Passage to India? Productivity at home will counter outsourcing.

National Review Online ^ | 08/27/2003 | Bruce Bartlett

[Fury]

August 27, 2003, 7:00 a.m.
Passage to India?
Productivity at home will counter outsourcing.

For years, manufacturers have been outsourcing operations to foreign countries to obtain lower wage costs and escape from high taxes, burdensome government regulations, and intransigent unions here at home. Now it appears that the service sector is joining the trend.As manufacturing workers worry about their jobs moving to China, service workers see India as the threat. With its large pool of educated, English-speaking workers available for wages 80 percent lower than here, many large companies, especially banks, have set up Indian operations or contracted with Indian companies to provide information-technology services.

A new report from Deloitte Research projects that outsourcing of IT jobs to India will accelerate in coming years. It estimates that $356 billion worth of global financial services will relocate to India in the next five years, producing a cost saving of $138 billion for the top 100 financial service firms. It further estimates that 2 million jobs will move to India — 850,000 from the United States, 730,000 from Europe, and 400,000 from other Asian countries.

However, another report from Deloitte Consulting throws cold water on these estimates. It notes that while direct wage costs may be 80 percent lower in India, total labor cost savings are much more modest — 10 percent to 15 percent for most companies. The reason is that there are important added costs to doing business in India that eat up much of the savings. Higher costs for travel, communications, equipment, and managerial oversight are some of these. But the largest costs are for lower productivity, cultural differences, and incompatible systems.

The Deloitte Consulting report goes on to detail several case studies where companies went into India thinking they would achieve significant savings only to find that it was not worth the effort. Other companies undoubtedly will make the same discovery.

Another reason service providers may find outsourcing to be unprofitable is that productivity in the U.S. service sector is rising sharply, as the result of heavy investments in computers, software, and telecommunications in recent years. Two new studies document this fact.

Economists Jack Triplett and Barry Bosworth, both of the Brookings Institution, look at recent trends in service-sector productivity. They note that historically productivity in this area has been far below that in manufacturing. One reason is that one really can't do many things any faster today than was the case even hundreds of years ago. Economist William Baumol points out that it still takes a string quartet the same amount of time to play a minuet as it did in Mozart's day.

While Baumol's point is true as far as it goes, it mismeasures the nature of productivity in music. In Mozart's time, the only way to hear a minuet was to be physically present when it was played. Obviously, that greatly limited the number of people that could potentially hear his music. But today, that same minuet can be played simultaneously on radio, television, and the Internet, potentially reaching billions of people at once. Moreover, the performance can be recorded on a CD, DVD, or videotape, making it available for future generations as well.

Therefore, we can say that productivity among string quartets has in fact risen astronomically when the potential number of listeners is considered the output measure. Something like this is happening in many industries once thought to be immune from productivity increases. For example, if one measures a physician's output by the number of patients he sees in a day, his productivity may not have risen much over the years. But if one measures his output by the number of patients cured or the lengthening of their life spans, then medical output can be seen to have risen a great deal.

Triplett and Bosworth, partly by taking advantage of better measures of service output, have concluded that there has been a big jump in service-sector productivity in recent years. They surmise that the rate of increase in service productivity is now equal to that in manufacturing. This conclusion is confirmed by a new Federal Reserve Bank of Chicago study, which found that services are now reaping the benefit of past investments in IT that will continue for years to come.

Rising productivity at home offsets most, if not all, the advantages India can offer in the realm of cost savings. As companies study the trade-offs more carefully, I think they will find that there is no pot of gold waiting for them there. At the same time, worker apprehension over outsourcing will diminish once the economic expansion takes hold and begins reducing the unemployment rate. As economist Brad DeLong notes, "Few would be worried about outsourcing if the U.S. unemployment rate were still closer to 4 percent, rather than at the over 6 percent level that it is."

	http://www.nationalreview.com/nrof_bartlett/bartlett082703.asp

[Fury]

Makes some good points.

The issue of workers who are located somewhere else has gotten bad for us for a couple of reasons. Number one, I can't understand many folks on the phone. The accent is so thick, it makes communicating very challenging. Second, their technical skills are not up to par.

For the reasons above and other reasons, we stopped doing business with a company that has a large portion of their tech support staff overseas and switched it to a local firm in Buffalo. We saved some $$$ and we are very happpy with the local firm.

[Psalm118]

Yes, Fury. We can only hope this damnable trend be reversed.

[MalcolmS]

The musical example is a good one, where "productivity" has soared even in live performances.

Example
A big band used to be 30 guys, with multiple trumpets, trombones etc. to generate volume. Now a big band is eight players with amplification.

Example
A solo artist can sing and play guitar, and be backed up with electronic drummer and bass, (rhythm box).

[proxy_user]

I think coordination and communication will turn out to be much bigger problems than you would think.

I once worked on a project where half the programmers were in one room, the other half in another (adjoining) room, and the users were in another building. The parts created by the programmers in each room worked well together, but there were constant disputes between the two rooms. As for the users, they relied on writing formal specs, which the programmers read and misunderstood.

This project was complicated because the programmers were a mixture of vendor consultants and company employees, but the project was run by the vendor. The users, of course, were company employees.

The system was a disaster. We finally saved it by tossing out the vendor, and putting everyone in one room, including the users.

[Uncle Miltie]

"It notes that while direct wage costs may be 80 percent lower in India, total labor cost savings are much more modest — 10 percent to 15 percent for most companies. The reason is that there are important added costs to doing business in India that eat up much of the savings. Higher costs for travel, communications, equipment, and managerial oversight are some of these. But the largest costs are for lower productivity, cultural differences, and incompatible systems."

I can confirm that in my industry. Also, when combined with the comparatively limited labor pool of skilled workers in India, wage inflation can be expected to eat up the remaining 10-15% of costs in the next few years.

For the sort of business functions that can be moved around successfully, great English communication skills, cultural understanding, and local business sense still count. For those attributes, I recommend the Plains States and Canada, where wage rates and cost of living are still relatively low, and straight mid-western professionalism is the norm.

BTW - Good-News-Bump for Willie!

[LibertyAndJusticeForAll]

"It notes that while direct wage costs may be 80 percent lower in India, total labor cost savings are much more modest — 10 percent to 15 percent for most companies."

How many CEOs are sharing THIS study with investors when they make the decision to offshore?

[CO_dreamer]

If they really want to increase productivity, why not outsource CEO, CFO, and Board of Directors to India. They sure as hell can't do any worse than the worthless pieces of crap currently in those positions.

Hey, if they can charge $30 million/year to run a company into the ground, I'd be willing to do the same for $1 million/year.

[proxy_user]

I was talking to some Indian guys, and this is total BS. You can get a slightly above average programmer for 10-12 lakh a year, which is $23-28K. This is about 1/3 - 1/2 of the US price, without the overhead. By the time you include the overhead and communications, you're up to 90% of the US cost.

The rupee is strengthening. At its worst, it was a 50 to a dollar; now it's at 45. If it went below 40, or US programmers accepted lower salaries, or both, the US would actually be cheaper.

[Dialup Llama]

>I was talking to some Indian guys, and this is total BS. You can get a slightly above average programmer for 10-12 lakh a year, which is $23-28K.

I agree. I saw some show about an Indian programmer in India. He makes $40K/yr. While that is much less than the Silicon Valley programmer, it is not all that much lower than the Midwest US programer. In any case, it is NOT 10% of the US wage. The only way you can hold a skilled and legitimately experienced progrmmer to 10% of the world wage is to put a gun to their head like they do in China.

Secondly these programmer are not living entirely at the Indian cost of living even though they may reside in India. They have to buy computers, books and classes for training. None of these things are greatly cheaper just because they are sold in India.

[rdb3]

For years, manufacturers have been outsourcing operations to foreign countries to obtain lower wage costs and escape from high taxes, burdensome government regulations, and intransigent unions here at home.

One would think that members of a conservative forum would be up in arms about these facts. Taxes and regulations strangle businesses. Yet the main argument here of late is to use tariffs, not to do anything about the taxes and regulations.

It just doesn't make any sense.

[Liberty Tree Surgeon]

I can understand how manufacturing costs rise due to regulation (OSHA), but what regulations would you eliminate to make hiring American IT people cheaper?

LTS

[rdb3]

...but what regulations would you eliminate to make hiring American IT people cheaper?

I don't limit my concerns to just IT. I strongly believe that any regulation that artificially raises the prices of services and goods should be scrapped immediately.

[Uncle Miltie]

Bingo. Deflating Willie Green's eternal arguments to the contrary.

I have confidence that American workers can remain the best paid with the highest standard of living by remaining the most productive in the world.

[scottlang]

Yes, Fury. We can only hope this damnable trend be reversed.

If it is not, Bush will find it hard to get reelected. Jobs and the economy will be central issues in the next election. Bush is highly vunerable in this area.

[Willie Green]

Taxes and regulations strangle businesses. Yet the main argument here of late is to use tariffs, not to do anything about the taxes and regulations.
It just doesn't make any sense.

The Bush Administration and GOP controlled Congress have abandoned any pretense of alleviating regulatory burdens and have instead committed acts of economic warfare against the American People and their domestic industries. The have left the federal regulatory bureacracy intact while undercutting domestic industries with foreign imports. They have deliberately ignored the negative economic impact of 7 million illegal immigrants who have invaded our borders, placing excessive burdens on government services. They have vastly expanded the burden of federal welfare programs with obligatory "entitlements" such as Medicare prescription drug coverage. They have embarked on an unprecedented campaign to plunder the Federal Treasury, proposing incomprehensible levels of deficit spending to ballooon our already astronomical National Debt.

A "revenue tariff" is the only mechanism available to address this situation. America MUST be returned to a course of creating wealth with it's value-added manufacturing industries and natural resources. A "revenue tariff" will enable reduction of other forms of domestic taxation to stimulate domestic production WITHOUT bankrupting the Treasury.

[rdb3]

Your first paragraph is overlooked, seeing how 1.) this isn't about President Bush, and 2.) We already know that you don't like this administration. Redundancy is always ommitted.

Also, it's not like you have even advocated the reductions of taxes and regulations.

Your Populist stance is not attractive. It's ugly. Lastly, no one gives a flip about Buchanan. Your prescription is worse than the disease. 99.99999% of us are just not buying it.

[Willie Green]

Bingo. Deflating Willie Green's eternal arguments to the contrary

I notice that you're still posting personal attacks without addressing them directly to me, Brad.
That's OK. I don't mind the discourtesy.

It only reflects on your own maliciously childish mentality.
Go ahead, you can resume making an ass out of yourself, see if I care.

[Willie Green]

Your first paragraph is overlooked, seeing how 1.) this isn't about President Bush, and

My first paragraph isn't about President Bush. It's about the bungling economic "leadership" of "The Bush Administration and GOP controlled Congress".

Also, it's not like you have even advocated the reductions of taxes and regulations.

I have indeed. You're no rookie around here, you should know better. Check the archives, I'm not gonna waste my time doing it for you just because you think it's "cool" to sit at a keyboard misrepresenting my views on issues. You can take that crap and cram it where the sun don't shine as far as I'm concerned.

[rdb3]

Misrepresenting your views? Now that's funny.

It's no secret where your intentions are located, and your consistent stream of negative news proves those intentions.

Ray Charles can see it.

[Willie Green]

It's no secret where your intentions are located, and your consistent stream of negative news proves those intentions.

Just telling it like it is.
Nobody ever fixed a problem by denying that it exists.

Ray Charles can see it.

Good for Ray!
I always liked his music.
It's flattering to know that technology enables him to read my posts, whether he agrees with me or not.