America needs a plan, not a debate on offshoring

Computerworld ^ | March 2, 2004 | William Mougayar

[Mini-14]

MARCH 02, 2004 - The U.S. needs a plan that clearly describes the risks, rewards, opportunities and challenges of offshoring. The national debate over this highly visible phenomenon is escalating, but it seems deadlocked. To get past this impasse, the White House should commission an unequivocal report that defines the benefits and drawbacks of offshore outsourcing, describes its full impact on the U.S. and world economies, and provides very specific details on how to cope with it with minimal stress and disruption.

Without a national plan, the issue will remain undefined and be allowed to meander. Statements made by the Federal Reserve or President Bush's chief economic adviser don't add up to a policy. If the U.S. government wants to adopt a laissez-faire attitude, that's OK, but we need a clear statement that says so. The current uncertainty surrounding the official government position makes it look as if the victims and beneficiaries of offshoring are having a debate of their own, without real arbitration to judge what's right or wrong.

Precedent exists for issuing such White House reports. In 1997, President Clinton released a significant policy report titled "A Framework for Global Electronic Commerce," which was compiled under the direction of Ira Magaziner. In 2002, President Bush published "The National Security Strategy of the United States of America." Globally, the issue of international competition has given rise to comparable reports. In the U.K., the Department of Trade and Industry has commissioned a study to look at the competitiveness of British call centers, with an emphasis on the impact on the overall U.K. economy. And Amicus, the largest manufacturing union in the U.K., has launched a campaign to influence the European Parliament to consider enlarging the offshoring debate to all member states, with the aim of producing a pan-European industrial policy and a comprehensive report that looks at the pros and cons of offshoring.

A White House report on offshoring could tackle a long list of outstanding questions on the issue, including the following:

• Is there an endpoint to the offshore-outsourcing phenomenon? What happens once the rate of outsourcing stabilizes? Is this part of a fundamental change to the U.S. economy, or is it a cyclical trend? Is this trend really unavoidable and unstoppable?
   
• What sorts of companies are taking advantage of outsourcing? Which ones are initiating layoffs? How much has this benefited them? Has it produced higher earnings or significant savings? What have they learned from this process? Who are the real victims? Which states are the most affected?
   
• What is the long-term prospect for American economic power? Which countries are the real beneficiaries of offshoring? How is the practice affecting their relationships with the U.S.? Are there geopolitical and socioeconomic benefits to recipient countries? Does the U.S. gain more political influence on these countries, and does that help to prevent further terrorism?
   
• Is the scope of the offshore craze limited to the IT industry? Which industry sectors are the most affected?
   
• How many jobs have been lost? Will a growing economy create more jobs than have gone overseas? What needs to be done in the areas of education and training to ease the transition into new jobs? Might newer technology make these offshore services obsolete? Will these services then be repatriated?

So many questions. To answer them, the administration must step up. Like other high-level policy reports, this one would be initiated by the White House and include the participation of cross-governmental departments and agencies. The most obvious contributors would be the departments of Labor, Commerce and Education, plus the Office of Science and Technology Policy.

William Mougayar is an author and consultant investigating the impact of IT on globalization. Contact him at william@mougayar.com.

[expat_panama]

Is the scope of the offshore craze limited to the IT industry?

Hollywood outsourced "Lord of the Rings" to New Zealand.  So does this mean that the 'protection mob' has called for a boycott of Hollywood, the Oscars, the Movie Theaters?  Maybe not: New Zealand isn't India, China, or Mexico.  Nobody makes fun of New Zealand surnames, accents, or town names like they do when the subject is outsourcing to say, India..

Any suggestion why? 

[only1percent]

I fear that any Blue Ribbon panel studying outsourcing will miss the most important points.

First, American companies don't just outsource to maximize their profits. They outsource because they are in worldwide competition against foreign companies who are already using low-cost labor, and will be unable to offer a competitive price if they don't do the same, or discover some other way to lower the costs of domestic production. Although tariffs and quotas could protect American producers American markets against such competitors (if we withdrew from WTO and NAFTA, etc., and were willing to stick American consumers with higher prices), they certainly wouldn't protect high cost American producers international markets. 95% of the world is not American and no company can disregard 95% of its (potential) market.

Second, our educational system is doing a very poor job of developing a diversified workforce appropriate for maintaining our high-value economic production and preserving some reasonable portion of low-value economic production. The top 10% is not being pushed hard enough by our educational system; we are underproducing the level of Ph.D. scientists we need, for example, to keep the high-value-chain work, and churning out lots of high IQ graduates of good colleges who don't know very much and basically do nothing but sophisticated paper pushing. The next 30% is being mis-educated (and, in some ways, overeducated) -- receiving very expensive college degrees which are not realistically targeted to economic needs when they'd probably be better off with economically-targeted college degrees or high-skill vocational training. The bottom 60% or so is grossly undereducated by our K-12 systems, all too often lacking the cognitive, life and job skills to be effective low-cost, moderate-value workers, and indulged by a social welfare system which allows many such people to be a public charge, in one way or another.

[oceanview]

show me any proof that IBM is competing against native low cost startup companies based in India. Or American Express. Or Direct TV. Your first argument is only applicable to manufacturing: its legitimate for Maytag to say that unless they move plants to Mexico, appliances from China and Korea will destroy their US market share, but that's only because we don't have tariffs on imported appliances. This does not apply to the jobs being offshored now. How many people are going to get the Calcutta Express credit card?

Regarding your second point: sure, our public education system is failing, but we don't need high percentages of graduates in technology. We always had enough. Now, we are underproducing (and it will get worse) because who wants to study and spend all that money getting an engineering degree when there are no jobs to get? Do you expect these college grads to commit financial suicide for the sake of American industries desire to have $30K engineers?

[oceanview]

sure, their competitors in the US (in the services division) like HP and Dell do also. They are all racing to the bottom together.

That's not the issue, the issue is the washing machine example I gave. That's a real example of foreign competition with no tariff protection. IBM competing in the US market with two other American companies like HP and Dell, that's a red herring. AMEX moves financial services and customer support to India, and uses the "other American companies are doing it, so we have to also" excuse. That's not foreign competition. Foreign competition would be if India and China and the Phillipines started entering the US credit card market, offering lower rates then AMEX, undercutting their business.

Direct TV has moved some call centers to India, they just raised my rates $3 per month, do you know of any India or Chinese satellite providers I can go to to get a better deal?

[oceanview]

where are they? In the computer services sector, where are the native Indian based startup companies that are walking into the US Fortune 1000 companies and saying "sign a contract with us and we'll take your entire IT infrastructure and operate it at 30% less then IBM is charging". That competition doesn't exist.

Ironically, its the offshoring that's is going to allow it to exist someday. India would not be capable of developing such an industry internally. But with the US sending everything over to them, eventually they will have the expertise to do it themselves. IBM is planting the seeds for future creation of the the very foreign competition they "fear".

There was a thread on FR yesterday with a similar example, a US based company that was trying to attract investors/buyers. When the prospective buyer did a little digging, they realized that all of the expertise and technology they were buying into, was held by workers offshore. They bailed out.

[only1percent]

I wasn't saying the international competitors were all headquartered in low cost countries, I was saying that the international competitors all >use< low cost labor as a resource. IBM faces heavy competition against Asian and European technology and consulting firms. (It is also starting to compete against Indian consulting and technology firms, of course, and will very soon be competing against mainland China technology companies as soon as they get over the last hump or two of sophistication). DirecTV is no longer an American company, it's a division of an Australian company which is in a battle to the death for market share in Asia (BSkyA, for example) and whose total return is affected by all costs across the board.

As for "how many people are going to get the Calcutta Express card," the answer should be totally clear to you as you drive past the 100th Accord or Camry in the mall parking lot. As soon as Calcutta Express can use its low costs to offer Amex's level of service and charges a $30/year fee rather than a $75 a year fee, or just under Amex's level of service for a $10 a year fee, there'll be ten million Americans beating down the door for a Calcutta Express card.

You misread my point on education. I doubt we need more graduates in "technology" on an absolute basis. We need better basic skills and values education for the bottom tier of the workforce, but no college degrees, and we probably need fewer BS-level graduates of engineering from Anywere State U. What we DO need is for more high school valedictorians and 99th percentile SAT takers to get Ph.D.s in the hard and life sciences rather than to major in sociology at Brown and bum around in marketing jobs for a decade and then end up in law school.

[oceanview]

AMEX already has fee free card. No one will get the Calcutta Express card, trust me on this. Foreign manufactured goods are one thing, as the buyer cannot distinguish quality versus price at the point of sale. That $39 chinese DVD player is a piece of crap, but you don't realize that when you buy it. Service is something totally different.

Sure, Direct TV was sold, but that's a moot point. It was surely an american company catering to the american market, and had no foreign competition in its segment.

Why do we need more highly educated workers for the bottom tier? To fill service jobs? How much education does it take to work at Enterprise rental car? Why get a PhD in engineering and then spend the rest of your life competing against foreign labor? The college kids are making exactly the choices the market is telling them to make.