Thursday, August 5, 2004

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Hillary Clinton does outsourcing

One of Bill Clinton's political gifts was to take at a divisive issue and frame it in a way that sidestepped traditional political faultlines. Quick example: his call for making abortion "safe, legal, and rare." That phrase epitomizes the vast American middle on the issue. One could argue that this is the core of "Third Way" politics in general -- Tony Blair's "tough on crime -- and tough on the causes of crime" would be another example.

Which brings me to Hillary Clinton and outsourcing. The good Senator from New York has managed to play both sides of the fence on this issue, blasting Treasury Secretary John Snow for suggesting that outsourcing helps the economy -- while simultaneously welcoming one of India's biggest outsourcing firms to Buffalo, NY. How to explain this? Some have accused her of lacking a firm grasp on policy issues -- but it could be that Hillary is stumbling around, trying to find a Third Way on the issue.

Which brings me to her Wall Street Journal op-ed of a few days ago. No stumbling here -- she comes up with a superior political response to offshore outsourcing -- that it's not as cost-effective as firms believe it to be:

New Jobs for New York, a nonprofit corporation focused on economic development, commissioned a study by Howard Rubin to explore the real facts on outsourcing. He found that next year, nine out of the 10 largest firms in New York are predicted to perform IT or business process work offshore. The primary reason given by 90% of these firms is "cost savings." So he analyzed these savings by category.

It turns out that the savings from outsourcing were not as large as many employers believe. While they cited average savings of 44% per outsourced job, Prof. Rubin demonstrates that the actual figure approximates 20%. Lower wages are only one part of the offshore equation. When you tabulate all the costs, our nation is more competitive than employers think.

You're probably asking, "How can we compete against countries where a computer programmer's wages are $10,000 per year while the equivalent U.S. wage is $100,000?" The explanation is that additional costs must be added to the offshore wages themselves to get the complete picture on costs. Companies have to spend money for planning, offshore transition, vendor selection, technology, communications, offshore management, travel and security. Many employers do not take every one of these costs into consideration. Add up all the costs and suddenly a call-center worker with a raw wage of $5 an hour offshore has a true cost of $17. And that's why we have the potential to be competitive.

The article then goes on to propose many of the things John Cassidy said wouldn't be discussed by politicians in his New Yorker essay. The political brilliance of this argument is that it allows the junior Senator from New York to blast the trend of offshore outsourcing without having to agitate for inane policy solutions like protectionism. Her argument is that if firms only realized the true costs, they wouldn't outsource to Bangalore, but to Buffalo instead.

Now, I'm pretty sympathetic to Clinton's argument -- it's a definite improvement over the position taken by the senior Senator from New York. It also buttresses a point I made in "The Outsourcing Bogeyman":

It is also worth remembering that many predictions [about the explosion of outsourcing] come from management consultants who are eager to push the latest business fad. Many of these consulting firms are themselves reaping commissions from outsourcing contracts. Much of the perceived boom in outsourcing stems from companies' eagerness to latch onto the latest management trends; like Dell and Lehman, many will partially reverse course once the hidden costs of offshore outsourcing become apparent.

My one caveat: eager to learn more, I checked out the New Jobs for New York web site to find the Howard Rubin study. I found this press release and this summary of the Rubin report (co-authored with Patricia Jaramillo). What I did not find was any hard numbers to back up Rubin's findings. It's not that they don't necessarily exist -- I just couldn't find any copy of the full report, and the summaries provided no data on this point.

Lest I be accused of not doing enough shoe-leather reporting, I, like, actually picked up the phone and called New Jobs for New York. The executive director was very friendly, and suggested I contact Rubin directly. I've left a message with him.

Should I see hard numbers, the readers of will be the first to know.

In the meantime, consider this a case study of how Hillary is learning from Bill.

UPDATE: Rubin might have his own consulting prejudices -- according to Forbes, he's a VP for Meta Group.

posted by Dan on 08.05.04 at 11:46 AM


I would be interested in seeing the specific numbers. In rcent rexperience, particularly with Mrs. Clinton...(Yes, I live in NY) if the numbers aren't there, the reason is they don't help the case being made. Call me made skeptical by my scar tissue.

posted by: Bithead on 08.05.04 at 11:46 AM [permalink]

Wouldn't you consider the phrase "playing both sides" to be a partisan expression?

If being a centrist means being able to see positive points on both sides of an issue, then the act of expressing those positives in a single phrase should be considered "offering a centrist view" - not "playing both sides".

(Whether you want to consider HC a centrist is another discussion.)

posted by: wishIwuz2 on 08.05.04 at 11:46 AM [permalink]

That is just like a Clinton to actually think about an issue and use what they find to formulate a better way. And we know from the '90s where that will lead us!

I think they just don't value straight-forward thinking. Some issues just don't need nuanced thinking, idiotic rhetoric is far superior.

posted by: Rich on 08.05.04 at 11:46 AM [permalink]

I know from personal experience and have reported here before that outsourcing doesn't nearly save as much money as Management would like to believe. On the contrary, it can actually cost extra, if you take everything into account, and it can be a complete waste of money, if you look at the quality of the resulting product.

But I'm beginning to wonder if there are some people here - possibly including Dan - who believe that outsourcing simply MUST be good. That this is not about "cost savings", "productivity increases" etc., but really just about outsourcing for the sake of outsourcing. We have to outsource jobs, because outsourcing must - somehow, magically - be a good thing.

So rather than asking for statistics to prove that outsourcing is a bad thing, how about you provide statistics that prove that outsourcing is a GOOD thing? And please don't confuse that with statistics (which you have provided in the past) that allegedly prove that outsourcing is not necessarily a bad thing. ("Not necessarily bad" is not the same as "good".)

posted by: gw on 08.05.04 at 11:46 AM [permalink]

Ah, brilliant. Now step two for the Hill-dog would be to start talking up the merits of insourcing, drop some hip references like "according to Chicago political scientist Daniel Drezner" and the stage will be set to up that p-value to where it belongs.

posted by: praktike on 08.05.04 at 11:46 AM [permalink]


The U.S. Senate can do a little better than these wishy-washy Clintonistas. Someone over at pejmanesque says YOU should run against Barack Obama. I don't know where Keyes stands on outsourcing, but he's probably not much better than Hillary. Drezner for U.S. Senate!

washington pundit

posted by: washington pundit on 08.05.04 at 11:46 AM [permalink]

Hilary would be smart to remind people of the distinction between outsourcing and offshoring. The important issue here is determining which processes will remain internal to the firm and which will be external, ie, outsourced to specialized service providers who, in most cases, will be US companies that for the most part employ people in the US. A company may outsource its HR functions to Gevity, a US provider, or its internal IT help desk to Remedy (owned by BMC), or most of its legal work to any number of huge corporate law firms.

Done properly, outsourcing is usually a very good thing because it allows companies to focus on their core processes. An energy company can focus on efficient power generation or tapping new markets rather than billing and customer care. An insurance company can focus on gaining new clients and launching new products rather than claims processing. Cost is only one part, and often the least important part, of the overall attraction of being able to let go of complex internal processes that do nothing to drive greater revenue, improve the company's products or secure a lasting competitive advantage. In short, companies that divest, or outsource, non-core processes can focus on what differentiates them in the marketplace, which is the best way to grow revenue and increase return on assets, ROIC and ROE.

Isn't this what we want our companies to do? How the hell else do you expect our slow-growing, F1000 mature-industry dinosaurs-- which employ probably as much as half the workforce-- to provide returns on invested capital of more than 1-2% per year? If they can't do better than this, then where the hell are this country's savings supposed to go, and how will workers' pensions ever be in the black?

posted by: lex on 08.05.04 at 11:46 AM [permalink]

While Dan has been hitting the outsourcing issue hard, he has been pretty solid is saying only that trade should not be restricted, not saying which trade should happen.

And the distinction between outsourcing and off-shoring is a pretty significant one that the terminology in this debate seems to have left behind. Companies outsource lots of stuff to US firms, from cleaning to running the cafeteria. No one in their right mind really complains about this (with the exception of when it applies to the US military). Off shoring is really the political issue and we should probably call it that. It will reduce confusion around the issue and perhaps encourage businesses to look at more outsourcing arrangments in the US, rather than outside.

posted by: Rich on 08.05.04 at 11:46 AM [permalink]

For what it's worth, I'm a middle manager in a small corporation -- what you might call manufacturing-lite. We made a $100,000 investment in some CNC machinery about four years ago. Our shop of (7) threatened to quit, citing their eventual replacement by machines.

Cut to four years later, we've bought a second CNC machine and have (22) shop employees, including all (7) of the original group. That's the point of offshoring (the term is offshoring, not "outsourcing"), to make the company stronger by saving costs, to eventually bring on more employees at your home office. The point is not to somehow subvert the American process, bankrupt the unions, starve out the poor and send all of your human rubbish to work at McDonalds and Wal-Mart.

posted by: Gunnar Hegel on 08.05.04 at 11:46 AM [permalink]

Let's say for a second that Rubin and Sen. Clinton's statistics are correct. Do they think they know more about a company's business options than the company's maangement? Do they think CEOs are generally stupid? Having consulted on a recent decision to source goods abroad (not for the business decision per so but shhh), I relied on management's forecast. Yes, they recognized that the forecasted direct cost savings were partially offset by increases in other costs. My guess based on their perception of their facts - the Rubin statistic in their case was around 40% not 80%.

posted by: pgl on 08.05.04 at 11:46 AM [permalink]

Hey -- isn't tenure a form of protectionism? If so, is Dr. Drezner willing to give up the struggle to achieve it?

posted by: stari_momak on 08.05.04 at 11:46 AM [permalink]

Here's a huge mistake with the Clinton arguement:
Companies have to spend money for planning, offshore transition, vendor selection, technology, communications, offshore management, travel and security.

These are mainly one-time expenses. In the long run, offshoring probably saves the firms money. I would guess the $17 figure comes from calculating these all as ongoing expenses. Also, it doesn't take into account if these are extra expenses or differently allocated expenses.

posted by: Ted Craig on 08.05.04 at 11:46 AM [permalink]

Amen, Ted. I'm sure that in 1903, horse and carriage transportation was also more efficient than automobile transportation.

Here's how it shakes out:

--planning: if by this is meant Program Management, then this is a one-time expense. There is of course significant financial planning and analysis required on an ongoing basis, but these are not more expensive than on-shore.

--offshore transition, vendor selection: one-time expenses.

--technology: no expenses over and above what one would pay for servers and software onshore.

--communications: ongoing but significantly decreasing as bandwidth in India and other naitons increases.

--offshore management: cheaper than onshore

--travel: significant and recurring

--security: not significantly greater than for onshore.

All in costs make it clear that, as with capital expenditures of any kind, outlays connected with offshoring business processes or applic'ns mgmt or IT mgmt are high at the outset and then decline rapidly after the first year. The return on investment, which is significant, is realized over several years. As with any investment, funds need to be carefully allocated and the projectg managed effectively for it to pay off.

Our understanding of how to manage offshore processes is improving rapidly. There is no question that offshore outsourcing of non-core processes is already cheaper than keeping these processes in the US and in the company and that these efficiencies will increase considerably as we master the process of managing offshore.

posted by: lex on 08.05.04 at 11:46 AM [permalink]

lex is in that business and will save my mental energy in stateing only that he lost any credibility
a while back.

posted by: Alex on 08.05.04 at 11:46 AM [permalink]

It's a nice business. You should think about getting into it, Alex. Nothing sinister about it, it's just one aspect of the reinvention of the the corporation and of business processes in a globalized era.

posted by: lex on 08.05.04 at 11:46 AM [permalink]

Man, this lex guy is choice. Definitely one of the new breed of republicans (or elites of any stripe). A perfect exemplar of why Huntington is right, only now the disease has spread to the sub-elites.

Recalls a conversation I overheard with one of the MSc. students here. Seems he was glad that none of congresperson's kids were in the military ... you see , the 'Republican', his word, conservative 'elistist' has to be behind the scenes (at the 'home office'?) to run things.

How different from real Americans. Classic free riders, using up the social capital built up over generations, taking advantage of the peace, the roads, the schools, that our fathers and grandfathers built, while selling out the future of America. People like lex should be forced to go live in India or wherever they 'outsource' from. I am sure they could get a nice flat behind high, high compound walls. It wouldn't be punitive for them, it would just spare us the gangreneous he puts out .

posted by: stari_momak on 08.05.04 at 11:46 AM [permalink]

"Do they think CEOs are generally stupid? "

Were you sleeping during the Internet boom?

Often, yes, CEO's are frequently too stupid to resist a slimy consultant or market research firm.

Offshoring is getting the same kind of hype that was put out about the internet. In the 90's, the consultants (paid for by web services firms) were saying that every business had to get on the internet or risk being "Amazon'd" out of business by competitors who do it first.

The web services companies made loads of money, but the threat wasn't very substantial, and the companies received poor value for their money.

Now, the same consultants (now paid by offshoring interests) are saying that every business has to get their people offshored, or else risk being put out of business by their competitors who go offshore first. This time, the beneficiaries are the companies that provide offshored services. It's not in their interest to let you know about problems in offshoring and the actual costs.

As an aside, if anyone reads IT-related offshoring "numbers" or opinions issued from Carnegie Mellon, be advised that the group at CMU which issues such things is partly controlled by Tata, the vast Indian conglomerate founded in the Victorian era, which is a major player in the offshoring business (and the H1B/L1 visa worker business).

posted by: Jon H on 08.05.04 at 11:46 AM [permalink]

As far as I'm concerned, the debate about outsourcing begins and ends here

I share most of your skepticism about outsourcing, and I suspect that the financial benefits are not anywhere as large as its propents suggest. However, AFAIK, Dan has never suggested that anyone should use outsourcing, rather that they should be able to do so. There's a big difference.

You may argue that outsourcing is stupid (and I may agree), but that doesn't mean that a law should be written to outlaw businesses from doing stupid things. And if you are advocating a law prohibiting a certain action, I would argue that the burden of proof is clearly on you to show why the action is bad and should be banned.

I think you need to look at the history of trade in this country to see how it has benefited the future of America, not sold it out. Think of all the other times in our history where people thought some kind of change was going to cause everyone to lose all their jobs. Whether it was the blacks, the Mexicans, the Japanese or the robots, whenever a change comes along that makes businesses more efficient, Chicken Littles keep coming out talking about how this is going to cause everyone to lose their jobs, and it hasn't happened yet and I don't see why it should start now.

I'm rarely one to defend the actions of "management consultants", but when you talk about India, realize that people like lex are giving these people a far better job than they would otherwise have, and is helping to build the Indian economy. I would assume that lex is doing a hell of a lot more then you are to help the people of India.

posted by: deytookrjobs on 08.05.04 at 11:46 AM [permalink]

Stari and Jon H, Well said!!! [sorry about my earlier typos due to anger re]

posted by: Alex on 08.05.04 at 11:46 AM [permalink]

Well, we know where she stands on outsourcing senators...

posted by: Alan K. Henderson on 08.05.04 at 11:46 AM [permalink]

Outsourcing in itself is neither good not bad. It is the firm's decision. Bill was smart and a great president, but Hilary is doing even better. Perhaps it is time for the DNC to seriously consider the Toricelli option before it is too late. Maybe the DNC and RNC could do a double switch in the late innings: Hilary for "JFK" and Rice for Cheney.

posted by: jim linnane on 08.05.04 at 11:46 AM [permalink]

If posters like stari and jon are representative of the public's knowledge of outsourcing, it's no wonder our politicians say so much nonsense about the matter. At least Jon has picked up on the difference between outsourcing, which is universal, and offshoring, which will be near-universally adopted in the next two decades. Outsourcing merely one facet of the drive to enhance organizations' ability to process information, whether that be done through technology, or improved business processes or a combination of the above. It's no more sinister than the personal computer.

Let's make it simple. Imagine it's 1995. Suppose we have a group of professors at U Chicago who, in addition to their daily teaching, writing, blogging and collecting of celebrity photos, are trying to develop some expertise in new research areas such as outsourcing. Traditionally they have hired research assistants (let's call them RAs) to gather articles, abstract them, organize these abstracts and present them so as to streamline the information flow and enable the profs to get up to speed quickly. The RAs do searches on Nexis, but much of their time is spent in libraries perusing statistical abstracts, thumbing through books, chasing down articles and photocopying them.

Some of these RAs are quite talented, most do good work, but the process is difficult for the profs to manage because

a) the RAs tend to turn over quickly, which often leaves gaps as profs scramble to find and train new ones;

b) due to their 9-5 work schedules, the RAs are often not available precisely at those times when the professors need a quick turnaround (eg prior to a media appearance or when reacting to an opponents' attacks);

and most importantly,

c) the information flow is increasing geometrically due to an explosion of new research, new articles and new data.

So the business problem, so to speak, is that a predominantly manual process (with the aid of the Nexis database) does not meet the professors' needs for timeliness and breadth of research coverage. As the decade progresses, new web search technology arrives, and works moderately well for such content as is available on the web, but not well enough to replace the RAs, who use it in addition to their other data sources and research tools.

Fast forward to 2001. A new and extrememly efficient search engine called Google comes to the attention of the profs. Let's say the profs want to use this tool to search content available only to U Chicago faculty, ie, not out on the web. That requires a site license that costs, oh, let's say, $1500 per seat, or user, plus 15% maintenance and maybe another $50k to install and configure the software on their network.

So here's the question, folks: The profs can either buy only 5 licenses and restrict them to the RAs' desktops, or buy 305 licenses for all the profs and the RAs. The profs don't have budget for 305 x $1500k x 1.15 (maintenance), but they love using Google against their proprietary data sources and want 24x7 access to it.

What would you recommend the profs do?

posted by: lex on 08.05.04 at 11:46 AM [permalink]

Excuse me--change the 1995 scenario by deleting replacing blogging with chatting with all and sundry in Hyde Park coffeehouses.

posted by: lex on 08.05.04 at 11:46 AM [permalink]

Here's a thought. The RAs are smart people with college degrees. Why not train two of the more technically-inclined RAs to become database administrators and move the other three into external-facing positions that generate either funds for the university or publicity for PR-hungry profs? How about a full-time media relations flack to elevate Dr Drezner's profile and get him TV appearances?

Result: U-C profs develop a leading role as experts on oputsourcing; U-C gets more revenue from two additional fundraisers + increased publicity.

posted by: lex on 08.05.04 at 11:46 AM [permalink]

Man, lex must really be a 'management consultant'.

RA's, in exhange for providing near slave labor to prof's, are supposed to be learning the 'craft' of research. The university, BTW, operates very much like the Middle Ages' guild system. Very restricted entry, with your prospective 'peers' as the gatekeepers. And at the end of it all, a ticket out of all the competition for the rest of your life. Talk about protectionism.

I don't understand lex's analogy. To make it similar to 'off shoring', he would have to have the RA's positions taken by 5 people in India.

As to my need to look at American economic history, I am pretty sure that the longest sustained growth took place at a time when protectionist Republicans were in power in the later half of the 19th century. I also know that the German economy in the later half of the 19th century, behind protectionist walls, caught up with the trade oriented Brits. Therein lies a lesson. Free trade in a single ethnolinguistic area is probably good -- the Zollverien princip, let us call it. Add ethnolinguistic variation and you end up with Mexico.

posted by: stari_momak on 08.05.04 at 11:46 AM [permalink]

The "RAs" in my example were not graduate students but reasonably well-educated administrative assistant types not enrolled in a PhD or other graduate program.

To be clear, the choice is either no Google or no more RAs. Any rational organization would seek to have both, ie avail itself of technology AND transition these talented people into jobs where they can increase revenue or manage the technological tools adopted.

The point is that outsourcing, be it technological or process-based, enables companies to move people into higher value-added jobs. I know from experience that hardly anyone wants to do redundant work that can be better done by either software or external specialty service providers. Isn't this also what we as a society want for our people?

posted by: lex on 08.05.04 at 11:46 AM [permalink]

Stupid? CEO's and other executives? Are you kidding? Have you ever worked for a dysfunctional organization as I am now? A place where "deadlines" are set by layers of manangement who never see people who ever see people who ever see people who might know whether the deadlines are realistic?

I have watched as this project I am working on has been forced by unbending deadlines into making idiotic design choices or design non-choices. I have seen a "technical architect", in the face of impossible deadlines, instead of pushing back against the impossible deadlines, make a potentially fatal design flaw that enabled him to get a superficially high level of low-quality output out the door. Fixing that mess is my job, he is on to his next architecture project. The result is the project ultimately will take much longer than if it had been done right in the first place. But hey, I don't have to care, I get paid by the hour and actually get paid for overtime.

Cultural differences come into play here. This technical architect comes from China, speaks very poor English, and probably doesn't know how to push back against impossible demands in a culture that is strange to him. This is a quality that executives prize, but they're shooting themselves in the foot.

I, a 51-year old contract programmer who is practically unhirable in the outsourcing climate anymore in spite of being damned good at what I do now sit next to a project manager who is busy hiring talent for another big project. One factor in his hires is the need for training - training in java, training in object oriented technologies, in java, in databases - things that many "unhirable" programmers already know.

He, himself, mentions the need for a "governor" to be placed on the outsourcing engine. For those who don't know, a "governor" in this context is an artificial device needed to restrict a vehicle from going as fast as theoretically possible. There is an offshoring "frenzy" in which fear of competition and fear of Wall Street punishing firms that don't offshore causes more work to be offshored than is actually good for the corporation.

And so, never a fan of Clinton-triangulation, I have to say that Hillary is onto something here. Part of the offshoring movement, whether you're pro-free trade or not, is simply the latest business school fad, the internet boom of the 'oughts.

posted by: Steve Cohen on 08.05.04 at 11:46 AM [permalink]

I would like to know the full numbers as well I am writing an Essay on Outsourcing Jobs to Foreign Countries for my Business Writing Class. Please let me know when or if you get those numbers.
Thank You

posted by: Bonny on 08.05.04 at 11:46 AM [permalink]

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