Offshoring: What You Already Know

he typical programmer wears clothes made in Honduras. He drives to work in a Korean car while he sips Mexican coffee. He sits down at his Chinese-made desk, and turns on his laptop that was assembled in Indonesia with parts from Japan, Taiwan, Singapore, Brazil, and a dozen other countries. Nearly every second of his day, some product manufactured in some other country makes his life easier or more agreeable and his lifestyle more affordable. And all the while, his 401k hums away inaudibly, growing in fits and starts with the profits of a global marketplace.

He seems like a nice enough guy. Then he opens his mouth and complains about the Indians and the Russians and the Vietnamese and the Philippinos, all bent, it seems, on taking American jobs.

My anonymous programmer is grumbling about offshoring?or offshore outsourcing?of programming and IT jobs. There’s so much fear of outsourcing within the software and IT community that we’re losing our good sense. And just for the record, I’m not an economist; I’m a programmer. I’ve been laid off before, and I know that it sucks. But I’m also a shareholder and a consumer; you probably are too.

This will be a tough crowd, I know. Last week, DevX Executive Editor Russell Jones wrote a commentary “Offshoring: It’s Not Too Late to Change,” which accurately reflects many of the issues, fears, and concerns of the anti-offshoring faction. Reading it, I was reminded of a commentary I wrote several weeks ago that only just touched on outsourcing. In response, I received a slew of misinformed emails from irate programmers criticizing my failure to unambiguously condemn outsourcing, offshoring, and developing nations in general.

Well, I won’t. In fact, I believe the opposite: The available evidence indicates that offshoring creates American wealth while giving a leg up to some of the most desperately poor countries on earth, creating new markets and more American jobs in the process. But I suspect that you already know that. You might even call yourself a “fiscal conservative” (that seems to be a popular identification among programmers) but you’re hoping for some kind of special exception for you own industry.

Chicken Little?
Despite a good deal of blog-fueled hysteria, the numbers just aren’t there to justify too much hand-wringing. In fact, there’s very little evidence that the offshoring trend has actually contributed significantly to unemployment among programmers. Of course, there’s an increasing amount of software being written overseas by American companies as well as contractors. There are even companies closing (or drastically scaling back) their domestic programming operations. But numbers from the Bureau of Labor Statistics suggest that these layoffs are very small indeed compared to standard business cycle reductions in force.

Our industry is based on change. More than anyone, we should resist the temptation to demand special treatment because, more than anyone, we know that the world keeps right on moving. And so does the world economy.
What about the future? It’s not hard to find alarmist projections, if that’s what you want to read, but here too there’s little evidence of massive job flight. Some of the most dire predictions come from the Forrester Research Group, which claims that up to 3 million jobs will be lost to offshoring by the year 2015.

Sounds bad, I admit, but put it in context. According to remarks made in March 2004 by economist Ben S. Bernanke, a governor of the Federal Reserve Board, in an average year around 15 million Americans lose their jobs?and another 18 million start new ones. With a net of 30 million jobs created in the next 10 years, 3 million is not calamitous.

Moreover, many of the most alarming studies are overly simplistic in their assessments. According to a Government Accountability Office (GAO) report to congress released last month, “Many of these studies of job losses do not take into account other economic effects of offshoring that may offset the job losses … For example, Forrester does not try to estimate any other effects from offshoring, such as potential expansion of employment in other sectors.”

And this makes sense. Though our roles may change, let me assure you that many?even most?programmers can’t possibly be replaced outright by an Indian or Russian counterpart. Building software is hard, but rarely so for technical reasons. The hardest part lies in assessing business needs in sufficient detail to start development, and that gives an incredible advantage to the technical experts physically close to the business and the customer.

Editor’s Note: The author wishes to acknowledge Amy Flynn-McMullen’s contribution to this article. Her research on the related subject of “Re-Insourcing and the L1 Visa” has framed and informed many of the arguments herein.

Oh Yeah?Economics
Opponents of offshoring occasionally mention (as Jones did in his commentary last week) the importance of creating a “level playing field.” The rationale goes like this: workers in developing nations are willing to work for a good deal less than their American and western European counterparts, so it’s necessary to level the field with tariffs and other protectionist measures.

But the whole concept of a level playing field is flawed; on the contrary, international trade is based on the old idea of “comparative advantage.” It’s the advantage of specialization, the idea that different regions and populations are better at different things. An old and popular illustration of the concept is English wine. Because of the climate and the soil, it’s difficult and expensive to produce large quantities of grapes in the British Isles, so England imports most of its wine. That’s a good thing (and not just for wine drinkers) because it lets different nations specialize. Putting up trade barriers to level the wine industry playing field would only mean more expensive Claret for Londoners.

The same principal applies to the new international trade in white-collar labor. Offshoring is actually a very positive trend if you’re a stockholder?a group that now includes about half of American households, according to the Securities Industry Association. Cutting development costs could certainly mean a shot in the arm for flagging technology companies. But programming is just the tip of the iceberg. As business processes become increasingly agile, more and more back office functions can be outsourced like accounting, data entry, and payroll and benefits processing. This means an ongoing cost savings available to a wide range of industries.

The reality is that the global economy will provide incredible opportunities not just for developing nations to lift themselves out of poverty, but also for western nations to profit in the bargain.
Moreover, offshoring opens up new markets for American goods. Programmers in India work on HP workstations running Microsoft Windows, in offices equipped with Cisco routers. At home, data entry specialists and call center workers drink Coke, watch “Friends,” and listen to Britney Spears. With over a billion people and a growing middle class, India represents a vast new market for American products and entertainment and the potential to create new jobs in consumer packaged goods, U.S. television studios, advertising agencies, and marketing firms as well as computer manufacturers and even software companies.

Offshoring is good news for consumers as well because cheaper workers mean cheaper stuff. The price of a TV, for example, has dropped by 40 percent in the last 20 years, largely due to overseas manufacturing. In that same time, quality has increased dramatically, and a typical American house now has three, four, even five TVs. In the same way, cheaper coders will make software affordable to a wider range of people and industries.

All of this adds up to a pretty decent payoff. A 2003 study by the McKinsey Institute?a global management consulting firm?concludes that because of cost savings and expanding markets, every $1 spent on offshoring brings back $1.13 into the U.S. economy . Far from losing money to those evil outsourcing companies, offshoring actually creates wealth.

And finally, consider the dangers of putting up walls. You know that saying about bricks and glass houses? Well, the U.S. is a net technology exporter and protectionism has a way of spreading. If we “protect” American jobs by taxing the labor of developing countries, they could well respond in kind with import duties on American software. That makes us the big losers. Not only will protectionism stop the expansion of new markets, but it could kick us out of places we already dominate.

None of this is too original. In fact, among professionals, it’s almost cliché. Bernanke explains:

“Economists are often accused of not being able to agree on anything. Although we are indeed a contentious bunch, one proposition commands almost unanimous assent within the economics community. That proposition is that free trade among nations promotes economic prosperity.”

Unplug Your Ears
If all of this sounds familiar, I’ll tell you why: You know this stuff as well as I do. You already know that trade creates wealth. You already know cutting costs saves money for stockholders and consumers. And until a couple of years ago, you rightly thought of “protectionism” as a dirty word. Now that situations are reversed, it’s hard not to demand a special exception for your job and your industry.

It’s different when it happens to you, isn’t it? There’s sort of a NIMBY mindset at work here. Usually, we reserve the mantra of Not In My Back Yard for new Wal-Marts, oil refineries, and landfills?things we know are necessary, positive even, but also things we don’t want near us. All this theoretical trade talk is well and good, you say. You even appreciate offshoring when it means cheaper hard-drives, cameras, and cell phones. But there’s an entirely new emotional aspect when outsourcing threatens your own industry.

But techies are also uniquely positioned for adaptability in the new global marketplace. We thrive on change. We look forward to next version of Oracle or Java or .NET or PERL. We download beta versions and play around with them in our spare time. We crack jokes about the state of the industry “back in the day” when we worked on Windows NT 4.0, all the way back in the year 1999. Our industry is based on change. More than anyone, we should resist the temptation to demand special treatment because, more than anyone, we know that the world keeps right on moving. And so does the world economy.

Focus on Innovation
Knee-jerk protectionism helps no one: it doesn’t help America or India (or the Philippines or Russia or Vietnam or Brazil); it doesn’t help businesses or consumers. But doing nothing isn’t an option either. Once you’ve been laid off, your 401k returns aren’t the first thing on your mind. And make no mistake: as long as offshore outsourcing continues, domestic programmers will have to adjust.

The real shame is that politicians simply condemn or ignore the practice. You’ll hear a good deal of hyperbole, political grandstanding, and demagoguery; they’ll talk of traitors and blame globalization for every evil plaguing the nation. The reality is that the global economy will provide incredible opportunities not just for developing nations to lift themselves out of poverty, but also for western nations to profit in the bargain.

Of course all this means change?change that we have to be ready for. Trade doesn’t destroy jobs; it moves them around. So the first thing you can do is demand better government support for worker retraining. Cheaper developers will mean more software, and techies in the states have the advantage of being in the largest consumer nation of software in the world. That means we’ll need legions of new architects, researchers, systems analysts, usability engineers, business analysts, and product and project managers?positions that programmers are ideally suited for, but positions that require a slightly different skill set. That’s what I mean by comparative advantage: some help from overseas will allow workers in the states to focus on customer demand.

But let’s plan for the long run as well. Let’s improve our comparative advantage: schools, libraries, colleges, and universities. If the U.S. can spend billions of dollars subsidizing corporate sugar-beet growers, we should be able to fully fund public schools. Instead of losing our money and our markets to tariffs and protectionism, let’s make money so we can spend it where it’s most needed.

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