In defense of outsourcing

COMMENTARY--Few topics are as controversial as outsourcing. Thisis understandable. To state the obvious, jobs are a fundamental part of our ability to lead a happy and productive life.

Unfortunately, jobs exists within the context ofvolatile global markets. The growth of outsourcing isthe result of developing nations reaching a point intheir economic evolution where they have the skills tocompete in higher-skill domains traditionally servedby rich country workers. The same cost advantagesoffered to lower-level manufacturing are now beingbrought up the value chain to software development.

In the United States, a number of congressmen haveproposed bills which would protect American IT workersfrom foreign labor competition. Furthermore, thoughfew are as overtly anti-trade as Dick Gephardt orDennis Kucinich, it is increasingly clear thatDemocratic party contenders for the U.S. presidency viewforeign competition as a potential winning issue in the 2004 race.

I don’t deny that Western IT workers will have to make adjustments to accommodate the new global reality. However, as I explain in this article, outsourcing isnot the jobs catastrophe its opponents make it out tobe. Furthermore, there are a number of practicalreasons to maintain an open market position which have ramifications for the future health of Western economies. In short, like it or not, Western nations need outsourcing.

Don’t overestimate the threat
My first job as a programmer was with PriceWaterhouse. My memory of that time includes afrightening amount of airplane food, as I made weekly round-trip flights to client destinations from my home "base" (at the time, Dallas, Texas).

The reason for this was that Price Waterhouse assistedclients in creating custom software--and this requiredclose interaction with the client. Whole teams ofdevelopers would be flown to the site to gatherrequirements, generate prototypes and write code. Real world custom development is often a trial anderror process, something that works best whendevelopers on-site can respond instantly.

Maintenance work, however, does not require such close interaction since the broad outlines of the application have already been laid out. This development was often performed off-site, therefore, saving the client airfare and housing costs.

Custom software, even under the best conditions, oftenmust contend with "fuzzy" requirements. Likewise,most software is of the ad-hoc variety, and often is "temporary" in that the actual code written has a short life span. This means that most software will need the kind of close client interactions Price Waterhouse provided to its customers. Such interaction can’t occur when the consultants are sitting in an office in Hyderabad.

Furthermore, the people best qualified to work withAmerican or European clients will be other Americansor Europeans, given the shared cultural contextco-nationals share with their fellow citizens. Inother words, most custom development will call uponlocal citizens, because their ingrained "skill" atdealing with local clients cannot be replicated.

Maintenance, however, can be performed off-site,including at offshore locations. This was central tothe arguments made by Rahul Sood and George Gilbert intheir recent article. They noted that one ofthe best way to use outsourced labor is as a place tooffload maintenance tasks, freeing up the domesticlabor force for higher-value new software development.

Even so, this doesn’t mean that domestic IT staffwon’t face jobs pressure. In the long term,however, it pays not to underestimate the power of thesoftware industry to create new jobs.

The rise in demand for software developers in the1990s was the result of the industry’s attempt todigest the changes introduced by the spread of theInternet. Technology continues to advance, however,and it is my opinion that we have only seen the tip ofthe iceberg in terms of the integration of computingpower into our daily lives. I spoke of the softwareopportunities created by the adoption of RFIDtechnology in a previous article, but alsoconsider the advent of smart phone technology, or eventhe growth of wearable processing power (SPOT watchesbeing a good example) to be areas for future growthand jobs.

Technological advances in these and other areas willdrive demand for new categories of software, and thatdemand will pick up any slack that results from theexpansion of the global pool of developers to includecitizens of developing nations.

Lastly, large economies are often their own biggestmarkets. Exports account for 10 percent of GDP in the UnitedStates (which is currently the world’s largesteconomy), compared to 43 percent in South Korea andSwitzerland, 36 percent in New Zealand and 28 percent in France. This position is mostly a function of America’s size,at 300 million people, and its wealth, with a GDP of10 trillion. As China’s 1.3 billion citizens grow in affluence, Chinese companies are bound to find that China is its biggest market.

As Asian economies grow, programmers are going to be too busy serving their own markets to offer much competition for American or European software projects. It is in the interest of Western programmers, therefore, that Asian economies develop as fast as possible.

Company competitiveness matters.
Many who oppose outsourcing offer no alternative meansto make up for the cost savings missed by a refusal to outsource. This matters, because modern companies compete on a global stage. Unless every company in the world decides to forego use of lower-cost software developers, companies that fail to outsource will make themselves less competitive.

Furthermore, consider the importance of softwarewithin modern business. Software is critical to theefficiency of even small companies, irrespective ofindustry. By forcing companies to pay more forInformation Technology solutions, countries make their companies that much weaker.

One of the problems with America’s recent steel tariffs(now removed) was that it benefited 0.5 percent of theeconomy (steel production industries) atthe expense of 13.1 percent (steel consuming industries,such as automobile manufacturing). The cost offorcing companies to pay more for software would beeven greater, as far more industry uses software thanconsumes steel. This leads to a weaker economy thatproduces fewer jobs overall.

In short, preventing companies from outsourcing merely impoverishes the many to benefit the few.

China and India are the markets of thefuture
The United States and Europe have been the largest andmost important markets for the last 100 years. Thatstatus provides tremendous advantages to companiesbased in these regions, as young companies often relyon their local market for business, and residents havespecial knowledge of their home markets which can’t be replicated by a foreigner.

Though the United States and Europe will always beimportant markets, the status of most important willpass to others as 2.3 billion potential consumers(China and India combined) enter the ranks ofdeveloped nations. American and European companiesare tripping over themselves to place a stake in theChinese market, and for good reason. China is alreadya bigger market for personal computers than the UnitedStates, and they have managed this with a populationwhose average per capita GDP is $900 (though inpurchasing power parity terms, the figure is closer to$3900). Imagine how much product can be sold to theChinese when that average merely doubles, as is likelyin less than 10 years?

The people who best understand that market, asdiscussed in a previous section, are those whoactually live there. There is a lot of value,therefore, in employing developers in those markets. Such developers would apply their "special knowledge"of local market conditions to help American andEuropean companies build products that better meet theneeds of Asian consumers.

Likewise, note that foreign software is more expensivein developing countries, both as a percentage of theaverage income (developing world citizens earn less)and due to weaker currencies. By using lower-costworkers, Western companies build products that aremore affordable in developing markets, enabling thesecompanies to grow larger and hire more workers athome.

Local creation of software would help prevent future protectionist tendencies in these important markets. This was one of the motivations behind the decision byJapanese automakers to "outsource" manufacturing tolocations around the United States. China will be asimportant to the health of Western economies asAmerican and European markets are currently to thehealth of the Chinese economy. If Western nations takea "me first" attitude at the height of their economicpower, why should we expect China or India to doanything different when their economies surpass, interms of size, our own?

Rich nations have the chance to shape the future ofeconomic relations by example. If we set a badexample, the economic leaders of the future are likelyto follow it.

Building a globally-competitive workforce
You don’t make a champion runner by limiting with whomhe trains in order to avoid stressing him too much. Similarly, you don’t make a rich nation IT workforcecapable of facing foreign competition head-on byhiding them behind protective barriers.

Programmers in India and China cost less. Closingborders won't make those workers any less competitive,nor change the benefits companies derive fromoutsourcing to such locations.

There are ways for more expensive programmers tojustify their existence, some of which Berlind mentionedin a recent article on the subject. They can move upthe value chain by managing outsourced developmenttasks. They can spend more time in design work, asdesign is something that will always be kept domesticsimply because requirements gathering is a verypeople-oriented task. And as mentioned, there willALWAYS be a demand for local programmers to servicecustom domestic software needs.

What CANNOT change is the reality that exists in Chinaand India. Rich-nation workers MUST face thatreality, however painful the adjustment might prove. Failure to do so now merely harms Western businessesand forces future generations to pay more for ourreluctance to face the pain of transition now.

Remember the "Big Picture"
Bill Joy, a co-founder of Sun Microsystems, generateda lot of controversy when he warned in a Wired magazine article of the dangerous potential posed by nanotechnology, genetic engineering and robotics. We'll be able to change our environment, andourselves, by altering DNA. We will build resourcesmolecule by molecule at practically no cost (so muchfor non-proliferation treaties).

Such power, as Bill Joy noted, can lead to catastropheif used improperly. Given recent events, there seemsto be large numbers of people with an interest inengaging in such improper use. In what kind of world doyou feel safer, one where you have a majority ofpoor and desperate people crushed under totalitarianregimes and aching for a decent share of globalresources, or one where most of the world had decentincomes and democratic governments?

Both South Korea and Taiwan were militarydictatorships until relatively recently. Whatchanged, for the most part, is that people in bothcountries reached a sufficient level of affluence asto have time to pay attention to how they were ruled. No government can long face down the will of itspeople, and nothing boosts the will to be free than togrow accustomed to being free in one’s economic life.

Obviously, outsourcing by itself won’t make or breakthird world development. However, as part of ageneral willingness to trade with developing nations(a willingness which would be undermined by specialprotections for "white collar" IT workers), its partis not inconsiderable. People need to keep an eye onthe bigger picture. Think globally if you truly wantto create a safer future.

biography
John Carroll is a software engineer now living in Geneva, Switzerland. He specializes in the design and development of distributed systems using Java and .Net. He is also the founder of Turtleneck Software.