Minnesota employers are increasingly using offshore labor for technology work, and some critics worry the trend could put a crimp in the state's economy as tech workers lose out to lower wages in foreign markets.

The practice of outsourcing information-technology tasks to India and other countries accelerated in recent weeks as Lawson Software and eFunds Corp. announced staff cuts totaling about 150 Minnesota workers. St. Paul based-Lawson said it would shift some work to an Indian company; former eFunds workers said some positions had been moved to Chennai, India.

Also this year, smaller firms such as Analysts International Corp. and the e-learning firm Adayana Inc. have either formed partnerships with or acquired Indian software providers. Target Corp., Best Buy Co. Inc. and, in fact, many Fortune 500 companies have outsourced consulting or business-support services overseas for some time.

Employers say they're forced to pursue lower costs in a global economy. But the moves frustrate U.S. workers and worry some observers who say the trend could have long-lasting effects.

Even some companies that operate in India are concerned. "There are some big policy questions that arise from this," said Ed Booth, CEO of Bloomington-based Integrated Decisions and Systems Inc. (IDeaS), a software firm founded by natives of India that has operated an office in Pune, India, for years. "A lot of these jobs aren't coming back," he said.

It's a familiar scenario for Booth, who in a previous job watched globalization reshape and weaken America's manufacturing sector. "It's the return of the giant sucking sound," he said, referring to Ross Perot's famous warning about jobs draining away to foreign markets. He worries that, even as the economy improves, tech firms will continue building overseas operations rather than rehire laid-off tech workers.

So far, there is little data to support such fears. But the Minnesota Department of Employment and Economic Development recently began a study to gauge the economic effects.

"It's something we're looking pretty hard at," said John Fisher, a department spokesman.

The moves have angered some of the workers who have been let go. "Why are companies allowed to continue to move jobs overseas like this?" asked a Twin Cities software developer whose job was recently eliminated. He spoke on condition of anonymity; his final weeks will be spent training the overseas workers who will replace him.

A 'reality of business'
Employers, meanwhile, say they have little choice. If they don't cut costs by moving technology work offshore, they'll lose out to rivals that do. In a message to employees after the layoff announcement, Lawson CEO said that competitors such Oracle Corp. and PeopleSoft Inc. already use offshore labor.

"This is tough, but it's a reality of business," said Penny Quist, senior vice president at Analysts International. In the spring, the company contracted with a unit of Mumbai, India-based Mastek Ltd., which will help Analysts International complete technology projects for customers at a reduced cost.

Those cost savings can be significant. Indian technology workers can fetch between one-sixth and one-third the wages of a similarly trained U.S. worker. In other markets, such as the Philippines, wages are even lower.

While the quality of overseas work was once a concern, that has decreased in recent years. Isaac Cheifetz, a recruiter for Open Technologies in Minneapolis, said India invested heavily in technical universities over the past decade.

As a result, companies of all sizes are exploring offshore strategies that were once pursued only by the largest businesses. "There are probably dozens of companies locally that are thinking about doing this, simply because everybody else is," said John Fox, vice president of Plymouth-based SWAT Solutions Inc., a software-quality tester. Much of its new business comes from companies that are evaluating software farmed out to India and elsewhere.

Is it worth the risk?
Not everyone is convinced of the benefits of offshore work.

"It's great on a per-hour rate base, but I'm not sure the companies are really getting the payback," said Lisa Steffens, owner of the Steffens Group, a Minneapolis management-consulting firm.

She cited the expense of setting up an offshore presence as well as the testing needed to make sure the software coming back is up to par. "If you had a small, mobile team here, you wouldn't need that extra stuff," she said.

Such considerations have spawned an entire sub-industry of firms assisting businesses in doing technology work abroad. Examples include SWAT Solutions and Minneapolis-based Renodis Inc., which helps companies develop outsourcing strategies.

Quist believes offshore development is worth the effort, though she acknowledged the challenges. "It's not a matter of saying, 'I can take this job overseas and cut my costs in half.' Not everybody is ready to do this."

Analysts International went through a lengthy process of choosing a partner and ensuring that developers on both continents could work well together, she said.

Shailen Gupta, CEO of Renodis, said such caution is warranted. "There are more than 1,000 tech vendors in India, and a lot of companies trip up when choosing a partner," he said.

But the process of global expansion can be fruitful. IDeaS opened its first Indian office in 1999; that division now employs half of the company's 140 employees.

Could vs. should
Despite the potential benefits, some critics maintain that U.S. companies shouldn't be undercutting their nation's economy by shifting jobs abroad.

"It's a dangerous trend," said Steffens, who compared it to the decline of the nation's manufacturing sector. "Now you're displacing the white-collar sector, which has more disposable income.

"Sure, Target will save money by doing offshore IT work, but if workers here can't shop at Target anymore because they've lost their jobs, does it matter?" Target could not be reached for comment.

Stopping the practice may not be feasible, however. Unlike agriculture or manufacturing, there's no history of protectionist policies for the tech-services sector, and trying to impose barriers could inflame trade relations that could hurt other industries.

Others say such efforts aren't needed, arguing that globalization is good for everyone -- Minnesota, the United States and the world. "Innovation is about creative destruction," said Rajiv Tandon, CEO of Adayana, which recently bought an Indian software firm. "As one industry fades, a whole new set of jobs is created." He said Adayana will add one Minnesota job for every two Indian positions it creates.

Cheifetz, too, considers the trend to be broadly positive, arguing that a stronger Indian economy is in U.S. interests. "Would we prefer to have India be more like Pakistan? I'd prefer competing with them on software; at least that gives us something in common."