Nortel Networks Corp. (NYSE/Toronto: NT) has confirmed it's increasing research and development efforts outside the U.S. and Canada, and some are worried that it could cost workers in North America their jobs.

Nortel has a long history of outsourcing development, particularly to India. The company has used contract laboratories there for the past 10 years to help develop switching, wireless, enterprise voice, call center applications, and wireline products. Now the company will be sending even more work overseas, though it won't say exactly how much more.

Meanwhile, sources speculate that this could be mean major shifts in development of some core voice and packet applications, CDMA wireless applications, and testing tools. At least one, who asked not to be named, says the move could hit Nortel workers in facilities based in Richardson, Texas; Calgary, British Columbia; and Ottawa, France, and Brazil.

Nortel officials say fears of a shift in strategy and possible job cuts are overblown.

“There has been a slight increase in India-based R&D,” says Ann Fuller, a spokeswoman for the company. “However, this is not indicative of a change in R&D philosophy or geographic focus, but merely reflective of Nortel Networks' global market presence and customer focus. Ottawa remains our primary R&D facility, supplemented by other strategic centers globally.”

Over the past three years the company has drastically reduced its headcount from roughly 96,000 employees in 2000 to about 36,000 today. The company eliminated about 1,100 jobs in the first half of 2003, according its 10-Q filed with the U.S. Securities and Exchange Commission (SEC).

On Nortel's last earnings call, Frank Dunn, the company’s CEO, told investors that headcount reductions were substantially completed (see Nortel Still Profitable in 2003). But the company is still paying for the downsizing. It still expects to take a $30 million to $40 million charge in the second half of the year for items related to work force reductions, including severance packages, according to the 10-Q.

“We expect headcount to remain stable,” says Tina Warren, another Nortel spokeswoman. “The additional charges are part of the previously announced cuts.”

Still, increasing R&D efforts outside North America strikes a bitter chord with many domestic workers, who fear their jobs could be eliminated and sent overseas.

The trend toward offshore development has been on the rise industrywide. Forrestor Research predicts that about 3.3 million jobs will move to foreign countries over the next 10 years. About 400,000 of these jobs will be in technology, says John McCarthy, group director of research for Forrestor, specializing in offshore activity.

“We’re seeing a lot of activity in industries that are in the most pain,” he says. "Clearly, that would include telecom companies.”

McCarthy adds that companies like Nortel, which have already dabbled in offshore development, will increasingly look to foreign countries as they attempt to cut costs. Factoring in overhead costs associated with doing business overseas, McCarthy says companies that outsource can often save as much as 30 to 40 percent per year on operational costs.

“Companies go through an evolution as they develop their offshore activity,” he says. “As they become more committed, they start doing more sophisticated product development and maintenance.”

Nortel's Fuller says the company R&D efforts, which totaled about $2.2 billion in 2002, will continue to include a combination of core, regional, and contract laboratories throughout the world. Core labs are responsible for the development of core technologies and platforms. These efforts are focused in Europe and North America. Ottawa is the hub for R&D and accounts for almost half of the company’s total R&D investment.

Nortel also says it will continue operating smaller labs, which are either owned or contracted, in various parts of the world, such as Australia, India, Ireland, Russia, Romania, Turkey, and Vietnam. These regional labs largely focus on product adaptations and applications of R&D to address specific customer and market needs and to shorten time to market.

— Marguerite Reardon, Senior Editor, Light Reading