Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

Did somebody famous ever say “We won’t know where we are going until we know where we’ve been”? I did a quick Google search and could not come up with this quote being attributed to any person. If somebody did say this, then I’m borrowing the line for this posting. If not, then feel free to use it (but mention my name please). As my regular readers can imagine, I’ve been gone for about 3 weeks simply due to a very busy fourth quarter/year-end close. While scanning the internet recently for interesting and important information to bring to your attention, I stumbled upon a very interesting and thought provoking article in Internetnews.com by Kenneth Corbin entitled The 10 Most Important Social and Digital Media Developments of 2009. As I have stated in the past, I am a bit of a History Buff (What’s a Buff? See definition 2; enthusiastic, yes; knowledgeable, maybe). So I like to know the background of why things are as they are; and so I think it is nice to know what has happened in the past relating to technology in order to get a better understanding of where we may end up in the technological future. Corbin’s article is a gem. It informed me more fully of things I might have heard but should know more about. It reminded me of things that happened and how society dealt with it. It made me laugh (e.g. someone threatened to kill their cat if Miley Cyrus did not reinstate her Twitter account – really). And it made me wonder about the future. Here is a brief synopsis of Corbin’s Top Ten List peppered with my editorial comments. I hope I can do it justice:

#10.       Amazon.com’s Kindle will change the world: I read somewhere that the Invention that changed the world was the printing press. Well move over Gutenberg, the Kindle has arrived. In 2009 Amazon sold more digital books than printed editions. This e-reader will change the world. For an interesting take and a more in-depth analysis see Don Reisinger article entitled The Most Important Tech Product Is the Kindle, Not the iPhone.

#9.          Craigslist Killer: Some med student solicited an escort off of Craigslist and murdered her. The story was sensationalized due to the use of this new technology. As Corbin correctly points out, this story would have not garnered the attention that it did if the escort was solicited from the many personal ads or from the too numerous to mention yellow page advertisements.

#8.          Social Networking Sites Made Money: Facebook and Twitter, both a free service to their customer base of MILLIONS (yes I’m shouting MILLIONS) managed to figure out a way to make money. Facebook does it through advertising and the sale of virtual products; and Twitter did it by licensing the ability to add real-time content to Search Engines Google, Microsoft, and Yahoo.

#7.          Social Media in the Government: Is this a good thing? I don’t know. The Obama Administration seems to think so. They’ve done weekly addresses to the nation on YouTube and hosted online town hall meetings. There are numerous government websites and blogs.

#6.          The slow death of the Newspaper: Is this really happening? Are we really getting more (or most) of our news from the internet? What will the new business model turn out to be? Dare I say, do we need yet another industry bailed out?

#5.          Miley Cyrus deletes Twitter account: I honestly do not understand this phenomenon. Apparently there are millions of fans of all sorts of celebrities and Star Athletes that are interested in knowing and these Celebs/Sport Stars are interested in tweeting what they may be doing most hours of the day. Is this the downfall of our society? Well, it is at least another reason for it. Oh how I long for much calmer days and “Home Tweet Home”.

#4.          Social Web becomes target for hackers: Why do they do it? I don’t know. Some do it for the thrill of the “hack” and some are out to steal our identity. We put too much personal stuff on these social sites. Regulators and privacy advocates have fertile ground for their causes and activities.

#3.          The Twitter revolution in Iran: In June of the last year as Iranian authorities were cracking down on protestors, these same protestors began to twitter their cause, and when the foreign correspondents were thrown out, became the only source of hard data on what was really happening in the country. Corbin reports that the US State Department convinced the people at Twitter to postpone a planned power outage for scheduled maintenance just so they would keep the twitter lines of communication open.

#2.          The growing sense of urgency about information:  It seems that everything is about immediacy. We’ve got to have it real-time. 

And the #1 important issue that materialized last year relating to Social and Digital Media was VIDEO: The web is free and on-demand. How does one derive a business model out of that? TV Everywhere offers paying subscribers the option to watch content on the web. Hulu pulls content from sites, and its owner News Corp is thinking about making it a paid site. So is free TV over the air waves supported by its advertising (i.e. commercials) a thing of the past?

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Paul McDougall reports for Informationweek in their Global CIO Blog that the National Association of Software and Services Companies (“NASSCOM”) predicts the $58.8 billion in India’s outsourcing revenue for the fiscal year ending 2009 will grow to over $225 billion in the next decade. McDougall quote’s Som Mittal, the president of NASSCOM, an association that promotes Indian offshoring, in his article entitled Indian Outsourcing To Increase Fivefold:

“ … the potential for this industry is tremendous and the industry will not be demand constrained”

In order to achieve savings and to stay competitive in the global marketplace, more and more companies are outsourcing their business and technical functions. McDougall confirms in his article that the Obama campaign rhetoric of keeping the existing jobs in the US and preventing jobs from going overseas has not materialized. For further discussion on the Obama campaign rhetoric and the actual affects on outsourcing, see also the following postings in this Blog:

·         No Slowdown in Offshoring for the Foreseeable Future; posted April 20, 2009

·         Obama’s Tax On Outsourcing; posted June 1, 2009

The current trend has tech, financial services, and manufacturing as the core industries making up the bulk of the $58.8 billion in outsourcing revenue. However Mittal suggests that WIPRO, Infosys, and Tata, India’s outsourcing behemoths, foresee healthcare and transportation as the engines for further revenue growth.

With the coming growth an emphasis on infrastructure moves to the forefront. The traditional centers of Hyderabad and Delhi will need to be supplemented by the so-called second-tier centers like Kolkata in West Bengal in order to accommodate the growth.

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Stephanie Overby has written an article for CIO.com entitled “The Truth About Obama’s “Tax on Outsourcing” in an attempt to clear up all the questions that were raised when the President attacked the Tax Code for creating loopholes if a company creates a job overseas. Overby freely admits that she can’t clear up all the mistaken beliefs because the White House may not have been as clear about its objectives as was needed. In addition to identifying the five (5) misconceptions that are circulating, she also provides some necessary definitions of terms which help the reader to better understand the issues and the real targets of any proposed legislation. Those five areas in question are as follows:

        I.            Is “Outsourcing” the same as “Offshoring”?

a.       Outsourcing means contracting to any third party. This could be to a third party within the US.

b.      Offshoring means a NON-US location.

c.       The distinction to be made is: work being done at the US company’s own foreign facility called a “Captive Center”, versus offshore work being done by a third party, in essence offshore outsourcing.

      II.            Will the tax apply to “Offshore Outsourcing”?

a.       This was the point that was not made clear initially by the administration. Overby helps us out and states that the Obama plan will only apply to US companies with “Captive Centers”.

b.      So this will affect the IT Vendors such as IBM Global Services and Accenture AND ALSO Non-IT Vendor companies that maintain a presence abroad.

    III.            Will India’s IT Services Industry suffer the most from the proposed taxation?

a.       No. IT Vendors such as Wipro and Tata will not be affected. The tax is aimed at US Multi-National companies conducting operations in foreign lands.

    IV.            Will this taxation create more US jobs?

a.       Unlikely.

b.      There has been no indication that US companies would lessen their foreign presence due to the tax. In fact “most multi-nationals set up shop overseas to access cheaper labor or new markets”.

c.       Such a tax could cause MORE offshoring to offset any increase in taxation. In fact US IT Vendors may chose to relocate entirely overseas.

      V.            Is this protectionist tax policy certain to pass into law?

a.      Daniel Masur, an outsourcing attorney and partner in the Washington, D.C. office of Mayer Brown states, "It would be viewed by the rest of the world as protectionist and would trigger a wave of retaliatory legislation, and it would be bad for American business."

b.      Masur continues and states, “However, given Congress's propensity in recent months to write major legislation over a weekend and Congress's preoccupation with populist sound bites, such a provision could be buried in the next stimulus or budget bill".

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Orla O’Sullivan reports for Network Computing in an article entitled, Obama Not Impeding Offshoring, TATA Says, that the campaign pledge to slow the flow of work to cheaper labor markets, either by directly employing people abroad or by engaging third-party service providers based outside of the U.S. has not occurred and in fact may be on the upswing. O’Sullivan discussed this matter with one of India’s leading providers of offshoring services, TATA Consultancy Services.

A large portion of TATA’s services are to the financial services industry, and this segment is growing with actual IT Operations taking place as banks and other financial services firms send more and more work offshore. O’Sullivan further reports that back in October of 2008 TATA purchased Citigroup Global Services Limited, Citi’s Indian offshoring services unit providing business process outsourcing. TATA’s next step is to sell its’ banking software products in the US.

As Raymond Strecker, global consulting practice head for TATA North America, describes this current spurt of growth:

“Our infrastructure business is growing the fastest. That is, inside the glass house, or data center: remote server administration, server repair, network monitoring, and various infrastructure services.”

It appears that as banks find the need to cut costs in this current global economic slowdown, that more regulations will just force these institutions to become more creative. If a bank or financial services firm finds it uncomfortable to have operations offshore, there doesn’t seem to be any prohibition from employing onshore service providers who do have operations offshore and thus indirectly reaping the benefits of cost savings.

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Michael Markulec, COO of Lumeta Corporation, writes in CIO Update that the Obama Administration has appointed Melisa Hathaway as Advisor to the President on National Cyber Security. For a more comprehensive review of the appointee and her relationship to the Bush Administration see Siobhan Gorman’s article in the Wall Street Journal, Hathaway to Head Cybersecurity Post. Markulec is all for the newly created position. He points to the disconnect between the federal government and the private sector when it comes to our infrastructure and the necessary control systems in these most important industries. He states the obvious that their connection to the internet leaves us open to a cyber-attack. He also touts Hathaway’s concern that simple hand-held devices can be used to conduct foreign and industrial espionage.

I’m sorry but I just don’t see anything new or any quantum leap towards more effective cyber security from this newly created position. But one only needs to read further and the newness becomes apparent. Markulec predicts, and I agree with him, that new regulations are on the way. He compares the coming new regulations for the IT community and the CIO to the Sarbanes-Oxley legislation aimed at corporate CFO’s. Well, I guess we all know how that went. Do we really need more regulations or do we just need enforcement of the existing laws? If we are using our latest string of financial debacles as our guide, I guess arguments can be made for both sides. Some might say if the Congress didn’t block the creation of regulations for Freddie Mac and Fannie Mae we might not have had the subprime mortgage meltdown. Others might argue if the SEC had only investigated and enforced its own existing regulations the Bernie Madoff Ponzi Scheme would have been discovered much sooner with less devastating financial losses for investors.

I think the Obama Administration may have tipped their hand at what may or may not be coming down the pike as it relates to cyber security, and that I am afraid is more of the same. Gorman reports that James Jones, National Security Advisor, has requested a further study on cyber security. Hathaway is tasked with conducting this 60 day study. And so the end result will be a study that will collect and discuss issues that are apparently known. Will the ends justify the means? Will we have tougher regulations for CIO’s as Markulec predicts, and if we do, will they be enforced and make any difference? That remains to be seen.

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• There has been a plethora of news stories regarding the future of outsourcing and IT jobs. In my research I came across a Blog that is maintained by the Staff at the Ubikwiti website. The Blog entitled Stemming the Outsourcing of IT Jobs cites freelance writer Rachael King for BusinessWeek.com. King reports that speaking to Ohio workers President Barak Obama stated, “We’re not looking to create just any kind of jobs here; we’re looking to create good jobs that pay well and can’t be shipped overseas.” The Blog posting on the Ubikwiti website goes on to make some interesting claims, such as:
• 140,000 more jobs will be moved offshore by 2010 (Hackett Group December 2008 report).
• 25% of all IT jobs at the largest global corporations will be outsourced by 2010.
• The posting then touts some of the spending items in the current stimulus package:
• $20 Billion for health information technology and the building of its infrastructure.
• $6 Billion to improve broadband internet access.
• $11 Billion for modernizing the power grid.

The above statement by Barak Obama and the planned spending as stated above, with the intended purpose of creating jobs here at home that cannot be “shipped overseas”, does not comport very well with his newest appointment to his National Economic Council. David Sirota reports in his Blog Article, More to Promote Outsourcing Than Anyone Else In America, on an Op-Ed piece by Ron Hira, a professor at Rochester Institute of Technology and a progressive.  President Obama has appointed Diana Farrell of McKinsey & Co. to his inner circle of economic advisors. As Hira states, “Farrell's firm made millions of dollars consulting with companies, advising them to accelerate their offshoring.  And she publicly made the rounds to convince policymakers and the public that offshoring was good for them and the country.” She is also the co-author of a study entitled Offshoring: Is it a Win-Win Game?, which Hira claims did more to mislead the American public on the impact of offshoring than any other debate.

The inconsistency of the above has to give one pause. On one hand Obama states he does not want to ship jobs overseas and on the other hand he appoints, arguably, one of the most pro-outsourcing executives in this country to a top economic post. Now we throw into the mix an article in Financial 24 entitled Outsourcing Gets Crimped by Recession and its report of the troubles in India and the outsourcing field is wide open. Financial 24 reports on the convergence of several factors that may bust the Indian market for outsourcing. These factors converging at once are:

·         The global recession – no more needs to be said on this one

·         The Mumbai Terror Attacks of November 2008. This caused great concern regarding India’s ability to provide adequate security, especially for US Companies.

·         The financial scandal of India's fourth-largest outsourcing provider, Satyam. There are many questions whether there is enough regulatory oversight of India-based outsourcing providers.

In light of the serious situation facing the Indian outsourcing market, here is a list of the next emerging outsourcing destinations:

1. Cebu City, Philippines
2. Shanghai, China
3. Beijing, China
4. Ho Chi Minh City, Vietnam
5. Krakow, Poland
6. Kolkata, India
7. Cairo, Egypt
8. Sao Paulo, Brazil,
9. Buenos Aires, Argentina
10. Shenzen, China
11. Hanoi, Vietnam
12. Chandigarh, India
13. Curituba, Brazil
14. Prague, Czech Republic
15. Pasig City, Philippines
16. Dalian, China
17. Coimbatore, India
18. Santiago, Chile
19. Colombo, Sri Lanka
20. Johannesburg, South Africa

"20 emerging outsourcing destinations" by Sriram Vadlamani.

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