Thursday, May 23, 2024

Dissenting Opinions About Outsourcing

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There have been lots of “studies” on job migration and outsourcing over the past five years that try to position outsourcing as something political: outsourcing creates jobs … outsourcing is the inevitable consequence of globalization … outsourcing will destroy the U.S. labor force. But what’s really going on?

We need to level set for a moment. First, outsourcing is about (1) core competency assessments, the (2) segmentation and distribution of expertise and (3) cost management. Nothing more, nothing less.

Many companies have decided that they no longer want to be in the IT business or the check processing business or even the R&D business. The smart ones have prioritized the tasks they should pursue as their core and decided that they really don’t need to perform whole sets of tasks to remain competitive and profitable. The rise of the IT services industry is testimony to core competency (and other) analyses that companies have performed about what’s core and what’s not.

Expertise is also evolving. Not too many decades ago, the United States owned a huge relative chunk of IT expertise, but over at least the past decade that expertise has become distributed across the globe. This new reality is affecting sourcing decisions on every continent.

Companies also outsource – down the street or across the ocean – to get access to expertise at a good price. If local, regional or national expertise were at hand – and cheap – there would be no offshore outsourcing. But once a company decides about its core competencies and once it identifies the expertise it needs to satisfy its non-core requirements, then it looks for cost-effective expertise. Much of this expertise is local, regional and national, and much if it is global.

The Report

The recently released report on “Globalization and Offshoring of Software” from the ACM argues that outsourcing is “good” – if not inevitable – and, in fact, actually creates more jobs than it eliminates ( In the spirit of full disclosure, I was a member of the study team for the report contributing to the education section of the report.

Let’s look at the report’s major conclusions with my comments in italics.

  • 1. Globalization of, and offshoring within, the software industry are deeply connected and both will continue to grow. Key enablers of this growth are information technology itself, the evolution of work and business processes, education, and national policies.

    Nothing profound here. I would have been happier had this initial finding been contextualized within the larger core competency, expertise segmentation/ distribution and cost management trends discussed above.

  • 2. Both anecdotal evidence and economic theory indicate that offshoring between developed and developing countries can, as a whole, benefit both, but competition is intensifying.

    The first reaction to what is a part-anecdotal and part data-based finding is that we need to segment the nature of the jobs outsourced, in-sourced and co-sourced before we imply that outsourcing is “OK” (because it creates more jobs than it eliminates). The technology food chain is important to assessing the effects of outsourcing.

    Some jobs – at the bottom of the food chain (like legacy systems maintenance programming) – are being outsourced at an accelerating rate. Others – at the top of the food chain (like architecture) – are less likely to be outsourced – at least today. What new jobs are being created as outsourcing increases? Are they at the top or the bottom of the food chain? What do careers and salaries look like for the jobs that remain? I’d also challenge government figures about job creation, loss and trends. Aside from a healthy suspicion all of us should have about government statistics, there is real debate about the accuracy of the BLS (Bureau of Labor Statistics) technology job data and the trends that the BLS suggests will hold into the early twenty first century. Finally, the whole notion of an invisible hand prudently allocating expertise to everyone’s comparative advantage minimizes the problems connected with transition and comparative imbalance.

    While comparative advantage is a fact of economic life, the outcome isn’t always pretty – especially if the parties involved mismanage the trends and opportunities. Does everyone, for example, believe that the U.S. government or U.S. industry will get all this just right? (Before you answer note that the U.S. government recently cut funding in basic research in computer and information science.) Darwin – not politicians or CEOs – tend to dominate discussions about comparative advantage.

  • 3. While offshoring will increase, determining the specifics of this increase is difficult given the current quantity, quality, and objectivity of data available. Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations.

    The sub-text here is truly scary. Basically, the report punts: no one really knows how many jobs might be lost, but there’s optimism that it will all work out fine. If ever there was an argument for better data, closer monitoring and a robust government/industry partnership, this is it. I for one am amazed at the uncertainty and imprecision surrounding all this. If we cannot offer more definitive data, why are we presenting “findings”?

  • 4. Standardized jobs are more easily moved from developed to developing countries than are higher-skill jobs. These standardized jobs were the initial focus of offshoring. Today, global competition in higher-end skills, such as research, is increasing. These trends have implications for individuals, companies, and countries.

    This is also scary – especially given the problems with intellectual property (IP) countries encounter all the time. There are countries that are not playing by the global community’s IP protection rules – so why would companies trust them with their R&D? I agree that the U.S.’s dominance in R&D is “challenged”; actually, I believe that it’s much worse than just “challenged.” If present trends continue, the U.S. will lose its dominance to a set of countries that together will move up the technology food chain and create a variety of hardware, software and communications innovations. This will exacerbate sourcing strategies. The U.S. could find itself outside of the technology food chain altogether.

  • 5. Offshoring magnifies existing risks and creates new and often poorly understood or addressed threats to national security, business property and processes, and individuals’ privacy. While it is unlikely these risks will deter the growth of offshoring, businesses and nations should employ strategies to mitigate them.

    Hard to argue with any of these findings.

  • 6. To stay competitive in a global IT environment and industry, countries must adopt policies that foster innovation. To this end, policies that improve a country’s ability to attract, educate, and retain the best IT talent are critical. Educational policy and investment is at the core.

    The U.S. needs to jump start interest in, and support for, technology-focused education and training. At the present time, the grade I would give U.S. policymakers in this area is an “F” – and that would be a gift. In fact, the U.S. response to the trends discussed here is literally unfathomable. U.S. industry would get a generous “D.” But industry’s motivations here are compromised since they’re always trying to maximize profit, shortsighted as that strategy may be.

    So What Now?

    Time will tell if outsourcing results in more technology jobs; time will tell if the jobs are at the right place in the technology food chain. I am not optimistic about the U.S. government’s ability or will to respond to the challenges that comparative advantage will throw at the industry. The U.S. federal government’s recent track record here – especially in the innovation area – is dismal. The companies that “benefit” from outsourcing on one level or another are conflicted about intentions, investments and strategies.

    U.S. public companies – ever driven by quarterly pressure to achieve results – are especially conflicted – and therefore only mediocre partners in outsourcing management or optimization. I am also worried about the educational system’s ability to stay current, foster innovation or provide leadership. A case in point: what has academia done about the huge declines in computer science and management information systems majors at the undergraduate level?

    A final comment: I am not sure at all about the ACM’s task force’s general conclusion about job net gains, not because there may or may not be job gains (the data is way too fuzzy to predict anything definitive), but the task force’s generally optimistic attitude about outsourcing trends is confusing, especially given our inability to predict empirically-definitive outcomes, identify or assess the disruptive effects of increased outsourcing, or government’s horrific track record anticipating and reacting to major shifts in the national or global economy. Or, put another way, the facts really don’t speak for themselves.

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