Thursday, July 14, 2005

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A new outsourcing business model

Bo Cowgill was kind enough to e-mail me a link to this Computerworld story by Patrick Thibodeau about an entirely novel outsourcing venture:

What San Diego-based start-up SeaCode Inc. plans to do is nothing if not novel: anchor a cruise ship three miles off the coast of Los Angeles, fill it with up to 600 programmers from around the world, eliminate visa restrictions and make it easy for customers to visit the site via water taxi. The two men behind the venture -- Roger Green, who describes himself as an IT and outsourcing veteran, and IT consultant David Cook, whose job history includes a stint as a ship captain -- recently discussed their plan in an interview with Computerworld.

What is the business model? Green: The promise of the benefits of outsourcing in distant lands doesn't come free. Most of the gotchas are related to the geography and to the cultural difference....

Green: The model is based on making a platform, if you will, to house these engineers, this workforce, which is very close to the U.S. but which is in fact not in the U.S. We can pull programmers and engineers from anywhere in the world. A fact of life is there are different skills that are stronger in one country versus another....

Does U.S. labor law apply? Cook: U.S. labor law does not apply except on a U.S. flagship. The flag of the ship will provide the labor law -- more than likely [the ship will be registered in] Vanuatu, the Bahamas or Marshall Islands. Their intellectual property laws, as well as the laws governing seamen, are very similar to the United States'.

What will life be like for your employees? Cook: The pay is about three times what they earn in India today....

What is the salary? Cook: Approximately $1,800 a month.

What is your pricing going to be relative to India? Green: We will be approximately the same price as the distant-shore companies. We will take a little less margin than they do.

Do you expect U.S. residents to apply? Cook: Absolutely. Approximately 50% of the resumes that we've received are from U.S. residents.

There are a lot of things that don't make sense to me about this business model:

1) How can they pay three times the Indian wage but maintain similar pricing levels?

2) How are cultural differences eliminated by moving developing country programmers from their country of origin to a ship three miles off the U.S.?

3) Is evading U.S. regulatory strictures (payroll taxes, health insurance, labor standards) the only thing that makes this venture even close to profitable? If so, what does that say about U.S. regulations?

posted by Dan on 07.14.05 at 08:22 AM


There was also a company (PRTG or something) that was profiled in Inc Magazine a few years back that was building a development site on the Caribbean and populating it with programmers from all over the world (but mostly from India). The company had some successes, but then went on a complete downward spiral into bankruptcy. How much of that was because the model was flawed versus poor marketing on the part of the company is unclear.

Now, this seems even more bizarre. While I do not know how much it costs to operate a ship of this kind, I just can't see how the cost model makes sense. How can this be cheaper than leasing office space in the Bahamas ? And while office space in Bangalore or Hyderabad is expensive, I can't believe its more expensive than space on a ship (especially given that living quarters are also needed). Not to mention support staff, meals etc.

And what happens if you need more space ? Lease another ship ?

I can see the attraction to young unattached programmers, even US programmers though. Work there for a few months, collect money free of US taxes (US taxes are worldwide, but if you're outside the US, upto $80K can be tax-free). But its impossible to build a solid organization with that kind of turnover.

posted by: erg on 07.14.05 at 08:22 AM [permalink]

I think their profit margin may be eaten up by the cost of dramamine.

Seriously, this idea is idiotic. Why not just put them in Mexico? You can walk across the border from here, for pete's sake. It would cost less to bribe the Mexicans to look the other way than to rent and maintain a freaking cruise ship.

posted by: Don Mynack on 07.14.05 at 08:22 AM [permalink]

You can bet there won't be any 50-something year old white men among the programmers, even though there are plenty of them available.

"Regulations, we don't need no stinking regulations."

Is this how far we have fallen?

The political backlash is coming (see CAFTA).

posted by: save_the_rustbelt on 07.14.05 at 08:22 AM [permalink]

As a former Marine, I can vouch for the fact that being on a ship gives one a whole new perspective of how long 24 hours really is. Don't look now, but K. Marx's ruminations on the working day are coming to mind here. And will there be any more profound proof of the impact of globalization when the good folk in the port cities of Mexico's west coast view are abuzz with the prospect of the Indian programmer's ship pulling into port for 72 hour liberty....

posted by: leather_neck on 07.14.05 at 08:22 AM [permalink]

Working with people in different time zones is not easy or quick and time to market has value. Much of what they will provide is better communications, coordination, control and service. Get them away from mom and the girlfriend, and you can really get the code out of them.

This will also be a company town. Food will be purchased on board, maybe a Fry's on the poop deck, trips to Tijuana will involve paying for the boat to and from, etc.

16 lines, what do you get?
Another hour older and deeper in debt.

posted by: Richard Heddleson on 07.14.05 at 08:22 AM [permalink]

Being a woman I probably shouldn't be suggesting such things, but I'd hazard a guess that staffing the boat with Pamela Anderson look-alikes might go some way towards keeping the "talent" shipbound and content. There would definitely need to be something besides the thrill of twice or thrice my usual salary to lure me to spend months on a leaky tug with fellow geeks from around the world, that's for sure.

posted by: Kelli on 07.14.05 at 08:22 AM [permalink]

The idea is actually not "novel". Before World War II, there were floating gambling casinos anchored past the 3-mile limit near Los Angeles. They would have come back after the war, but Las Vegas was a better substitute. These appear in several Raymond Chandler novels.

But also, a practical difficulty -- though not insurmountable -- in offshoring is the dialects of English spoken. I assume the intent of the promoters here is to bring programmers from India, the Phillipines, Pakistan, and so forth, to these ships to do the work. Even though all such workers would be native English speakers, it's very hard for them, and for US-born English speakers, to understand each other's versions of English.

However, this sounds almost like a Producers type con game, trying to find a sure-fire business failure.

posted by: John Bruce on 07.14.05 at 08:22 AM [permalink]

Having worked in a firm that employs offshoring on a pretty significant scale, a thought that occurs to me that 600 engineers are going to require some pretty serious bandwidth (and low latency) internet connections. Sat connection can't work (AFIAK too high latency) so I assume they will need to rig up some sort of direct wi-fi connection to US. I would suspect reliability will be a HUGE issue. Since all the data servers are not going to be hosted on the ship having the internet connection cut would basically ruin the productivity of the everyone in the operation.

That being said, having the offshore team on the cruise in the same time zone is a pretty big plus. Also, travel for meetings between the crusie ship and the onshore office becomes much more practical. Finally, as far as I know, profit margins for offshoring firms are very high so that paying three times Indian wage won't bankrupt them.

My .02 cents.

posted by: Martin Ross on 07.14.05 at 08:22 AM [permalink]

Somehow I picture 300 Indian geeks barfing over the port rail the first time the seas get rough.

Could be a new chance for entrepreneurship, someone could chopper in hookers daily, or maybe float a barge beside the geek-ship-lollypop.

posted by: save_the_rustbelt on 07.14.05 at 08:22 AM [permalink]

Here's the "liberal" take.

Of course, "liberals" are also the ones who've helped employers evade hiring and safety laws by allowing millions of illegal aliens to come to the U.S. Apparently the Indians aren't Of Color enough or something, otherwise they'd be encouraging a million ships.

I'd suggest using Yahoo! to search for discussions of this matter at nerd sites, I'd imagine they have rather interesting things to say about it as well.

posted by: The Lonewacko Blog on 07.14.05 at 08:22 AM [permalink]

Sorry, I meant "yahooing", as in "yahoo it".

posted by: The Lonewacko Blog on 07.14.05 at 08:22 AM [permalink]

When the geek-ship-lollypop gets in trouble, will they expect the U.S. Coast Guard to rescue them?

Not with my tax dollars, sorry.

posted by: save_the_rustbelt on 07.14.05 at 08:22 AM [permalink]

If I understand the matter correctly, a ship of this kind could anchor at sea off the US coast but could not enter a US port without putting employees from India and certain other countries in violation of visa requirements. So if a mechanical, weather or other emergency forced such a vessel to a US port the company could find many of its employees arrested and processed for deportation. If the Computer World guy was told that this idea would permit evasion of visa requirements, I think he was misinformed.

posted by: Zathras on 07.14.05 at 08:22 AM [permalink]

Last I heard there is a casino boat that operates in and out of Little River, SC - which is right at the North and South Carolina border. The gambling is done outside US territorial waters of course.

If there ever was a business model asking for "unforeseen" problems, this one has got to be it.

posted by: russell120 on 07.14.05 at 08:22 AM [permalink]

What about the other 50% of the applicants?

I think their profit margins would be eaten away by the whales more likely!!

posted by: fullymubbed on 07.14.05 at 08:22 AM [permalink]

So if a mechanical, weather or other emergency forced such a vessel to a US port the company could find many of its employees arrested and processed for deportation

Not at all. Under an emergency, they would be granted some sort of temporary permission. If the ship had to remain on dock for an extended period of time, then the employees would probably be asked to leave.

From what I read, the intention is to use sailor's visas for the employees. With those, the employees could visit the US on shore leave or transit through the US.

Still the idea is loony.

posted by: erg on 07.14.05 at 08:22 AM [permalink]

Are all of you too young to get my Shirley Temple joke?

posted by: save_the_rustbelt on 07.14.05 at 08:22 AM [permalink]

I also think this sounds like a con.

Eat some start-up capital, then 'discover' that it'll never work. Declare bankruptcy.

Or something like that...

posted by: MattJ on 07.14.05 at 08:22 AM [permalink]

If the Computer World guy was told that this idea would permit evasion of visa requirements, I think he was misinformed.

I have this mental image of a group of software managers and marketeers leading a group of Indian programmers through a hole in the border fence in San Diego so they can seek some shore leave.

This'd make a good movie.

posted by: The Lonewacko Blog on 07.14.05 at 08:22 AM [permalink]

I think it's a con too. I've seen how hard it is to maintain comms on a US Navy flagship (LHD class), and that's with a worldwide satellite network backed by the US govt.

Also, the water three miles out is probably too deep to anchor so they'll have to keep moving. This will increase the difficulty (and expense) of maintaining their connection (satellite, or straight shot to LA area) by at least a factor of 10.

Things they'll need:
Gyro stabilized antennas
Multiple antennas to unmask blind spots when the ship turns
An auto switching network to detect which antenna has the strongest signal and switch automatically.
People to maintain all of the above.

Let's not even get into the environmental regs. Ships have to be x miles off the coast to pump sewage, y to dump trash (yes, it just gets thrown over the side) and z to pump gas and oil waste. (I believe 3/12/25, but don't hold me to it)

Depending how well the ship is maintained, it'll need to come into the shipyards every 12 to 18 months for an overhaul that will last 30-90 days. What will the company do then? Even if the US govt allows the programmers to stay on board, the yard won't let non-crew onboard.

All in all it would be easier and cheaper to bribe the mexicans and set up shop in TJ or rosarita.

posted by: Kevin on 07.14.05 at 08:22 AM [permalink]

I currently manage a bunch of indian programmers. What my company does is bring them to the US for a few months at a time with work visas. That way we can pay them indian salaries and have them work in the US. My guess is when you add up the cost of food and lodging, the savings evaporate, but, I don't think the decision makers are smart enough to figure that out.

I agree with the difficulty in understanding them. It's not just a difference in dialect either. Sometimes I fully understand every word they say. It's just that what they say doesn't make any sense.

The boat idea doesn't sound like a huge improvement over having them work out of Bangalore. You can have BGL developers work at night to match normal US hours. They can typically take it for a few months before quitting.

posted by: Bob on 07.14.05 at 08:22 AM [permalink]

"What does this say about US regulations"??? You have got to be kidding me. Nobody imagines that basic labor standards are cost-free, only that the benefits outweigh the costs. The fact that dodging regulations is profitable doesn't necessarily say anything about US regulations. Any fool can see the benefits (to the company's owners) of escaping oversight.

posted by: Slippery Pete on 07.14.05 at 08:22 AM [permalink]

So is this for real? After reading the article and comments on it here, I can't shake the thought this is some big joke.

posted by: Andrew Steele on 07.14.05 at 08:22 AM [permalink]

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