: the system architects,technology experts and researchers that design and build the company'smost important and complex software.

"Nothing that is critical in any way, shape or form will ever gooverseas," Inovant spokeswoman Elvira Swanson said.

Besides worries over trade secrets, many companies are encounteringbasic problems, ranging from communication to operational knowledge.Programmers in Bangalore or the Ukraine often can't sit downface-to-face with business executives in San Jose to hash outproblems--and that costs valuable time and resources.

"We found that we have to provide a lot of direction," BEA's Hockersaid. "That's difficult over a long distance, through many times zonesand in different languages."

Hocker notes that offshore technology workers have the education andprogramming skills but often have an inadequate knowledge of a company'sinternal business processes--what she, Sanchez and others call "domainexpertise." That means that they are less efficient at building highlyspecialized new applications.

Whether it's handled within the United States or abroad, such extra"hands on" management that is needed to complete complex projects withoutsourced workers can nullify any perceived cost advantage, Hockeradded. "I cannot afford for that stuff to not work perfectly," shesaid.

For reasons such as this, analysts say, companies are beginning toreassess the value of outsourcing before rushing abroad.

"As jobs and entire functions ebb further away from management's directcontrol, executives are becoming more aware of the inherent risks andcomplexities of managing outsourcing relationships," Tom Weakland ofDiamondCluster International, a consulting and research firm, said in aMarch report. "Executives have become more realistic in theirexpectations and are now more likely to implement outsourcinginitiatives incrementally."

But the lure of skilled workers earning a third or even a quarter of thesalaries of their American counterparts could prove too hard forcompanies to resist, and not all IT companies and departments object tosending their most sensitive work offshore. As the skill level amongIndian and Eastern European programmers increases, many businesses seemoving high-level work overseas as a natural extension of theoutsourcing agreements they already have in place.

General Motors outsources its entire IT process, a move that has enabledthe automaker to trim its technology budget from roughly $4 billion in1996 to $2.9 billion last year, according to Tony Scott, the chieftechnology officer of GM's information systems and services group. Someof that work is sent offshore by the company's outsourcers, whichinclude IBM and Hewlett-Packard.

Doreen Wright, chief information officer at Campbell Soup, said she usesoutsourcing wherever it fits, to give her company an edge. "We're a soupcompany, not a technology company," she said.

Development centers
For their part, the companies that create technology are taking adifferent approach to offshore work. Systems administrators are morelikely to contract for routine maintenance with outsourced servicescompanies, such as IBM and Keane in the United States, and WiproTechnologies and Tata Consultancy Services in India. However, technologymanufacturers typically open development centers abroad and staff them,in part, with their own people.

Microsoft, the world's largest software maker, has an R&D budgetthat is also one of the world's largest--some $6.8 billion for fiscal2004. It operates research labs in China and the United Kingdom, but thebulk of its work takes place in the United States.

"We will push some product development projects to India and China, butthe lion's share will stay where it is, because we think the best workforce is here," Microsoft's chairman and chief software architect, BillGates, said in an interview with CNET News.com.

At the same time, Microsoft and other companies have shown far lessreluctance to send entry-level jobs overseas. Opponents of outsourcingsay this is a short-sighted practice that raises a difficult questionfor the future: If lower-level jobs move offshore, how will companiesdevelop their next "rocket scientists"?

"One of the strengths of this country has always been innovation andcreativity in the world of software," Denis said. "Now, companies arebeginning to worry about intellectual-property drain."

The U.S. technology industry will lose the natural farm teams that havecreated architects, analysts and innovators for generations, criticswarn, leaving companies little alternative but to outsource anever-rising number of important jobs.

"Here's my biggest challenge," Sanchez said. "Let's talk about 10 yearsfrom now. Where am I going to get my systems architects? I work with anumber of CIO organizations and with academia, and that is the No. 1question. I started in code development on mainframes, on COBOL, Pascaland Fortran. If all of the entry-level jobs go offshore, where is theentry point? How do you become a good business analyst?"

Given the political opposition and early operational problems, some industry veterans believe thatthe current wave of offshore outsourcing may already have begun tosubside.

"Like any other good idea, at first, offshore outsourcing is gettingpushed too far too fast," said Andy Oram, of technology publisherO'Reilly & Associates, who is a member of activist group Computer Professionals for Social Responsibility.

"Until the right balance is struck," he said, "a lot of jobs will washback with the tide."

CNET News.com's Dinesh C. Sharma in New Delhi and Michael Kanellos inSan Francisco contributed to this report.