Marx and the Corporations: Chapter 1 - The Inception

As it happened, I worked in the United States during a period that came with a significant boost to the IT industry, so I have experienced it live in the world's largest and most mature IT market. Like it or not, the sun of the IT industry rises in the US, and the speed with which people and companies are reacting to change and the adoption of new ideas are unmatched. A chain of events during a short period created a dramatic shift in the industry regarding the workforce. After 3-4 years, labor arbitrage became a major pillar in the industry.

So, what were the factors? First, the Y2K/Millennium Bug – year 1999. There were many applications, pieces of coding, systems, and so on to adjust, rewrite, and test. It was not highly complex stuff, but a heavy workload.  At the same time, companies were having their IT departments busy with BAU activities, their tactic, or strategic internal projects. Where do you get the people from to do all these?

Second, the dot-com bubble – years 2000 and 2001. I remember it was a crazy period; the level of market demand for IT people in the US reached an unbearable limit. People were offered extremely high salaries only to join these dot-coms, which sprang up like mushrooms after the rain. The salary inflation in IT at that time was another factor for what would come later. I had colleagues who were part of these start-ups and became on-paper millionaires for a few months. Very few were successful when the bubble exploded; some came back working for corporations like ours.

The third and last event was the tragedy of 9/11,  the year 2001. The companies were facing a completely different paradigm in a matter of months. I will give you an example. I read somewhere that before 9/11, +200,000 consultants and IT specialists traveled within the US weekly. I was one of them. Now, think of the hit the US economy took immediately after the attack when all these people stopped traveling: no airplane fares, no hotel rooms, no rental cars, no restaurant spending, no bar tips, etc. And that was only one of the hidden effects. I was on a project in Silicon Valley in the fall of 2000 at one of the Semiconductor manufacturers. Every day, at 9 a.m. and then at 5 p.m., the main highway between San Francisco and San Jose (80 km) was a parking lot; cars would not move more than 5 km/hour. OK, 5 miles/hour! One year later, in November 2001, the highway was accessible the entire day. They say that 60-80,000 jobs were lost from the spring of 2001 to the end of 2001 in the Bay area, in only six months!

As I have already stated above, companies in the US do not sleep on problems; they react. Of course, the first and simplest reaction was, and still is, to cut the spending. And the local IT market was hit hard by those reductions. People to do IT activities were still needed, but they had to be cheaper. I think you have the full picture of what happened over a relatively short period, and you can easily guess what the logical response of the American IT industry to this chain of events was: massive offshoring. Many large IT companies had delivery centers up and running in 2000, but they needed them to be bigger and more significant to their overall business. By the years 2002-2003, every large IT services provider company had a sizeable delivery center in India at least. Why India? Intelligent people, well educated, a natural inclination towards IT, English language like natives, and of course, the size of the country that has always mattered. Oh, I forgot to mention one essential thing: cost competitiveness, like no other country on earth. For the same experience, one-fifth of what one would pay in the US at the time.

Not only did large IT American companies open offshore delivery centers; practically every large and medium Western (US & EU) company, irrespective of the sector, opened, used or at least contemplated the idea of opening and working with an off shore delivery center. As it always happens, Americans are the pioneers, and the others are followers. With one amendment, Western European companies needed near-shore centers for several reasons that we will discuss in the next episode. They discovered the CEE, former USSR countries, and even some locally opened domestic centers.

I will close this first chapter by saying that despite what some people might think, I firmly believe that the massive workforce migration to the East was a win/win/win situation; the companies won by getting the workforce needed and improving their profitability, the countries that had these centers won from taxation, the experience of the Western enterprises, and market development; in the end, people on both sides of the pond won, some for getting things done faster and cheaper without losing their jobs, the others gaining knowledge, large corporations experience and more cash. At least!

Next week a new chapter: The Invoice.