Making sense of outsourcing and offshoring

COMMENTARY--From all the ballyhoo in the media--and the United States Congress--you could be forgiven for thinking outsourcing is about to become the ruination of the Western world, with all the jobs heading to India and China. The reality is we have been outsourcing almost everything and anything for a very long time. Even before the industrial revolution, back to biblical times, countries had unique capabilities in the production of silks, spices, foods and artifacts.

It is called free trade. Ultimately it leads to globalization--free trade + outsourcing = globalization--which in turn leads to greater spread of wealth, political stability and better living standards.

Outsourcing is really about people doing what they do best, becoming specialized, hyper-productive and achieving an improved standard of living. Hence the modern company maxim--do what you do best and outsource the rest. And if this works for individual companies then, the logic says, it should apply at a country level too.

Despite the losses in steel production, automotive and white and brown goods manufacturing in the UK and the United States, both nations have grown wealthier by migrating to areas where they are more skilled and productive. In the UK, for example, the focus has been on design, software, services and specialized high-earning high-tech products. The big deal with outsourcing this time around seems to be the migration of software jobs abroad. While it was OK to lose a few thousand call centre jobs, our coveted software writers appear to be another matter altogether.

Why is it happening to software? There is a shortage of good software folks in the UK and the United States–-demand seems to have outstripped supply. At a more fundamental level, software is both immature and tough, and the sector has been limping under pitiful productivity gains for decades.

While hardware productivity at around 80 per cent growth per annum has been sustained for decades, software only sees less than 5 per cent. A net result has been a reduction in the number of hardware jobs as improved design techniques and automation have moved in, while software has bloated to the point where the balloon has burst and a lack of skilled people has been compounded by rapidly rising costs.

At this point there is some good news and some bad news. The economic advantage gained from outsourcing call center jobs is very transient as eventually all competitors do the same and the market equalizes to return to comparative competitive stasis. But these jobs will ultimately go anyway as we can increasingly expect to talk directly to machines and their location is of no economic importance.

Also, new generations of software are being created by machines with no human intervention and may ultimately aspire to the same productivity gains enjoyed by hardware. In the meantime we have no choice: if we want to be competitive and survive we have to join this global outsourcing circus.

What is at threat next? The financial services industry is probably next in line with $350 billion of business at risk of being outsourced in the next four to five years.

Is this all a really big deal? Yes and no. On the one hand, to take a popular location only 3 per cent of India’s GDP ($1,200 billion) is earned through outsourced earnings. On the other, some Western banks have outsourced thousands of jobs before asking the key question: is there a security risk? When Margaret Thatcher closed down the UK coal industry and we had to rely entirely on imports the same security issues arose--can you depend on, and trust, a third party in a distant land?

History would have us abandon all worry. If it were not for the Japanese, their attention to detail and fetish for quality, we would all be driving unreliable and uncomfortable vehicles and it is unlikely we would be enjoying the high quality cameras, radios, TVs, PCs, laptops and so on we now take for granted. And a key outcome has been the rise of the Japanese economy from the devastation of war to First World standard. We might even speculate that the mutual interdependence of such outsourced economies results in a political and economic stability based on a different brand of MAD (Mutually Assured Destruction) from the nuclear kind.

I can think of a couple of extra mechanisms adding their weight to the outsourcing equation that may seem oblique but I think are unavoidable. The West is getting progressively older, while the new industrial forces have very young populations and an abundance of eager talent. China, for example, has around 50 per cent of its population under 25 years of age.

A second cause is associated with the falling standards of education in the West. Scientific, engineering and generally technology-based topics are not valued and the numbers being trained and educated are not matching industrial needs.

In short, hardware and software engineers are in short supply. India, China et al have the converse situation and are ideally situated to deliver good value.

So where is all this going? I think it goes like this: 20 years ago the jobs currently being outsourced didn’t exist. They rapidly came into being as part of the IT revolution but are still at a juvenile stage (or infancy) in their development cycle. Like all jobs they went through a honeymoon period and now have leveled as they become subject to market forces. Just as IT created these new jobs we have to look to new industries to create the next wave. And this is the hard bit.

What exactly will they be?

We (as a species) are being taken out a layer at a time by our own machines as well as overseas cheap labor. I’m placing bets on the following sectors – not in any particular order – for job creation: healthcare, defense, security, education/training, nanotech, biotech, materialstech, sustainable energy and energy generation, transmission and storage, and transportation.

All have massive problems, few solutions and revolutionary technologies. They represent huge opportunities for original thinking, discovery and exploitation to the advantage of everyone and the environment.

Finally, here’s a little recent history, which happens to be a recurrence of the industrial revolution before. During the dot-com boom thousands of Indian and Chinese nationals were recruited into Silicon Valley and other centers across the US and the EU. But when the dot-crash happened, their companies abruptly laid them off without a second thought. Unable to find work they simply drove to the airport and went home to India and China. So these countries suddenly had an influx of well-educated, trained and experienced professionals. Could it be that these are the individuals powering the current outsourcing boom?

Draft typed on BA2227 flying London to Atlanta. Revised later the same day in the bar at the Sheraton Buckhead Hotel on Lenox Road, Atlanta, and dispatched to silicon.com via a free high-speed Wi-Fi service.

biography
Peter Cochrane is a co-founder of ConceptLabs CA, where he acts as a mentor, advisor, consultant and business angel to a wide range of companies. For more about Peter, see: http://www.cochrane.org.uk/. He writes a regular column for silicon.com that is archived here.