Thursday, July 5, 2007

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So how's the offshoring tsunami going?

Your humble blogger has been unusually consistent in his position on offshore outsourcing:

1) The initial offshoring of tasks will slow as a) mistakes are made and as b) labor markets begin to equilibrate;

2) Offshoring will be limited to tasks that can be segmented into simpler jobs.

Let's see how things are going now, shall we?

The Influence Peddler reports that some Silicon Valley firms are now engaged in "reverse offshoring":

No Joke:
The rising cost of paying engineers in Bangalore has prompted at least one Silicon Valley start-up to save money by closing its Indian engineering centre and moving the jobs back to California.

While this “reverse offshoring” remains unusual, it points to a broader belief in the US technology industry that the savings that drove software engineering jobs to India’s technology capital are quickly eroding., a search engine company that uses image recognition software to find pictures on the web, took the step of closing in India after seeing the wages of top-level engineers in some cases rise close to US levels.

“Bangalore wages have just been growing like crazy,” Munjal Shah, chief executive, complained in a blog post. In the next few months, would have had to lift the salary of one of its Bangalore engineers to 75 per cent of the US level, even though the same engineer earned only 20 per cent as much as an equivalent US-based worker two years ago, Mr Shah said.

It's almost as if there's this crazy... international labor market -- and higher value skills and greater value added lead to higher wages. And then when companies no longer save money by locating jobs abroad, the potential actually exists for them to return to the US.
The rising wage problem is disputed by Nasscom, the Indian software association -- though they acknowledge that the shortage of high quality workers is a growing problem.

The other problem is local knowledge, as this New York Times story by Steve Lohr suggests:

“Once you start moving up the occupational chains, the work is not as rules-based,” said Frank Levy, a labor economist at the Massachusetts Institute of Technology. “People are doing more custom work that varies case by case.”

In the field of technology services, Mr. Levy said, the essential skill is “often a lot more about business knowledge than it is about software technology — and it’s a lot harder to ship that kind of work overseas.”

The offshore specialists in India are learning that lesson. As they increasingly compete for higher-end work, the Indian companies are hiring thousands of workers this year in the United States, adding an odd twist to the offshoring trend. Tata alone plans to recruit 1,000 workers in America, said Surya Kant, president of the company’s American unit, for “the near-shore work that requires regular contact with clients in person.”

Lohr demonstrates the need for hands-on workers by profiling an IBM project for a Texas utility. IBM is using both domestic and international units to complete the assignment. For the domestic employees, the skill set required would be difficult, at best, to outsource offshore: The utility project I.B.M. is doing in Texas offers a glimpse of the global formula. The far-flung work team includes research scientists in Yorktown Heights, N.Y., and Austin, Tex.; software developers in Pune and Bangalore, India; engineering equipment and quality-control specialists in Miami and New York; and utility experts and software designers like Mr. Taft that have come from Philadelphia, San Francisco, Los Angeles, Chicago, Raleigh, N.C., and elsewhere.

I.B.M. plans to use the skills learned and software written for the smart-grid project in work with utility clients around the world. In the services field, these are deemed “reusable assets,” reducing costs in the future.

Ron Ambrosio, a senior I.B.M. researcher, has been down to Houston a few times, attaching sensors to power lines and collecting gigabytes of data on electricity flows. He and others at I.B.M. are studying how to predict and prevent power failures, optimize performance, reduce costs and conserve energy. “We’re looking at this as part of a worldwide opportunity,” he said.

Dennis Hendon, an account executive, and Rob Calvo, a senior services consultant, lead the I.B.M. team in Houston. Mr. Hendon is an engineer by training, while Mr. Calvo has a business degree, but their real skills lie in years of on-the-job training — what labor experts call “passive knowledge” and “complex communications,” observing, listening, coordinating, negotiating and persuading. The two men say they think of themselves as orchestra conductors, getting all the human parts working smoothly together, inside and outside I.B.M. “We aren’t mounting the poles, but our subcontractors are,” Mr. Hendon said.

This kind of human capital formation raises an interesting question for economists like Alan Blinder who feel that we need to redirect K-12 education right now to address the offshoring revolution: if the skill set required to develop non-offshorable jobs comes largely from on-the-job training, how would educational reform address the offshoring "problem"?

posted by Dan on 07.05.07 at 09:54 AM


I would say initial offshoring has been fast, to make all the mistakes that can be made and find what opportunities actually exist. Now it may slow down as what not to do has become more apparent.

I think offshoring was limited to simple tasks at first, but this is rapidly going away. Reverse offshoring is the result. It makes little sense for a startup or small company with only limited engineering needs to offshore. Any gain is lost in communications, negotiation, and scheduling. It really takes large companies setting up offices there to really take advantage of offshoring and this won't be limited to simple tasks.

posted by: Lord on 07.05.07 at 09:54 AM [permalink]

An interesting observation to be sure. But we still have to realize in this country that a) these are anecdotes, not necessarily generally representative of the broader picture, and b) rural and small-town America is getting absolutely massacred by this without much of an offsetting gain in urban America.

Bottom line is it costs an awful lot to do business in the US, even though we have some of the lowest taxes. Most glaring example -- the Midwest, especially Michigan, in auto manufacturing. As long as it costs US producers double the insurance premiums and taxes for health care per vehicle that it costs non-US producers, this process is going to continue. If GM has to become a foreign company to survive, they will, and I won't blame them. Something like one million car industry jobs shifted from Michigan to Ontario alone in the past 15 years -- close to a quarter of all the manufacturing jobs we've lost. And not just Michigan and not just US manufacturers; Toyota Corolla production has migrated from plants in the Ohio Valley and California up to Ontario as well.

No one wants to admit that it is too expensive to do business in the US, and health care is the 800 pound gorilla in that room. Demagoguery for or against trade is a side-show; no serious person wants Smoot-Hawley again, but evidently very few serious people seem to understand why the US is offshoring so much.

IF US manufacturers and service industry can't afford to do business here, they won't, simple as that. And health care is what sets us apart more than anything else. We must do whatever it takes to fix it. Rationing, socialized medicine, abolishing HMOs, requiring med schools to teach preventative care, abolishing the ill-concieved Medicare drug benefit, making all preventative care tax-deductible -- I'm not too fussy at this point. Just whatever it takes.

posted by: db on 07.05.07 at 09:54 AM [permalink]

You are assuming it is either:

1) on-the-job training


2) education

But, there is a third answer:

3) on-the-job training + education

Not all on-the-job training is equivalent. And the better positions which offer better training requiring an educational foundation that include at least (a) critical thinking and (b) analytical reasoning but also may include (c) a specific foundation that arises from education.

I guess it is all the rave in libertarian circles to suggest that education has little value. But I say, put your money where your mouth is. Do not encourage your own children to become educated beyond highschool.

posted by: Mr. Impressive on 07.05.07 at 09:54 AM [permalink]

What struck me about that IBM article was that IBM had 50K engineers in India, up from 3K 5 years ago. There's one big reason software has not recovered the jobs lost in the dot bomb and also why students are shunning the field.

But ha, ha, IBM. They dump Americans and do their part to destroy the American software industry and then they are, so to speak, hoist by their own petard. Ha, ha.

posted by: dissent on 07.05.07 at 09:54 AM [permalink]

I think Blinder would respond that these floating labor markets will alight in some other untapped low wage locale instead of India, and that place won't always be back in California.

The key point is this: With internationalist corporations its the nations that do the servicing. Shareholder wealth surpasses and subjugates national interests. Look, Marx may be considered pre-historical, but it doesn't take much of a stretch to see where the globalization of the labor market appears to be headed.

posted by: Babar on 07.05.07 at 09:54 AM [permalink]

I will probably like this whole free trade thing a lot more after the dollar crashes.

posted by: paul on 07.05.07 at 09:54 AM [permalink]

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