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-- an economics question (has to do with outsourcing)
an economics question (has to do with outsourcing)
just wondering about this whole outsourcing thing and how its going to affect jobs in the CS industry cos im a CS major...i think the main reason companies continue to outsource jobs is that its a lot cheaper in those countries...but if that really was the reasoning then why didn't we just experience a drop in wages here instead? that way the jobs would stay here even tho the wages would go down...
what am i missing here??
thanks
you better move to India quick, thats where the jobs are at 
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| Originally posted by Yoepus you better move to India quick, thats where the jobs are at |
I was wondering about when this would be mentioned, I frankly am not against it, but wish that some of the people who answer the phones could speak better English. One of the chief outsourcers is Dell Computers. I have a Dell and whenever I call for tech or customer support I am answered by someone who I have to repeat to about five times my problem for calling and then they seem clueless as to what I am speaking about. I swore off Dell for this primary reason, if you are going to outsource make sure that the customer can communicate with the workers in one of your frequently used departments.
Re: an economics question (has to do with outsourcing)
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| Originally posted by AnotherWay83 just wondering about this whole outsourcing thing and how its going to affect jobs in the CS industry cos im a CS major...i think the main reason companies continue to outsource jobs is that its a lot cheaper in those countries...but if that really was the reasoning then why didn't we just experience a drop in wages here instead? that way the jobs would stay here even tho the wages would go down... what am i missing here?? thanks |
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| Originally posted by Yoepus you better move to India quick, thats where the jobs are at |
Re: Re: an economics question (has to do with outsourcing)
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| Originally posted by trunks1022 in econ, opportunity costs play a role in free trade. if it can be done cheaper elsewhere why not. would people here stand for cheaper wages too? naaaaah |
why cutting salaries won't do in the states is because some programmers wont accept those positions (yes some of them still want those 100K jobs). But most importantly, you see a company doesnt only pay your salary, they have to pay all the social advantages like health insurance, dental, paid vacation, overtime hours, bonuses, training, rent in the building where you work, employment insurance, etc etc
it might be crazy to say that, but they could pay yearly as much as your salary to cover those things.
I can give an example about my job, i get a measly 36K, but these guys have paid about 15K only in training and I have worked only for 6 months, plus 4 paid weeks vacations a year, 10 paid days a year when i get sick, etc...
so imagine in India where not only wages are dirt cheap, these things I stated before cost way less or even in some case don't exist in that country.
u've made some great points, ahlamalek. i hadn't thought about all those extras...
Re: Re: Re: an economics question (has to do with outsourcing)
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| Originally posted by AnotherWay83 the immense amount of money thats being saved by these companies is ultimately ending up in the pockets of just a very tiny minority of the population, those at the top like CEOs and others, while a vast number of ppl. are being forced to accept lower standards of living. |
i recently spoke to someone who holds a high position in a company and he actually told me how they were making more money now that they had sent programmer's jobs elsewhere.
but u're probably right, too...i dont really know...
It's a double-edged sword, and the terms "absolute-advantage" and "competitive advantage" are central to the whole issue. The benefit of having products manufactured cheaper elsewhere is that it reduces the total cost of the product, enabling society as a whole to be able to purchase the finished good at a lower price, and thus it is arguable that everyone is benefitting from the outsourcing of labor. The downside is exactly that--jobs at home either get sent away to another country or someone has to take a deep cut in pay to match what the company could save elsewhere. This will always be the case in an industry that produces goods--based on the producers' respective advantages (access to resources, better educated workforce, cheaper labor, etc.)
Like it was said earlier, while you may be willing to work for less, it's highly unlikely that everyone in a given field would be willing to work for less. Some need the higher pay to afford things like their living expenses, school, healthcare, etc. It just may not be feasible for someone to trim their own budget (similarly it's a lot harder to pass a tax increase than a tax cut.)
Unfortunately in the computer science field, and a lot of other fields, the value of intellectual capital is declining as more and more people are able to perform the same programming/technology tasks as you, but at a lower total cost due to their country of origin.
A good solution may be to focus your efforts on finding a job that is more service related as opposed to a job where you are producing a finished good. Service related occupations are usually driven more by the ability of the person performing the service, so if you are good at what you do, you should be able to demand a good price for the service you perform without as much fear that your company may recruit a bunch of Asians or Mexicans to replace you. That said, there is always the risk that there is someone out there who does as good or a better job than you at whatever it is you do.
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| A good solution may be to focus your efforts on finding a job that is more service related as opposed to a job where you are producing a finished good. |
it looks like i wasnt so far off the mark after all. at least one company is already paying programmers the same salaries (well just a lil more, because they get the added advantage of having them on-site so they have more control over what happens) as their counterparts elsewhere...
http://businessweek.com/smallbiz/co...003122_8887.htm
the article says that when they placed the ad in the paper they were flooded by offers even from qualified programmers...i guess programmers will be forced to accept lower wages now that they're faced with the prospect of outsourcing...but 45k a year isnt so bad really
outsourcing is cool, cause its salvery for super cheap. instead of bringing the slaves here, feeding them and providing shelter, we move the jobs and pay them dirt. reminds me of the good days when negros picked our cotton without the rape. right guys? 
joke dudes, dont ban 
Interesting articles:
Peter Drucker Sets Us Straight
The 94-year-old guru says that most people are thinking all wrong about jobs, debt, globalization, and recession.
FORTUNE - Monday, December 29, 2003
By Brent Schlender
You can always count on Peter Drucker to provide a new way of looking at things. After all, he is the man who first recognized that management is a discipline worthy of deep and formal study. Long before anyone else-in the early 1950s, no less-he predicted how computer technology would one day thoroughly transform business. In 1961 he presciently called attention to the rise of Japan as an industrial power, and two decades later he warned of its impending economic stagnation. And we can thank him for coining the concepts of "privatization," "knowledge workers," and "management by objective."
At 94, Drucker is still full of insights that seem to elude others, and he is as opinionated as ever. His interests range from economics to psychology to philosophy to opera to Japanese art; his experiences include consulting with literally hundreds of companies, governments, small businesses, churches, universities, hospitals, arts organizations, and charities. To this day, leaders of all stripes make the pilgrimage to California to learn from the master, who continues to lecture at the management school that bears his name at Claremont Graduate University.
Drucker recently invited FORTUNE editor-at-large Brent Schlender to spend the better part of a day at his home in Claremont. It was two days before his birthday, and the professor was in fine fettle. You could tell, because the first thing he said was that he could certainly improve upon the list of questions and topics submitted beforehand ...
You say that the U.S. economy today suffers from profound misperceptions. Can you give some examples of what you mean?
The structure of the U.S. economy is remarkably different from what everybody thinks. Nobody seems to realize that we import twice or three times as many jobs as we export. I'm talking about the jobs created by foreign companies coming into the U.S. The most obvious are the foreign automobile companies. Siemens alone has 60,000 employees in the U.S. We are exporting low-skill, low-paying jobs but are importing high-skill, high-paying jobs.
But isn't it true that labor costs are much higher in the U.S., and that moving more manufacturing abroad harms our balance of trade?
Wage cost is of primary importance today for very few industries, namely ones where labor costs account for more than 20% of the total cost of the product-like textiles. I don't know what proportion of the cost of a typical American product is attributable to labor, but it's a small and shrinking one. Take automobile parts. Because of my consulting, I happen to know the internal cost structure for one of the world's biggest auto parts makers. They tell me that it is still very much cheaper to produce in this country-or maybe in conjunction with a maquilladora plant along the Texas-Mexico border-than to import, because the parts, while labor-intensive, are also very skill-intensive to design and make. When that's the case, you're still better off producing in this country. So the belief that labor costs are a main reason for producing outside the U.S. is justified for only a very small segment of industry.
Consequently, the industries that are moving jobs out of the U.S. are the more backward industries. The U.S. remains the cheapest place in the world to produce for many of the more advanced industries. I say that not because our wages and salaries are so low. They aren't. But employee benefits are much cheaper than in Europe, and American workers are more flexible. I don't just mean you can move people out of accounting and into engineering here; I mean physically moving people from Chicago to Los Angeles. Don't you dare try that in Germany. They won't go. That's one of the absurd byproducts of their huge and restrictive employee benefits: It's cheaper to allow someone to remain unemployed in the Ruhr than to move him to Stuttgart for a real job. The same thing is true in Japan.
So what I call "invisible" costs are quickly beginning to be more significant than direct labor costs. These are pension costs, benefits and health-care costs, and especially something nobody has yet assessed, which I call "reporting" costs, which are basically associated with complying with regulations, taxation, labor relations requirements, and the like.
What about the widespread impression that the U.S. has an unemployment problem?
Nobody seems to realize that we have the highest proportion of our population in the workforce by far than any other country in the industrialized world. We have the lowest long-term unemployment rate in the West. Most of the unemployment we do have is not the long-term kind, but the short-term kind when people are between jobs for at most a few months. And we have easily the highest availability of good jobs for educated people who want to enter the labor force. We basically have no unemployment for college graduates, as they do in much of Europe. Now they all may not get the job they would like, and they may not get $70,000 a year the first year, but they get employed. And finally, when you think about it, in less than three decades we absorbed all the women who wanted to work into the workforce with no upheaval. It's quite remarkable.
Let's talk about the productivity of the U.S. economy. The numbers measuring productivity keep going up and up, even in this period of sluggish growth.
I don't think you can trust all the productivity improvement figures that we see. But there's no doubt that in manufacturing we're seeing some basic changes in philosophy and in systems that may be comparable to the industrial revolution of the 1920s. The changes are coming, not by computerizing and automating production in the literal sense, but by systematizing production. In the past, the way to increase your productivity was to specialize. Today we design manufacturing and to some extent distribution not so much to maximize it but to optimize it. And the new manufacturing systems build flexibility into the system, which may actually result in a loss of immediate productivity by the way we currently measure it.
You see, these figures measure the productivity when work is being done, but they do not measure the loss of productivity when work cannot be done, such as when you're setting up a plant to make something different. I would suspect that the productivity increases are actually greater than all the figures we see because the new, more flexible manufacturing processes practically eliminate setting-up time, when manufacturing has to cease. In some cases this setting-up time has come down from three hours to four minutes. This does not show up in our productivity figures. Nor do the figures address the value of being able to change the mix of production, because they focus on the pure output of traditional mass-production industries. We don't quite know yet how to measure productivity in some of our newer industries.
How can the productivity of knowledge workers be measured and improved?
Nobody has really looked at productivity in white-collar work in a scientific way. But whenever we do look at it, it is grotesquely unproductive. As you know, most of my work these days is with universities and hospitals and churches, which are three of the biggest knowledge-worker employers, and their productivity is dismal. In part this is because knowledge work by definition is highly specialized, and that means that the utilization of the knowledge worker tends to be very low.
The inefficiency of knowledge workers is partly the legacy of the 19th-century belief that a modern company tries to do everything for itself. Now, thank God, we've discovered outsourcing, but I would also say we don't yet really know how to do outsourcing well. Most look at outsourcing from the point of view of cutting costs, which I think is a delusion. What outsourcing does is greatly improve the quality of the people who still work for you. I believe you should outsource everything for which there is no career track that could lead into senior management. When you outsource to a total-quality-control specialist, he is busy 48 weeks a year working for you and a number of other clients on something he sees as challenging. Whereas a total-quality-control person employed by the company is busy six weeks a year and the rest of the time is writing memoranda and looking for projects. That's why when you outsource you may actually increase costs, but you also get better effectiveness.
Many high-tech CEOs are worried about the higher-education system in the U.S., and especially the fact that there are fewer people studying technology. Does this concern you?
That's perfectly true. But there are two things they forget. We are the only country that has a very significant continuing-education system. This doesn't exist anywhere else. And we are the only country in which it is easy for the younger people to move from one area at work to another. That's impossible in Japan. If you're an accountant, you're an accountant. That's equally impossible in Europe. But here it is easy.
Consequently, our most important educational system in the U.S., unlike Europe, is in the employee's own organization. I'm conscious of that because my European friends, when they move into this country, are overwhelmed by the expectations they face. Look at the career path for many people here. Jeffrey Immelt, the CEO of GE, worked in about half a dozen different categories-in sales, in design, in different product groups. In contrast, the head of Siemens never held a job outside Germany until he became CEO.
What do you make of the recent so-called recession?
What we have been going through these past three years is most definitely not a recession. It's a transition-a transition with a lot of incongruities. Let me tell you a simple incongruity. We are going to have both fewer young people because of our own birth rate, and yet more young people because of immigration. For educated American young people there is no recession. But the immigrants have a mismatch of skills: They are qualified for yesterday's jobs, which are the kinds of jobs that are going away.
This also is especially hard on uneducated urban American blacks. Their great ladder of opportunity since World War II is going away. When Mr. Bush talks about the manufacturing crisis, that's what he's talking about. But it doesn't touch anybody else. And in reality there is no crisis: Manufacturing production in this country has doubled in the past ten years, even as factory employment has gone down. So our productivity improvement has to do with the shift from the old way of manufacturing to the new, more systematized form that happens to require less unskilled labor.
You sound fairly sanguine about the state of the U.S. economy. Do you see any danger signs?
Oh, yes. The biggest problem I see is our total dependence on foreign money to cover our government debt. Never before has a major debtor country owed its debt in its own currency. It is unprecedented in economic history. Japan, by contrast, owes all its foreign debt in dollars. Now if you devalue the dollar, the Japanese economy benefits, because their imports become much cheaper. And the value of their debt goes down also. The individual Japanese companies that invest in dollars would lose, but the overall Japanese economy gains. But we have no experience about what will happen here when we owe so much debt in our own currency and we're forced to devalue the dollar. Sooner or later, we're going to find out.
What's more, there is an enormous amount of surplus capital in the world for which there is no productive investment. The supply greatly exceeds the demand. So there is a very jittery body of excess money that is desperately in need of returns, and it could become panic-prone. We have no economic theory or model for this.
Does the U.S. still set the tone for the world economy?
The dominance of the U.S. is already over. What is emerging is a world economy of blocs represented by NAFTA, the European Union, ASEAN. There's no one center in this world economy. India is becoming a powerhouse very fast. The medical school in New Delhi is now perhaps the best in the world. And the technical graduates of the Institute of Technology in Bangalore are as good as any in the world. Also, India has 150 million people for whom English is their main language. So India is indeed becoming a knowledge center.
In contrast, the greatest weakness of China is its incredibly small proportion of educated people. China has only 1.5 million college students, out of a total population of over 1.3 billion. If they had the American proportion, they'd have 12 million or more in college. Those who are educated are well trained, but there are so few of them. And then there is the enormous undeveloped hinterland with excess rural population. Yes, that means there is enormous manufacturing potential. In China, however, the likelihood of the absorption of rural workers into the cities without upheaval seems very dubious. You don't have that problem in India because they have already done an amazing job of absorbing excess rural population into the cities-its rural population has gone from 90% to 54% without any upheaval.
Everybody says China has 8% growth and India only 3%, but that is a total misconception. We don't really know. I think India's progress is far more impressive than China's.
What is the most important impact of information technology on business?
Information technology forces you to organize your processes more logically. The computer can handle only things to which the answer is yes or no. It cannot handle maybe. It's not the computerization that's important, then; it's the discipline you have to bring to your processes. You have to do your thinking before you computerize it or else the computer simply goes on strike.
This enforced discipline has some disadvantages, because it often forces people to oversimplify. Also, the process of arriving at business decisions isn't always systematic enough to be supported by computers. You have to take the assumptions out of the mind of the decision-maker and put them explicitly into the process, along with a method to check them, and only then can a computer help you manage it. Older executives find it excruciating to have to be that explicit, because they just don't want to be. Besides, as we all know, many decisions are ultimately made by the hydrostatic pressure in the boss's bladder.
Given all these systemic changes in how businesses plan and operate, do you think the role and status of the CEO is changing too?
In every boom there is a tendency toward hero-worship of CEOs. The smart CEOs methodically build a management team around them. But many of those celebrity CEOs who are so highly regarded don't know what a team is. Moreover, the compensation inflation for CEOs has done very real damage to the concept of the management team. In an executive program I have at Claremont, the typical students are general managers of major divisions at very large companies, and they are very well paid. But it's fair to say they are contemptuous of the excessive pay that many of their CEOs receive. J.P. Morgan once said the top manager of a company should have a salary 20 times that of the rank-and-file worker. Today it is more like 400 times that. I'm not talking about the bitter feelings of the people on the plant floor. They're convinced that their bosses are crooks anyway. It's the midlevel management that is incredibly disillusioned. And so the present crisis of the CEO is a serious disaster. Let me again quote J.P. Morgan, who said, "The CEO is just a hired hand." That's what today's CEOs have forgotten.
Looking back on your career, is there anything you wish you had done that you weren't able to do?
Yes, quite a few things. There are many books I could have written that are better than the ones I actually wrote. My best book would have been one titled Managing Ignorance, and I'm very sorry I didn't write it.
I don't regret turning down Henry Luce when he asked me to be foreign editor of Time magazine, and later to be managing editor of FORTUNE. I wanted to keep teaching, and I wanted to do my own writing, which you can't do when you're working for a publication.
I'm also glad that another job I was supposed to have didn't materialize. After teaching at Bennington College, I planned to work with a friend at Columbia University who was starting a department of American studies. Dwight Eisenhower, who was then the president of Columbia, vetoed the funding. He was a cost cutter. I had already been approved by the trustees and already had a contract. All it needed was Eisenhower's signature.
On the day I was told I didn't have the job, I left Columbia and was going into the subway at 116th Street when I ran into another old friend, who taught at New York University. He told me he was going to Columbia to look for some teachers to help him staff a graduate school of management at NYU. Before I even got on the subway, I had signed up. And that is how I became a professor of management. So in retrospect I'm exceedingly glad the job at Columbia fell through.
http://www.fortune.com/fortune/inve...,565912,00.html
The Pitfalls of Outsourcing Programmers
Why Some Software Companies Confuse the Box with the Chocolates
by Michael Bean
[email protected]
View Reader Comments on This Article
Clothing and toys are manufactured overseas. So why not make software there too, where labor is cheaper?
Many U.S. technology companies have outsourced their software development to India. Last year Hewlett-Packard became India's largest multinational IT employer, with more than 10,000 employees.
The enthusiasm for overseas outsourcing, also known as offshoring, mirrors the enthusiasm for Internet companies in the Nineties. In a recent article, Ravi Chiruvolu, a partner at Charter Venture Capital wrote that "Venture Capitalists decided that because of cheap engineering talent in countries like India it would be more cost effective to outsource software development. If Nike could outsource sneaker manufacturing, we could do the same with code." Following similar logic, Oracle has announced it will more than double the number of software engineers it employs in India to 6,000.
Although the offshoring trend has resulted in a net transfer of jobs outside of the US, this article isn't about job losses in the United States. We live in a global economy and people in India deserve jobs as much as people in the United States or anywhere else. It's worrisome when companies are criticized solely because they have hired people overseas.
Offshoring is a mistake when technology companies confuse operational effectiveness and strategy. Operational effectiveness is about working cheaper or faster. Strategy is about the creation of a long-term competitive advantage, which for technology companies is usually the ability to create innovative software.
Outsourcing programmers works when the software developed isn't a key part of the pipeline of innovation for products a company actually sells. For example, when website design or back-office software such as payroll or inventory control is outsourced, that can be good because it improves operational effectiveness.
But writing innovative software cannot be done on an assembly line. It requires hard-to-find development and design skills. Farming out development to legions of programmers overseas will not create a differentiation advantage. When a technology company outsources software development, that company loses its capacity to innovate and its competitive advantage.
Why Some Software Companies are Confusing the Box for the Chocolates
Recently, I bought some chocolates as a gift for some friends from a specialty shop. These chocolates are remarkable. Owner Jean-Marc Gorce makes them by-hand and his small shop has been rated as one of the top ten in the United States. In addition to being a chef, Jean-Marc is also an entrepreneur and an innovator.
Jean-Marc recently started selling his chocolates in gold and blue boxes. I told him I liked the new boxes. He explained that his wife designed the boxes and he found a company in the Philippines that could produce the boxes in the small volume they needed for a good price.
Jean-Marc�s gold and blue boxes are an example of successful outsourcing. Jean-Marc sells chocolates, not boxes. The design and production of chocolates is his core competency. Jean-Marc can outsource box production to improve his operational efficiency without sacrificing his reputation as a maker of superlative chocolates.
While outsourcing boxes improves chocolatier Jean-Marc�s operational effectiveness, he would never consider outsourcing chocolate production because he would lose his core differentiation advantage. Yet, in their enthusiasm for cost savings, several US technology companies have done precisely that-- outsourcing their core technology and key strategic differentiator.
Design and Assembly are Different
This isn�t the first time companies have tried to commoditize software development. In the eighties, Japanese companies unsuccessfully attempted to set up software factories to manufacture programs. They discovered that just throwing a lot of programmers together doesn�t create innovative software.
Unlike software, it makes sense to outsource the manufacture of clothing and toys. Most of the cost of clothing and toy manufacturing is in the assembly, not the design. Those products can still be designed close to corporate headquarters but assembled elsewhere to keep costs low.
Programming is like design and nearly all of the costs of creating software come from writing the program, not the assembly. The assembly stage for software is really just copying the final program onto a disk and enclosing it with a manual in a box.
Harvard Business School's Michael Porter, a world expert on strategy and competitive advantage, nicely summarized the problem with competing solely on operational effectiveness:
"If all you're trying to do is essentially the same thing as your rivals, then it's unlikely that you'll be very successful. It's incredibly arrogant for a company to believe that it can deliver the same sort of product that its rivals do and actually do better for very long. That's especially true today, when the flow of information and capital is incredibly fast. It's extremely dangerous to bet on the incompetence of your competitors -- and that's what you're doing when you're competing on operational effectiveness."
Ultimately, the offshoring fad is bad for companies not because of the short-term programmer layoffs but because technology companies will lose their capacity to innovate. Tech companies that outsource their programming talent will ultimately be replaced by competition, and then everyone will be losing their jobs.
http://www.forio.com/outsourcing.htm
Very interesting. I dont necessarily agree with some of the conclusions but he makes the point I have been making for a long time.
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| Oh, yes. The biggest problem I see is our total dependence on foreign money to cover our government debt. Never before has a major debtor country owed its debt in its own currency. It is unprecedented in economic history. Japan, by contrast, owes all its foreign debt in dollars. Now if you devalue the dollar, the Japanese economy benefits, because their imports become much cheaper. And the value of their debt goes down also. The individual Japanese companies that invest in dollars would lose, but the overall Japanese economy gains. But we have no experience about what will happen here when we owe so much debt in our own currency and we're forced to devalue the dollar. Sooner or later, we're going to find out. |
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| The world economy, as I see it, remains very much in a state of fundamental disequilibrium. A US-centric global growth dynamic has given rise to extraordinary external imbalances around the world. America, the world's unquestioned growth engine, is facing unprecedented imbalances of its own; the national saving rate, current account, Federal budget deficit, and private sector debt ratios are all at historical extremes. And an increasingly powerful global labor arbitrage continues to keep high-wage developed economies mired in jobless recoveries. The result is a unique confluence of tensions that have left the global economy in a state of heightened instability. The venting of those tensions could well be the main event in world financial markets in 2004. |
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| While the global labor arbitrage continues to push costs and pricing lower, it does have its dark side. Significantly, it continues to put pressure on job creation and income generation in the high-wage developed world. Largely as a result, consumers in the high-wage developed world end up defending their lifestyles by drawing increasingly on alternative sources of purchasing power, such as asset-driven wealth effects, increased indebtedness, and tax cuts. In my view, vigorous consumption cannot be sustained in the context of the profound income leakage that stems from the global labor arbitrage. That underscores yet another source of disequilibrium that must be vented. In this instance, the venting appears to be exacerbating the pressures bearing down on an unbalanced world. That's because it has taken the form of heightened trade frictions and growing protectionist risks - developments that only intensify pressures on the dollar and the US bond market. |
| quote: |
| Originally posted by rupert While the global labor arbitrage continues to push costs and pricing lower, it does have its dark side. Significantly, it continues to put pressure on job creation and income generation in the high-wage developed world. Largely as a result, consumers in the high-wage developed world end up defending their lifestyles by drawing increasingly on alternative sources of purchasing power, such as asset-driven wealth effects, increased indebtedness, and tax cuts. In my view, vigorous consumption cannot be sustained in the context of the profound income leakage that stems from the global labor arbitrage. That underscores yet another source of disequilibrium that must be vented. In this instance, the venting appears to be exacerbating the pressures bearing down on an unbalanced world. That's because it has taken the form of heightened trade frictions and growing protectionist risks - developments that only intensify pressures on the dollar and the US bond market. |
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