Saturday, January 06, 2007

Outsourcing Shock

There is a familiar pattern by which new ideas become incorporated into our society. First, people are skeptical and resistant. The prevailing forces crush the new idea. If the idea doesn't have outstanding merit, it dies stillborn. Second, the idea starts to pick up followers and advocates. First the early adopters, then the forward looking mainstream, then the mainstream. Third, as the idea starts to have real legs that are obvious even to journalists, the over-enthusiasts take over. The idea begins to be touted as the new hottest thing since sliced bread. Suddenly, one can scarcely pick up a newspaper or magazine without a mention. This idea will be better than any idea ever before. It will get us to the moon. It will cure cancer! Fourth, the hangover sets in. This idea isn't so great. What was I thinking? This idea is awful. Everyone starts jumping off this bandwagon. Fifth, this idea is denigrated. This idea is terrrible. It lost me a pile of money in the stockmarket. Let's not talk about that. The final stage occurs when, in the midst of depression, the proper level, use, or place for the new idea is found, and the idea is no longer new, it is simply part of everyday life.

Such an impulse-response spike is what we have witnessed in the late Nineties with the Internet, or in the Twenties with modern manufacturing techniques. The larger the change the greater the spike. After the initial impulse there is a period of periodic "ringing" which gradually dampens down and blends into the system noise.

Outsourcing is a more recent example of a new idea whose shocks to the system are still being worked out. Starting in the late Nineties, outsourcing was the new idea du jour which was going to transform our economy beyond all recognition. All the manufacturing jobs were going to move to China while all the service jobs migrated to India. What could possibly be left for Westerners to do in such a low-cost world?

At a period seven years later of near all-time-low unemployment, it would appear that the benefits were over-exaggerated and the fears were overstated. Life once again has turned out to be a false hope and a groundless fear. One article writes:

The great tide of offshoring that has sent millions of U.S. jobs to low-wage countries such as China and India seems to be slowing. If I'm reading the signs correctly, U.S. workers are facing lower odds this year of seeing their jobs sent overseas in the name of corporate cost-cutting than at any point in this decade.

Why is that?

My own company is a good example. In order to produce some things cheaply, we have outsourced the low-wage production to India. This plan had been hatched years ago, when the spike of enthusiasm for outsourcing was very high. It takes a long time for people to respond to changed reality. We've had work done in India for the last year, and it has been good work, but it hasn't been enough. It takes a long time for things to go to India and come back, and it is difficult to control what's happening there from here. So, even though it would cost somewhat more, there's a sudden desire to open a second production process right here in Boulder, right next door. It would give us more flexibility and more control. Saving money isn't always the only consideration. Sometimes getting more is desirable, even though it costs more to get it. Sometimes you can make more money by spending more money, and such is the state right now with our outsourcing efforts.

I'm ready to declare the outsourcing to India idea simply part of the noise right now. It's an idea whose time has not passed, but integrated.


David Thomson said...

"Outsourcing is a more recent example of a new idea whose shocks to the system are still being worked out."

New idea? Nothing could be further from the truth. “outsourcing” is inherent in all economic activity. Most of us do not grow our own food or perform heart surgery on our loved ones. No, we outsource to those who specialize in these matters. Outsourcing today is a discombobulating concept to many because of the international implications. However, we outsource on a daily basis between states, cities, neighborhoods, and sometimes even our next door neighbor’s son. We might prefer to pay him to cut our lawn.

Morgan said...

Well, "overseasing", then. I think MHA is right - both about the typical pattern followed by new ideas and about where we stand right now with respect to outsourcing.

I'm not sure we can fully define the conditions under which outsourcing is likely to work, but it seems to work much better for standardized products than for prototypes (like software, which in some ways remains a prototype even after it's released).

So outsource the production of CDs on which the software is distributed - probably works well. Outsource the production of the software itself - probably not so well.

buddy larsen said...

One thing USA could do in its own behalf is reform the corporate tax/regulatory burden that adds about 20% to our cost of doing business relative to the destinations of our capital flight.

Our corporate tax rate @ 35% is second-highest in the developed world, and does nothing but retard commerce while passing the cost to the consumer in ther form of higher than otherwise prices for domestic goods & services.

David Thomson said...

"Well, "overseasing", then."

That would be a far more accurate description---because this is what the debate is actually all about. Half the problem can often be the inadvertent abuse of language. The term "outsourcing" is just plain stupid. It makes no sense whatsoever.

Morgan said...

"Overseasing" gets 112 hits on google. Not much new under the sun, I guess.

Anyway, I do think the distinction is useful when you're talking about the political debate on the issue. I'm not so sure it's useful when you're talking about the impact on the outsourcer (overseasers being a subset).

Politically, we're clearly sensitive to the "loss of American jobs" component of overseasing. Hence Lou Dobbs. But from the company's perspective, it seems to me that the control, communication, flexibility, cost, and other considerations are identical (though, granted, farther afield is farther afield, and the magnitude of these considerations usually grows with greater distance geographically and culturally).

Rick Ballard said...


Shh. The corporate tax is the only way to get the mendicant free riders to carry anything besides an appetite. Don't forget - it's totally regressive and clips the welfare chiselers much harder than the producers. If the corporate tax were eliminated do you think the Dems PT Barnum "one born every minute" client base would stand for an actual assessment?

Geez, Buddy, next you'll be pointing out that no business has ever actually paid a dime of FICA - what are you thinking?

buddy larsen said...

Rick, right you are--it's absolutely regressive, and the best thing that ever happened to the tax-party's latest bete-noir, the Yellow Peril.

Meanwhile, SarBox sends cascading floods of capital out of NY to London and Hong Kong, despite the fact that fraud was already fully 100% illegal long before the congress perpetrated its new populist bandwagon footshooting.

David Thomson said...

"Politically, we're clearly sensitive to the "loss of American jobs" component of overseasing."

That's why you have to break it down. How does this sound?:

"Politically, we're clearly sensitive to the 'loss of Detroit, Michigan jobs' to Houston. Texas component of over-stateing."

"Politically, we're clearly sensitive to the 'loss of Houston, Texas jobs' to Dallas, Texas component of over-citying."

"Politically, we're clearly sensitive to the 'loss of Main. Street jobs' to Glover Avenue component of over-blocking."

When you think about it logically---why is international trade suppose to be bad, but not trade that is more localized?

terrye said...

I bet people did the same thing withg automobiles, telephones and womens rights too.

chuck said...

When you think about it logically---why is international trade suppose to be bad, but not trade that is more localized?

It depends on how paranoid you are. If the conditions for trade -- peace, law, communications, finance, and affordable transport -- remain in place, then trade and geographic specialization is a good thing and everyone benefits. If trade should break down at some point, then it is a bad thing. Think of food disappearing from the markets and suddenly you are left to your own devices. Berliners, for instance, were growing produce in the city parks shortly after WWII. Now, when it comes to history, I'm pretty damn paranoid. It's one reason I've never felt that bad about agricultural supports, here, or in Japan or Europe.