Decline of the Engineering Class: Effects of Global Outsourcing of Engineering Services

The Department of Labor’s Bureau of Labor Statistics’ Occupational Outlook Handbook (2004) shows that the engineering profession, in general for the United States, is growing slower than the average for all occupations. In fact, from 2002 to 2012, the number of civil engineering jobs is only expected to grow by 18,172 jobs. In light of this, it is easy to understand why the number of civil engineering graduates is declining. Some industry leaders are crying that there are shortages of engineers. This brings to mind the story of Lee Iacocca, former head of Chrysler, when in the early 1980s, during a labor dispute—to loosely paraphrase—he told the union that he had zero jobs at $20 per hour, but he had plenty of jobs at $17 per hour. The situation here is somewhat similar with prospective employers saying there are plenty of engineers to fill positions at a decent wage, but there is a shortage of engineers that will work at the wages many United States firms want to pay, or that their fee structures can support.

Electrical and computer engineers, who are some of the highest-paid engineers, are losing out the fastest to the offshoring trend. In the period of 2000 to 2004, the number of employed electrical and electronics engineers dropped from 444,000 to 343,000, according to the IEEE (“U.S. Technical Employment Falls” 2005).

Duke University’s Center for International Business Education and Research (CIBER) began researching offshoring trends in 2004. The first survey (“Offshoring Survey” 2004), which focuses on the Forbes 2000 firms, produced results that may also represent the trends that affect engineers at firms in the A/E/C industry. Some of the more interesting findings were that firms tended to offshore business functions in this order: information technology (IT), call centers, accounting, research, and engineering. However, within these same firms, they have reached an outsourcing “maturity level” where they are now comfortable and focused on offshoring more of their engineering and research.

CIBER and Archstone Consulting’s “1st Bi-annual Offshore Survey Results” (2005) found the following:

While the current research from CIBER and Archstone Consulting does not represent the A/E/C industry specifically, it definitely represents the trends within other industries and points in the direction for the future of all engineering services regardless of the industry. At present, the United States is graduating roughly 60,000 engineers annually, while China is graduating over 300,000 annually. What those numbers represent are the future engineering labor pool. Held up to the simple economic law of supply and demand, as productivity increases and demand for engineers shrinks, coupled with the global supply of engineers increasing, then wages for engineers will go down. It will take some market equalizations of demand for engineers, as well as lesser wage arbitrage, before wages will stabilize again and move upward.

One software firm president is adding software engineers at a rate of twenty-five per quarter. Only one or two are U.S.-based; the remainder are in various offshore centers. While the president is still very active in controlling costs through offshoring, he said that what they are now faced with is more a question of how to manage a global labor pool, or quite simply, “globalization issues.” Competition for qualified employees in China and India is already fierce and wages in those locations are increasing up to 20 percent annually. Compare this to the apparent glut of software engineers and programmers that are unemployed or underemployed in the United States.

While software firms have reached a high level of maturity in their offshoring activities, most A/E/C industry firms are still taking baby steps. The fractured nature of the industry will mean that it will take time for the A/E/C industry to build the demand and drive offshore wages in a similar manner. Until offshore wages begin inflating, the wage rates in the United States are at the mercy of the developing offshore market.

Globalization in the form of international travel, traded goods, and services has occurred for thousands of years. The Greeks and Egyptians traded agricultural as well as durable goods across the Mediterranean. Marco Polo followed the trade routes from Europe to China and Mongolia. Europeans sailed around Africa to trade goods for spices. In fact, Christopher Columbus stumbled upon the New World trying to find a faster trade route to the ports in Asia.

Free trade, or the free movement of goods and people, is not new either. Between the 1870s and 1914, goods, money, and people had relatively free movement across borders in Europe and America. Economists refer to this period as the laissez-faire period of economic governance, where free trade was more of a reality than it is currently. It was not until World War I that it became commonplace for countries to began instituting import quotas on goods and requiring citizens to carry identification papers or passports (Gray 1998).

The period after World War I saw tightening restrictions on the import of goods and free movement of people as attitudes of nationalism and isolationism started. This continued until after World War II when the United States, preferring for countries to rebuild themselves through foreign trade than to give them assistance in loans and grants, began espousing the benefits of more open international markets (Buchholz 1999). Of course, this was not a bad deal for the United States either, since our industries were not destroyed in the war and we could easily provide badly needed goods and services to the international markets, particularly to countries that had been decimated in the war. The United States had many more items in demand in the global markets than other countries had that would be imported to the United States (Adams 2005). This environment remained throughout the 1950s and 1960s. It was not until the 1970s that the United States began to lose its dominance in the world markets with their products and services.

The global outsourcing trend for the United States began in the 1960s with the offshore assembly plants in Mexico. U.S. firms established “twin-plant programs,” where one plant would be in the United States and the other in Mexico, often just across the border. The parts would be designed and manufactured in the United States, shipped to Mexico for assembly, and the finished good would be imported back to the United States. This was the beginning of the trend of utilizing cheaper labor in the production of goods for U.S. firms (Adams 2005). The idea was that the United States could maintain the higher value-added work, including design, marketing, and distribution, while the lower value-added activities involving lower-skilled and unskilled labor would be outsourced to cheaper labor regions.

Children growing up in the late 1960s and 1970s probably remember that many of their toys were made in Hong Kong, Japan, and China. During this time outsourcing of production accelerated to these offshore locations and importing finished goods into the United States increased.

The Japanese invasion of automobiles increased in the 1970s, initially with cars that were not well suited to the U.S. market of large, gas-guzzling vehicles. It did not take long for the Japanese to figure out the U.S. automobile market and to begin making cars that were larger, as well as fuel efficient and reliable. With the relative rise in labor costs, value of the Yen, and restrictive labor practices in Japan, it became more cost efficient for the Japanese to move production to the United States. This was also required because the U.S. automobile industry was putting increasing pressure on Congress to protect the industry from “cheap” imports. As a result, Honda, Toyota, and Nissan were all producing cars in the United States by the end of the 1980s. (Dossani and Martin 2004).

During the 1980s, the cost of building semiconductor fabs rose tremendously, threatening the United States’ semiconductor industry, which responded by shifting fab production to Taiwan, keeping other office functions including engineering design onshore. These “fab-less” semiconductor firms sprang up, with production in onshore and offshore foundries, or by simply licensing their designs to other firms. By 2002, fab-less firms were far outperforming vertically integrated semiconductor firms. Protectionist legislation would hurt these fab-less firms and their ability to import their offshore manufactured semiconductors. The result would be higher prices for any goods with semiconductors, which are in practically all appliances and electronics (Dossani and Martin 2004). Also during the 1980s, personal computers began proliferating and competition among producers became fierce. By the early 1990s, PCs were being built with a significant number of foreign components (Dossani and Martin 2004).

Engineering and construction firms throughout the 1970s and 1980s were going through a period of consolidation and expansion. Many firms had worked in the Middle East and Europe in the preceding decades and now that work was slowing. Firms such as Brown & Root, Kellogg, Fluor, Daniel Construction, Lockwood Greene, Phillip Holzmann, Turner, Hochtief, CH2M Hill, Rust, Sirrine, Bischoff, and others were merging and acquiring firms. For these large multinational firms (MNCs), it was not unusual for them to have designers working on projects halfway around the world from their office—it was quite the norm (Bryant 2005). In fact, while working in Germany in 1991, I was asked to assist in the design of a multistory building to be built in Philadelphia. This same firm was supplying turnkey cogeneration plants to Iran and hydropower generating equipment to Canada. It should be noted that in 1991, this large multinational engineering firm was still producing drawings by hand. They had not yet converted to CAD.

In the 1990s, the information technology world exploded. The Internet was “discovered” by the common person, e-mail became widely adopted as a communication medium in companies, and the Y2K scare caused the outsourcing of thousands of software programming jobs to India. It was during this period that MNCs began recognizing that India did not just provide cheap labor, but that much of it was skilled, educated, and capable of providing more business services than just programming.

Global outsourcing of business services was not very practical as recently as the early 1990s. However, rapid changes in technology and the reengineering of work processes, often a result of technological advances, made delivery of business services relatively simple. Attitudes about it are changing as well. While much of the United States reacts with protectionist measures trying to isolate America from the rest of the world, Great Britain’s government, actually their foreign trade minister, publicly declared that they intended to leverage their relationship with India to encourage more offshore outsourcing (Bryant 2005). There is something ironic when a powerful island nation has realized that it is not, and cannot, succeed as an “economic island.”

Multinational engineering and construction firms have shuffled work among remote offices for decades, while small and medium sized firms are just starting to tap foreign engineering talent (Brown 2005). Technology has been a significant factor that is now making offshoring an economically feasible alternative to domestic engineers, and perhaps a necessity for midsized and smaller firms in the not too distant future.

Beginning in the 1980s, a few specific productivity enhancements—including desktop computers and standard commercial software—reduced the number of hours required to design projects. Commercial software can perform calculations in a fraction of the time it used to take engineers to figure them by hand with a slide rule or calculator. Drafting is computerized, and in some cases automated, so the hours required to draw the required details and produce shop drawings has been dramatically reduced through standardization or proceduralization. For example, the American Institute of Steel Construction (AISC) has developed standards for data integration, while other firms produce software that is capable of taking three-dimensional design information on steel structures and produce detailed shop drawings automatically in a fraction of the time it would take human detailers.

Drafting, once the domain of entry-level engineers, is now the domain of lower-skilled technicians. These types of process improvements, known broadly as process reengineering, have developed over the last two decades to shift work from the high-skilled, high-cost engineering labor pool into a lower-skilled, lower-cost labor pool. Now that drafting has been proceduralized and computerized, it has a much lower skill requirement. Because this lower skill requirement can be met by a larger labor pool, the work “seeks” the lowest-cost producer of that service. Whether that provider is across the street or halfway around the world is quickly becoming irrelevant. Technology and reengineering have definitely shifted drafting work that used to require specialized skills and training and driven it into the realm of commodity work.

Even with standardization and proceduralization, shifting work offshore has not been easy. It took a change in the way people work and responded to technology to make offshore outsourcing possible. Just ten years ago, many mid- and senior-level professionals resisted even touching a computer. Not anymore. Computers are ubiquitous worldwide and very few working professionals today do not use one.

Global telecommunications bandwidth, infrastructure, and computing power development over the last ten years has enabled firms to move more work that is tied to computing to offshore locations. Not only that, but standardized software packages for everything from word processing, to drafting, to engineering design have made it possible for tasks that are performed on a computer to be completed practically anywhere in the world. Global cell phone usage, especially outside the United States, has advanced so that e-mail, messaging, and regular correspondence can be handled anywhere a cell phone can be accessed.

Another reason why it is getting easier to offshore engineering services is that the United States is such a good exporter of secondary education. It used to be common for foreign students to relocate permanently to the United States after getting their education at a U.S. institution. During the last ten years, more firms hired students with the intent of sending them back to work in their home country. In the case of the students from developing countries, that means that they will work for less money in their home country, as well as provide a bridge between their home culture and the U.S. corporations in dealing with other workers and businesses (Lockwood 2005).

A significant reason that firms are working offshore is because that is where the work is. Just as manufacturing firms are shifting operations overseas, U.S. engineering firms that worked for them in the past are following their clients. Gone are the days of simple production facilities. Facilities are more complex than ever, and engineering firms now have to understand how to make those facilities work in developing countries. Usually that means engineers with local knowledge and local contacts are required. R. V. Rao, president of Acro Services, tells their story. Acro is a U.S. engineering firm that was founded in 1982. Acro Global Engineering Alternatives in India was launched to support their U.S. customers who moved factories and engineering centers overseas. Early on, their work was CAD and finite-element analysis (FEA), but now the work has moved up the value chain to structural analysis, crash simulations, and facility layouts (Brown 2005).

In the literature and in the teleconference, common reasons for global outsourcing were explained. These were:

Even though A/E/C firms cite “following the customer” quite often as a significant reason for using offshore engineering, cost is the number one reason that most firms outsource work or shift work that could be performed in the United States (Bryant 2005). Cost savings are usually the initial driver of offshore outsourcing initiatives. CIBER’s research showed that over 50 percent of firms’ that outsourced engineering services reached at least a 40 percent cost savings level. Offshore outsourcing cost savings, in general, for the large engineering and construction firms have been positive. Eighty-five percent of firms researched indicated that they saw a cost reduction in engineering expenses, and 20 percent indicated they saw a cost reduction in construction costs related to outsourced engineering (Bryant 2005). These savings are mostly derived from shifting work around to more cost effective offices within the company.

Manufacturers have relocated their facilities and U.S. engineering firms are following them. It makes perfect sense for the U.S. firm to maintain the relationship with the U.S. manufacturer while providing engineering talent local to the new manufacturing facility. Manufacturing facilities in offshore locations are more sophisticated than their simple assembly predecessors, so having a local engineering presence is more important than ever (Brown 2005).

Better service and increased quality often result from offshoring, which reinforces the decision to continue to offshore. While most people would believe that cheaper labor translates to lower quality, the cheaper labor allows more time to be spent on the project—including drawing additional details or looking for design problems before they occur. Having more total man-hours available to spend on a project increases the quality of the documentation. Lower-quality documentation was reported as a frequent owner complaint in the 2004 FMI/CMAA (Construction Management Association of America) “Annual Survey of Owners” (FMI/CMAA 2004). The visible increase in quality from offshoring is likely due to at least three reasons: (1) the firm that is offshoring the work has to look internally at how they perform work in order to convey their processes to the offshore firm, which results in some reengineering of their design process; (2) the offshore firm can spend more man-hours and time checking the work against the onshore firm’s standards; and (3) the onshore firm is spending more time checking the work that comes in from the offshore firm (Bryant 2005).

In a number of articles, as well as the teleconference, the speed of getting the work done was another reason for going offshore. Where labor is cheap and plentiful, more resources can be directed at completing designs. For a design/build firm that is used to fast-tracking jobs, having the capability to put designers on twenty-four hours per day (combining on and off shore staffing), or having employees that will work long days (as in India), work tends to be completed in fewer total days—not necessarily fewer total man-hours, but the budget savings from the labor rate arbitrage simply allows more man-hours to be spent on the project. Surprisingly, access to additional resources (supplemental staff) is not frequently mentioned, perhaps because it is not as visible as costs, quality, and speed. Nevertheless, firms benefit from outsourcing when they can add resources as needed while keeping their core staff levels constant. This reduces a firm’s fixed overhead and gives the firm better control over costs. It is arguably less expensive to hire and fire service providers—or to ask for ten resources this month and two next month—than it is to hire and fire individuals as needed. This is especially true in countries where the costs of hiring and firing are much greater than in the United States.

CIBER’s research supports the claim that most firms met or exceeded their cost goals and service levels. CIBER found that the service providers’ figures tended to be more conservative than the firms outsourcing the work, so the service providers could be seen as “underpromising” and “overdelivering.”

There are at least two sides to any issue. Beyond the issue of whether or not offshoring displaces U.S. engineers, there are a few hurdles that need to be examined, including: public safety, legal issues, insurance, and poor quality.

One argument frequently cited against outsourcing is that firms or organizations claim that engineering work cannot be performed outside the United States since it is not under a licensed engineer’s care. This argument does not hold water because there are registered engineers, licensed in many U.S. states, that do not work or live in the United States. Many non-U.S. citizens sit for the P.E. examination in California, for example, and many do not work for U.S. firms. However, once they pass the exam, they can live in their home country and design any structure within their legal limits for construction in California. Most states do not have a proximity or location clause in their statutes requiring engineering work to be performed in proximity to the professional engineer. In this case, the licensed P.E. could live anywhere in the world and have the actual engineering calculations performed somewhere else in the world. The P.E. could then review and stamp the drawings, and they are perfectly legal. In any case, there are ways around the proximity requirements where they exist, including importing staff on temporary work visas, that could be used to get around the system. One Indian IT firm, Tata Consultancy Services, employs more than five thousand foreign consultants working in the United States. Not only that, but are U.S. jurisdictions going to begin policing who is in which office when it comes to enforcing these requirements? To take this argument one step further, suppose that the engineer in responsible charge is out sick, or on maternity leave; does that mean that all work in the office must stop?

Legal responsibility concerns have been raised as well, but firms that have been performing engineering work offshore for decades do not see this as an issue. Their point of view is that the firm that outsourced the work is ultimately responsible in any case, and the engineer that stamps the drawings has the ultimate responsibility for the work (Bryant 2005).

Insurers have not, as yet, voiced their opinions loudly in regard to the offshoring of engineering services. It would be more difficult for an insurer to sue a foreign company for breach of contract or negligence in contract performance, especially if the country is India or China. Those are risks that could be reflected in future insurance premiums and might influence the decision of a mid- or small-sized engineering firm to select an outsourcing firm or service provider that is a legal entity in the United States (Bryant 2005).

No matter which method is chosen for outsourcing, there will always be a learning curve. The most important obstacle to overcome, as covered in the teleconference, the CIBER research, and other articles, is reaching the expected service level. Reaching acceptable service levels involves communication of standards, proceduralizing much of the work, and having the right people managing the relationships between onshore and offshore groups, whether the groups are interfirm or intrafirm. This is why performing outsourcing on a “project only basis” is so difficult. A one-off project is not likely to hit savings targets and service levels. The best method to reach service levels and savings targets is to develop a relationship with the offshore group. Neilsoft and other firms typically send their foreign project manager to the customer site to learn about the firm firsthand. This way the requirements of the work, both the obvious and the subtle, can be relayed back to the offshore engineering team more effectively. For this reason, most service providers are seeking long-term relationships with engineering firms, and not one-off projects.

Is the Indian IT firm mentioned earlier, with more than five thousand foreign consultants in the United States, the future business model of engineering services in the United States (Brown 2005)?

U.S.-based firms with no offshore presence tend to keep offshore tasks simple, such as detailing drawings or two- or three-dimensional drawing conversions. Firms with an offshore presence—as in a branch office, a joint venture (JV) partner, or a captive group—tend to work higher up on the value chain, demanding more complex engineering services (Brown 2005). The business approach for outsourcing services can take on a number of different models, including:

Branch offices are usually reserved for large engineering firms and have staff that are predominantly direct-hire employees of the multinational engineering firm. Firms start branch offices for a number of reasons, including access to a geographic market, access to projects, and access to labor pools. There is scarce data on how these offices are started, but they can be started from scratch, as an outgrowth of a project team, or acquired. Those started from scratch would tend to be the riskiest investment and take years to begin to succeed since the firm would have to learn about the location, workforce, etc. Those that start as an outgrowth of a project team, especially on a long-term project, are slightly less risky since the project team is funded by the project and the team members are learning the economic and political dynamics of the area. The least risky and currently popular method of gaining branch offices is through an acquisition of an existing firm. While international acquisitions still pose their own risks, performing sufficient due diligence on the firm can lower the risk substantially (Bryant 2005).

Sometimes acquisitions develop out of partnership arrangements. Partnership arrangements come in various forms, including JVs, strategic alliances, and previous project experiences. In a JV, the firms create a separate legal entity for a project or for a specific purpose, such as a particular market focus. Strategic alliances are looser in that the firms do not create a separate legal entity, but may have a legal agreement for a project or a specific focus that is mutually beneficial. Firms also decide to merge based on previous experiences on projects, with less costly labor being utilized and expertise being brought to the table.

Third-party service providers can be U.S. firms or offshore firms. Their offerings are customizable to meet the needs of their clients, but tend to be grouped in three different arrangements. The first is captive groups, where the domestic firm provides a basic level of management and the service provider provides the workers. Only management is a direct employee of the domestic firm and the service provider is the employer of the offshore workers. In this way, management has direct contact with the workers and can establish expectations and monitor service levels without the headaches that come along with direct-hire employees. The second method involves dedicated resources. In this method, the offshoring firm does not provide management of the offshore employees. The service provider is completely responsible for the workers and management of them. The workers are dedicated resources and will work only for the single firm. This reduces training requirements by allowing the workers time to develop competencies in a firm’s procedures and methods. The third and simplest form of outsourcing provided by service providers is on a project basis. Due to the nature of the relationship, the work is usually simple and may involve transferring drawings from one format to another or simple detailed drawing. With the absence of any long-term relationship, it is more difficult to reach expectations in service levels and cost savings since those take time to develop.

During the teleconference, Neilsoft described yet another service provider model that is an outgrowth of the captive and dedicated resources arrangements. Build/operate/transfer (BOT) is a method that firms are using to develop branch offices. The service provider relationship is used to develop an employee base, provide training, and operate the resource center. After a term of four to five years, the offshoring firm has the option to take ownership of the resource center, essentially making it a branch office.

One option that is seen in other business process outsourcing (BPO) functions (but has not been recognized in engineering services) are shared resource agreements. In this case, companies that might not be able to fully utilize dedicated resources can band together and essentially share a service provider’s resources. Neilsoft’s demand to date has been predominately from large firms, but now they are seeing more interest from small firms in their services. The small firms are asking for four and five resources (engineers or draftsmen) on an ongoing basis, like a small resource center. What they are not seeing is small firms getting together and sharing their resource centers, like firms currently will with outsourced IT and business processes.

The response by firms and individuals to U.S. firms’ global outsourcing of engineering can be divided into three categories:

Ignoring the trend suggests that the individual or firm does not feel any impact, positive or negative, from the trend. Perhaps they believe that their firm is too small or that they have a niche that will not be impacted by global outsourcing. To date, only the smallest of firms have indicated that they are not feeling any effects from the outsourcing trend and have no concerns about it (Bryant 2005). Anthony Lockwood (2005) writes that ignoring the trend by believing that we (U.S. engineers) will “innovate” ourselves from it—because for some reason we are smarter than the rest of the world—is delusional.

Combating this trend is popular with the National Society of Professional Engineers. The organization has produced a position study firmly against outsourcing any engineering work that can be performed by a capable U.S. engineer (NSPE 2004). They have lobbied Congress and tried to pass protectionist legislation that restricts engineering work that is performed by persons outside the United States. They have also tried to bring political pressure to bear on firms that do not subscribe to their beliefs on the subject. By making this issue a political issue, they have succeeded in driving the issue underground where firms are extremely sensitive about it. Many firms only want to talk about global outsourcing “off the record” or “behind closed doors” (Bryant 2005). Unfortunately, this lack of open discussion only makes it much more difficult for U.S. firms and individuals to analyze and address the outsourcing issues in an informed and educated manner. CIBER reported that 24 percent of firms “quietly moved forward” with offshoring plans, and 4 percent “postponed” plans due to potential political backlash.

History provides a number of examples on the problems with protectionism. In the early 1800s, as the war with Napoleon drew to an end, grain from mainland Europe would again become available for import into England. This grain would be less expensive than grain produced in England during the war, so prices would inevitably drop. This meant that English farmers would get less for their crops. Lobbying Parliament, the landowners encouraged the passage of protectionist measures that would keep the cost of grains high, even though plentiful and cheaper grain from mainland Europe would be available. Industrialists, on the other hand, wanted to ensure that they would be able to pay the lowest possible wages to their factory workers, who’s diet was 50 percent grain based. The “Corn Laws” were passed in Britain and not repealed until 1846. These laws caused a chain reaction in that food prices were higher than they should have been, causing factory workers’ wages to be higher, which kept prices for the goods factories produced higher (Buchholz 1999).

In a more recent example, consider the impact of protectionist policies adopted by the United States in the late 1970s. “During the 1980s Japanese automakers began ‘voluntarily’ restricting exports to the United States to avoid even harsher measures from Congress. Because the supply of Japanese cars was limited, their prices rose, and American manufacturers were able to charge more for their cars. Economists estimated that American consumers lost $350 million as a result in the first three years of the restraints. Even if, at most, 10,000 jobs were ‘saved,’ the American economy could have paid each worker $\$\mathrm{35,000}\text{per}\text{year}$ just to sit home. Instead, fewer consumers could afford cars and those who bought had fewer dollars left to purchase other goods, reducing jobs in other sectors” (Buchholz 1999).

ASCE adopted “Policy Statement 509” as of April 15, 2005. ASCE recognizes offshoring, or globalization, as a reality to their members. Their simple position is that offshoring should not be legislated except as it affects national public safety, health, and welfare.

However, in the closely related issue of stagnating and seemingly declining salaries and status of civil engineers, ASCE adopted “Policy Statement 465,” making the Master’s degree the first level of the civil engineering professional. This is a very complex subject, but economically this would seem to have several impacts on offshoring. First, it would raise the cost of education to be borne by either firms or individuals who would expect their salaries to increase to compensate for the investment. Secondly, it would cause even more engineering work to move offshore, as the cost of engineering would have increased. Thirdly, it will ensure that engineering work is reengineered to the level of technician, and the licensed engineer would be used only in a checking and managerial role. Ultimately, it would have the end result that ASCE is seeking, of limiting engineers and increasing salaries, but to what effect on the engineering career in general? Perhaps this is a desirable end result, but it is no solution for keeping more engineering work in the United States. Nevertheless, it will have the effect of sending more engineering work offshore.

Embracing the trend does not necessarily correlate to liking the trend. Unfortunately, politicians try to tie the two together to bring the appearance that someone or some firm is a villain. Business leaders understand that they have to adjust their firms’ strategies to meet the needs of their customers, as well as adjust to the strategic moves of their competition. Engineering and construction firms could collude, illegally of course, and decide that out of the interest of the U.S. engineer, they will not offshore any engineering. Which firm would be the first to break ranks in that pact? Engineers could decide to form a union and refuse to work for their firms unless their firm used only U.S. engineers. What is the likelihood that either of those scenarios will occur? It is possible, but not likely.

So what are the large engineering firms doing? They have had offshore offices for decades, so offshoring or shifting work has been second nature to them for a long time. None of the large engineering and construction firms are ignoring or combating global outsourcing. Most of them already have foreign offices and are continuing to JV or acquire additional staff in those locations with well-trained engineers that are local to many of the projects they are pursuing. These firms see the need to keep lower-cost engineers out of necessity to compete with other international engineering and construction firms that have taken the same approach (Bryant 2005). This reflects CIBER’s research—firms indicating that one of their primary reasons for outsourcing work to cheaper labor pools are because they are responding to competitors’ strategic movements.

What is different today is that the larger firms are reducing engineering staff in higher-cost regions while smaller firms are now discovering that offshore outsourcing of engineering is economically feasible for them (Bryant 2005).

Depending upon the work that is offshored, the culture of an industry, of a company, and of customers can have a significant impact on the selection of an offshore strategy. Offshore locations have many different variations and attributes in culture and capability. Locations that have been in favor, such as India, are now being passed over for locations like the Philippines, China, Indonesia, and Russia. Some interesting reports from companies about different locations include:

The list of lessons learned that was discussed at a CIBER workshop in mid-September 2005 was quite lengthy. This shortened version comes directly from the workshop and from companies with significant offshoring experience:

Global outsourcing has both positive and negative effects on the U.S. industry, such as highlighting blind spots in engineering education and job destruction.

One firm’s CEO described their struggle in moving to an international model with engineering in multiple locations. This statement summed up his frustration: “People in our industry may have mastered fluid mechanics, but not the King’s English.” He understands that the demands on engineers are much different today than thirty years ago. Engineers today have to be not only competent technically, but must be capable leaders if they want to advance in their careers. As firms become more international, either with branch offices or through outsourcing, those same engineers must understand complex, multicultural team dynamics, including communication styles and attitudes toward deadlines, hierarchy, and accuracy. This firm had to create training programs from scratch and weed out a number of unsuitable candidates to finally reach their goals (Bryant 2005).

Unfortunately, this CEO’s opinion of the typical engineer is widespread. Engineers today tend to be stereotyped as narrow-minded, inflexible, and uncultured. However, a narrow technical focus emphasized through schooling has squeezed out some important aspects of the engineer in society, which used to be that of an influencer and socially aware community leader. One CEO (and P.E.) of a mid-sized engineering firm expressed his opinion at an American Council of Engineering Companies (ACEC) CEO conference. He said, very matter of fact, that engineers today are completely unqualified to run a business.

Is it possible that offshore outsourcing is actually creating more engineering jobs in the United States? This effect has not been studied specifically, but was claimed by at least one large engineering and construction firm. This firm has been able to capture more contracts overseas since they have capability spread around the globe. The workload has shifted so that their U.S. engineers are being sent work by the foreign offices. Their core market in the U.S. has been slowly eroding, but their expertise is sought in international markets. They believe that having offshore engineering capability has actually increased their U.S. workload more than if they were trying to perform all their engineering with U.S.-based engineers. This might hold true for the larger firms in particular circumstances, but it has yet to be proven that this is widespread among firms that are globally outsourcing.

Concerns have been expressed that with the loss of engineering jobs, there is a hollowing-out effect of technical capability and future management capability. The argument follows that without the experience of drawing and digging into the minutiae of engineering design, future engineers will not be able to develop sufficient skills to lead engineering efforts (Bryant 2005). Perhaps it just changes the location where they learn those skills? It could also be that the U.S. engineer’s loss of focus in the engineering details and refocusing on the management of people is a more profitable use of time to both the individual and the firm than detailed engineering. That would fit more correctly with nineteenth-century economist David Ricardo’s “comparative advantage” argument, in that countries, firms, and individuals should do work that causes them to give up the least (Buchholz 1999).

An effect that is arguably negative for the domestic engineering industry is that the offshore engineering services will inevitably move up the economic value chain. What begins as an outsourced service to translate drawings from 2D to 3D might become a service to develop 3D-detailed drawings and eventually to performing designs in 3D. This value chain climb has occurred in the manufacturing engineering world. General Motors opened an engineering center in Mexico a number of years ago. The engineering center’s early work was in component parts and supporting their American counterparts. Over the course of ten years, the engineering center kept increasing capabilities and was eventually allowed to undertake the design of its first complete vehicle. The lesson here is that migration of engineering centers up the value chain is inevitable, especially where skill increases are coupled with a continued cost advantage (Adams 2005).

There has been a dearth of great civil engineering entrepreneurs, like Gustave Eiffel and John Roebling, in the last century. In fact, if Eiffel were alive today, he would probably be marginalized for his outlandish ideas. Imagine building a three-hundred-meter-high structure based on aqueduct technology that you fabricate in sections away from the jobsite and erect in sequence, built within two years. It was an absolutely ridiculous idea in 1887.

Global outsourcing is bringing to the forefront the need to develop skills in engineering graduates that reach beyond the technical skills. Despite falling engineering student numbers, fields outside of engineering recognize engineering graduates as being some of the brightest and most trainable students. Fields such as banking, finance, and economics recognize the engineer’s talents for reasoning through complex problems, rigorous thinking, and attention to detail. Salaries in these fields also have the potential for being significantly more lucrative than engineering. As global outsourcing continues to marginalize engineers in status and salary, fewer engineers will remain in the engineering field (Bryant 2005).

Engineering education needs to adapt to the changed realities of engineering work. One professor of engineering commented: “In regard to the additional Master’s degree being contemplated, if all we do is focus on teaching students more detailed ways of doing the same engineering work, it is not going to meet our objective or that of the country…. [W]e need to teach students to be more effective managers, to create better designs, and to understand those theories of design” (Bryant 2005).

The National Academy of Engineering’s (NAE) book, The Engineer of 2020: Visions of Engineering in the New Century (2004) made five suggestions. Of these five suggestions, two really get to the heart of reengineering the engineer:

Global outsourcing will fill the gap in shortfalls of engineers to address the aging engineering workforce. To compete with the global engineering workforce however, engineers in the United States will have to separate themselves with special skills from the mass of engineers being educated in China and India, not to mention the foreign students in the United States.

Both NAE suggestions talk about technology leadership and innovation adoption—necessary skills in the effort to differentiate the U.S. engineers from the global engineering labor pool. Neither of these talk about developing deeper technical skills—both seem to point to broadening engineers’ understanding of the world around them, making the links between engineering and unrelated fields, and leading others to share in their vision.

Manufacturing jobs began moving offshore in the 1960s. As the United States continues to lose manufacturing jobs at accelerated rates, white-collar professionals are beginning to see their jobs move offshore. White-collar professionals, unlike factory workers, will not have thirty years to make adjustments. Unlike manufacturing jobs, which require significant investments in infrastructure, logistics, and facilities, white-collar service jobs require little more than a computer, software, and an uplink to the Internet.

It is not difficult to draw parallels between the blue-collar manufacturing jobs of the 1970s to engineering jobs today. Just as those days were the peak of earning power of the blue-collar worker, the late 1990s might have been the peak of the engineer. Just as the 1960s and 1970s saw the beginning of the erosion of stable and plentiful jobs for blue-collar workers, the 1990s and 2000s are seeing the erosion of engineering positions. The common factor for both is the technological capability and availability of lower-cost labor in the global labor pool. Just as manufacturing wages have declined in real terms, the wages for engineers just might be following. IEEE has reported that the salaries for electro technology and info technology professionals have recently seen their first drop since 1972 (in nominal terms), and a decrease of 3.68 percent in purchasing power (“Incomes of Technical Professionals” 2004). This is coupled with a 23 percent decline in electrical and electronics engineers employed (“U.S. Technical Employment Falls” 2005).

John Gray, professor of economics at London’s School of Economics, has a broad theory on the movement of goods, capital, and labor. For centuries goods traveled more or less freely across borders and were bartered for other goods. Then came monetary exchanges, where money could be exchanged from one country to the next. The problem that we now face is that labor is not free to move across borders. This causes a problem since goods, services, and money can cross borders with relative freedom. People that have developed specialized skills cannot move freely to follow the jobs. Gray believes that if people were able to move freely across borders, then that would alleviate some of the worker displacement issues countries now face (Gray 1998). As an example, suppose a machinist in Milwaukee loses his job because the company is outsourcing his work to Mexico. If this worker were able to follow his job, he could choose to move to Mexico and take his old job, at the rate of pay in Mexico, which we assume would have a lower cost of living, and perhaps a lower standard of living. The issue this does not address directly is the willingness of people to move every decade or even to another country to follow their jobs, which leads to a separate discussion of social decline from weakened family ties and community networks (Gray 1998).

An example of Gray’s theories about the movement of labor, money, and jobs can be seen in practice. U.S. firms are hiring foreign students (from India, China, etc.) at U.S. colleges and having them return to their homelands to work for the U.S.-based firm. This provides the U.S. firm with a college-educated “local” employee that is willing to accept a lower salary since the cost of living is lower (Brown 2005).

The writing is on the wall that engineers have now joined the ranks of the global labor pool, much as factory workers did twenty to thirty years ago. Engineering jobs will not disappear overnight, just as manufacturing jobs have not disappeared despite three decades of competitive pressures. What will result is a stagnation or decline in salaries and a change in the work itself. The more convenient and frequent outsourcing becomes, and with the United States having a higher wage than most countries, U.S. wages will inevitably follow this path.

As Buchholz (1999) indicates, “Ricardo…showed that people and countries should specialize in whatever leads them to give up the least. This is their ‘comparative advantage.’ The sacrifice they make in not producing a good is their opportunity cost. Thus, specialization is determined by whoever has the lower opportunity cost” (not by specializing in what they are most efficient at performing). An example of this is an attorney that can out type his assistant. The attorney should not split time between practicing law and typing; he should spend his time lawyering, as that leaves him giving up the least potential earnings.

U.S. firms will continue to seek survival strategies and respond to competitors’ moves in regard to global outsourcing. Beyond simply responding to lower cost structures, one option for firms is to find a niche that for one reason or another is inaccessible to lower cost firms. Alternatively, a firm could develop an innovation that leads them to new technology, or creates a new business model completely.

Individuals will also need to develop survival strategies, which may or may not be aligned with their firms. For example, a firm might decide to outsource some drafting to Brazil, which might be a good reason for an employee to learn basic Portuguese and take a vacation in Rio de Janeiro. A continuously evolving career plan will serve an engineer well in the next decades. Career planning for engineers will likely increase during the next decade as engineers compete in a global labor pool.

Individuals and firms are capable of finding market niches and there will inevitably be new jobs and firms created by the outsourcing trends. As the offshore engineering centers grow and thrive, they will take on more complex tasks. If their cost advantages are maintained, then more core engineering work will shift to them. The need for solid technical engineers will decline and give rise to the need for managers with some technical expertise. Constant monitoring of the business side of engineering and remaining flexible enough to develop differentiating marketable skills are the keys to survival. Without any differentiating skills, wages will migrate toward the global average, as basic engineering work becomes a commodity.

Although the trend of global outsourcing cannot be stopped, the effects can be minimized through strategic changes. Firms and individuals can determine their strategic response to these trends while maintaining enough flexibility to alter it as the landscape shifts.

The questions raised by global outsourcing are best examined through the lens of economics. Economics, unlike engineering, is not a science of precise laws, or even consistent laws. Governments always face political pressures to take measures that can ruin good economies. Free international trade hurts some domestic producers. Low inflation hurts borrowers. Falling interest rates hurt bond buyers. Technological innovation hurts some workers and helps others. Taxes on pollution hurt corporations, but pollution hurts ecosystems (Buchholz 1999). Finding a balance of these competing needs is an extremely complex issue made even more sensitive because it impacts peoples’ livelihoods.

The global outsourcing trend appears to be accelerating and engineers are beginning to feel the effects in available work and salaries. As shown by the CIBER and Archstone Consulting surveys (“Offshoring survey” 2004; “1st Bi-annual offshore survey results” 2005) engineering and research are the next major frontiers for global outsourcing. This is already underway at larger manufacturing firms. Engineering firms and individuals will need to make essential strategic adjustments for the future, and should seek an appropriate government response.

Following are recommendations from this initial investigation into the global outsourcing of engineering: