Report 2004-115 Summary - January 2005

The State's Offshore Contracting: Uncertainty Exists About Its Prevalence and Effects

HIGHLIGHTS

Our review of the extent of the State's offshore contracting revealed the following:

RESULTS IN BRIEF

Offshore contracting (offshoring) replaces services provided domestically with those performed outside the nation's borders. Although part of the U.S. economy for 30 years, the offshoring of jobs has recently expanded from manufacturing into services, especially skilled jobs such as software development. This loss of some well-paid jobs to other countries, the offshoring of food-stamp call centers, and an overseas threat to disclose confidential medical records have sparked public attention and led to proposed legislation restricting the practice. However, there still is a limited understanding of the extent and effects of offshoring, either by the private sector or by government.

Perhaps because offshoring has only recently emerged as a concern, the State has not developed policies and procedures requiring its agencies to track where contracted services are performed or the extent to which these services are performed offshore. Our survey of selected state agencies and campuses (entities) indicates that some state-funded services are being performed offshore, but the prevalence and effects of this practice are difficult to determine. However, from our limited data, the State apparently has been spending little on services performed in foreign countries. We surveyed the 35 state agencies with the largest dollar amount of contracts for certain services and the five University of California campuses with medical centers about their use of offshoring. These entities reported 185 contracts totaling $638.9 million in which at least some portion of the work has possibly been performed offshore, with 55 percent of these contracts being for computer-related services, such as information technology consulting and software development and maintenance. Asked to estimate the dollar amount of these offshored services, participants reported that they did not know the amount for 76 of these contracts. For the remaining 109 contracts, totaling $349 million, participants estimated that only $9.7 million (2.8 percent) of the contracted services were performed offshore. The actual amount may be somewhat higher but is not likely to approach the total of the 185 contracts because survey respondents for the larger contracts estimated that relatively small amounts have been offshored. Survey results also indicate that state entities are inconsistent in including contract provisions related to the subcontracting, delegation, or assignment of contract duties. Some entities do not require notification when contractors subcontract, assign, or delegate services, leaving the entities unaware of who is performing contracted services. Also, even when they receive notification that services have been subcontracted, the entities themselves cannot always determine exactly who is doing the specified work and where it is done.

Three other attempts to measure the extent of offshored government services also produced similarly limited results. The Department of General Services (General Services), a nonprofit corporate research company, and the U.S. Government Accountability Office all tried to estimate the extent of offshoring in either state or federal contracts but found a general lack of comprehensive data on this subject.

State and federal laws currently exist protecting an individual's confidential information, such as medical records, from disclosure. The offshore contracts we reviewed generally contain provisions to protect sensitive and confidential information from disclosure. To ensure that all parties to the contract, including subcontractors, are aware of and comply with the standard terms and conditions, state entities must know who will be performing the contracted services and where those services will be performed.

Finally, proposed legislation designed to place restrictions on and limit offshore contracting could face legal challenges and have unintended economic consequences. Over the last year, the federal government and 40 states, including California, have introduced or enacted legislation related to offshore contracting. These include laws that would prohibit all contracts in which work is performed offshore, provide preferences to state or local vendors, require that state contracts detail and report all services performed offshore, and require disclosure if contractors send sensitive or confidential information offshore. Although California legislators authored a number of bills in the last legislative session dealing with offshoring, the governor signed none into law; however, given the attention this issue is receiving, legislators may consider similar measures in the future. Existing research indicates that state efforts to restrict offshore contracting may violate constitutional provisions allowing the federal government to set uniform policies for the country as a whole in dealing with foreign nations. Also, restricting or limiting offshoring may invite retaliatory trade sanctions against the United States. Before proposing measures to restrict offshoring, policymakers need to consider whether such actions are both legally sound in the United States and capable of withstanding international legal challenges.

RECOMMENDATION

If the Legislature wants information and data on offshoring of state services to be more readily available, it may consider granting General Services the authority to require contractors to disclose, as part of their bid on state work or during performance of the contract, details on any and all portions of the project that subcontractors or employees outside the United States will perform.

AGENCY COMMENTS

Our report contains a recommendation that we direct toward the Legislature. General Services indicates that it will be available to assist the Legislature and other interested parties in evaluating the proposed actions and will fully address any additional direction that is provided related to the control of offshoring.