High-tech Outsourcing

Outsourcing of software development is such a hot button issue in the high-tech industry, but I personally really don’t have any problem with this. My beliefs tend to the socially conscious libertarian sort, so I am predisposed to agree with opinions of economists, who rigorously and intellectually treat this topic but, on the other hand, may (not necessarily) live in gated communities secluded from regular people. Economists almost universally agree on the benefits of globalization, and their support for outsourcing naturally follows from the same principles used of comparative advantages.

There is a vocal army of people directly affected by dislocations, but there are also indirect second order benefits accruing to the general population such as cheaper and more products and services. Since I previously developed software at Microsoft, it’s not hard for me to find a development job; I just choose not to and develop my own software practice. Whether I am looking for a job or creating my own, either way there is little for to empathize with those laid off. But even so, the demand for new software technology is so great that developers shouldn’t remain unemployed for long.

At a personal level, I am developing my own software company, but I could ultimately end up competing with developers from Eastern European and Asian countries. The author of BlogJet, the software that I use for posting blogs, is probably happy to sell his product for a low price in US dollars. He lives in Russia, where the cost of living is a fraction of the States, so he can afford. He’s just one developer among an emerging group of shareware developers from developing countries.

A recent editorial in the newsletter of the Washington Software Association indicated that only four percent of layoffs in Washington state, a major producer of software, was actually linked to outsourcing. The clamor may be disproportionately louder because of widespread perception that most layoffs are caused by outsourcing rather than from normal business cycles. It gets more emotional as the newly laid off claim that "greedy" executives are using the cost savings to fatten their own paychecks, ignoring that it makes more sense for them to pursue positive NPV projects elsewhere in the company. Implicit is the moral argument that executives should do everything to prevent layoffs even curtail their own salaries, even when the structure of the company is inefficient or unsustainable. This argument gets a lot of support in welfare societies like France and China, where economic and technological progress are subservient to concerns to human welfare and money-losing companies are subsidized. These are trade-offs in the short-term, but economic progress can also lead to higher average quality of life over the long term and this occurs with little government intervention, which is why I favor it. A minimal support system is probably also needed (temporary enough not to introduce perverse disincentives) since career disruptions can remove a person as a productive contributor to society and increase poverty, crime and sickness, all of which can also impact economic growth.

Should a company which just launched a successful new product and rushed to build a product support group be forced to continue maintaining that expensive group when it has a chance to reassess its cost structure in the face of declining margins and new competition? First, some attrition may be necessary even without outsourcing, since the cost structure might not be sustainable and call centers may not be a core function of the company. Outsourcing of customer service could lead to more phone lines made available and handled by specialized companies, thereby improving customer service. The money saved from outsourcing could then be shifted to more productive uses such as new development or to lower prices. Under a simple but common microeconomic model, when costs drop, a company can generate greater net revenues by passing on exactly half of the savings to customers in return for higher volume.

Recently, I heard about a prominent Nobel laureate in economics, Paul Samuelson, a strong advocate of globalization. Recently, he sharply changed his tune on outsourcing in his article for the Journal of Economic Perspectives;   Since it appears to be the just one economist arguing against outsourcing, I am not that alarmed, but I am becoming more open-minded. The article was met with rebuttal articles by Arvind Panagariya and others, and some economists view him as a heretic.

Outsourcing opens new possibilities, too. Slashdot had a post from a developer claiming that he was outsourcing his development work to an Indian programmer for a fraction of his salary. Maybe, it was a fabrication, but the post does suggest an appropriate model of thinking in this new age; perhaps we developers, stuck in an earlier mindset, are slow to realize the new arbitrage opportunities available through globalization. The New York Times wrote “Outsourced All the Way” about a growing number of mom and pop operations outsourcing, “braving a host of potential complications and turning to places like Sri Lanka, China, Mexico and Eastern Europe to make clothes, jewelry, trinkets and even software programs.” There are also some Internet sites, such as rentacoder.com and elance.com, where one can hire a developer from other countries to do work. Recently, I pointed to a site www.designoutpost.com in which designers compete to build your logo or a site.

Just my thoughts. Feel free to set me straight.

Comments

[optionsScalper]

Mr. Moise,

I couldn't set you straight if I tried. I'm a moderate Republican and I agree with most of what you say here. Globalization is important. I'm a 41 y.o. U.S. citizen, and see that my generation and the next two or three generations will be affected by globalization. Outsourcing and offshoring are important.

Witness the change in asset-backed securities in the 1980s. Previously, banks and S&L's had few alternatives to manage their loan portfolios. With asset-backed securities, banks now have the ability to decide what part of the portfolio provides the most/least exposure to interest rates or other risks. Bankers can now decide to securitize and resell any portion of the loan portfolio to manage their business. The S&Ls went belly-up in the process, so this example, like outsourcing and offshoring, is not without pain.

Outsourcing provides similar benefits. It provides a necessary tool to senior management to manage the business and decide where to focus. I think it is difficult enough for a business to focus on the things that add value for their customers. Offshoring in today's environments provides for benefits in costs by moving work to pools of labor that provide the best value per unit currency.

Had there not been a global revolution in components in computer hardware, we would not see the benefits of the inexpensive PC machinery of today.

Sahil Malik had a great post recently that described in detail the difficulties of globalization and the impact on the information worker (http://codebetter.com/blogs/sahil.malik/archive/2005/06/19/64812.aspx). One key point was exploitation of labor, i.e. "slave" in his post, because of global economic conditions. It is painful for many in many different ways.

I enjoyed your viewpoint and your facts.

---O

[Dmitry Chestnykh]

OK, I'll raise the price on BlogJet :)

Sincerely, just take a look at successful US software companies that make mass-market products -- most of them don't outsource their work.

Three days ago I passed a degree work on high-tech and IT in Russia. And you know what -- the analysis showed that I just live in a wrong country :) I'd better live in the States. The cost of living in Russia is "an excuse" for the total lack of venture capital, the lack of startups, the lack of infrastructure for new researches, the lack of investing, the lack of "the Silicon Valley culture", the lack of "Economy II" where are all those marketing and business-related stuff. We have programmers, but we don't have businessmen in this field. So we have two choices: 1) become a businessman (that's where this low-cost living helps), and 2) work for a businessman from the States :)

I'm just an example of a single developer who tries to become a businessman and found his market, like, say, Nick Bradbury. And, yes, now I would like to outsource my programming work to others, too :)

Thanks for nice article!

[Dmitry Chestnykh]

Oh, and I forgot to mention that price is just one of the huge number of competitive advantages. BTW, BlogJet is the most expensive solution in its area. But that doesn't stop people from paying for it.

[Wesner Moise]

OptionsScalper, += 40 for agreeing with me.

The primary example I was thinking off was the decline in computer prices over the last decade. Prior to the mid 1990s, a basic computer cost 2 grand and this price stayed fixed although power/$ grew exponentially; now one can be had for less than $400.

[dru]

Outsourcing also has positive moral implications. Why should we have all of the money? Outsourcing is a powerful way to bring poorer countries out of poverty. In China the average wage of a girl under 16 is around $0.48. If it wasn't for the US garment industry she would either not have a job or would be paid less. I am aware that such a low payment is obscene by our standards but their wages are increasing as the large but limited pool of Chinese labor is getting absorbed into manual labor. For what it is worth life is sooo much cheaper in China. You can eat a big meal for $3 US.

[Denis]

... where economic and technological progress are subservient to concerns to human welfare ...

If there were ever a clearer distinction between the left and the right than that statement, I'd like to hear it. Either you believe that economic and technological progress has greatly benefited those lucky enough to be in a country that has such progress or you don't. I would say that the empirical evidence is rather clear.

And yes I understand that there are those who will say the evidence clearly points to one side or the other but, really, isn't the truth a even a little persuasive.