Saturday, November 5

outsourcing versus location

Dear Kannu

here are a series of articles on the impact of offshoring / outsourcing on a national economy. Its a fairly light analysis but it is important for you to understand this. As you know, the western economies have been offshoring and outsourcing manufacturing, agriculture and services with gay abandon. Tom Friedman's very light book (which we have), the world is flat is a paean to globalisation, offshoring and outsourcing. On the other hand, this set of articles talks about why western economies are in danger of losing its place in the world while India and China eat their lunch. Michael Porter's competitive advantage tract is also a seminal book about how each country should concentrate on what it does best and import

go down, there are 7 articles in the list.

There are pro's and cons to this argument and here are some thoughts.

  • importing and exporting has been going on since time immemorial. Our ancient civilisations in Greece, Egypt, Mesopotamia, Indus Valley, China, etc. all traded with each other. Here in England, we have evidence of trade going back centuries. So imports and exports always have been with us
  • Technology destroys industries, changes things hugely. Again, history tells us so. The cross over between the bronze age to the iron age was accompanied with huge ruction. The invention of the wheel was traumatic across humankind. When automated looms were introduced, they destroyed a vast textile industry. The telephone, fax, photo copier, digital camera, mobile / smart phones all have disrupted industries. So I am not surprised that availability of technologies such as software configuration management, global co development frameworks for s/w development, collaboration tools, etc. etc.
  • So this is no different, jobs and industries in countries have vanished or changed. Take for example the issue with chicken legs. Americans and Brazilians love chicken breasts but they don't like chicken legs. So what do the American and Brazilian poultry chaps do? they export the legs at a dirt cheap price. In countries like India and many in Africa, they love chicken legs but they don't like chicken breasts. So dirt cheap legs have flooded these countries and has destroyed the poultry industry in many countries. See here for an example:
  • I went through a similar exercise while working in ABN AMRO. They offshored and outsourced to an amazing extent. But the core damage to this kind of exercise is that you loose your best people specially if you offshore/outsource on the basis of "manage my mess for less". The good chaps go, the new blood doesn't come in and people end up with managers and not the do'ers. So the lesson I took from that experience is that never outsource stuff that is crucial to you. In banking, technology is crucial, its critical, outsourcing that is not good. Offshoring is a different matter but needs different management styles, offshoring if done badly can destroy client and business value as people who are away from the client don't understand what they are doing. Asking for comprehensive documentation is frequently not possible or expensive or suffers from the other issue, too much detail is like a straitjacket, you have defined everything and changes becomes very difficult. Translating what the client/business wants to what the tech guys can deliver becomes more and more difficult.
  • But some of the underlying aspects that the chap mentions in his forbes articles are true, if you start taking out basic elements of the industrial value chain, then you will lose out the industry. Which is one of the reasons why some of the industries have gone off to China.
  • That said, quite a lot of industry is still in USA, Germany, UK, etc. but you have to be smart about it. If you are looking for investment opportunities, think about where the value is being added, so invest in firms like Rolls Royce which make high value added stuff onshore.

Anyway, go have a read, its interesting.

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