The Harsh Truth About Outsourcing

Business Week ^ | March 22, 2004 | Paul Craig Roberts

[Starwind]

You left out the most important. Quality and time to market.

If we were having a more theoretical discussion of what consitutes competitive advantage, there are several other factors to consider.

But we are talking about outsourcing in the context (I presume) of China and India. Outsourcing means having some other company do what a company used to do for itself. Time to market (in the context of developing new products) doesn't enter in because the design, fab, shipping, etc have all been done. That 'time to market' race has been won by the company that is outsourcing. The Chinese or Indians reap the benefit of the outsourcers win. They have no significant 'time to market' problems when taking in outsourced production.

Which leaves your point of quality.

If an American workforce is in the revenue stream of a corporation then the focus has to be on faster and better quality throughput than can be achieved in a foreign location.

Quality is important but it also has a cost component. That cost of improving quality is lower in China and India as are all their costs. While there are quality problems now, they will be resolved, just as Japan resolved theirs. Some short-term realignments will happen (Dell pulling is corp tech support back to Austin for instance). But moving a chip foundry or assembly operation back won't happen. The quality problems will be worked. Poor services for the most part are not coming back either. The cost of keeping them here is prohibitive relative to the costs saved by competitors who remain 'outsourced'. There is no point in improving quality if the cost of it drives all your customers to your competitors.

Lastly, a point both you and Southack overlook with regard to China's competitiveness and 'quality' is that the companies that are outsourcing and moving to China do so also because China demands it in exchange for access to their markets. Nigeria has no market that anyone wants access to and so very little will be going to Nigeria because China 'demands' that it receive the outsourcing investments. Even if Nigeria worked free, it has no market leverage.

Lastly, Southack, as an aside exchange rates do not dictate incountry costs of living. It dictates how much an Indian can buy from an American, or a Chinese from an American (and vice versa). But as explained above with China, outsourcing to China is a condition of market acess, not because the exchange rate with China or elsewhere is attractive or not.

[Nick Danger]

America NEEDS to create jobs HERE in AMERICA

That is a fine emotional sentiment, but when translated into policy it sounds suspiciously like requiring Big Mommy to provide jobs, as opposed to the kind of self-sufficiency that might reasonably be expected of adults.

It seems to me that we are either going to have Big Mommy who makes sure that everyone has a job, or we are going to have a country of adults who operate in freedom. I don't think we can have both at the same time.

I recently had occasion to need a job, and I decided to just make one up. We still have the freedom in America to do that, so I did. That's as opposed to expecting AMERICA to hand me a job on a platter. Now instead of reporting to some boss I don't like, I have customers. So lucky me... I have a whole bunch of bosses who are mean to me instead of just one. This is freedom, but it's also opportunity. Those are two things you will never get from Big Mommy.

Be careful what you wish for... you might get it.

[Texasforever]

Quality is important but it also has a cost component

Only in the abstract. If work is done right the first time vs a workforce that requires 3 attempts to get it right then the labor cost advantage is narrowed significantly. Now China and India are 2 very different labor pools and it is not honest to place them in the same category.

Outsourcing means having some other company do what a company used to do for itself.

In the case of IT you missed the salient point. The work done in India is company overhead tasks. Support functions that add nothing to the bottom line of the company. It would be insane and a fiduciary act of irresponsibility for the officers of that corporation not to take advantage of the low costs offshore workforce.

[Nick Danger]

Now what are you going to say then? Are you going to be honest and say "I did all I could to help arm and built the Chinese communist super state."

Listen to you. I am "doing all I can to arm and build the Chinese super state." I don't have time for crap like that. Good night.

[Starwind]

Only in the abstract [does quality have a cost component].

Never in the abstract. Always in the real world. Quality, like anything else has a cost whether measured in engineering design, manufacturing, or in tech support, it has a cost.

If work is done right the first time vs a workforce that requires 3 attempts to get it right then the labor cost advantage is narrowed significantly.

If it costs an American $100 to get it right the first time and an Indian costs $5 three times each to get it right - the Indian has the cost advantage. Further, the Indian, like the American, will learn and get it right the first time the next time. Quality advantages are ephemeral. Cost is forever.

Now China and India are 2 very different labor pools and it is not honest to place them in the same category.

No dishonesty intended. India receives service outsouring predominantly but their manufacturing is growing as well. China receives primarily manufacturing outsourcing, but as their population becomes more broadly educated and 'globalized' (similar to India's) they will get more service outsourcing.

In the case of IT you missed the salient point. The work done in India is company overhead tasks. Support functions that add nothing to the bottom line of the company. It would be insane and a fiduciary act of irresponsibility for the officers of that corporation not to take advantage of the low costs offshore workforce.

No, you miss the salient point.

Any cost saving adds to the bottom line of a company, whether it is support or design, service or build. CFO's scour their organizations top to bottom looking to squeeze out fractions of percentage points of cost.

Further, the design and development of software products and B2B BPO is growing as well. They are also doing more medical technical support (reading and interpreting test results for instance), and front office client accounting and legal analysis. That was what I meant when I alluded to them being able learn anything cheaper than we can learn it. There are no intellectual or discipline barriers to what they can do.

We OTOH have a cost barrier that will be painful to overcome.

[sarcasm]

Actually, the posted data confirms the Canadian study and my contention that real wages are lower now than they were in the mid 1970's.

[lelio]

I ask because MIT does not have a computer science department per se, and applicants to MIT do not specify a major on their applications.

The head of MIT's EE and comp sci department:

John Guttag, head of MIT's electrical engineering and computer science department, points to what he called a "worrisome" downward trend. In the current academic year, 229 sophomores selected his department as their major, down from 282 in 2002 and 342 in 2001.

[lelio]

I'm sure by bringing up this I'll be labeled a Marxist."
Yes, and yes.

I'm beginning to see the Southack tactic:

• throw out there that of course wages have gone up
• when someone points that they have gone down since the 70's, say "well go back to the 50's"
• when that shows a bare increase start screaming "its an increase not a decline!"
• if someone questions this, label them as a Marxist

Not very convincing.

[LibertyAndJusticeForAll]

No patriotic American can so carelessly dismiss these critical technologies as you have done.

That they are being given away to Communist China is foolish beyond words.

From toxic waste to these critical technologies, many CEOs have proven that they care for nothing but this year's bonus. It is sad that they are so lacking in business ethics and patriotism.
Raw, capitalist greed unchecked is very ugly indeed.

When Clinton was guilty of treason I joined in with my fellow Conservatives in pointing it out. When I see American corporations giving away critical technologies just to improve profits on already profitable companies, then I will point out the dangers inherent in such a philosophy as well.

[WilliamofCarmichael]

RE: How can Europe and Japan offshore to us and do well but we have to offshore to "developing countries" to survive.

Thank you very much for you reply. Everything you said makes perfect sense. Here is something you may (or may not) find interesting. It is by an Ivy League professor (I believe) and an Indian who offered his opinion about India's education vis-a-vis innovation; i.e., the ability to be innovative. It ain't there, even in India's best universities -- you know, the ones that are suppose to make MIT look like a high school. "Free" traders feeeeeeeeeeel that way.

"Competitive exam mania. It’s the quality of education that suffers," by Pratap Bhanu Mehta http://www.tribuneindia.com/2003/20031201/edit.htm#5

Though not mentioned in the article this mania has led to much cheating. I always post googled articles about cheating (India universities cheating) whenever some nitwit writer opines that "they are better than us."

What you write hints at another poster's opinion that perhaps these offshored jobs (coming here) are here now but they are on their way to India, China, etc.

[Starwind]

Another tactic of failed argumentation is to change definitions, such as "wealthier" can mean a 50 cent/per hour real wage increase after 45 years.

Then, as a last resort, change your initial claim and hope no one notices, or that you didn't understand your own data well enough to realize it failed to support your initial claim.

Southack post #50:
"No, real wages in the U.S. have steadily increased even after inflation. "

Southack post #167:
"It was a binary question, after all. Did "real" U.S. wages go up or down?"

[Nick Danger]

No patriotic American can so carelessly dismiss these critical technologies as you have done.

Any "patriot" who thinks that "we" collectively own all privately-owned assets within the boundaries of the United States, and can — through our government — tell people what they can do with their own money, is no patriot in my book. He's a statist and a self-annointed Ruler of Men. Take that flag off; you have no right to wear it.

You can condemn the Magnequench people as foolish, or long-term stupid, or whatever you want. As soon as you cross the line into advocating that something be done about it, using governmental force, you have entered the realm of Public Ownership of the Means of Production, which is the dictionary definition of socialism.

You will not get me to go there no matter how loudly you yell about it, or how tightly you wrap yourself in the flag while you do it. To me, the term "patriotic socialist" is a trick... and I'm not falling for it.

To my mind, you are ignoring one of the great lessons of the 20th century, which was that authoritarian regimes cannot exist in the presence of modern technology. We can kill communism in China by feeding it the same poison the Soviet Union consumed. As soon as things like fax machines, copiers, and telephones get loose in a place, the despots can no longer control the flow of information. The truth always brings them down. In Russia they faded away without hardly a shot being fired.

As isolated as Russia was during the Cold War, they still managed to acquire what they needed to build a nuclear arsenal rivaling ours. Despots can always do that. What they can't fight is a population that knows they are full of crap. Give the people the tools with which to spread the truth, and they will do so. I don't know the Chinese word for the Russian Samizdat, but whatever it is, they probably already have it circulating around.

many CEOs have proven that they care for nothing but this year's bonus

Has it occurred to you that this is what they are hired to do? Those bonus plans do not fall out of the sky. They are designed by the Board of Directors, usually its compensation committee. Most companies do not allow Directors who are also in management to sit on that committee. The Board decides what behavior will be rewarded. The CEO carries that out... or he gets fired. He's just another guy with a job.

Your quibble is with the shareholders, who are the ones demanding ever-higher earnings. We have met that enemy, and he is us. A majority of the voters in this country own stock in corporations. When they pull their money out of earnings funds or growth funds, and switch them over to funds that won't invest in a company that outsources, you will see the end of outsourcing. And not a day before. Which is as it should be. The shareholders do, after all, own the place.

[Ronzo]

HINT: you don't break down *average* wages.

*average* wages expressed in REAL dollars - or dollars adjusted for inflation, taxes, whatever...and yes, you can break down the "sample" to show the numbers that went into making the "average."

The statistic is still meaningless, especially since it's an "average."

Here is a very simple example of how government "average" statistics are meaningless, especially when it comes to wealth creation, which is the crux of your argument:

100,000 people are working making $20.00 an hour. Then 50,000 get laid-off and now make zero dollars an hour. The 50,000 who are still working all get a raise, and are now making $20.50 an hour. So what's the average wage? $20.50 an hour. Those who are no longer making a "wage" are no longer included in the equation. That's why any discussion of "average" wage is completely meaningless, especially in regareds to wealth creation, which is the real point you are very unsuccessfully trying to make.

[P.O.E.]

Regulatory and tort reform would help tip the balance back, but since patronage is the lifeblood of politics, it ain't gonna happen.

[FrankR]

If we/they want the corporations to come back to the USA, there is one thing that will do it for sure:

Just make it cheaper for them to operate over here, than outsourcing...

I know...I have a remarkable grasp for the obvious, however, it's as simple as that...follow the money.

But as long as Congress and their greedy ilk keep piling punitive regulations and taxes on businesses and corporations...not to mention the lawsuits and unions...then I really can't blame the corporations for outsourcing...

It's call "Capitalism".

[LibertyAndJusticeForAll]

National Security was once considered enough reason to stop the flow of critical technology to Communist governments.

Ronald Reagan's administration understood this.

The average shareholder has little say about the obscene amounts that CEOs take from the corporation. You are very naive if you think that corporations are passing on even half of the savings from foreign labor to the shareholders.

Like many free traitors, you are concerned about consumers, not citizens.

BTW, we are not engaged in free trade, this is a very manipulated against us market. Our gigantic trade deficit with Communist China is evidence enough. They devalue the yuan 40%, use forced prison labor, have high tariffs, are dumping goods to drive many small to mid-sized American firms out of business, steal our technology, make their own versions of our products and will never buy much from American corporations.

For the first 200 years America engaged in protectionist policies, and these policies overall helped us grow enormously. Now American corporations are not even made to consider the dangers of giving away critical technology.

America will lose its leading-edge and we will no longer be the leaders of the free world. Of course, this won't bother you, because we are just a bunch of consumers to you. And, I suspect that the fall of America is a goal of yours.

[Southack]

"Actually, the posted data confirms the Canadian study and my contention that real wages are lower now than they were in the mid 1970's."

Only in your Bizzarroland. All three posted studies (e.g. my link in post #50, your study, and the BLS study) show that average U.S. wages have increased in the U.S. even after factoring in inflation from 1959 to today.

Your own Canadian study even concludes that U.S. wages have *grown*, although at a slower pace recently than in the 1970's and 1980's.

Thus, the only way that you can claim that average wages have declined is through sheer denial of reality.

Seek help. You are not living in the real world.

[Ronzo]

I recently had occasion to need a job, and I decided to just make one up. We still have the freedom in America to do that, so I did. That's as opposed to expecting AMERICA to hand me a job on a platter. Now instead of reporting to some boss I don't like, I have customers. So lucky me... I have a whole bunch of bosses who are mean to me instead of just one. This is freedom, but it's also opportunity. Those are two things you will never get from Big Mommy.

"Big Mommy" can do quite a bit to either help or hurt our economy. By "AMERICA" I was referring to the American ECONOMY, not the government.

While I agree with your point that we should not be waiting for handouts from "Big Mommy," I do think Mom can do more than she currently is to help out.

When companies decide where to put their new plants and business based mainly on how many tax breaks and incentives they are getting from Big Mommy, Little Mommy, and Medium-Sized Mommy, then only a complete idiot would fail to see that Mommy (whatever her size) has many rules and regulations in place that are hurting business, not helping. When governments start giving businesses all sorts of breaks in taxes and regulations to get them up in running in their backyard, then perhaps it's time to take a look and see why they even need to do that in the first place...

[Southack]

"I'm beginning to see the Southack tactic: throw out there that of course wages have gone up when someone points that they have gone down since the 70's, say "well go back to the 50's" when that shows a bare increase start screaming "its an increase not a decline!" if someone questions this, label them as a Marxist "

I didn't just "throw out" that average U.S. wages had gone up. No, I posted a link to official U.S. government data that showed average wages increasing since 1959. Then I posted supporting evidence of increases in American wealth such as the number of cars per household, the increase in the number of Americans who now own their own homes, the increase in the number of American stockholders, the increases in the size of stock portfolios, etc. In addition, the Canadian study posted by Sarcasm even concluded that U.S. wages were still increasing, though it claims at a slower pace than in the 1970's and 1980's.

And it was a binary question. It was: did U.S. wages rise or fall, not: Have U.S. wages risen so much that we can all build our own Trump Towers?!

Furthermore, people who claim that we are progressively impoverishing ourselves *are* Marxists. That's Karl Marx's sum total point of his book Das Kapital, after all.

Marx says that *every* capitalistic society progressively impoverishes itself each year until economic conditions finally become so onerous that the "people" rebel against their mythical ruling class. And people who parrot such discredited nonsense are Marxists, whether they realize it or not.

If such labels bother you so, then simply don't parrot Marxism.

[sarcasm]

My statement, of course, was that real wages are lower today than they were in the mid 1970's. For your edification, I am reproducing the chart that Starwind furnished which proves my point. BTW. please explain how we are so much "richer" when real wages are lower.

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Annual
1970	314.15	314.46	313.90	311.58	312.65	311.17	312.30	313.36	311.94	311.32	309.85	311.86
1971	312.90	313.06	314.82	315.06	316.08	317.19	315.69	317.54	318.42	319.39	320.38	322.34
1972	327.62	328.58	329.53	331.23	330.44	331.41	330.69	331.63	332.70	334.60	333.77	333.87
1973	334.01	334.26	333.82	332.34	331.78	331.94	333.64	327.99	328.76	326.66	327.23	324.96
1974	321.48	319.78	318.04	317.23	317.94	318.31	317.25	316.39	314.08	312.91	308.37	308.09
1975	306.48	304.43	303.58	303.33	304.92	305.32	303.23	306.41	304.97	304.63	305.03	305.53
1976	306.05	308.55	306.71	306.90	309.16	308.81	309.09	309.70	309.43	308.22	309.59	309.24
1977	306.39	309.66	309.05	310.23	310.46	310.21	309.59	309.73	309.97	312.68	311.54	310.34
1978	306.85	309.66	311.22	312.10	310.91	312.12	311.41	310.31	310.13	309.66	308.56	308.38
1979	307.37	306.78	306.65	298.65	300.82	299.52	297.84	296.97	296.20	294.47	293.28	291.83
1980	286.69	286.14	283.85	281.18	279.40	278.12	278.64	280.31	279.67	280.40	280.81	279.89
1981	280.85	278.05	279.63	279.35	279.07	278.07	276.33	276.59	274.20	274.86	275.52	273.12
1982	268.82	276.22	276.00	274.72	274.33	271.74	271.77	271.91	272.69	270.47	271.68	274.65
1983	276.54	275.53	276.30	276.23	277.29	277.43	277.98	275.63	277.91	280.38	279.39	279.45
1984	279.53	280.26	280.00	281.60	279.67	280.47	280.47	277.33	278.14	275.72	277.15	278.73
1985	276.37	275.27	276.01	275.89	275.71	276.23	275.18	275.88	276.32	274.77	274.48	275.59
1986	274.78	274.87	276.90	277.35	277.96	276.23	275.75	276.92	275.14	275.51	276.80	275.58
1987	274.98	276.27	274.09	273.20	274.18	272.22	271.81	274.00	271.80	272.54	273.32	271.58
1988	271.19	271.52	269.85	270.72	271.26	270.65	270.72	268.34	268.65	270.74	269.09	269.55
1989	270.42	268.83	267.88	267.89	264.53	264.99	266.29	266.55	266.23	268.36	265.77	265.30
1990	264.41	264.21	265.02	264.17	264.29	264.96	263.51	260.90	259.98	258.20	258.69	258.44
1991	257.68	258.18	257.54	257.97	257.77	258.95	259.07	258.75	258.75	259.38	258.00	257.99
1992	257.81	257.99	257.98	259.43	258.61	257.43	257.93	258.35	258.38	257.45	257.39	257.33
1993	258.32	258.02	257.33	258.88	258.13	258.01	259.06	258.30	259.35	258.58	258.93	259.10
1994	259.39	258.46	260.20	260.54	260.48	259.90	260.31	258.75	258.17	259.89	259.43	259.60
1995	259.15	258.84	258.79	257.47	256.67	257.81	258.53	258.46	258.80	259.02	259.29	258.31
1996	255.06	258.78	258.23	257.96	258.49	260.22	259.40	259.94	260.74	260.36	260.62	260.82
1997	260.43	262.11	263.17	264.20	264.50	263.88	265.12	266.73	266.55	266.93	268.43	269.07
1998	269.58	270.80	271.07	271.75	271.76	271.06	271.78	273.12	272.78	273.54	273.84	273.80
1999	273.59	274.37	274.24	274.42	275.12	275.73	275.61	275.61	275.36	275.28	275.36	275.36
2000	275.93	275.60	273.89	276.20	275.51	274.75	274.95	275.05	274.49	276.00	275.50	274.39
2001	274.64	274.10	275.87	274.89	274.12	274.42	275.75	275.51	274.08	274.86	277.27	279.28
2002	277.83	278.28	277.76	277.38	277.34	279.99	278.29	279.09	279.41	278.90	279.30	280.07
2003	279.00	278.16	277.49	276.67	279.19	279.29	279.24	278.08	277.33	278.96	281.09	278.80
2004	279.68(p)	279.48(p)
p : preliminary