Long Term Effects of Outsourcing

simulate writes "There have been several postings about outsourcing and offshoring in the past few weeks. Is outsourcing just a fad? In Outsourcing Programmers is Bad Strategy for Software Companies author Michael Bean compares offshoring to the enthusiasm for Internet startups in the Nineties. He claims that outsourcing programmers is bad for companies not because of the programmer layoffs, but because technology companies lose their capacity to innovate. Offshoring is a mistake when technology companies confuse operational effectiveness and strategy." I don't think the comparasion to Dot Bombs is entirely accurate - the trend to globalization overall has been going on for decades. Still interesting piece.

Comments

Not always a great idea

[CreamOfWheat]

f you're building an innovative software company, you need to retain your best and brightest programmers internally. Software companies entirely based in India can successfully innovate over the long-term, as can US companies or companies based anywhere else. It's this recent trend of US software companies outsourcing all their development that's bad strategy.

Re:Not always a great idea

[sdcharle]

That's nice, the problem is something like 99% of IT people don't work for innovative software companies. They work for banks or insurance companies or pharmas or telecoms or whatever.

Re:Not always a great idea

[sql*kitten]

banks or insurance companies or pharmas or telecoms or whatever.

You are joking, right? If you knew anything about IT (hint: there's a lot more to it than the web) you would know that finance, pharma, telco etc are in the driving seat as far as advanced IT goes. Why do you think Sun, IBM, Oracle et al are selling the top-end kit to? Any company that can use technology for competitive advantage will drive (i.e. pay for) innovation to happen. Finance and telco created a whole new industry, data warehousing, which forced the development of mass storage, fast networking, massive parallelism. Pharma created a whole new branch of computer science, bioinformatics.

The innovation that happens in the public eye is trivial compared to what happens in corporate cubicle farms and data centers.

The reason Western software is innovative is because it is driven by the needs of Western companies. The reason India doesn't innovate is because (aside from Western companies outsourcing to it) it doesn't have large or complex enough domestic businesses competing with each other to push IT as competitive advantage.

Re:Not always a great idea

[CrazyTalk]

Advanced IT at banks? In my experience (having worked as a consultant for a major bank and as a FTE for a Financial Management company), fianancial insitutions are way behind the curve technologically, because they are by nature very conservative and don't always need the latest and greatest (along with the associated risk). I know one place still running code originally written for Windows 3.1. Why? Because it works.

Re:Not always a great idea

[Shimmer]

You missed the point.

These companies might be innovative, and they might even be creating innovative software, but they are not "software companies", and hence the outsourcing option is a viable one.

The great-grandparent post claimed that software companies (i.e. companies which produce software for profit) cannot outsource. The grandparent post pointed out (rightly) that such companies employ a tiny fraction of all software developers.

Re:Not always a great idea

[pkphilip]

Just something about myself - I am an Indian - I head the technology division at my firm based out of India - I am also the lead programmer.

I have worked in programming jobs for over 9 years now.. both within US as well as many other nations across the world. Right now I am living in India.

All I see in this discussion group are rehashed stereotypes. Let me address these;

Misconception 1 - American programmers are better.
Not necessarily. Indian programmers aren't necessarily better either. The averages are about the same. But there are exceptional programmers in both camps and then there are a lot of duds.

Misconception 2 - Indians are not innovative.
One of the aspects of being in a developing world is that budgets for research and development are always very hard to come by.. But not any more. Indian companies are throwing money at research and development now...Everyone here knows that the service industry for pure outsourcing cannot last for ever.. So there is a desire to innovate and get into new areas.. to innovate as much as possible when money is not a problem. This is not just true of India - look at China, see how fast they are innovating .. in all fields. See the number of headlines on Slashdot about new products under development or new ventures being planned. You didn't see this much before, did you?

I have played a lead role in a very large project for an American publishing company - this project would not have had the slightest chance of even taking off the ground if it weren't for our team.
The American end of the programming team was quite antogonistic when we started - had some really racist remarks thrown my way. But within a month, we had won their confidence and I have had multiple mails from the same people about what wonderful work we had done. One of these projects later went on to win a Java Developer Journal award.

PWC was involved in another part of the same project and there was a desire within the American programmers to have PWC thrown out and have us take their place. NOTE: Not from the management but from the programmers. The only reason this didn't happen was because there was an ex-PWC chap in the management team.

I have worked on other projects as well which were being managed and programmed by American teams - which were floundering. Since we have taken over, these companies now have a product they can sell.

This is not to say that we haven't had failures - we have had our share. But please don't make it seem like we are incompetent idiots who can only obey orders and even then do the job badly.

US Programmers vs Off Shore Programmers

[millahtime]

Are we saying programmers in the US are more innovative than Indian, Russian or other off shore programmers?

Re:US Programmers vs Off Shore Programmers

[mbrinkm]

I agree with your assessment 100% and would like to add that the loss of innovation does not come from the location or the individuals doing the work, but from the lack of incentive for the outsourcing company to provide innovative work. I would assume, because I don't know this to be true and please correct me if I'm wrong, that the majority of the firms that receive outsourcing contracts for programming have more than one client that they program for. Because of this they have little to no incentive to innovate for their clients, especially if they are working for two clients that compete. These companies would have ample incentive to innovate in maximizing the programming abilities of their staff, but not in the programms they create. Now if the corporations didn't outsource, but instead opened a subsidiary or branch locations for the specific purpose of programming, the loss of innovation would not exist because the same inncentives of "rising" up through the ranks or the financial incentives of your company succeding still exist. By opening these branches the company could still see the monetary gains of a cheaper workforce while providing the same incentives for innovation that they currently have.

Yet, there are still significant downsides to "offshoring" divisions of any company, especially programming. One would be the potential of a competitor latching on to this and using it as a "Support Americans" marketing ploy, this worked quite well for the big three auto makers in the 80's, if only short lived. Another would be the long term prospects of your company. Succesful companies are built on hard working employees that prove themselves in the trenches of their respective companies, rising through the ranks to middle and upper management. I don't know of too many companies that survive on exclusively hiring individuals that have no prior experience in their industries. A good mixture of fresh with experienced management is preferrable, in my opinion, but too many of either can be a problem.

That's my 2 cents.

Gasp! Actual insight!

[TopShelf]

The comparison of design/assembly splits between manufacturing and software development provided some useful insight, but it's not like companies don't realize this.

The hard part about realizing the gains from outsourcing is that most firms aren't up to managing such a long-term, strategic relationship in the manner that's required. When the work is done in-house, you can trust that the developers have your company's best interest in mind - when dealing with an outsourcer, their ultimate goal is to extract as much money from you as possible. If done right, it can be worth it, but as we've seen, many firms haven't been up to that challenge.

Re:It'll get worse before it gets better...

[pjwalen]

Dell has recently made the smart move and relocated all their business class call centers back in to the US from India. The bottom line comes from Pleasing customers. Cutting costs is not the only way to generate revenue. I expect to see more companies follow suit, atleast when outsourcing to non-english speaking countries.

Re:Tech Consulting

[sql*kitten]

So his argument isn't good - companies can still keep the design close to home and then outsource the assembly to India or China.

Yes, but in the industry, Accenture is a byword for disaster. Every project they get involved in runs vastly over budget, is late (sometimes years late) and often doesn't even do what it was supposed to in the first place. NIRS2, anyone? Accenture (and the rest of the Big 5, EDS, etc) is a vampire feeding on the clueless... their slick suits sell gargantuan consulting and systems implementation projects to managers who are intimidated by technology. They'd get laughed out of the building if they pitched to the savvy (free tip: if any big consulting firm pitches to you, make it a condition of signing a contract that the people who do the pitch will be working full time on the project. Watch them squirm, because the consultants business model requires that they dump cheap newbies on you to free up the experienced to sell more engagements).

I worked for Andersen Consulting (now Accenture) so I know how those guys do business. I left after two months

Yeah, I used to be a management consultant too, so I know all the tricks :-)

Bad economic security, too.

[FuzzyDaddy]

There's another aspect to this, which is contractual. If you're outsourcing something sensitive or proprietary, or paying for the development of something you don't want a competitor to get for cheap, you write a contract with strict non-disclosure clauses and strong penalties for violating that. Once you leave the US, enforcing these contracts becomes prohibitivly expensive and difficult.

Re:At some point....

[Johnny Mnemonic]

it will only take one piece of protectionist legislation in the US to tumble the whole house of cards

Or for Pakistan to threaten to nuke them again, as they were doing just a few years ago. The first time a deadline is missed, and money is lost, because of instability in the region, I think we'll see lots of this work come back. Businesses don't appreciate uncertainty.

OTOH, if outsourcing becomes entrenched enough for long enough, then it becomes in America's interest to protect their stability with our own military force projection; witness Taiwan, or military protection of oil interests in the Middle East. How long until we turn this cusp I don't know--it has to be a factor of how much of their capital investment tax-paying-and-Congress-lobbying American Corps have to lose, and if the cumulative amount is enough to risk sending US boys to die for.

But that is the final result of India gaining outsourcing dollars--they are liable to become another Taiwan, which means that US boys might well be sent to defend India against China or Pakistan, to protect US Corp's right to unemploy those soldiers when they get home. India must appreciate having another friend in the world, considering China's expansionism and Pakistan's recent threats--so they'll be sure to play this for all it's worth, as soon as US Corps are extended there enough.

My solution.

[Raven42rac]

I saw the proverbial crap hitting the fan and started looking for a job that is "impossible" to outsource. For example, I am an on-site Network Administrator/Engineer/Hardware Tech/Telephone Tech/Help Desk/All Around Nice Guy. No way in hell someone from India can do that job. Sure, they can tweak scripts or change passwords, but can they replace a CPU fan or install RAM? I do all that stuff, and I bring in candy. What more can a company ask for? Well, unless you are a Diabetic that is.

long term trend

[ajagci]

Realistically, "outsourcing" just is the situation when software development is cheaper in India but their US-based management doesn't want to move there. The long term resolution to that is obviously not that software development comes back to the US, the long term resolution is that management also moves to India (or wherever).

It's really not that different from what happened in the electronics industry after all: initially, parts came from Japan, then whole devices, and now the companies themselves are Japanese. And it was the same with cars and computer hardware.

What should the US do? There is really only one choice: if it wants to retain its strong economic position, the US needs to start the next revolution in a different field. Maybe that's biotech, nanotechnology (whatever that is) or the commercialization of space. But anybody who wants to claim a leadership position can't lean back and say "we'd just like to lean back for a while and relax on the strength of the jobs we already created".