Monday, April 19, 2004

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Offshore outsourcing creates American jobs, redux

The Chicago Tribune reports today on how offshore outsourcing is aiding in the creation of more small business start-ups -- which help to create American jobs. The story focuses on one Chicago entrepreneur:

While offshore outsourcing has come under political fire in a tough job market, entrepreneur Jai Shekhawat said the approach has enabled him to create jobs in Chicago.

His business-to-business Web-based software start-up, Fieldglass Inc., wouldn't be employing 66 people in the U.S., most in Chicago, if not for the company's decision to outsource overseas from the get-go, he said. In fact, without outsourcing, he said, "I wouldn't have started the business."

In a difficult economy, offshore outsourcing has become essential for many emerging companies, experts say.

"I can't think of one of our portfolio companies that doesn't use offshore outsourcing," said Travis Winkey, general partner at BlueStream Ventures in Minneapolis, one of five venture capital firms investing in Chicago-based Fieldglass. "As a start-up, you care about getting as much mileage out of every dollar. A great tool to leverage is offshore," he said....

While politicians may bemoan offshore outsourcing as a missed opportunity for domestic tech workers, venture capitalists often take a different view.

They see its potential in stimulating new businesses, which in the long run will help companies add jobs domestically. "If you outsource 10 positions, it might help you employ 20 in the U.S. It has a multiplier effect," said Deborah Farrington, partner at StarVest Partners in New York and a Fieldglass director.

Developing new software such as Fieldglass' InSite is a perfect example of how cross-border employment can pay off, said Winkey, who is also a director of Fieldglass. "If we had to build out that same kind of engineering, we would have had to sacrifice in other areas. It allows us to hire more skilled positions here," he said.

Which helps to explain the continued expansion of small business hiring that I alluded to several months ago.

Virginia Postrel posts another example of how (onshore) outsourcing facilitates small business growth.

posted by Dan on 04.19.04 at 10:31 AM


I see that you are starting the collection of personal anecdotes supporting outsourcing (as you suggested your side needed to do in your recent NYT book review). Good job putting your money where your mouth is.

posted by: ch2 on 04.19.04 at 10:31 AM [permalink]


Good God that's funny as hell! How long and hard did you have to search for this stuff? 10 jobs? 20 jobs? Aren't those piddling numbers compared to the number of jobs lost overseas?

Yeah that'll convince me. Suuuurrrreeee.

posted by: ed on 04.19.04 at 10:31 AM [permalink]

Ed, notice that the anecdotal evidence simply supports the factual analysis. It is intended to counter the opposing argument which is almost entirely anecdotal and doesn't consider at all the complexities, related trends, relative importance (broader context), and interactions.

posted by: aaron on 04.19.04 at 10:31 AM [permalink]

Could we look at this a little deeper? The outsourcing that this B/B company, Fieldglass, does: does it really create higher-skill jobs in the US, or mostly service (e.g. sales) and administrative jobs that have to be in the US because that's where Fieldglass customers are? How many of those jobs are just temporary, likely to disappear as soon as Fieldglass is able to train less expensive Indian workers to do them? In the long run (for our purposes, let's say the long run is the next five/six years or so), is Fieldglass a good deal for American workers and investors, or mostly for the latter? And how typical is this company of businesses that outsource on a large scale?

I don't mean to prejudge the answers to these questions; I do not consider myself knowledgable about this whole subject, and am less opposed to outsourcing than to the notion common among free trade-oriented economists that its benefits should be taken for granted. I will confess also to a skepticism about business reporting that took root as the late-'90s' boom collapsed and that I will probably never outgrow. These are the kind of questions that outsourcing defenders need to answer to sustain public support for a hands-off policy toward outsourcing.

posted by: Zathras on 04.19.04 at 10:31 AM [permalink]

I think what he is trying to say lets assume you have an idea for a new software product that filters obnoxious comments from web logs but you are not a programmer. To minimize your start-up costs you would look at all options of how to best bring your product to market. You could hire 30 people for start-up costs of millions (Hard to get millions these days) or you could outsource key components to U.S. and/or off-shore companies for a fraction of the cost of hiring full time employees. At a later date, when you have revenues and profits to justify expansion, you could begin to insource key areas of the company that make financial and/or strategic sense. For start-ups this formula has a much higher chance of success with much less risk if the product is a flop.

posted by: Kamakazi on 04.19.04 at 10:31 AM [permalink]

It appears to me that Fieldglass' InSite primarily develops software that helps companies manage the projects they have outsourced!

It goes without saying that as American business outsources more and more projects offshore, there will be demand for software that helps them manage those projects. Presumably, the software will be written by offshore programmers, too. The software would allow the business to manage more projects with fewer resources (read people) on site.

The proponents of offshore outsourcing allude to the wonder of the markets and tantalize us by initmating that the effects of the efficient use of capital will have a multiplier effect that we have yet to realize.

This scenario results in a the multiplier effect alright, but it sure isn't the kind an out of work programmer wants to see.

posted by: Genardo on 04.19.04 at 10:31 AM [permalink]


we outsource our CD burning, saves us from hiring 2 people to burn CD's and saves us from purchasing very expensive proffesionaly quality buring hardware (100 or more copies at a time)

with that saved money, we hire 2 more developers

outsource the 2 disposable low paying positions, hire 2 more high paying positions.

same money, yet this posts a gain, as we are investing more in the production of the code and less on the manufacute of such.

seems simple enough to me...

posted by: leesus on 04.19.04 at 10:31 AM [permalink]


1. "Ed, notice that the anecdotal evidence simply supports the factual analysis. It is intended to counter the opposing argument which is almost entirely anecdotal and doesn't consider at all the complexities, related trends, relative importance (broader context), and interactions."

So you're saying that incredibly minor and totally insignificant facts can be used to support theory? Here's a point to consider:

360,000 people file new unemployment claims each week. So how does the offered data compare to that number alone?

Not too well.

2. "These are the kind of questions that outsourcing defenders need to answer to sustain public support for a hands-off policy toward outsourcing."

Those are the questions that not one single outsourcing proponent has answered nor do I expect that they ever will answer.

3. "At a later date, when you have revenues and profits to justify expansion, you could begin to insource key areas of the company that make financial and/or strategic sense. "

That's actually kinda funny. So if you have an existing successful business plan that revolves around outsourcing key labor for the reduce associated costs, why on earth would you alter that plan in order to *increase* your costs? What reason would there be to do this? If you've already gone through the effort of outsourcing, what reasonable rationale is there for insourcing after you've achieved success with the former method?

That doesn't make any sense at all.

posted by: ed on 04.19.04 at 10:31 AM [permalink]


1. "outsource the 2 disposable low paying positions, hire 2 more high paying positions."

The problem isn't outsourcing of low-paying jobs. The problem is that high-paying professional jobs are being outsourced in record numbers. So, to extend your example, the company would also save a great deal more money by outsourcing the software development. Then you'd have more money to hire .... well more outsourced software developers actually.

Once you've done the work of setting up an outsourcing effort, why bother doing anything else?

oh hell. Frankly I've argued this damn thing on this blog and I'm tired of it. So far I've gotten nothing but BS and disposable theory. I'm moving on.


posted by: ed on 04.19.04 at 10:31 AM [permalink]


You seem to have never had a job in the business world. Companies shift between outsourcing and insourcing all the time. A small company may outsource HR but when they reach a certain size they bring it in house as at that point they can do it cheaper and better. Same with software development, manufacturing, distribution etc. These are decisions that all companies make on a continuous basis and if they refuse to stay competitive, they will die. Buy increasing worker productivity, our companies also become more attractive outsourcing recipients about which there have been several recent articles.

posted by: Kamakazi on 04.19.04 at 10:31 AM [permalink]

Well... in my experience, you outsource the temp jobs and insource the permanent jobs. Who wants to bother to hire people for a six-month job, then fire them? Too much trouble, too many lawsuits.

Say your company makes a computer widget. You insource the understanding of your widget and its market niche and all of that. You outsource the driver software - it's a one-off project that doesn't build you anything for the future.

posted by: Rob on 04.19.04 at 10:31 AM [permalink]

This discussion is real easy to understand if one starts talking about the constant outsourcing going on between states, cities, and people on your own street. The international aspects foolishly messes up certain people’s minds.

posted by: David Thomson on 04.19.04 at 10:31 AM [permalink]

Somewhat OT,
From an article on Commondreams re:Iraq
"The private U.S. economy is so uncompetitive it runs a half trillion dollar a year trade deficit with the rest of the world. And the U.S. lives so far beyond its means it runs a half trillion dollar a year federal budget deficit. It must go, hat in hand, to the rest of the world to borrow these sums, well more than two billion dollars a day. This is hardly a model of economic vibrancy. And the U.S.’s civic culture—what the neo-cons once lauded as “the soft power of ideas”—is now feared and mocked by much of the world, including former allies. And herein lies the danger. "

Are these statements remotely accurate? Here is the rest of the article.

I am curious but since I am no expert on the economy I defer to greater minds. I have heard rumblings that our economy is weakening globally but are these figures accurate and if so does it mean we are worse off than it seems?

posted by: Kat on 04.19.04 at 10:31 AM [permalink]


Our trade deficit is not a sign that we are uncompetitive, but more an indicator that we are drawing more foreign investment than we are saving ourselves. A good article is here ...

posted by: Allen Phelps on 04.19.04 at 10:31 AM [permalink]

Hmmm. Did anyone notice a horde of Mexican millionaires setting up factories and hiring in their neighborhood after NAFTA passed? What I noticed was several local factories closing and long time employees being thrown out on the street because the owner said wages were lower in Mexico and he was moving south.

The Indian that Dan mentions is a small drop in the bucket relative to the massive US outsourcing to India. I don't think anyone has noticed a lot of Indian entrepreneurs posting help wanted ads in their local paper either.

Why toss anecdotes? Why not look at the actual hard data at the Bureau of Economic Advisors site?

This site has data on the amount of money invested into the United States from foreign investors and the money invested by US plutocrats into foreign countries. Some numbers:

a) Money moved from US and invested overseas: $136Billion
b) Money moved from overseas and invested in US:
$72.116 Billion
c) Total capital exported from US (a-b): $64 Billion
d) Ireland: From US:$4.659B To US: $2.394B
e)China: From US: $1.718B To US: none
f)Hong Kong: From US $2.303B To US: $49M
g) India: From US: $231M To US: None
h) Singapore: From US: $4.119B To US: -$471M

IF you look at 2002 data, you see the same outpouring of capital (and jobs) from the US to overseas.

This data is hardly obscure or hard to access. So why do globalization's defenders not discuss it instead of trying to muddy the waters with
cherrypicked anecdotes?

In my opinion, its because they are lying -- trying to deceive the US voters.

After all, how many bright young people spend 6 years of their lives --and run up a debt of $150,000 plus in order to get an Ivy League BS, MS, maybe PhD --only to discover those tickets are worthless unless they find some rich man's butt to kiss . Worthless unless they use those prestigeous postmodernist skills to run intellectual con games on the American public.
Hey, who do you think pays for all those clowns at the National Review, New Republic, New York Times,etc.?

posted by: Don Williams on 04.19.04 at 10:31 AM [permalink]

Dear Mr Drezner,

I just heard your NPR interview concerning outsourcing of software to India. As you yourself said, you clearly do not understand the software industry -- which means that you are in the majory -- most of the management of most corporations clearly do not understand the industry either.

I have been working in this business since 1982. I spent about 10 years, on and off, trying to improve the software development process at the large military company that I worked for at the time. I eventually gave up in frustration because the managers at that company did not want well engineered software which was in fact routinized so that cheap labor on anther continent could do that work. Instead, they wanted to force their software developers to jump when ordered and ask how high on the way up. This is not conducive to the routinization you repeatedly stressed in your interview.

Further, at another company, I worked hard to help a group in India pick up the so called routine maintenance of a super large commericial software product. These guys did a good job and are doing a good job. However, it took them the same year and a half to learn how to work in that environment that it took me when I first joined the company. I and many Americans who are now laid off worked hard to teach them to be successfull.

However, our management did not understanding how long each member of that Indian team took to get up to speed started sending all kind of work to India but none of that work was routinized. As a result, there was a lot of stress put on the Indian guys to get things done but a lot of them were newly out of school and had not had even the 1.5 years I mentioned before of training with experts on the new projects. These projects went horribly slow and the work product was terrible and the people being very demoralized jumped to one of the other jobs easily available in the Indian marketplace.

As a result, the little training that they did get from the effort cost our company but benefitted someone else.

It is very important to understand that as it is currently run, the software industry is NOT routinized or routinizable. Bad management has prevented the development of standards and practices that can easily be taught. Further the tools available do not allow for novices to effectively jump into a production software project and be immediately useful -- most people even on simple projects take 6 months to come up to speed. If the job market in India is so hot that no one has an incentive to say in their job that long (and it is) then companies are in fact wasting their money on outsourcing projects.

Therefore, I am not really worried about outsourcing. The jobs will come back when companies begin to look critically about productivity and not just about the short term bottom line. Recent reforms in the way companies are monitored both by the government and major stock holders (like mutual funds) gives me confidence that the emperor's nudify will eventually become common knowledge.

Of course, if we ever do clean up the industry, then maybe the jobs will go away and stay. I think this will take longer than the rest of my working career, however.

posted by: Cowboy on 04.19.04 at 10:31 AM [permalink]

Thanks Allen I will check it out.

posted by: Kat on 04.19.04 at 10:31 AM [permalink]

Say Dan, is that gonna help us when India and China bury us with good old fashioned straight forward competition?

Whatcha ya got here is a case of denial, political and academic all around. Why is it that you academic types never talk about whether or not trade could turn out to be a Nash Equilibrium. Ya know? It's only called competitive equilibrium.

Look, it's true that there are beneficial trade effects. However is this the main process going on, is this the most significant trending factor? I would have to say no. I would have to say the most significant long term factor in play is the long term competitive degradation that America is experiencing.

Companies get outcompeted, fairly or not. There's no reason to conclude that countries can have that happen to them too. And while you're worring about beneficial side effects of trade, bad government policy and ill-thought out trade policy are trading away the intellectual and labor capital of tomorrow.

posted by: Oldman on 04.19.04 at 10:31 AM [permalink]

At bottom, our military successes in the last
hundred-odd years were based on an unbeatable
economic power (allowing both successful
attrition, and the establishment of solid
alliances). This was the true 'deterent' - the
basis, along with the Atlantic and Pacific, of
our security. We bumped along without changing
that equation, until now. The main difference now
is that there is no new "New Economy" for us to
move to to support the equation.

As far as foreign competition, they apply trade
barriers to all American products. The same
people telling us that Americans earning living
wages in the late 70's and early 80's was why we
couldn't compete are those saying the same now. I
lived in Japan 2 years during that time, and they
had higher wages than we did - Government
subsidies were their trade leverage. American
cars were quarrantined for two years, and the
duty was 200% of retail.

Watch the money. Back then, the average CEO made
50 to 70 times the wages of their lowest paid
worker. Today, the Fortune 500 CEOs make 200 to
250 times the wages of their AVERAGE worker. Same
beneficiaries of the tripe today. The
putative 'new jobs' will all be hands on,
relatively low paying jobs with - new trend - NO

I haven't ever heard that a country has ever
*given* away its security and future capital
before - that's because the entities pushing for
this are not loyal to a coutry, but their coffers
(conveniently relocatable). The OMB's figures are
also available - 50 years ago, corporations
provided roughly 50% of Federal revenue with the
rest provided by individual income tax. Now, they
provide 1/6th the revenue of the individual. They
pay no taxes, and have loyalties off shore
(coffers). The numbers here are 2 plus 2...

posted by: Steve on 04.19.04 at 10:31 AM [permalink]

"Our trade deficit is not a sign that we are uncompetitive, but more an indicator that we are drawing more foreign investment than we are saving ourselves."

Strictly speaking, it's American borrowing that's driving the trade deficit. As the post from Don Williams shows, direct investment is actually flowing out of the US.

posted by: Skeptical Speculator on 04.19.04 at 10:31 AM [permalink]

The real problem is that the US dollar is overvalued. If it weren't overvalued, we wouldn't have the huge trade deficits that we do.

If the dollar falls 50% relative to the rupee, the Indian programmer just got 100% more expensive. If the dollar falls 50% relative to the yaun, those Chinese imports now cost twice as much. If the dollar kept falling, at some point, Americans would cost as much or less than the Indians and Chinese.

Countries like China can play stupid currency games by buying dollars. This changes the situation, because now instead of a rising currency making their exports more expensive, an overheating economy and inflation make their exports more expensive. Either way, their exports get more expensive.

Why will the dollar fall? Supply and demand. The US is flooding the world with dollars with its 500-600 billion dollars a year trade deficit. More outsourcing will increase the trade deficit.

Some have argued that the US will export all of its jobs. The US cannot export all of its jobs to outsourcers. At that point, the US would be producing nothing and the value of the dollar would be worthless. At that point, the US companies could not afford the then infinitely expensive Indians and Chinese.

Outsourcing will eventually go away as an issue. Outsourcing and the trade deficit will lead to a falling dollar, which will make the Indians and Chinese a lot more expensive than they are now.

posted by: Paul on 04.19.04 at 10:31 AM [permalink]

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