The Changing Face of Offshore Programming

teambpsi writes "BusinesWeek Online has an opt-ed piece on the trend in offshore programming pricing going up, with domestic rates going down. As a contractor, I've seen the downward pressure on contract gigs now to rates lower than what I was charging over five years ago. Dell Computers recently announced that it was bringing its customer service back on-shore, I wonder if this might be the start of some bigger trend -- maybe 'buy american' could be our new battle cry ;)"

Comments

Economics, not dogma

[jmorris42]

Don't expect any success with simply screaming "Buy American". Offer a better value proposition.

You are closer to the customer, not thousands of miles away.

You understand their problem better than some Indian programmer who doesn't truly grok the underlying American business practices being codified into software.

You are operating in their time zone.

etc.

That will win business a lot better than trying to shame a potential customer into paying more just because you are an American.

It will all balance out

[samdaone]

This is keynesian economics at its best. Acutal supply and demand. Now that contractors and programmers in the states are worried that all their jobs will move over seas, they are lowering their prices. Chances are US based companies would rather do business with someone they can get of hold of, and I don't know how the legality of the system works, but you can sue people for breach of contract and such here, I do not know if you can do that with overseas contractors, is it more of a "buyer beware" methodology?

Now you can expect the overseas operation to start lowering their prices or adding more value to their service, and vice versa until it eventually balances out, and once that happens most US based companies would probably prefer to work with someone based locally.

Doctors may not have to worry about this problem of oversea contracting since you still need to see them in person to do the best type of work. Lawyers on the other hand may not have the same benefits :)

Re:It will all balance out

[DAldredge]

Why doesn't freetrade work for the consumer? After all my goverment wants to make it illegal/claims it is currently illegal for consumers to import drugs from canada.

Why is it ok for large companies to benefit from freetrade but wrong for regular people to?

As for your doctor comment, some hospitals are sending xrays/mri scans oversees to be read.

Re:It will all balance out

[The Snowman]

Why is it ok for large companies to benefit from freetrade but wrong for regular people to?

How much time and money do you spend lobbying Congress? I thought so.

As for your doctor comment, some hospitals are sending xrays/mri scans oversees to be read.

Processing of medical records goes overseas too. There was a recent story on Slashdot about a woman in Pakistan basically holding sensitive medical data hostage over a contract dispute. Also, within the last year or two an M.D. in Australia or Hawaii or somewhere operated on a patient in the U.S. with a robotic arm and a fat data pipe. I think that was more proof of concept, but still, they may as well outsource surgery now too. Hire a nurse at a fraction of an M.D.'s salary to oil the robot and turn it off if it goes on a crazy killing spree, and save some money :-)

Re:It will all balance out

[Ezubaric]

I don't think you realize what "Keynesian economics" is.

Also called "Reaganomics," it's when you run up a deficit during times of an economic slump. It encourages the economy to rebound and more quickly get back on its feet. If you balance it out by underspending when the economy is good, you average out to stronger growth (because if you spend too much when the economy is good, you'll overheat).

What you're thinking of is perhaps David Ricardo, who developed the idea of comparative advantage. Even though one country A might be absolutely better at doing everything than country B, country A can't do everything, so it specializes in what it does best (activity 1) and country B do the things that country A does well but not best (activity 2) and trade for can trade activity 2 for activity 1, making everybody better off.

But what you're talking about above is more like assymetrical information, where you don't exactly know the true cost of the product or what the market is willing to bear, so until it's resolved, prices are unstable.

Re:It will all balance out

[michael_cain]

Why doesn't freetrade work for the consumer? After all my goverment wants to make it illegal/claims it is currently illegal for consumers to import drugs from canada.

In many cases it does. Relatively free trade is why you can buy a DVD player for $40. It's why you can buy a variety of relatively fresh produce from Chile at the grocery in January. It's why the Big Three US auto makers had to improve the quality of their products when people discovered that Japanese cars didn't start falling apart after three years. If the US government removed sugar supports and import restrictions, the consumer would be able to buy sugar at half the price they pay today.

Prescription drugs are an interesting situation. In many cases, the drugs sold in Canada are actually manufactured in the US, or in Canada by US companies using the same processes and quality control they use in the US. But in Canada, prices are capped by the government. Much like trade arguments over steel in the past, the drug companies are opposed to anyone, including the end user, being allowed to import a competing good from a country where it is priced below cost. I'm not an advocate of the drug companies, just pointing out that they have an argument of sorts.

Of course, the health care system in the US has far too many aspects that tend to drive up drug prices. Enough people are in the situation where (a) their health care is paid for by someone else (employer insurance, government, etc) and (b) they have the freedom to "shop around" for doctors. Enough people that it is profitable for the drug companies to advertise directly to the consumer: "Is Lipitor right for you? Ask your doctor!" And in too many cases the doctor will prescribe the drug because they know that if they don't, the patient will "take their business" somewhere else. Collectively, US drug companies now spend more on advertising than they do on research.

It is an interesting mental exercise in economics to think about what might happen to drug prices if consumers paid their own bills. If the answer to the question "Is Lipitor right for you?" was, except for the wealthy, answered with "No, it's too bloody expensive, I'll take this cheaper drug that has 80% of the same benefits," would prices go up or down? Keep in mind that in many cases elasticities are non-linear, and total profit can be maximized by selling less at a higher price. Major league baseball discovered this years ago -- total ticket revenue is maximized at prices that leave about 15% of the seats at the ballpark empty.

battle cry?

[Slowping]

maybe 'buy american' could be our new battle cry ;)

Wasn't that Walmart's battle cry for years... until it became convenient for them to forget it in favor of another battle cry that generated yet more money?

Re:battle cry?

[sirinek]

Absolutely. They were ALL ABOUT "Buy American" for years and then when they got big enough, they used their size to crush competition by lowering prices by going to offshore companies.

There's a ton of websites out there chronicaling WalMart's abuses.

A few jobs coming back

[GeckoFood]

Dell Computers recently announced that it was bringing its customer service back on-shore...

Another poster spoke of the specifics of Dell, so I will not touch that. However, Capital One is beginning to bring back [some of the] work it mailed off to the other side of the planet, as they have been losing accounts hand over fist by customers pissed off about not being able to converse with support personnel due to a language gap. Sure, the labor is cheaper, but is it cheap enough to compensate for lost business? Apparently not, in the case of CapOne.

Re:Opposition to outsourcing rooted in racism

[AKAImBatman]

"Who cares if an Indian can do a job better: they are Indian"

Except that they can't. Here in the US, I can keep track of my team and teach them what they need to know. If the work gets outsourced, then all you end up with is a large number of junior level programmer with no direction. It's simply not effective. Then again, neither is hiring 200 programmers for a project.

The real problem is that buisnesses are looking for the sweet spot between quality, productivity and price. It seems counter-intuitive to companies that a smaller team of more experienced programmers will be more effective than a large team of juniors. They think that a senior developer simply costs more, and that they'll still need the same number of developers.

A free market is a global market.

[vkg]

Protectionism is stupid. American manufacturing workers have had to adapt to their jobs moving abroad since the end of World War Two, and it's caused enormous economic hardship here - but given hundreds of millions of people abroad new hope and new life. Sweatshops may suck, but they're better than making a living picking through garbage dumps, and that's often the alternative people face.

In the long run, this is one world, and one market: individuals should be free to trade ideas with anybody they want, and in most cases goods and services too.

Why shouldn't somebody in India, or Taiwan compete with me for my clients? No reason I can think of: it might suck for me, but it's going to be great for them, and probably for my clients too; the competition helps everybody except the losers.

America enjoys it's massive economic and social advantages for two reasons: the huge natural resources of it's land, and the incredible hard work and ingenuity of it's people. I think that asking the Government to step in and interfere with free trade in an otherwise free market (as software is now) simply to keep domestic prices high is exactly what landed us with a moribund and over-subsidized farming system, a largely uncompetitive and second-rate automotive industry and so on.

Repeat after me: government interference in markets, other than to address market failures or personal safety, is bad for the market, and bad for those who buy and sell in it in the long run. We have a history of lobbyists destroying the global competitiveness of their industry: don't become one of those people.

So what does that leave for the domestic programmer? Well, at one end of the spectrum, there's the stuff which is too small to outsource: the transaction costs in specification and organization are too large to make it more efficient to outsource.

And on the other end of the spectrum, there's the stuff which is too important to outsource: areas where people will pay a premium for domestic labor because it has to be done fast, and a risk of misunderstanding or second-rate work makes outsourcing unattractive.

But in the middle? Get used to the pressure, folks, as generations of your forebears have in other industries as the rest of the world began to catch on... First mover advantage only lasts for so long.

Re:A free market is a global market.

[cubicledrone]

Sweatshops may suck, but they're better than making a living picking through garbage dumps, and that's often the alternative people face.

And this is what we should aspire to: the object of an honest day's work is either a sweatshop or a garbage dump.

Now let's all sing the company song...

Re:A free market is a global market.

[TRACK-YOUR-POSITION]

A few things you're forgetting: India and Europe both heavily subsidize health care and education--which are probably the two largest factors in the high cost of labor in the United States. These countries are actually practicing crypto-protectionism--government intervention to reduce to price of exported products with social programs for workers. To blame American workers when foreign governments give their workers unfair advantages is a disgusting lie.

With the massive American trade deficit (which will eventually annihilate our economy, which will make life suck for you whether or not your job goes to India before that happens), one would expect the value of the dollar to fall. But Asian banks have been proping up the value of the dollar by buying United States Treasury bonds, to encourage more exports to America. This is great for Americans who have lots of money and property and don't need to work for a living--it means fantastically cheap products at WalMart. It makes life suck for you if you have to work for a living. Once again, foreign government intervention screwing over American workers. Free trade has nothing to do with free markets!

Not too mention that Americans are expected to compete with workers who are restrained by American laws--no environmental standards in factories, no minimum wage laws, nothing. Why on Earth did we pass these laws if we aren't going to enforce them for all products that can be purchased on American shelves? So even American government policy encourages jobs to go overseas. (No, I'm not suggesting we eliminate the regulations--I just think we should enforce them for all products bought in America.)

So it isn't a free market at all. It's a market in which foreign fiscal and treasury policies are forcing American jobs overseas and American regulations produce an unfair disincentive to build factories here. Basically, every other government says "Screw America!" and the U.S. doesn't give a shit as long as a few key corporations get rich. Repeat after me: Globalism has nothing to do with free markets or capitalism.

The other insanity in your post is that you think workers (you say programmers, but all workers are just as screwed over by anti-market globalism as programers. Michigan is hurting a lot worse than Silicon Valley.) are going to just acquiesce to these changes just because you keep saying the magic words "free market". Repeat after me People need to eat, and will do whatever it takes to ensure they get food and shelter. If you tell people that there is no way for them to meet their needs within the free market, they have no choice but to destroy the free market! Why do you think those lobbyists always succeeded in argiculture and auto manufacture? Because no one cares about maintaining the global competitiveness of jobs that are going overseas anyway. Thank heavens that those lobbyists are always able to shut up fools like you--America would be vastly poorer than we are now if we purchased every last one of our cars and vegetables overseas.

History is clear on this. There is no example of a great empire that maintained growing trade deficits indefinitely. There are many Empires that have fallen because they gave away all of their gold for luxury and consumer goods for the middle class--see Spain and Britain. The Chinese sell us DVD players we throw away next year, and buy industrial capital to make themselves economically stronger indefinitely. If this continues, China will be stronger than the entire Western World--and then, because some American leaders upheld their narrow and simplistic view of Capitalism, we will lose something much more precious--Democracy.

Re:The only battle cry companies heed is "returns!

[The Snowman]

Mind you, I'm as pro-capitalism as they come, so being driven by the battle cry of "returns!" is a good thing, IMHO.

I think capitalism is the best socioeconomic system mankind has come up with yet. But some people get into it a bit too much -- mainly the CEOs at the top who think making ten million per year isn't enough, so they do various things to hurt the people at the bottom of the ladder (cut wages/benefits, outsource, etc).

I like the "survival of the fittest" aspect of capitalism, but I would rather have the citizens survive than a business. Outsourcing is painful, but I think eventually, as the author of one of the articles says, equilibrium will be reached. Hopefully few of us Americans get hurt in the process.

Re:Whinging

[Alan Cox]

I would disagree. The bigger companies do think about such costs. Thats why you get a 25-50% saving when the salary difference is way higher. Similarly they are careful what and how they use very cheap but possibly lower quality resources. So for example who you get for a long distance phone billing problem depends on how much you spend a month.

Places like India are getting more expensive because they are getting way better at doing the jobs well. The experience and infrastructure is now there. Much of the really low grade work now goes elsewhere.

I am not afraid.

[Apoptosis66]

I work for a major company which is now trying to outsource my J2EE programming position to Brazil.

Its almost too funny watching it go so wrong.

Our group has for years fought with the business group over software requirement specs. What we end up building almost always diverges from what they had in there minds. Yes we create software requirement specs with mock up and all that. Yet most of these are in business speak, and can be interpreted in many different ways.

Now they are attempting to outsource to a CMM level 3 development group. The thing is the Brazilians require the software requirement specs to be in precise use cases covering every function that can possibly take place. In fact they will not even start working on a project until this document has been created and signed off on by everyone and their mother.

What has instead happened is the business has no idea how to create software engineering specs. They can't effectively communicate this through the middle management hell that is spread out over 3 countries. The Brazilians effectively sat on their asses for 3 months, and documented the fact that they did. Once they finally wrote something it didn't integrate correctly with all the systems that we have in place in the USA, because there was nothing spelling out the fact in the specs. Now the project is late and everyone is pissed.

Somehow this is better than paying me extra to know the systems, to interpret what business really wants (and sometimes get it wrong), and get things out on time.

In short I am not afraid, in fact I am looking forward to the time the come back to me needing help and I ask for a big fat raise!

You haven't seen racism until you've dealt with...

[vkg]

Indians, Pakistanis or Chinese. Really.

I'm an Indian, and let me tell you, the culture is racist to the core. Hell, even within the race there's the caste system, and don't for a minute believe anybody who tells you that it's dead.

Most cultures are ferociously racists: the only exceptions are places where there are too few people of other races to even notice (some parts of England, say, are pretty chilll) or America, where the fight against racism is a big historical driver.

This is one thing which I think Americans have got right and can teach the world: how to deinstitutionalize and stigmatize racism to the point where basic values change for many, if not most, people.

Seriously: I think that America has an incredibly tolerant and non-racist culture over all. Festering throwbacks excepted.

Re:Whinging

[Lumpy]

I know you are a troll, and I shouldn't feed you but hey, It's 2004....

The smart companies never moved their programming and tech staff from in house, as they knew that the only way to get the best quality was to keep it at home.

We had a few phb's try and convince the CTO and the CFO that moving the entire development staff to an outsourcing firm... they almost suceeded until the old man (read that as the dude that built this company..) that hold's 51% of the stock said, "no way in hell. there is no security, no quality control, and no way for us to completely control the process." he went on about how only fools would trust another company with their secrets and their future.

The old man did this on one of the telecasts in front of the whole company intentionally making the Executive staff and the phb's look foolish for chasing small dollar returns for giving up the stable.

A company with strong leadership that actually looks toward the future sucess does not chase the easy dollar.

I'm not whining, I'm proud to have a leader in the company that isn't as incompetent as the management that thinks like you do.

My outsourcing experience

[Bozdune]

I moved four projects to India with reasonable success. We did not use a lowest-cost provider; instead, we used a company that charges more than Wipro or Infosys, but fields better talent than they do (in fact, they cherry-pick from Wipro and Infosys for new recruits).

Here are my conclusions:

1) We were able to ramp up faster than if we had tried to hire locally.
2) We were able to overcome personnel issues more quickly -- the vendor was able to add higher-powered programmers very quickly when they got into trouble, and "swarm" the problem with bodies. In our case (simple Web apps) it worked, although there are situations in which it obviously would not have worked (mythical man-month, blah blah blah).
3) The quality of the finished product was reasonable. Call it B/B-. Which was OK for us, maybe not good enough for some, but acceptable.

It turns out that if I had hired a much smaller number of local programmers as permanent employees (consultant rates would not have worked) -- very good ones at market prices -- and they had performed up to expectations -- I could probably have brought the same projects in on the same schedule for the same price. I probably would have ended up with a better architecture, and better code.

So maybe it's a wash. Except, I would have had the following problems:

1) Hire/fire. When the work was over, I didn't need the teams any more. With the Indian vendor, I could cut back without worry. With permanent hires, I'd have a serious morale problem.
2) Risk. If my gunslingers ran into a problem, I wouldn't have been able to "throw bodies" at it. My budget wouldn't have allowed for that.
3) Maintenance risk. The Indian teams can be scaled way back, but I could still keep 3 people on the project for continuity. If I scaled back my own teams similarly, I'd only be able to save one job, and if that person quit, I'd be hosed.

So there are a lot of subtle factors that play here. The Business Week guy alludes to them, but doesn't really itemize them well.

The is likely only a short term trend...

[Osrin]

... and it's driven by the declining value of the dollar overseas. Our currency is not going far when you try and spend it beyond our shores at the moment.

We declinded 19% against the Euro during 2003, sadly it is a trend that looks like it will continue for a little while longer.

Once the dollar recovers we will start to see jobs and services outsourced again.

Accents are not the problem

[fm6]

Here's the funny thing about the accent issue: call centers have been outsourcing to India for years. Aside from saving money, 24-7 operations find it useful to have a call center where the time's half a day ahead of the U.S.

So why don't you hear a lot of people complaining that their airline or credit card company customer reps can't talk good American? Because there are plenty of well-educated Indians who speak fluent western English. All they need is a little practice on their idioms and pronunciation, and you can't tell them from a native of Duluth. Not over the phone anyway.

So it's perfectly possible to run an operation out of Bangalore or Dehli without communication problems. And yet you hear all these horror stories. I have a few myself: I subscribe to techwr-l, and we often get lame questions from Indian writers, usually basic grammatical stuff even a American 4th grader or a Slashdot editor would know.

My inference is that the companies driving the offshoring trend aren't satisified with the pay differential between San Jose and Bangalore. So they don't hire people with degrees from India's universities or engineering schools. (Which produce a lot of good people -- I've worked with some of them.) They hire folks whose educational achievements culminated in one of those "learn programming in 2 weeks" schools. Their English is hard to follow, not because of their accents, but because its one of the highly-localized English dialects that Indians use amongst themselves.

Here's another horror story. If you're a tech writer in the San Francisco Bay area, you've noticed a lot of headhunters trying to fill a very strange job in San Ramon. What's in San Ramon? A bunch of engineering outfits that decided that rents in Silicon Valley were too high -- never mind a limited local talent pool, if people want to keep their jobs, they'll commute or move. One of these outfits is the development arm of what used to be Pacific Bell, now a nameless subsidiary of SBC.

You need massive databases to run an RBOC, and this one has fallen way behind on database development. People complain of billing errors and outdated listings. There's a hair salon in San Rafael that can't get SBC to put its Yellow Pages listing in the proper category -- for two years running it's been listed under "Massage". Which sounds funny, until you consider the kind of lowlifes who respond to a massage ad for "Curl Up With Kelly".

So these guys in San Ramon are scrambling to update the software. They need a tech writer who can document their work. Said writer needs to be able to read source code in half a dozen languages, including the venerable Revelation Basic. Oh yes, and the writer has to work for $25/hour.

Well, I have the skills and I need the work. But that's hardly a reasonable wage, especially considering the two-hour commute. (It's a short term contract, so relocation is not practical.) I'd be better off working at the Starbucks down the street.

When I pointed out the absurdity of offering entry-level pay for a job requiring advanced skills, I was told that all the costs were measured against the alternative of moving the whole operation to India. Which is total nonsense. I'm sure there are plenty of Indian operations that could engineer a fancy database from scratch, and do a good job very cheaply. But SBC doesn't even want to spend that much money. They want to continue hacking 20-year-old code running on legacy platforms. Do they think that India is swarming with experts on the PICK database system?

The whole offshoring thing is just the latest development in a nasty long-term trend. Even before the dotcom bubble burst, Wall Street was dominated more and more by numbers dweebs, people who have no understanding of the industries and businesses they're investing in, and have an idiotic obssession with the bottom line. They hate costs more than anything. Even if you're turning a

Not the right explanation

[GCP]

I don't deny the caste consciousness still strongly present in many Indians, but I don't think it's relevant here. We Westerners are exempt from the system. I've worked in India and with Indians in the West, and among the many perplexing cultural differences I've run into, the inclusion of *me* in their caste system was never one of them.

I think that what you encountered was just an individual personality. I've had these experiences with Indians, too (especially bureaucrats who wanted to prove their importance), but I've had similar experiences with people everywhere. I've managed a tech support group in the US and some of my own people acted this way (until I either stopped it or got rid of them.) It wasn't correlated to their skill level either, just to the degree to which they seemed to feel the need to prove to others that they were smarter (which seems to afflict geniuses and idiots in roughly equal proportions.)

They were being polite

[MillionthMonkey]

The Japanese have a very strange concept of politeness. The culture is completely dominated by it. Politeness even complicates the grammar of the language. It's a tool for scrupulously observing the details of social convention, and everyone is expected to play by the many rules. Foreigners in Japan are quickly immobilized by a net of condescending smiles and polite retorts that permit no escape.

I'm not Japanese, so what do I know? Here's my guess. Your friend was probably breaking a rule when he tried to speak Japanese to the people at the train station. He is a guest to the country and they are workers at a train station, which makes them servants. They are definitely at a lower point than he is in whatever social hierarchy determines these things, and so they were clearly expected to speak his native language, in deference. By placing them in a situation where he is speaking a non-native language for their benefit, he is forcing them to be impolite. They were trying to make everything polite and OK again by insisting on English. In fact he committed a grave social error when he forced the old man to admit they did understand his Japanese.

Just a few weeks ago at work a tantrum arrived via fax from a software distributor in Taiwan who had been recently fired by our sales employee in Japan for breach of contract of some sort. It was a copy of an email that the distributor had sent in response, and the guy was so livid he faxed a copy to us in California in an attempt to go over his head. In the first paragraph it says "You, being Japanese, should not have allowed this to happen." I thought that was a very strange remark.