Offshoring, Outsourcing, and the Global Marketplace

[Encryptshun]

Lame first post, but Greg mentioned he'd read an article in Wired or somesuch that addressed an upward trend in onshoring/insourcing. I was hoping you could post up what you read and your thoughts. I'm quite close to this topic in particular, so I'd love to hear it.

For the uninitiated, we need to make the definitions clear:

1) Outsourcing -- the act of moving a domestic core operation function to a third-party (i.e. another company) who will manage and deliver it for you

2) Offshoring -- the act of moving a domestic core operation function to a non-domestic nation

As a point of clarification, these two are not synonymous. The former deals with who "owns" the function and the latter deals with where the function is located. You can outsource and keep the function domestically-provided; likewise you can offshore and keep it internally managed. Popular jargon has misrepresented the two as the same thing, but it's worth pointing out that they aren't.

[AZhitman]

Here you go: http://www.wired.com/magazine/2011/02/f ... rica/all/1

Very interesting read.

[Encryptshun]

Thanks, Greg. That was a great read!

Certain industries will always primarily be able to avoid the outsourcing issue, namely hands-on services and perishable goods manufacturing (well, at least until distribution methods get so cheap that they make up for the lack of margin).

Interesting that the subjects of the case study elected to return production to the U.S. and eventually replace much of the human workforce with robots. What that says to me is that when faced with the choice of having cheap labor or no labor, no labor wins.

[AZhitman]

Sure it does - that's technological progress.

But not so fast: It's simply a shifting of labor. Someone's gotta build / program / maintain / operate the robots.

Until robots start building robots (ok, they actually already have in certain cases), there'll always be jobs.

The days of a guy with a GED making $37 an hour bolting brackets onto trucks all day is gone. Time to adapt.

[Encryptshun]

Greg, that's an excellent point, and it's the million-dollar question. Is it better for the economy to employ more people at lower net cost each or fewer people at higher net cost each? From an automation shift perspective, it's gotta be a net reduction in labor costs or there can be no positive ROI. You won't have as many techs as you had laborers, meaning you still generate unemployment. And there are still a finite number of available jobs.

So say you had 5 factory workers making $7.25/hour assembling wigets. That's $15,080 a year plus benefits. You invest $100K in an automated line, eliminating those 5 postions and replacing them with one new employee making $15K a year to operate the robots and another making $60k a year to perform maintenance. Your only labor savings are in the difference in fringe between your old work force and your new one, plus you still have to pay off and pay ongoing support costs for the automation solution. You might have some quality savings, but if your labor force was well-trained and loyal or if the operation was simple enough that a robot can do it, then your defect rate might not have been that high in the first place, so that OEE is questionable.

So you have eliminated four $15K jobs, kept one and added one at $60k. Those 4 people are now out competing for jobs against the rest of the minimum-wage labor force. They might find something. They might go back to school and in about 10 years have a degree (assuming 4-year degree taking 2 classes per semester and working full-time to be able to afford school). But it's still a game of musical chairs. Net net there aren't enough jobs for everybody, so what happens to the displaced workers? Unemployment? Welfare? Medicaid?

They certainly aren't paying in to the tax system. So would 5 x $15K (assuming our tax code was "repaired") pay the same amount of taxes that 1 x $15K plus 1 x $60k would?

So I reiterate (and I don't know the answer): Is it better for the economy to employ more people at lower net cost each or fewer people at higher net cost each?

[AZhitman]

I don't know that it's an answer (or perhaps a mitigating function), but keep in mind that the new $60K guy will now have more disposable income (and presumably less free time).

This benefits the services industries as they hire someone to care for their yard, wash / service their cars, clean their homes, prepare their meals, etc (whereas previously they did it themselves to save money).

Remember also that the 4 $15K workers likely filed "exempt" (or close to it). After deductions, it's unlikely they're paying taxes anyway.

It really is an unknown IF you take the politics and ulterior motives out of it and look at it with pure curiosity.

Great thread.

[IBCoupe]

Planet Money had an interesting show, premised on the notion that there are two Americas, and that one of them is in decline, while the other is going strong: http://www.npr.org/blogs/money/2011/08/ ... money-live

If I recall correctly, the first America is the one where you could go to high school, work really hard, and still live a middle class existence. Sometime in the late 1970s to mid 1980's, that ceased to be a reality. For those Americans, they no longer were able to live a better financial life than their parents.

For the rest of America, the one where college degrees are ubiquitous, we're still going strong, and we're still doing better than our parents. Give it a listen if you've got an hour to kill.

[Encryptshun]

I will give it a listen Isaac (and welcome back!), but at first blush I'd say it sounds about right and it SHOULD sound about right. It's progress. Used to be a perfect life was to own a farm. That's a primary industrial society. Then the perfect life was working in a factory. That's a secondary industrial society. Now, life requires advanced education, increased personal competition, and self-marketing. That's tertiary industry, which is where our economy is focused now. In that regard, it makes sense the people who are trying to make a living in a sector of our economy which is in decline are not going to be as successful as those making a living in the sectory that's currently top-dog.

The assertion that I'm hearing more and more is that we are sliding backward from a tertiary industrial society and back into secondary. I think that will depend ultimately on whether we decide to become more economically isolationist -- if so, our primary, secondary and tertiary will need to be in balance rather than so far skewed like they are now. Onshoring labor will help to bring that balance, if there can be a commensurate cost of living adjustment to make it feasible to work in factory jobs and still live a lifestyle that Americans have become accustomed to without resorting to over-unionization.

[IBCoupe]

Well, I've also read that labor and production is beginning to be brought back on-shore as quality control and transportation costs are beginning to outweigh the savings realized by lower wages and material costs.

[Encryptshun]

^ Yes, that is absolutely true.

[AZhitman]

Well, I've also read that labor and production is beginning to be brought back on-shore as quality control and transportation costs are beginning to outweigh the savings realized by lower wages and material costs.

...which is what the OP was about.

Something I'm pretty certain of is this: My kids (and their peers) are likely to be the first generation of Americans who DON'T "have it better" than their parents. I'm not sure where the cutoff is (or if there really is one), but the big green sign on the freeway that says, "Success - 2 miles" appears to be moving (or narrowed down to one lane).

[IBCoupe]

Heh, I suppose if I'm going to offer a link, I should do you the courtesy of reading yours. :P

But really, that risk for your kids can be pretty much eliminated by getting a good college education.

[Encryptshun]

Master's is the new Bachelor's. PhD is the new Master's.

When I got my MA, only about 1 in 20 managers working for large companies had Master's degrees. Now it's like 1 in 5.

[AZhitman]

That I'll agree with.

I'm encouraging mine to find something they love, do it better than anyone else, and figure out a way to do it without having to work for "The Man".

Realistically, I don't think college is for everyone, and there's attorneys in my office making $40K a year. I'm pretty sure that's insufficient to cover their exorbitant student loans and still have much quality of life.

[IBCoupe]

Heh. Tariq, come talk about student loans. :P

[Encryptshun]

Just to add some levity to the conversation, below is an excerpt from an email a buddy of mine just sent about his recent experience with his company's outsourced & offshored technical support team:

"Thanks for the birthday wishes, guys. When I landed in London and turned on my computer (AFTER paying for internet service at the hotel, of course) I discovered my hard drive didn't work any more. Worked fine in Chicago, but whatever. That was on my birthday.

Then I went into the London office and talked to the US support office (which is located in India, I think). I told him somewhere around 8 times that I was in London and to have someone call me there (because of course the people in London are from the other legacy firm and aren't allowed to touch my computer). Naturally, what happened is that the help desk person created a ticket and sent it to Chicago.

I mean, I seriously told him eight times and gave him the desk phone number where I was sitting in London. He still couldn't get it straight. I even asked if I could get the name of the exchange server for getting mail from Chicago. He said I should ask the person next to me. I almost yelled at him. Not that anything could have been done about the computer, as it turns out."

[szh]

But really, that risk for your kids can be pretty much eliminated by getting a good college education.

Reduced ... yes.

Eliminated ... I sure hope you are right.

This is one of my major concerns right now ... as an older parent of a 13 year old, i am seriously worried about what world he will live in ... and I will probably not be around for him to lean on if needed.

Z

[heliochrome85]

Heh. Tariq, come talk about student loans. :P

today i had a patient who was 7 and had come to the hospital because she had some vaginal pain. yup, herpes. im not in a "debating" mood, but rather a "get banned" mood.

[szh]

Heh. Tariq, come talk about student loans. :P

today i had a patient who was 7 and had come to the hospital because she had some vaginal pain. yup, herpes. im not in a "debating" mood, but rather a "get banned" mood.

Not good at all!

Please do try to separate your work from you personally - although easier said than done in situations like this, I suppose.

Z

[AZhitman]

Get used to it, brother.

I'm gonna share something I learned working in the field: Tell yourself, "I didn't cause this, but I can sure as hell try to help."

Otherwise, you're gonna be useless as a physician. And we need people like you.

[szh]

today i had a patient who was 7 and had come to the hospital because she had some vaginal pain. yup, herpes. im not in a "debating" mood, but rather a "get banned" mood.

Not good at all!

I reread what I wrote sleepily last night (I was on too early a trip yesterday morning to Florida) ... I hope it was clear I meant the situation with the patient was not good at all, not you, of course!

Z