Indian Wisdom from the Workbenches (Update)
by Cem Basman
IT Outsourcing - two sides of the coin: Vivek Seal, 23, is a technology reporter for Global Services based in New Delhi, India, blogs as a guest at Rogers Cadenhead's Workbench:
I just wanna ask one thing: If some American company invents a machine that can replace 100 laborers working in India, does it mean that the Indian company should not buy that machine which is economical and efficient? Just because the situation is the other way around, there is a such a hue and cry about it -- that we should make a policy to retrain those displaced and provide them employment.
Good point, Vivek. But some Americans didn't see it the same way.
Update: There was too much controversy about Vivek's guest postings. The blog owner Rogers Cadenhead says: "Outsourcing: Not Safe for Work - I've taken Workbench back from Vivek Seal" ... But don't forget: The world is flat, Rogers.
Comments
If the Americans don't get their heads out of the sand quickly, and start focusing more on training their people - especially young people - to do jobs which can't be done in India and China, it won't be long before they are history. The same goes for most European countires too. That's the short comment. The long one is in Thomas Friedman's book The World is Flat, which makes interesting reading.
to do jobs which can't be done in India and China
Which jobs do you mean? The only job you cannot "export" are the "jobs of the last mile". Like the cable guy. Or like serving the customer at the counter of your local McDonalds restaurant.
Cem - that's not true. there's a whole range of jobs that have to be done locally - dentist, hospital staff, divorce lawyers and so on - on the one side. Of course, the internet means that many knowledge jobs can also be exported. Not just the manufacturing jobs.
So it means that we and the Americans also have to focus on innovating - call centers were an innovation that didn't start in India, for example. The iPod wasn't designed in China either. And for that you need a good education. The number of engineering and science graduates in the USA has fallen steadily over the last 25 years and education in Germany is an unfocused muddle being managed at local level. That's wrong if you want to compete with the developing world, where China especially is very focussed on catching up. However, I'm not going to go on any more - you really should try to get a copy of the book I mentioned. Friedman's book was the winner of the Financial Times / Goldman Business Book of the Year and he can explain his ideas much better than I can.
It's a competion between the "first world" and the "third".
When it comes to pricing it is very tough for the US, Japan and Europe to keep up with India, East Europe & Company. Quality of service delivery is almost the same in the offshore and domestic markets. Distance doesn't seem to play any significant role due to the internet and modern cheap aviation. Basic and even specific knowhow is good or even excellent abroad. They have a very large crowd of well-educated and cheap "academic proletariat" who is hungry to show its abilities.
What is now the advantage of the western world? This is my serious question. BTW, albeit the threat from offshore - the US is still the largest outsourcer and for the Europeans the largest offshorer by far. Compare this list of revenues and profits of the top outsourcing companies of the world. But the Indians are coming at lightspeed ...
I agree with you. However, we won't do ourselves any favours by trying to erect hurdles for outsourcing or offshoring (like many of those American commentators want to). We have to compete head-on. That's easy for the jobs that can be done more easily locally, and we have to provide added value in the other areas - by innovating, or providing services and solutions which are better adapted to our local requirements, and by generating business for ourselves in those countries with which we compete. That means have a long-term plan for education and training - and that is exactly what is missing in many western countries.
But I don't think at the moment, that the Indians are the most dangerous competitors. They invested approx 21 billion dollars in 2003 in new infrastructure (3.5% of GDP), and the Chinese 150 billion (10,6% GDP). The Indians have the problem that their government still hasn't realised how important infrastructure is (or how embedded they already are in foreign business processes). The Indians have the (English) language advantage, but the Chinese are accelerating even faster than the Indians...
(The current Economist has a short article on infrastructure in India here: http://www.economist.com/displaystory.cfm?story_id=6969858, which is where my figures came from)
I agree with you about the fact that infrastucture developement has not accelerartion but the fact is that the realization has been felt.It would be few months if not few years before the world sees Indians better on this infrastructure front...
Thank you for the link, John. I think also we have to watch China. It seems they are attempting to outrun India in the next 5-10 years.
Kidambi, offshoring application development and even research is easy - but not infrastructure services and system intergration, too. This is a domain where you to be close to your customer. But this is also an area where the margins are a lot thinner than in the application and BPO business.
Maybe it's off topic, reading those comments I was wondering whether is already an example for outsourcing / offshoring the jobs of MBAs. Maybe if there was a danger of loosing their own jobs too, they would use a different set of priorities for outsourcing decisions.
I am not against outsourcing or pro legal barriers, but simply believe many decisions are a bit short sighted.
All you techies, let's invent some cool way to also offshore management and sales jobs ;-). Others like e.g. controlling are already being shifted to what is called shared service centers.
I tend to agree, and have said many times that the way to avoid being outsourced is to not allow yourself to be a commodity.
I give the free market the most credit for being able to produce the best overall economy.
The problem, however, is that the market isn't free. My friends in France and Germany should see the as clearly as anyone. China manipulates its currency against both the Dollar and the Euro to maintain artificially low exchange (and thus manufacture) rates. India, China, and many "Third World" nations do provide the depth and strength of worker's rights and social safety nets provided by the "Old World" (Europe) economies and "New World" (U.S.A.) economies.
To compete solely on price, we would have to allow our companies the power to ignore our health, safety, and tax laws as well as provide subsidies which balance the influence of these manipulations of the exchange rate by China.
These are unacceptable.
Andrew, there are two seperate concepts.
One is to outsource work. In the definition of Wikipedia:
Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation.
This does not mean that work is delegated to foreign countries. And usually it isn't. The other concept is offshoring (see Wikipedia):
Offshoring can be defined as relocation of business processes to another country, especially a country overseas. This includes any business process such as production, manufacturing, or services.
And this doesn't mean that work is always outsourced when offshored. An example for offshoring (without outsourcing) is IBM's recent decision to invest 6 billion USD (2006-2008) in its own facilities in India.
To come to a conclusion: Yes, in both cases wages and cost of labor are essential and critical for the decision of an enterprize to outsource and/or to delegate work to an offshore place.
Just not to mix up those two concepts of "outsourcing" and "offshoring" ...
At the present time, I'm making research and business development on "work" which cannot be outsourced easily and where at least Germany and the local providers have some advantage. The key question would be for me: Where is the future of IT service providers in the old world.
@John Keys: I have ordered "The world is flat" today ... ;)
Cem - I think you won't regret it. I found it most stimulating.
He uses some unusual terminology to aim the book at non-tech readers (For example: "The World is Flat" is his way of describing the reduction in the friction in doing business via the internet). Lots of focus on supply chains and on how the 3rd World companies and governments are using better communications (both internet and roads) to improve their competitiveness.
It's quite a wide ranging book, which also looks at how Al Qaeda is gaining leverage by using the internet - they have a supply chain (of terrorists) too...
Oh - and just one remark on outsourcing / offshoring. About 6-7 years ago I worked for an IBM subsidiary that specialised in outsourcing. We consolidated 3 mainframe computer centers (in the USA, Germany and Singapore) for a customer to IBM's outsourcing computer center in Germany. Since then, the 270-odd highly skilled jobs at that computer center have been offshored to Hungary.
So one thing sometimes leads to the other. Even though the two things are quite different.
Outsourcing / Offshoring -- I won't play word games with anyone. Life is too short.
My point, which I believe to be valid regardless of the choice in words, is that to be unharmed by ([either one]) you must not allow yourself to be a commodity.
The moment you are a commodity, you have nothing to compete with but price.
In a free market, commodities do (and should) regularly get sourced from the lowest bidder.
My other point -- also still valid -- is that the market place in which this competition is taking place on a global scale, is not free. Justifying reduced barriers and a tearing down of protectionism by declaring it free market forces at work is a fallacious argument used by people seeking to lower their costs. The market is not free at all. The market favors a few people in countries willing to allow those people to exploit their most vulnerable workforces.
If the free market is to work, an assessment on a per country basis would need to be made (and credits become traded) based on the economic value of a countries social, legal, human rights. Tariffs would then be justified as a balancing mechanism against the use of cheap, exploitive labor.
Andrew, I agree with the aspect of avoiding commoditisation (if there is such a word :-) That's why I think it is important to innovate and provide services/goods customised for the local markets. Exploit niches.
And in the short term I think you are right that lax labour laws in the third world can cause some pain in the first world. In fact if you compare the tax and legal situation in Ireland and Germany (both in the EU) you can see the same thing there too. The German government hates the Irish taxation subsidies given to businesses that move to Ireland, for example.
Where do you draw the line? Did a command- and regulation-driven economy behind the Iron Curtain work? Do we want a labour market as regulated as in France or Germany? I don't, although I have lived in Germany for over 25 years. I also don't want to work in a Chinese sweatshop producing tee-shirts for the World Cup fans.
I think that as living standards improve in India and China etc., the willingness to be exploited will reduce (compare working conditions in the UK now to those at the time of the industrial revolution, where there was also child labour, long hours etc.). Also, countries like China see advantages to becoming members of the World Trade Organisation and membership to the WTO also brings obligations to respect copyright laws and stop exploitation of child labour.
Let's also not forget that the Third World suffers from our massive protectionism in the agricultural markets, so we are just as bad and the effect here is that we pay inflated prices for tomatoes, bananas, corn, etc.
And what goes up must come down - I don't think that China can keep the Yuan artificially low indefinitely, any more than the US can maintain a massive trade imbalance for ever. The American economy is largely financed by money from the Far East and Europe and if these countries withdraw their investments in US government bonds and shares, the dollar will collapse against those lender's currencies - end of problem about undervalued Yuan. That is starting to happen now as some countries have started to shift their investment focus (slightly) from the USA.
So yes, we do face some threats from the Third World, but at the same time, consumers pay much less now for goods than they did 20 years ago. So I think the bottom line is that each individual is responsible for his/her own career-planning. The idea that you work for one company for life has already disapeared everywhere; the idea of one career or one trade for life is under threat, so it's time to look for one's own niche or local advantage and avoid becoming a commodity at a peronal level. That might involve re-training. Which is why I think western governments need to focus much more on education and training programs for their citizens.
John, you bring interesting points, some of which I can address, others not.
With respect to labor laws and the costs of highly socialized economies vs. the supposedly less socialized US economy -- if you combine taxation with private donation on the income side and you combine governmental and charitable social support on the output side, you'll see that the US actually comes very close to the EU nations in per capita spending on social programs and the safety nets those social programs provide. In the US there is more done privately due to the generic believe that governments do not do things efficiently. Remember, the US is by some definitions a theocracy.
There are differences in labor laws here, primarily impacting small business which accounts for a very high percentage of all business in the US. I cannot compare our occupational safety laws with those of the EU as I don't know the topic well enough, but I know that most EU nations have more days off work per year for most employees than in the US.
Social Medicine costs in the EU and private insurance costs in the US can be said to roughly balance each other in many respects though they have different goals and produce different results at the extremes of both wealth and poverty.
In short, the economics in the EU and the US are much closer than most people give them credit for.
You most interesting point to me is the general idea that it becomes very difficult to "rate" these laws, taxes, and situations in a way that makes it sensible to determine their relative merits. Presumably, each country has the laws and rules that most meet their own definition of "best balance". That doesn't really hold true at the individual level even in first world economies but on a macro level it does. The third world economies however frequently do not as well represent the best interests of their largest population segments however.
Personally, I like the idea of some kind of trading system whereby social benefits and protective laws are assigned some kind of value and can thus be traded. Good luck assigning the values however, and it begs the question of where it stops. Under such a system could a company get credits for having its workers only work 10 hours a week, and would the value of those credits be so high on the market that an India based telemarketing firm would buy them for enough to pay for the outsourced/offshored work to be done there? Does that lead to social benefit inflation or worse -- deflation?
I'm glad its not my job to figure it out. Its so much easier to toss idea in from the gallery.
--Andrew
That's an interesting idea - trading credits depending on the environment in which the work is done. Quite like the idea of trading environmental credits to try to fight pollution.
Well tossed! But now we need the governments to pick it up and run with it. As you say, the negotiation of the details could cause a lot of discussion between the affected parties...
