High-tech Outsourcing

6/25/2005 12:29:55 PM

High-tech Outsourcing

Outsourcing of software development is such a hot button issue in the high-tech industry, but I personally really don’t have any problem with this. My beliefs tend to the socially conscious libertarian sort, so I am predisposed to agree with opinions of economists, who rigorously and intellectually treat this topic but, on the other hand, may (not necessarily) live in gated communities secluded from regular people. Economists almost universally agree on the benefits of globalization, and their support for outsourcing naturally follows from the same principles used of comparative advantages.

There is a vocal army of people directly affected by dislocations, but there are also indirect second order benefits accruing to the general population such as cheaper and more products and services. Since I previously developed software at Microsoft, it’s not hard for me to find a development job; I just choose not to and develop my own software practice. Whether I am looking for a job or creating my own, either way there is little for to empathize with those laid off. But even so, the demand for new software technology is so great that developers shouldn’t remain unemployed for long.

At a personal level, I am developing my own software company, but I could ultimately end up competing with developers from Eastern European and Asian countries. The author of BlogJet, the software that I use for posting blogs, is probably happy to sell his product for a low price in US dollars. He lives in Russia, where the cost of living is a fraction of the States, so he can afford. He’s just one developer among an emerging group of shareware developers from developing countries.

A recent editorial in the newsletter of the Washington Software Association indicated that only four percent of layoffs in Washington state, a major producer of software, was actually linked to outsourcing. The clamor may be disproportionately louder because of widespread perception that most layoffs are caused by outsourcing rather than from normal business cycles. It gets more emotional as the newly laid off claim that "greedy" executives are using the cost savings to fatten their own paychecks, ignoring that it makes more sense for them to pursue positive NPV projects elsewhere in the company. Implicit is the moral argument that executives should do everything to prevent layoffs even curtail their own salaries, even when the structure of the company is inefficient or unsustainable. This argument gets a lot of support in welfare societies like France and China, where economic and technological progress are subservient to concerns to human welfare and money-losing companies are subsidized. These are trade-offs in the short-term, but economic progress can also lead to higher average quality of life over the long term and this occurs with little government intervention, which is why I favor it. A minimal support system is probably also needed (temporary enough not to introduce perverse disincentives) since career disruptions can remove a person as a productive contributor to society and increase poverty, crime and sickness, all of which can also impact economic growth.

Should a company which just launched a successful new product and rushed to build a product support group be forced to continue maintaining that expensive group when it has a chance to reassess its cost structure in the face of declining margins and new competition? First, some attrition may be necessary even without outsourcing, since the cost structure might not be sustainable and call centers may not be a core function of the company. Outsourcing of customer service could lead to more phone lines made available and handled by specialized companies, thereby improving customer service. The money saved from outsourcing could then be shifted to more productive uses such as new development or to lower prices. Under a simple but common microeconomic model, when costs drop, a company can generate greater net revenues by passing on exactly half of the savings to customers in return for higher volume.

Recently, I heard about a prominent Nobel laureate in economics, Paul Samuelson, a strong advocate of globalization. Recently, he sharply changed his tune on outsourcing in his article for the Journal of Economic Perspectives;   Since it appears to be the just one economist arguing against outsourcing, I am not that alarmed, but I am becoming more open-minded. The article was met with rebuttal articles by Arvind Panagariya and others, and some economists view him as a heretic.

Outsourcing opens new possibilities, too. Slashdot had a post from a developer claiming that he was outsourcing his development work to an Indian programmer for a fraction of his salary. Maybe, it was a fabrication, but the post does suggest an appropriate model of thinking in this new age; perhaps we developers, stuck in an earlier mindset, are slow to realize the new arbitrage opportunities available through globalization. The New York Times wrote “Outsourced All the Way” about a growing number of mom and pop operations outsourcing, “braving a host of potential complications and turning to places like Sri Lanka, China, Mexico and Eastern Europe to make clothes, jewelry, trinkets and even software programs.” There are also some Internet sites, such as rentacoder.com and elance.com, where one can hire a developer from other countries to do work. Recently, I pointed to a site www.designoutpost.com in which designers compete to build your logo or a site.

Just my thoughts. Feel free to set me straight.

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Net Undocumented is a blog about the internals of .NET including Xamarin implementations. Other topics include managed and web languages (C#, C++, Javascript), computer science theory, software engineering and software entrepreneurship.

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