An Unseen Peril of Outsourcing

Business Week ^ | MARCH 3, 2004 | David Gumpert

[agitator]

ping

[Think free or die]

I'm glad to see BW writing about this side of the outsourcing issue. I've been concerned at the outflow of our technology, upon which so much competitive advantage ultimately rests.

[sixmil]

...waiting for the other shoe to drop...

[Last Dakotan]

Good post. I had a major customer lay off most of its engineering staff in a cost cutting move and reduce its new product development budget to $0. I'm betting they won't be around in five years, meanwhile most of the engineers have found homes in small companies in the area and are rapidly churning out new products.

[A. Pole]

"Our investor got spooked and walked out, based on what he heard about AM," says Rocci.

What upset the potential backer? In large part, it was the sense that not only were the manufacturing and development services based in India, but that the company's most important knowledge -- software and engineering savvy, not to mention its development expertise -- also had departed the U.S. Says Rocci: "All the knowledge about how to do things had moved over to India." The investor's withdrawal scuttled the former employees' proposed deal to acquire AM's products business did so because he saw that outsourcing had essentially stripped the concern of perhaps the most important asset of them all -- its knowledge.

Free trade bump.

[oceanview]

I don't know what they were surprised about, what they needed to do was dispel the idea they were investing in an American company, when it really was an Indian company.

[SAMWolf]

Bump

[hedgetrimmer]

And on the same day, a story about Bill Gates' visit to MIT where he wonder why people aren't studying computer science anymore.

[Henchman]

Got to agree. If AM had not had an Indian in charge, it seems to me they could have leveraged their labor costs (millions expended) with allocation of work to other cheap source countries. If an "American" (are there any anymore? "I be en Amelicn") were in charge, the entities could have been played off overseas and enough local management, development and sales people could have been returned.

The only flaw in my plan is "Who do you sell to"?

I do think that in the long run we will benefit. when the US is a third world country, in terms of economics 20 years from now, all the third worlders will go home. Only poor Americans will be left...but at least we will have our country back!

[Dialup Llama]

Here's a scary thought for stock investors. If the white knight investor bailed out of the bankruptcy rescue because the company was hollowed out, consider how this might effect the stock prices of going concerns that get too hollowed out. Investors need to consider which entity really owns the assets of the company and how that might effect the value of the company.

[txzman]

Add to this the requirement China is now making of American companies that they 'share' technology with Chinese companies as the price for entering their markets.

Case in point: GE's new generation of turbine aircraft engines - their engineering and research is to be shared with Chinese partners to win a $900 million contract in the country.

[sixmil]

Add to this the requirement China is now making of American companies that they 'share' technology with Chinese companies as the price for entering their markets.

Case in point: GE's new generation of turbine aircraft engines - their engineering and research is to be shared with Chinese partners to win a $900 million contract in the country.

That's weird that they would want our technology so bad since according to the free traders, these guys are geniuses and they built silicon valley.

[Euro-American Scum]

And on the same day, a story about Bill Gates' visit to MIT where he wonder why people aren't studying computer science anymore.

They're taking courses like Marketing 101 from places like ITT Tech. Such as. . .

Course outline: Smile. . . Hold that smile. . . Now, while holding the smile. . . take a deep breath. . . and now from the diaphragm with sincerity. . .

"Welcome to Wal-Mart!"

Graduate customer relations courses include advanced techniques of loading your customer's trunk with their purchases, thanking them for shoping at Wal-Mart and wishing them a good day.

And thanking them for shoping at Wal-Mart and inviting them to please come again. Can't forget that. But that's a post-graduate course.

[jpsb]

This transfer of wealth is of course reducing our ability to fund government, and slowly impoverishing the citizenry. But it gets even worse for the USA as our military grows ever more reliant on foriegn suppliers for critical supplies endangering national security. But it gets even worse for the USA, as entry level job opportunities disappear and young people turn to drugs and crime to support themselves. But it gets even worse for the USA as necessity is the mother of invention and as all problems associated with wealth creation move overseas so does the invention of new procedures and new innovations in creation of wealth move over seas too.

[RinaseaofDs]

True story. I'm consulting a large well-known tax/audit consulting firm, and the question in one of the exercises had to do with their position on outsourcing tax/audit work to India.

Well, clients are putting 2 and 2 together: This firm's clients are starting to ask:

"If you are going to send our tax/audit work to someone in Bangalore, then why should we hire a top firm like yours in the first place? Where's the premium? What is stopping me from going to India directly at 1/24th the cost?"

So, from the very people recommending outsourcing to their clients comes the very reason why it is going to come back home to roost.

[Mortimer Snavely]

So what if all the know-how is sent overseas? We got cheap stuff, man. As long as we make payments and keep our credit rating up, we can buy whatever we want on a minimum wage salary! What a stroke of economic genius!! It's the American way!!

Hell, my job's secure. Why are all these other people complaining?

[Mortimer Snavely]

"What is stopping me from going to India directly at 1/24th the cost?"

Mwa-hahahahah!

.... as they rub their hands in fiendish glee

[A. Pole]

"If you are going to send our tax/audit work to someone in Bangalore, then why should we hire a top firm like yours in the first place? Where's the premium? What is stopping me from going to India directly at 1/24th the cost?"

The answer is that this would unfairly reduce the well deserved pay and bonuses for the management!

[DustyMoment]

Excellent article, thanks for posting it.

While it sounds as though there was a serious attempt to disguise the true ownership of AM Communications from investors and customers alike, there were additional problems based on the labor-intensive nature of NeST.

Nonetheless, the major issue for me is the knowledge transfer. Free traders are running around claiming that American innovation will be the key to new industries but, if the knowledge of how to accomplish certains tasks has been exported, American innovativeness has been crippled. A week or so ago, another poster noted that when we export high-paying white collar engineering jobs, for example, we lose the knowledge that accompanies the engineering management process. When engineers attempt to drive a new project without any experience, their efforts will appear amatuerish and add cost to the R&D budget. For all intents and purposes, it will appear to be cheaper to outsource the work to a place like India which has that type of experience because we exported it to them.

History is rife with stories of the costs associated with re-learning long forgotten techniques, procedures, knowledge and technology. In the early 90s, the wireless telephony industry created the Global Wireless Education Consortium (GWEC) to teach RF engineering because most schools of electrical/computer engineering had focused on digital computer technology and no longer had the expertise to teach RF engineering. The lesson is this: when we export our electrical/computer engineering positions and decide at some point in the future that we want those positions back, will American corporations be willing to absorb the additional costs associated with re-acquiring that knowledge?