Tuesday, November 25, 2003

The Outsourcing Hot Rail

So we have a hot economy. Consumer confidence is way up. Unemployment has started to drop - it is down to 6.0% from 6.2% a few months ago, and will continue to drop, passing below the 6% barrier before 2Q04, and will probably be in the mid 5s by late next year.

So everyone should by happy, right?

You would think so, but there is an emotional minority that is all torn up about corporate "outsourcing". This is the situation where a company either subcontracts work overseas, or sets up its own overseas subsidiary to employ foreign workers at a fraction of the cost of U.S. workers. The two big areas that are getting a lot of press are manufacturing outsourcing to China (which has been going on for decades to the Far East) and call-center outsourcing to India (call-center outsourcing started happening a decade ago to Ireland, but didn't get a lot of negative press until it started going to India, so there is definitely a tinge of racism with the current anti-outsourcers).

In manufacturing, the fact of the matter is that the since WWII, manufacturing has fallen from nearly half of GDP to less than 30% and will continue to drop. Manufacturing outsourcing has been going on for decades and will continue as our economy matures.

For call-center outsourcing, the cost benefits are obvious: hire some PC tech guy in India for something like $8K a year versus a guy in the States for $35K a year (the "fully loaded" number is probably at least $40K if you include the corporate part of his social security/Medicare and some minimum health benefit). Even with the extra cost of long distance, internet connection, etc., the guy in India is a savings of 10s of thousands of dollars per year. Add that up across 100s or even 1000s or workers, and we're talking real money.

This outsourcing makes a lot of sense to some companies - costs can be passed to the consumer in the form of cheaper products (like Dell), or simply add to the profits to the company, which is good for shareholders.

But there are definitely companies jumping on the outsourcing bandwagon without thinking through all of the costs and ramifications: higher legal expenses, logistical problems, and even upsetting your customers.

In some of these cases, the company has reversed course, bringing back at least part of the outsourced area back to the States (like Dell).

This is why the whole negative focus on outsourcing is a bit extreme. Outsourcing is just one tool in a company's arsenal to control costs. It will make sense in some situations, but not all, and with a bit of stumbling and trial and error, companies will find the right mix for their particular market segment.

But the bottom line is this: outsourcing is here to stay. The world is leveling - workers here will have to compete with workers elsewhere. In the case of call centers, nothing is being "exported" or "imported", except knowledge - and the internet and communications has made communicating between two people in the world simple and practically free.

There is really nothing the anti-outsouring people can do: the government can't pass laws to turn off international phone lines and the internet. People aren't going to stop scooping up cheaply made goods from China at their nearest Walmart, or stop buying $500 PCs this Christmas from Dell in favor of the $1500 version from a more expensive manufacturer.

If the anti-outsourcing crowd really wants to do something, they can try to fill the domestic jobs we do have that can't be filled. There is a shortage of nurses - estimated at nearly half a million by 2007 - and these high-paying jobs can't be outsourced to India. Quit crying about the jobs that are being outsourced that you can't do anything about, and do something about the shortage of jobs we do have here in the U.S. which are begging for people.

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