Yohannon (yohannon) wrote,

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Outsmarting Oneself Over Outsourcing

About 8 odd years ago I was a part of this team at Apple Computer that was helping our QA team at County Cork, Ireland with getting their documentation in line for ISO certification. I became very intimate with the whole concept of "importing" jobs overseas and all the issues that surround it.

The reasoning is simple enough: Even with startup costs and other overhead, the salaries/benefits of an overseas workforce is cheaper than keeping the work here. As a libertarian I approve, but as someone getting his ass bitten by the more short sighted implementations of this approach, I want to bitch slap anyone who thinks this is some sort of book-keeping "magic" that allows you to make money hand over fist.

You see, there's ALWAYS a catch in any case where it looks too good to be true. Here's the pattern, broken down into simple steps so that even CEO's should be able to follow it:
  • Pick a spot on the globe where the economy is really depressed. This usually third world, with a desperate an eager work force willing to do pretty much anything to make some money. There are several "gotchas" to avoid -- no problems with unrest (places like Haiti or Afghanistan would be BAD ideas), at least the beginnings of a half decent telecommunications infrastructure, and non-restrictive foreign ownership rules or import/export regulations. Back in the early '90's it was some parts of Ireland, like the aforementioned County Cork, which makes a great example of a place that's been through this process already... and clearly illustrates where it will probably end up.
  • The local government is either properly "greased" through contributions to the appropriate places, or outright graft (only complete naifs would discount this as a reality). Some of this money goes to building up the infrastructure and bringing several likely bodies to the US for training. These will become the seeds, along with a constant stream of visiting US heads, that will form the new high-tech work force. Apple did this in cork to create a new manufacturing plant first, and then a European QA department.
  • Here's where the trouble starts: A rising tide floats all boats, so even though the new slew of "trained" workers are still vastly underpaid by US standards, it's still a lot more money doing far less arduous work than the rest of the local population. That begins to put some upward pressure on the local pay scale. This is exacerbated by any additional companies who either join together to leverage each others efforts to educate the local population, or anyone who jumps aboard as the area builds up. This trickles down, providing secondary opportunities for even these who weren't lucky enough to get all that "free" government/corporate training, as all that pay starts to circulate about. Suddenly there's work for artisans, carpenters, weavers, and all the rest. Even lorry drivers are doing better, and the completely unskilled find even their own standard of living is rising.
Now, if you're a myopic US CFO with a pronounced case of anal cranial inversion, you would be thinking that, despite all the start-up costs and ongoing overhead devoted to long distance communication, not to mention the hassle of dealing with a time zone 8 hours away (in this case), you're still saving butt loads of cash. Sure, you take a bit of a PR hit for "exporting" jobs from the US, but in five years it won't matter, because that's when the cost saving makeup for the initial outlay.

Except SURPRISE! It seems that you've created a shortage of skilled workers in a given area. That means they're going to be looking for more money and benefits. And since all whole set of companies have also come into the same area, they can choose to play the field. I'm certain that, if you want to go the Machiavellian route, you could collude with the other US owned businesses of the area to "fix" salaries, but that would just be BEGGING for the local "Norma Rae" to stand up with a sign scrawled with "UNION" in big block letters. You might delay the inevitable, but you will be paying more for your "cheap" labor.

So you find some other likely location and start the whole thing over again... only now you've created a bit of a monster. If you pull out of the first location, you now have TWO sets of PR issues to content with... The new workers will be pissed because you're pulling out, and the original US workers you reamed. Even if you ignore the human element like some cold hearted bastard, they can still turn around with all those skills you helped them to get and form their own company... and compete with you, at least locally. Remember, the locals are now PISSED at you, so they'll buy local with all that cash you helped pump into their economy.

If you don't pull out, you're stuck paying about as much as you would have in the first place in the US.

So having had this actually happen, what do US companies conclude? If you've been paying attention, it isn't to just keep the damn jobs here in the first place.

County Cork was basically a "pilot program" compared to the outsourcing mania that occurred right after the tech bubble burst on '01. People with MBA's and better looked at this same pattern, and decided that the solution was to find a BIGGER, more depressed area to exploit.

Like India.

A few hundred MILLION people to draw on, a much larger surface area to spread out in, and an even more bribe-worthy government structure (gotta love democracy!) seems perfect for the task. However, there were a few MORE gotchas... that whole language problem, for one. Sure, you can teach people to learn english, and even as an extra step it seems minor -- unless you're thinking of moving your phone support operations, which Dell discovered produced some embarrassing issues of it's own (several of their customers really didn't appreciate now being able to understand what the support operator was saying*).

But for a few years it seemed to work out... except that, once again, that "rising tide" effect struck yet again. A recent news story revealed that some programmers in India are making (hold on to your seats, people) 150.00 dollars US an HOUR. That's 300K per year! As the Tech Cynic Blog points out, even the best paid programmer in Silly Ass Valley, at the height of the 'Net Boom, was making maybe 150K a year.

He also points out that having software developed in another country creates a huge intellectual property and security risk, especially if now twice burned CFO's desperately try to make up for throwing even more good money after bad by finding ANOTHER outsourcing target. Current likely locations are Korea, Viet Nam (!), and China (!!!).

This last is especially scary. A company like Apple would be INSANE to have a country like China manufacture Macs or iPods... the temptation for an enterprising group of people to churn out Mac and iPod knock-off's would be too great. So what if they could never legally export them... there are over a BILLION people in China to sell to who otherwise wouldn't be able to afford the "real" thing.

So why would a company risk this? That same billion plus population: Having the worlds single largest market, even as potential, is the number one reason that this country closes one eye and looks the other way every time China does something egregiously obnoxious in terms of human rights. There are CEO's lining up to rim the Chinese Premier's un-wiped ass for access to that market, so if they make local manufacturing and talent a condition of doing business, then it's going to happen... is already happening, for that matter.

So there are two ultimate outcomes:

This pattern continues, which basically means that US based corporations are paying to train the world population, which in turn will produce the companies that compete directly with those same companies, all without any real return... except short term executive bonuses. Thus modern US business becomes a form of lottery, with a few making a lot of money, fewer (middle management) making SOME money, and the US population as a while getting the shaft. If this sounds pessimistic, reflect on what happened in Japan between WWII and today -- from an unskilled workforce and a demolished infrastructure, lots of US guilt money, crappy product that was the butt of jokes, to a technological dominance in some areas that we've simply conceded for all too long. Only our own western prejudice refuses to realize that there was nothing particularly "special" about what the Japanese accomplished, and that the Indians, Chinese, or whomever else we "assist" won't do the same damn thing.

The second outcome is really the ONLY outcome, it's just a matter of when someone decided the cycle must be broken. Some daring CFO realizes that we're screwing ourselves, or that there's nowhere else to exploit move on to... except back to the good ol' US of A.

Only guess what? In the intervening years all that tech talent either found work, or they moved on to other careers. The lack of work meant no one was bothering to train into those positions either. Which means that they'll either be stuck with old farts like myself (and we won't be cheap, folks!) or under-skilled fresh faces that they'll probably have to... that's right... subsidize educationally.

Let's review: They sent tons of money and technology overseas. They've educated the world at our expense. They've created companies that compete directly with themselves. They've created a huge vacuum (hmmm... I wonder if that's the "sucking sound" Perot warned us about all those years ago?) in terms of our own technological worker base. They spend even MORE money just to get back to where they started from. A few individuals may make lots of money, but companies (and it's investors) are screwed long term.

Tell me again where "outsourcing" is a good idea for America?

* The more cynical reader will note that even speaking perfect english wouldn't have helped in this regard for many tech support calls... but I digress.
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