Can someone explain to me why outsourcing is a good idea?

[emw]

Alright, this may sound like a naive question, but as someone who has suddenly be thrust into the role of determining how to outsource things, I find myself questioning why this is such a good idea. I'm speaking specifically of "sending" American work offshore to places like China or Mexico or India or wherever.

Sure, the executives and stockholders like it because profits go up, bonuses go up for them, etc., but doesn't it in the end pretty much guarantee that things will get worse for the average American? Pricing and profitability pressures are driving corporate America to do this, but by doing it they effectively reduce the ability of the average consumer to subsequently buy their product, meaning they have to further reduce prices. So they need to offshore more work, meaning even fewer people have jobs and can't afford to buy their products, and so on.

I guess at some point, you've got a lot of people managing the transition of work, and hey, hopefully India will one day start outsourcing to the US because we will then be the low-wage choice du jour. But really, how does this possibly help us?

I've heard the rhetoric that outsourcing actually helps to create jobs by creating higher-skilled positions here, but I don't see it and to be honest I don't believe it.

I suppose it's possibly inevitable since our educational system doesn't appear to be creating the type of highly skilled personnel we need to have in bulk. Hell, a few weeks ago I bought some sandwiches at a shop down by my parents house. They were $6 each. I had a buy 2 get 2 free coupon. She billed me for $28 and when I said that seem pretty high, she said she did it right and that it was just "tax and stuff" that made it so expensive.

So anyway, any insight would be appreciated.

[wordmunger]

Everyone loves outsourcing until their own job is outsourced. We love our Made-in-China Macs, our Made-in-Sri-Lanka clothes, our Made-in-Mexico cars. We love stuff! The cheaper the better.

What's different about today's outsourcing is that white collar jobs are being outsourced. America needs to learn what it can produce better and more efficiently than anyone else. Right now, I can think of a few things: education, biotech, computer systems and software design, entertainment. We probably need to come up with a LOT more, or soon America's going to look more and more like a third-world country.

[emw]

We probably need to come up with a LOT more, or soon America's going to look more and more like a third-world country.My fear exactly. The people who make the decisions aren't worried about their future since they've wrapped up "parachutes" worth millions. The rest of us don't have that luxury.

[wordmunger]

Man, just take a look at the ads for this forum page! It's all outsourcing! Get your golden parachutes ready America, this is going to be a bumpy ride!

[miloblithe]

The benefit of outsourcing is that the US gets the product but doesn't have to do the labor. In the broader sense, it's just trade. If people in another country can do the work better, or cheaper, in the long-run it benefits us because we get to enjoy that product while moving on to do other things that we can still do better than anyone else. We end up more productive because our labor is focused on things that we're still best at, while we outsource jobs that are less desirable.

I think people are freaking out because they are surprised by "high-tech" jobs going overseas, but I think this is misleading. The jobs that went overseas before were once considered high-tech but are now not really considered to be so, like textile manufacture.

Of course, this is all fine and good overall over the course of decades or centuries. In the short-run, this is great for capitalists and terrible for labor, who simply lose their jobs and have nothing to replace them with. While on a society level those jobs will be replaced by better ones (or at least other ones), the individual people who lost those jobs will undoubtedly be worse off.

[CanadaRAM]

Sure, the executives and stockholders like it because profits go up, bonuses go up for them, etc., but doesn't it in the end pretty much guarantee that things will get worse for the average American?
Companies have no mandate to look after the well-being of their community, whether socially, economically or environmentally. Companies respond to
1) legal requirements (mostly, that is. And the response might be to move elsewhere where they are allowed to {pollute, pay less than $1 an hour, pay no tax}) and
2) they respond to perceived threats to profitability (often late, and often the understanding of the threat is incomplete {Detroit and small cars, fisheries companies and declining stocks, polluting industries and community backlash}).

[miloblithe]

Companies have no mandate to look after the well-being of their community, whether socially, economically or environmentally. Companies respond to
1) legal requirements (mostly, that is. And the response might be to move elsewhere where they are allowed to {pollute, pay less than $1 an hour, pay no tax}) and
2) they respond to perceived threats to profitability (often late, and often the understanding of the threat is incomplete {Detroit and small cars, fisheries companies and declining stocks, polluting industries and community backlash}).

I think this is a somewhat outdated view of corporations. Most are recognizing that they do have certain kinds of social responsibility, and that shareholders are not their only stakeholders.

[wordmunger]

I think this is a somewhat outdated view of corporations. Most are recognizing that they do have certain kinds of social responsibility, and that shareholders are not their only stakeholders.

Only to the extent that it affects their bottom line. Companies tend to develop an interest in "community" only when they've nearly sapped the community of its life-force, and they see that if they don't "give something back," they'll be slapped with higher taxes or more regulation. Wal-Mart is a perfect example of this. No interest in the greater community until the greater community threatened to take its business elsewhere.

[plinden]

Up to a couple of years ago, the QA for our software was done here, onsite. We had close to one QA person per two software engineers. If there was a problem, I could walk out my office and down the hall and see what the QA tester was seeing. We had a good release cycle going, a dot release every three months, and our customer satisfaction rating were rising.

Then the company "restructured" fired all but a couple of the QA managers and outsourced QA to India. So what happened to the turnover time for critical bugs? Whereas we could fix one in less than a day since we would know about it immediately, the process was now more like:

QA finds and files a critical bug early in their day and can't continue testing because of it
We start work 14 hours later and see the bug filed.
We can't reproduce it and ask for more data
10 hours later they respond
14 hours later we tell them they've misconfigured the server
10 hours later they fix the configuration, retire the bug report and continue testing.
2 hours later they file another critical bug and stop testing.


Now, the Indian QA engineers were good (eventually with some training) but there were much fewer of them (1 per 10 engineers) and it took six months for them to be proficient enough to find anything but the most obvious bugs. Also, with the rising Indian IT economy, after a few months on the job, they were able to find higher paying jobs elsewhere, so the company had constantly retrain staff. Our software releases had to be rescheduled to once every six months to allow for adequate QA.

So we fired the QA company and moved our QA to the Ukraine. Unfortunately, the lack of English-speaking engineers, as well as the low quality of workers, meant this didn't work out as well as senior management expected, so they quickly fired that company and outsourced to Vietnam.

That's where our QA is done now. It's better than the Ukrainian company, and cheaper than India, but I've personally found more bugs than the whole QA team put together. But now, for some reason not explained to us, senior management has decided not to renew the contract, and not budgeted for us to look for QA elsewhere so after the new year, our software will not be QA'ed at all.

This of course helped our bottom line and held the share price up a bit, in the short term, but our customer satisfaction ratings are dropping and we are losing market share.

Of course, it could be argued that this is more to do with incompetent management, but I wouldn't be surprised to find this happening wherever outsourcing is tried.

[wordmunger]

I've read an argument that outsourcing is not effective most of the time, and the main reason it's used is as bargaining leverage with domestic employees. But if companies didn't actually outsource some of the time, then they'd have no real leverage.

Sounds kind of kooky to me, but I'd definitely say that there are many cases in which outsourcing is not a good idea for the company.

[Sun Baked]

...

Of course, it could be argued that this is more to do with incompetent management, but I wouldn't be surprised to find this happening wherever outsourcing is tried.That story sounds normal, like they are following in the footsteps of chainsaw Al Dunlop -- cut costs and boost stock price, at any price. :(

There are some critical functions you need to keep in the same office, if you cannot see them and control them every day, they hurt your business and make it harder to compete.

[jefhatfield]

we all know the economic forces are much more complex than this thread is addressing, but to keep things in the spirit of quick and easy communication, he he, here i go (and i ain't no economist...that was the subject i least understood in school, but what i did understand made me realize why it was a
"soft" science ;) )

let's say we are headed down in a big way and china, india, mexico, south korea and others are on the rise

and let's say the trend towards outsourcing is increasingly white collar

then maybe we should put our funding into schools for our K-12 especially, and focus more on math and science, and make that a long term investment but not expect to see any quarterly returns right away...i think our colleges are still ok but it needs to be fed with science and math major freshmen

basically, re-educate our youth to be math and science leaders again

right now, for a cure/better treatment to cancer, i look to countries that allow stem cell research like south korea...for good programmers, i look to india where the youth are more into analytical pasttimes like chess as opposed to shopping, paris hilton, and britney spears...for scientists, i look to countries that put more of their investment into science education for their youth

when an american kid studies computer science, making the latest computer video game or being some artistic multimedia genius are goals i seem to see students in colleges talking about...what happened to being good at making custom spreadsheet apps for corporate business?, because that's what the american employer will want from a computer scientist out of college...where is the training in our computer science programs to make them good programmers? before multimedia, games, and graphics, programming was the bulk of a computer scientist's education...it's that way in the third world and that's why companies like microsoft, oracle, and ibm have so many east asian and indian programmers supposedly taking our white collar jobs away

go back to the three R's and focus on the arithmetic before it's too late

[XNine]

Outsourcing (or hiring illegal immigrants, cheaper workers, etc.) is a vicious cycle that ends in America losing. I'm not some right or leftwing patriot here, just a simple observer, and affected party of the "cheap labor-force" addiction of today's US corporations.

Example: Carpenter has worked for 20 years, get 60 k a year for his work. Doesn't cut corners, does very good work, provides food for his family.

Boss thinks: "hey let's hire some illegals and fire this guy. I can pay 5 people the same amount, and produce more products in less time."

So, carpenter gets fired, goes to look for a new job. But to no avail, since every other builder out there is hiring illegal immigrants, or sending the work somewhere else.

Builder does produces much more in less time, but then the cabinets are crooked, start falling apart, crown molding isn't worked right, and now has to spend money on fixing these items. Eventually, builder goes out of business because no one wants to buy his homes from this shotty work.

old carpenter cannot afford to buy new products because he has no job.

So, now the big corporations are saying "damn, we're not making a profit anymore, let's fire this sector and send the work over to india or china or singapore." So, then all fo their former employees from that sector cannout afford these products. Thus, they don't buy.

So Big Corporation meets again and says "This still isn't enough, let's fire thsi other sector." They do, and the same thing happens. No one is purchasing anything anymore and the stock market goes to hell because, well, there's little to no movement on products on anymore."

Answer, out-sourcing, or going to the cheapest bidder is probably, most likely, the downfall for the US economy.

Take Avaya for example. Shipped its phone manufacturing to Mexico. Cheaper work. It's customer service complaints of broken phones SKYROCKETED.

**** outsourcing. **** those who do it too. When our economy crashes because some bigwigs couldn't live without their 6 million a year, I'm going to point and laugh, and move to Japan where Yakuza will protect my gaijin ass.

[ChrisBrightwell]

Alright, this may sound like a naive question, but as someone who has suddenly be thrust into the role of determining how to outsource things, I find myself questioning why this is such a good idea. I'm speaking specifically of "sending" American work offshore to places like China or Mexico or India or wherever. [...]It basically boils down to a short-sighted focus on the bottom line while disregarding the complications introduced for lower and middle management.

[maya]

Man, just take a look at the ads for this forum page! It's all outsourcing! Get your golden parachutes ready America, this is going to be a bumpy ride!

You do realize that the ad's that are placed in the google ad bar is based on keywords that is placed in the threads and posts. ;) :)

"If you start a thread in regards to iPod's, the google ad bars will place all ads that have some mention of iPod's in them." Same way Gmail and Google in the whole works. "Targeted Advertising." ;)

Few good thing my job is still safe. :D

[jefhatfield]

Outsourcing (or hiring illegal immigrants, cheaper workers, etc.) is a vicious cycle that ends in America losing. I'm not some right or leftwing patriot here, just a simple observer, and affected party of the "cheap labor-force" addiction of today's US corporations.

Example: Carpenter has worked for 20 years, get 60 k a year for his work. Doesn't cut corners, does very good work, provides food for his family.

Boss thinks: "hey let's hire some illegals and fire this guy. I can pay 5 people the same amount, and produce more products in less time."

So, carpenter gets fired, goes to look for a new job. But to no avail, since every other builder out there is hiring illegal immigrants, or sending the work somewhere else.

Builder does produces much more in less time, but then the cabinets are crooked, start falling apart, crown molding isn't worked right, and now has to spend money on fixing these items. Eventually, builder goes out of business because no one wants to buy his homes from this shotty work.

old carpenter cannot afford to buy new products because he has no job.

So, now the big corporations are saying "damn, we're not making a profit anymore, let's fire this sector and send the work over to india or china or singapore." So, then all fo their former employees from that sector cannout afford these products. Thus, they don't buy.

So Big Corporation meets again and says "This still isn't enough, let's fire thsi other sector." They do, and the same thing happens. No one is purchasing anything anymore and the stock market goes to hell because, well, there's little to no movement on products on anymore."

Answer, out-sourcing, or going to the cheapest bidder is probably, most likely, the downfall for the US economy.

Take Avaya for example. Shipped its phone manufacturing to Mexico. Cheaper work. It's customer service complaints of broken phones SKYROCKETED.

**** outsourcing. **** those who do it too. When our economy crashes because some bigwigs couldn't live without their 6 million a year, I'm going to point and laugh, and move to Japan where Yakuza will protect my gaijin ass.

but as we outsource more and those third world countries get richer, they improve their education and training and the bad quality becomes less and less and they get close to matching our best in textiles, auto making, and engineering

and the computer age along with robotics makes it possible to train a third world workforce cheaply, efficiently, and put out good quality products in a relatively short period of time

when the third world makes products and doles out services as the same quality as the usa, then we will really be in trouble

we might have to resort to some stiff tariffs and some protectionist measures to slow down our corporations and their thirst for cheap third world labor...japan has successfully done that to some degree and perhaps we should look at their model

[XNine]

but as we outsource more and those third world countries get richer, they improve their education and training and the bad quality becomes less and less and they get close to matching our best in textiles, auto making, and engineering

and the computer age along with robotics makes it possible to train a third world workforce cheaply, efficiently, and put out good quality products in a relatively short period of time

when the third world makes products and doles out services as the same quality as the usa, then we will really be in trouble

we might have to resort to some stiff tariffs and some protectionist measures to slow down our corporations and their thirst for cheap third world labor...japan has successfully done that to some degree and perhaps we should look at their model

I compeltely agree. I used to do High-end Audio/Video work for a low-voltage company. After a work-related accident and being out of work for four months, I come back to see (btw, this isn't meant to sound, or be racist) a bunch of mexicans, and some of my fellow partners are gone. Come to find out, they were paying these guys 6-8 bucks an hour, instead of the 16-24 bucks an hour the other guys, who were CEDIA certified, etc. And guess what? 8 months after doing this, the company went out of business.

America needs to wise up less we meet Rome's fate.

[miloblithe]

Ultimately, protectionism just makes everybody poorer. And a strong argument for NOT looking to Japan as a model for the US economy is that the US has had much higher growth rates than Japan for the past 15 years, and while people here complain about the US national debt creaping over 60% of US GDP, Japan's has exceeded 130% of Japan's GDP.

Eventually, the downfall of the US (in terms of relative position to the rest of the world), is inevitable. We're living beyond our means and Americans are not so amazing as to deserve (or be able to horde) 20% of the world's income (much less the 50% that we used to).

[tristan]

Company ABC makes medical devices. Company ABC pays Indian offshore outsourcer Indosoft $500k to build them the controller software, figuring out that it would cost $1m to do it onshore. Then they pay Chinacom, in China, $100 a unit to manufacture the device, which would cost them $200 to do it at home. They've saved money, right?

WRONG. China now has their hardware design. India now has their software design. One phone call between those two companies, and ABC has lost its its global market. They've handed their R&D to people who will be more than happy to steal it. Do you think all those software developers in India have legal copies of Windows?

Here's the biggest issue with offshore outsourcing. We don't manufacture many hard goods anymore, and our "soft" goods are routinely stolen by our trading partners (movies, music, software, other intellectual property). So what do we actually have that we can trade? I don't think we should trade anything but the cheapest products with anyone that doesn't respect our IP.

[Don't panic]

one of the problems, however, is that a lot of (most?) people are not willing to pay a bonus for a premium (real or perceived) in quality/origin of item.
and they are not ready to support measures that by all means would be anti-capitalistic

[emw]

It basically boils down to a short-sighted focus on the bottom line while disregarding the complications introduced for lower and middle management.I had to hop on a plane shortly after starting this thread, so I'm just now getting to read everyone's responses. I appreciate the notes, and most of them solidify what I've been thinking.

Chris - your note specifically hit home because earlier today I found myself trying to explain to someone how qualified the people were who were, essentially, going to take the jobs of his US counterparts. It struck me that it was like your wife coming to you and telling you that you're doing a good job, but that you don't make enough money, so she's going to go find a new guy who can provide her with more of what she wants. But there's a catch - you need to "train" her new beau so that he can understand her various idiosyncrasies.

Talk about uncomfortable. :(

[Don't panic]

but as we outsource more and those third world countries get richer, they improve their education and training and the bad quality becomes less and less and they get close to matching our best in textiles, auto making, and engineering

and the computer age along with robotics makes it possible to train a third world workforce cheaply, efficiently, and put out good quality products in a relatively short period of time

when the third world makes products and doles out services as the same quality as the usa, then we will really be in trouble


but in principle, as their lifestyle raises to our standards (or more likely, we meet halfway), so will their expectations in terms of salary, benefits, work-hours and so on. and the cost of producing items/services will finally equalize, therefore eventually eliminating the advantage of outsourcing

[jefhatfield]

but in principle, as their lifestyle raises to our standards (or more likely, we meet halfway), so will their expectations in terms of salary, benefits, work-hours and so on. and the cost of producing items/services will finally equalize, therefore eventually eliminating the advantage of outsourcing

sure but by then, america will be in 2nd place to somebody in asia

we have already played second fiddle to japan during the 1980s and it was very uncomfortable, and now we are facing having to be the world's second economy behind either china or india in the next generation sometime

eventually, we will be so far out of 1st place that we will be a fallen "rome", so to speak

when china and india have a fraction of our technology and/or education, their billion person strong economies will be too hard for the less than 300 million americans to keep up with

[miloblithe]

sure but by then, america will be in 2nd place to somebody in asia

we have already played second fiddle to japan during the 1980s and it was very uncomfortable, and now we are facing having to be the world's second economy behind either china or india in the next generation sometime

eventually, we will be so far out of 1st place that we will be a fallen "rome", so to speak

when china and india have a fraction of our technology and/or education, their billion person strong economies will be too hard for the less than 300 million americans to keep up with

So what?

Do we stop being Americans because most Chinese or Indian people are no longer living in abject poverty? Do we say America has failed because the average Chinese person has 1/4 the wealth that the average American has?

And in what possible way did the US play second fiddle to Japan in the 1980s? Japan never had a larger economy, greater per capita income, more military power, cultural influence, political influence... And that's very instructive. The idea that China and India will at some point surpass the US in GDP is based only on some measure of the last few years of economic growth, which assuredly won't remain constant for the required 30-40 years projected for China to catch up. Japan had that kind of growth in the 60s, 70s, and 80s, but has virtually no growth now. The Soviet Union had spectacular growth from the 40s to the 60s. China and India may well be able to sustain their growth, but it is hardly guaranteed.

[jefhatfield]

So what?

Do we stop being Americans because most Chinese or Indian people are no longer living in abject poverty? Do we say America has failed because the average Chinese person has 1/4 the wealth that the average American has?

And in what possible way did the US play second fiddle to Japan in the 1980s? Japan never had a larger economy, greater per capita income, more military power, cultural influence, political influence... And that's very instructive. The idea that China and India will at some point surpass the US in GDP is based only on some measure of the last few years of economic growth, which assuredly won't remain constant for the required 30-40 years projected for China to catch up. Japan had that kind of growth in the 60s, 70s, and 80s, but has virtually no growth now. The Soviet Union had spectacular growth from the 40s to the 60s. China and India may well be able to sustain their growth, but it is hardly guaranteed.

the massive or immediate downfall of america may not be the end result at all but we will be a victim of our own actions, or short term greed

what many see as an obvious mistake in our current outsourcing still seems to be beyond anyone's control and we have nobody to blame but ourselves...what really made america great was our large middle class but the main symptom of the greed of corporations (much of it through outsourcing to increase the bottom line) can put us into a caste system and a shrinking middle class

so it's not just in terms of america losing its place as a world leader, but the turning back of decades of progress in the usa since fdr

i don't only blame bush and the republicans for this since it's obviously been a bipartisan effort over many years

[tristan]

There's a ton of bad business strategy here. The only time outsourcing makes sense is if you get more for less - i.e. more quality for a lower price than you could do it in-house. if you're training somebody new, by definition you're going to get less quality. I hope you're not responsible for the output of these "replacements".

BTW Expect to find many of the "outsourced" people hanging around as consultants or working for a competitor, and many of the replacements asking for raises or leaving once they have the experience and can now earn what the previous person used to make.

You should be looking for ways to streamline your business operations so that you can do more with less. Reduce complexities, leverage your fixed costs across a greater base, raise your internal quality (for efficiency), etc. It's first year MBA curriculum stuff. And if you want lower labor costs, open an office in the Philippines and go manage those people yourself - that's the only way you'll get any decent productivity. Most outsourcing is a cop-out by organizations that can't manage a back office effectively.

[Sun Baked]

Well, here is a company on the verge... Delphi.An Industrial Town Stares Change in the Face (http://www.washingtonpost.com/wp-dyn/content/article/2005/11/11/AR2005111102116.html)
Woes of Auto Parts Maker Threaten Wages

By Sholnn Freeman
Washington Post Staff Writer
Saturday, November 12, 2005; Page A01

LOCKPORT, N.Y. -- Like a lot of people in town, Pam Mondello can feel the American dream slipping from her grasp.

Mondello, a 39-year-old plant worker, is worried about a big pay cut following the bankruptcy filing of Delphi Corp. last month. The auto parts supplier, as part of its reorganization, wants to slash the wages of thousands of factory workers around the country to as little as $9.50 an hour. Mondello, with bills to pay and three teenage children, is stunned that Delphi thinks it can get away with such a drastic cut.

"It's a slap in the face when they are paying $28 now," Mondello said. "We expect some kind of pay cut. But don't make us live in poverty."

To the 3,800 plant workers of Lockport, a class war is underway in the auto industry. Many of them believe Delphi's bankruptcy was orchestrated by auto executives to permanently smash the pay scale of working people. There is a sense here that nobody is holding the people in top management accountable.

...

[pseudobrit]

Outsourcing is a good idea if you're an high level executive whose pay is tied to stock performance. It brings more money to your pockets, which you can then use to buy things, which will in turn invigorate the American economy. Unless and until the things you're buying with that money have also been outsourced, in which case you're only putting money in the pockets of another set of wealthy shareholders and exectuives.

Which is the problem with coutsourcing. Like a corporate Ponzi scheme, the last layer out of the country are the losers, and while they're gaming the economy, American manufacturing has been crippled and the middle class is evaporating.

I recall reading in the WSJ that General Motors considers its long-term sustainable wage for a production line worker to be somewhere around $10-15/hr before benefits, and that eventually they're going to come down to those level wages.

You pay a pittance, you get petty employees. They'll end up with workers who don't care about their jobs or the work they're doing. They'll likely end up with temps building their cars. And I can tell you, about 90% of temps are temps for a good reason (hint: it's a bad thing).

[XNine]

Well, here is a company on the verge... Delphi.

That is simply awful! But then again, looka t GM's cutback of 30,000 people. Strange how cars SHOULD be otusourced. It's one of the only things I can think of that actually make sense, since AMerican cars are so useless.

I dunno. There's a lot of points on both sides of the fence that make sense and that don't, but the end result is there to hurt us. I think the rich believe that they will be okay if America's economy went way downhill. That is, until poor people came in amss to take over their mansions and estates.

I'm not poor. In fact, I only recently made it above the poverty level (in Colorado, if you don't make 35k or more a year you are considered poor). Of course I'm only 23 and I think I've worked hard and done well for myself without any college or mommyh and daddy providing everything for me. But how many Americans are in the same boat?

The enxt few years should be interesting. I wonder who are next president will be? Will he care about these issues? Will he bath in and drink oil with his pancakes?

[Hoef]

I have many insights to offer but to little time to write them up.... But the thread reminded me of this gentleman in Florida who outsourced his $80k programmer job (he was working remotely) to a guy in India for $25k or so (can't remember the figure details) which left him additional time to take on another computer job.... ;)

[tristan]

GM is just a special case. If that company were managed correctly, they'd own the global market for automobiles, motorcycles, planes, trains, etc today instead of being on the brink of bankruptcy. Someone just took Alfred P. Sloan's great company and ran it into the ground. It's just sad.

[Roger1]

I have many insights to offer but to little time to write them up.... But the thread reminded me of this gentleman in Florida who outsourced his $80k programmer job (he was working remotely) to a guy in India for $25k or so (can't remember the figure details) which left him additional time to take on another computer job.... ;)

Capitalism at its best. Gotta love it.
:D