new dog old trick

"Outsourcing" and "Saving Jobs" by Thomas Sowell -- Capitalism Magazine

"Outsourcing" and "Saving Jobs" by Thomas Sowell -- Capitalism Magazine

This is a great article by Thomas Sowell in Capitalism Magazine. Yeah, I'm still on that hobby horse. Me and every third weblogger. He very succinctly puts the case against political intervention in the free movement of jobs. As he points out, we've been through all of this before:

Federal Reserve Chairman Alan Greenspan recently warned against setting off "a new round of protectionist steps." But anyone with any knowledge of history could have given the same warning.

Back during the Great Depression of the 1930s, when unemployment in the United States hit a high of 25 percent, one of the many foolish things the government did was create international trade restrictions designed to "save" American jobs. Other countries around the world created similar restrictions to "save" their own workers' jobs.

Net result: world trade in 1933 was one-third of what it had been in 1929, making everybody poorer and therefore less able to create jobs. Many economists have blamed these restrictions for making the depression worse and longer lasting.

This is a relatively short article but packs a solid message. Sowell even gets in a nicely understated but very sharp jab at the demagogues on this issue:

Whole political movements are based on a refusal to accept that benefits have costs. Protectionism is just one of these movements. Environmental extremists often refuse to accept even the smallest costs for such benefits as the building of much-needed housing or the dredging of rivers and streams to prevent flooding and save human lives.

Ironically, those politicians who complain most loudly about the outsourcing of jobs often advocate the outsourcing of the job of making foreign policy and safeguarding American national security to the United Nations or to our allies in Europe.

Productivity Risks in Offshoring

Frank Scavo has a very good post in his Enterprise System Spectator regarding some of the risks in offshoring - specifically in offshoring IT/software work but many of the productivity risks he outlines apply to offshoring any type of work.

The bulk of this article (which links to a prior post by Frank on the same issue - I recommend that you read both posts) is from an email to Frank by a reader, Bob Boyd, who happens to be a VP at an outsourced services company that has operations in both the U.S. and Europe as well as its own offshoring lab in India. Boyd speaks from hard won experience in discussing some of the issues and pitfalls associated with offshoring. It provides a pretty even-handed evaluation of which types of IT/software projects might benefit from offshoring and which absolutely need to stay here.

This article reinforced one of my beliefs based on my own experience with offshore software projects - that there are natural limits to what can be effectively taken offshore. It's not an all or nothing proposition nor are the answers the same from one organization to the next.

More Tom Friedman on outsourcing - The Secret of Our Sauce

Op-Ed Columnist: The Secret of Our Sauce

This Friedman op-ed piece is from this past Sunday so the link won't rot for a few more days. Friedman continues to write on outsourcing. It's interesting in this piece how the people that we're currently outsourcing and offshoring so much work to understand better than many Americans what we must do to thrive in the new wave of globalization. The piece also points out some of the barriers that Indian companies face in trying to grow in their own country. Good piece by Friedman. You should read the full article.

Yamini Narayanan is an Indian-born 35-year-old with a Ph.D. in economics from the University of Oklahoma. After graduation, she worked for a U.S. computer company in Virginia and recently moved back to Bangalore with her husband to be closer to family. When I asked her how she felt about the outsourcing of jobs from her adopted country, America, to her native country, India, she responded with a revealing story:

"I just read about a guy in America who lost his job to India and he made a T-shirt that said, `I lost my job to India and all I got was this [lousy] T-shirt.' And he made all kinds of money." Only in America, she said, shaking her head, would someone figure out how to profit from his own unemployment. And that, she insisted, was the reason America need not fear outsourcing to India: America is so much more innovative a place than any other country.

The NYTimes Tom Friedman discovers outsourcing

Op-Ed Columnist: Small and Smaller

I am catching up on my backlog of outsourcing/offshoring related posts. Here's an Op-Ed from Thomas Friedman of the NYTimes (I think the link will retreat behind the NYT's subscription-only wall soon, sorry) on the topic. Friedman has just discovered outsourcing/offshoring, but he had a pretty good excuse as he's been focused on the war(s) on terrorism in the Middle East for the last couple of years. I don't always agree with Friedman, but I think that he's a thoughtful guy and a very good columnist. It will be interesting to watch him work on this subject.

Friedman's thesis in this column is that we're well into the third era of globalization, which he calls Globalization 3.0 (if this was Globalization for Windows, 3.0 would be the release that finally produced a working product, oops, sorry, I've been fighting with Outlook this week and feeling snarky about MSFT).

Globalization 3.0 was produced by three forces: First is the massive installation of undersea fiber-optic cable and bandwidth (thanks to the dot-com bubble) that have made it possible to globally transmit and store huge amounts of data for almost nothing. Second is the diffusion of PC's around the world. And third (what I missed most) is the convergence of a variety of software applications — from e-mail, to Google, to Microsoft Office, to specially designed outsourcing programs — that, when combined with all those PC's and bandwidth, made it possible to create global "work-flow platforms."

[snip]

"We created a worldwide network which connected all the resource pools on the planet, and suddenly we changed the rules of the game," said Nandan Nilekani, C.E.O. of the Indian software giant Infosys — which last year received nearly one million applications from Indian techies for 9,000 software jobs. You cannot wish away this new era of globalization, he added. "It will not go away."

Friedman goes on to wonder if, when we look back on the early part of the century from the perspective of history, we look on 9/11 and the war on terror or the enabling of globalization 3.0 as the truly important events?

So now I wonder: when they write the history of the world 20 years from now, and they come to this chapter — Sept. 11, 2001, to March 2004 — what will they say was most important? The attack on the World Trade Center and the Iraq war? Or, as Mr. Rao suggests, the convergence of PC's, telecom and work-flow software into a tipping point that allowed India to become part of the global supply chain for services the way China had become for manufacturing — creating an explosion of wealth in the middle classes of the world's two biggest nations, India and China, and giving both nations a huge new stake in the success of globalization. I wonder?

It's an interesting question. But I think he misses what is maybe the most important enabler of Globalization 3.0 - at least as it relates to India and, even more so, China. All of the technological progress that Friedman cites would make much, much less difference if both countries had not also taken steps to start to dismantle their socialist/communist economic systems and allow much greater spread of capitalism. India still certainly has socialist reflexes in some areas and too much bureaucracy and China still has a long way to go in taking apart its old economy but both have made great strides. Without those strides China would still be running Communism 2.0 (an old, discredited, buggy platform if there ever was one) and out in the cold on this wave of globalization and India would be a much smaller participant.

I guess we should have been more careful what we wished for. Don't you hate it when that happens?

Outsourcing/offshoring news

Man, trying to keep up with the flood of outsourcing/offshoring news is more than I can handle...Just when I was realizing that I had bitten off more than I could chew, the BusinessPundit pointed at a weblog where all they are doing is consolidating news on the subject. Whew. Now I can back off to be a little more analytical and selective (not that I was keeping up anyway, but I can delete the 15 draft posts that have backed up over the last week).

Anyway, here is Outsourced America. As they say...

What is Outsourced America? Quite simply we're your clearinghouse for articles on the outsourcing, or 'offshoring,' of American jobs abroad.

They look like they are doing a good job picking up outsourcing articles from mainstream media, although I notice they don't seem to be blogging articles from the Wall Street Journal (maybe because it's a subscription-only site?) and some of the business magazines (Fortune, Forbes, etc. - again, the subscription problem?). They also don't seem to be monitoring some of the industry trade journals - for example, the Info Tech trade pubs have been full of outsourcing news since it has been hitting highly paid IT professionals hard. I'll look to focus on those sources and leave the "mainstream" press to the folks at Outsource America.

Thanks to Outsource America for aggregating all of this news...and thanks to Rob at BusinessPundit for the pointer!

Offshoring Observations by Tom Peters

Observations.

Tom Peters has an 18-point rant about offshoring. Peters is definitely in the "it's happening whether you like it or not - and it's a good thing" camp on offshoring. There are some very solid points among his 18 - and I find it pretty hard to argue with most of it.

Some of the best:

1. "Off-shoring" will continue; the tide cannot be reversed. 2. Service jobs are a bigger issue than manufacturing jobs, by an order of magnitude.

The last point is where we're going to be fighting a lot of battles in the U.S. over the next couple of years. It was bad enough when we lost lots of manufacturing jobs starting in the 1970s, but given that our economy - and the growth of our economy - has become dominated by service industries and service (think knowledge worker) jobs even in manufacturing it means that this wave of offshoring it impacting closer to the core of the economy and is nailing lots of highly paid, well educated, people who up until the last few years probably figured that they were immune to this sort of thing. Collectively, these folks have lots of political clout.

More of the biggies from Peters:

5. Job churn is normal and necessary: The more the better ... in the long haul.

Yeah, but...what's the quote from Keynes - "in the long run we are all dead" or words to that effect. The problem is as noted above - in the short term there are highly educated, high income people out of work, under-employed, or just plain scared. Not a good environment within which to have a reasoned, rational, dispassionate discussion of how this is all good from a macro perspective.

7. The wholesale, increasingly upscale entry of 2.5 billion people (China, India) into the global economy at an accelerating rate is virtually unfathomable. Unfathomable = Unpredictable, exceptional challenges, amazing opportunities.

Yes, yes, yes. This may be the trend that does more to shape the direction and outcome of the 21st century than any other - in the same way that the evolution of the U.S. over the second half of the 19th and early 20th centuries helped shape the 20th century.

8. Free trade works. Period. It makes the world a safer place ... in the long haul. The process is not pretty at times. (Sometimes long times.) Those who dutifully followed yesterday's rules yet are displaced must be helped when the "rules change." Such help must not be in perpetuity -- it demands a sunset date.

One of my big fears is that the fear of offshoring undercuts free trade. We actually have some tough decisions to make about free trade anyway if we want to support and extend the current relatively free trade environment. If we allow - or even actively support - major backsliding on this issue I fear we set the stage for a major problems, even a historic depression. Think back to the way tariffs in the U.S. and elsewhere undermined free trade and helped trigger and extend the Great Depression.

11. Job creation is entrepreneurially led, especially by the small fraction of "start-ups" that become growth companies (Microsoft, Amgen, FedEx et al.); hence entrepreneurial incentives including low capital-gains taxes and high R&D supports are a top priority.

12. Primary and secondary education must be reformed, in particular to underscore creativity and innovation -- the mainstays of high-value added products and services. Children should be nurtured on risk-taking, with a low expectation of corporate cosseting.

17. Worker benefits (health care, re-training credits, pensions) should be portable, to induce rather than impede labor mobility.

The three points above are all ones on which it should be possible to unite people on both sides of the offshoring issue and take positive policy actions. But I can also see how each issue could be demagogued (from either side). These are areas where we should look for signs of leadership (or at least understanding) from candidates at all levels during the 2004 election.

18. Workers have the ultimate stake. And thus the ultimate personal responsibility. (Think: Emerson, self-reliance.) "Workers"/we/all must "re-imagine" ourselves -- take the initiative to create useful global skills, not imagine that large employers or powerful nations will protect us from the current (and future!) labor market upheavals.

Option policy as a tool for job creation

Mercury News | 03/01/2004 | Options drive innovation, create jobs.

This piece from yesterday's San Jose Mercury News has some high-powered authors fighting a last ditch battle in the war over whether stock options should hit the income statement as an expense. The CEO's of Intel, Cisco, and Sun (Craig R. Barrett, John T. Chambers and Scott McNealy) are credited as authors of this piece.

I'm happy that someone is still fighting this battle, given that so many business leaders seem to have caved in on the issue. I understand the theoretical reasons why options should be expensed, but at the end of the day I come down pretty close to the positions in this article. Yeah, there's some spin in this piece, but less than the emotional and envy-laden appeals used by many on the other side of the issue.

Note that this piece is totally focused on the use of stock options in broad-based programs, i.e. a program that grants options to a large majority of, if not all of, employees in a company, not just to a few fat-cats at the top. I have no sympathy for people trying to protect stock options as a benefit to be granted only to the top echelon of executives and senior management. But in technology companies, especially start-ups, where the more common policy has been broad-based granting of options, I think we should be working hard to preserve the ability to use this valuable tool.

As the article says in a paragraph titled Do No Harm:

Our priority should be to do no harm to the U.S. economy, bolster innovation and improve corporate governance. Instead, we are focusing on mandatory expensing of broad-based stock option plans, which could have a dramatic, negative impact on U.S. competitiveness, technology innovation and future job creation. In addition, current proposals will not make financial statements more accurate or prevent future abuses. The concept of expensing stock options is based on the use of a theoretical estimate of ``expense'' to a company for the use of stock options. No one has figured out how to do this accurately, and all current proposals will lead to numbers which will grossly overestimate the expense in any common-sense way.

As the former CEO of two venture-backed, pre-public companies (one of which I took public), I absolutely agree with many of the arguments in the article, which we'll outline below. Both my companies had stock options granted to 100% of employees. I really wouldn't want to run a company where it wasn't possible to share ownership broadly.

I'm also troubled with the practical issue noted in the preceding excerpt - how in the world do you calculate a meaningful value of an option granted today for stock that may vest over the next several years. Yeah, I have an MBA and studied the various models for calculating the value of options. But as far as I'm concerned, after going through the exercise myself on multiple occasions, I don't think the results are worth the ink and paper they are printed with. For a still private, start-up company the results are effectively meaningless. But even for many young public tech companies with very volatile stocks in still-developing markets, just how much more meaningful are the calculations? They can be grossly too high or grossly too low - and it will be years before you really know. I think the distortions that such "estimates" (pseudo-scientific wild-assed guesses is more like it) inject into income statements will have more to do with the death of broad-based stock option programs than will the additional expenses.

OK, off my soapbox - let's go back to Barrett and Chambers and McNealy...

Om Malik on Outsourcing... is it just a headline?

Om Malik on Broadband: Outsourcing... is it just a headline?.

Om Malik posted this a few days ago about outsourcing/offshoring. I think the real money quote is his opening line:

Over past few weeks, it has become clearer and clearer, that outsourcing/off-shoring is the new third rail of American politics.

I think he's right. This surprises me no end as I believed up until a short time ago that healthcare policies and costs were going to become the domestic and economic policy third rail issue for this electoral cycle. But it's clear that outsourcing - actually offshoring - is becoming an issue both in its own right as well as a proxy for other issues.

I'm going to start using this weblog to track the discussions on all sides of this issue. I'm actually somewhat conflicted on the whole subject myself - torn between the long term view that this will all sort out as long as the policies we implement as cures aren't worse than the disease and the short term sympathy for those who have lost jobs.