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Outsourcing: Cost-cutting and Efficiency

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A topic that is widely discussed today in the high-tech industry is outsourcing. The recession has pushed the industry past the tipping point, and every medium and large high-tech company plus many small ones are doing or setting up development in low-cost centers. For better or worse, outsourcing is here to stay; it’s time to move on, embrace it, and change our conversations.

The discussion we should be having is how to work more efficiently and how to achieve sustainable long-term success. Many high-tech companies, and most of the large ones, are already inefficient; outsourcing simply adds to the problem. Outsourcing is less efficient because of the greater amount of communication, review, and management (bureaucracy) required. Most companies don’t work efficiently when they start outsourcing, and outsourcing just makes the problem worse. However, investors and executives don’t notice because of the dramatically lower costs. For example, there are many manufacturing companies that ship partially assembled goods many times across the ocean. It’s so cheap that there aren’t enough people questioning the sustainability!

In my experience a change in process and mind-set can result in infinitely greater benefits, and those benefits lead to sustainable development and a competitive advantage over the long run. Outsourcing by itself will not lead to a sustainable advantage. In my current team for example, compared to three years ago we support twice as many customers, support three times as much source code, and we’re innovating on new workflows that will help our customers do more with fewer people. And most importantly, our team is 20% smaller. Those are measurable benefits that are a sustainable competitive advantage, but these results take hard work to achieve.

The question is, does outsourcing make your company more competitive? In the short term, simply through lower costs, the answer is most likely yes. However, in the longer term, the answer to that question is no. Why? Because unlike manufacturing the high-tech industry can only move to countries with a sufficiently large base of highly educated people. Competition for those people is increasing already in places like Bangalore and it’s going to increase everywhere else through the simple laws of supply and demand, and demand is inflated because so many high-tech companies are inefficient and use unsustainable practices.

The problem is it’s much easier in a large company to squeeze budgets to force outsourcing than it is to implement lasting process change. The loss of efficiency is going to hurt most on the front lines, and I believe that the companies that figure out how to work more efficiently and sustainably while doing distributed development are going to win in the long run. That’s where I see agile development fitting in, though admittedly not in the same form that it was first introduced, primarily for small co-located teams. I’ll save those thoughts for future posts because there are many angles.

Finally, these are the reasons why I think development in low-cost locations is here to stay:

  • Demographics and graduation rates. The developing world has a higher birth rate, more young people, and a higher enrollment and graduation rate from universities in high-tech related fields. And the quality of education is improving in many countries such as India, China, Singapore, Vietnam, Malaysia, Indonesia, the Phillipines, and Brazil.
  • Costs are dramatically lower. Not only are salaries lower, but many countries offer huge incentives to high-tech companies to hire local workers and make a long-term commitment. For example, there is one Asian country which I can’t name that will pay all startup expenses, provide free land and buildings, and tax incentives for five years if the company agrees to sign a ten year agreement. That’s impossible to compete with.
  • We can’t pretend that it’s just developing countries that want to diversify their economies. Many jurisdictions in developed countries are also offering incentives to high-tech companies. Quebec, South Carolina, parts of Germany, and Louisana are a few locations that I’m aware of that give free land, buildings, tax breaks, etc. in an effort to attract and keep high-tech industries. Frankly, it’s a good move because the same pressure to outsource doesn’t exist there as it does say in New York or California.

What does all this mean? The pressure to move jobs around the world is going to increase. Industry-distorting subsidies are going to increasingly be used as a blunt instrument to attract companies, and I don’t see any trade agreements coming soon. Agreeing on climate change should be easier, but we can’t get a global consensus on that! What we need to do now however is move on from blind cost-cutting to focusing on efficiency, sustainability, and long-term competitive advantage. It’s time to do the hard work.

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