Outsourcing, freedom and sovereignity

Outsourcing is about finding ways to more efficiently allocate scarce resources, and though the benefits shouldn't be exaggerated (as a recent TPI survey shows), the importance of freedom to pursue those cost savings can't be underestimated.

A recent survey by outsourcing advisory firm TPI found that outsourcing results in less savings than expected. From an article on Information Week:

But while more firms are turning critical IT and business functions like help desk support and customer service over to third parties, who in turn often send the work to subsidiaries in low-cost countries like India or China, they are saving less from the process than is widely believed. In India, programmers and service workers are paid anywhere from 80% to 40% less than their U.S. counterparts. However, the overhead associated with outsourcing appears to be eating up the bulk of those savings. Factoring in transition, legal, advisory and management costs, outsourcing typically lets a company reduce the expense of a particular function by 15%, TPI says.

This doesn't surprise me in the least. Though modern telecommunications makes it possible to use programmers in far away India, it doesn't magically give those Indian programmers the ability to communicate easily with American customers, an understanding of American needs, reduce the risk of sending critical technology off-site, or make them as responsive as a locally-based programmer can be. To bridge that gap requires resources, and that's why no outsourced project will ever generate the cost savings that a naive comparison of developer salaries would lead some to believe.

If you read the Talkbacks to a recent ZDNet article covering the TPI survey, however, you'd think the survey had claimed that the savings were even higher than thought, and that American IT jobs would disappear as "the man" (or as some call them, "the elites") furthers his plans to conquer the world in true Dr. Evil fashion.

Some depict free trade, global markets, and the international agreements that come with them as erosions of our sovereignity. It's worth noting, however, that every dictator hoping to control the lives of his citizens starts by turning the screws on people's economic freedom. Freedom means something, and if you start telling people they aren't free to buy a product from whomever offers them the best price, then you don't really believe in freedom.

No one in America would suggest that it's okay to limit rights to free speech. Why is the freedom to trade with whomever one wants any different? Both freedom of speech and freedom of trade are axiomatic of free societies, and to say that elected officials should have the right to undermine freedom of trade is little different than saying they have the right to undermine freedom of speech (both constitute limitations on freedom). You shouldn't be able to democratically choose to enslave someone else, or worse, yourself. This is why WTO rules (as an example) aren't limiters on sovereignity so much as enshrinements of basic principles of freedom.

Others feel it necessary to exaggerate America's problems in order to make their point. During the Great Depression, the world shut its borders, an act that erased virtually overnight large segements of national GDP and had much to do with the worsening of that global downturn. Americans panicked, and fear led them to do things that rolled back global trade.

Unfortunately, the job is a bit harder today with unemployment rates as low as they are in America (and to those who claim that unemployment rates are based on those who file for unemployment benefits, please educate yourself and find out how they are really calculated). Does America have problems? You betcha. We save too little, carry too much debt (and not because Americans are "just getting by," read Gregg Easterbrook's "The Progress Paradox" for details), have manufacturing industries that are strangled by unions, have governments incapable of spending within its means, persist with policies that are proven failures due to political paralysis, etc, etc, etc.

Outsourcing, however, has nothing to do with these problems, any more than outsouced computers parts (and the lower-cost PCs that come with them) are the reason Americans spend beyond their means. Though it's wise not to overestimate the benefits (as the TPI survey shows), outsourcing is about COST SAVINGS, and healthy and growing companies find the most efficient way to spend their scarce capital. Outsourcing enables companies to get more of the software they need written at a price they can afford, and given the fundamental importance of software in a modern economy (few businesses can manage without it), that matters.

I've talked before why the outsourcing threat isn't the jobs catastrophe its opponents make it out to be. In my opinion, outsourcing is a way for more American programmers to have the time to do the new development tasks they are best suited to do, leaving other tasks whose requirements are better understood - such as maintenance - to be outsourced.

Do Indian programmers imply more competition, requiring American programmers to learn new skills? Of course, particularly if you happen to concentrate in sectors of the software economy ripe for outsourcing. American states, however, had to learn to compete with other states as modern technology (such as the railroad) grew interstate commerce. Nobody in these forums, however, would demand that New York state stop trading with California, or Michigan (home of many car manufacturing plants) with Mississippi.

Remember the lessons of economic history. Poorer parts of the world have, for the most part, experienced positive growth for the last 200 years. Unfortunately, the sustained growth rate over time was several percentage points lower than in the west. Just as higher interest rates on savings accounts result in much higher gains over time, higher growth rates in western nations led them to become much richer than their African counterparts over a 200 year span.

In every case, wealthier nations had strong property rights, the rule of law, and relative freedom to trade with whom they wanted beyond their borders. That shouldn't be surprising, because as I noted, healthy companies are those that find the most efficient way to invest scarce resources - wherever they might find those savings.

Protectionism is not how America became a rich nation. Remember that the next time you lose sight of the forest as you lean against the trunk of that tree.