offshoring

Let’s not kid ourselves about just how cheap offshore labor really is. We not only pay substantially less per hour, we also avoid the costs we would incur if these workers immigrated here. We don’t pay for their medical expenses when they show up in the emergency room without insurance. We don’t pay for their pension costs if they don’t save for retirement. We don’t pay for their children’s public education. Nor do we pay for their out-of-wedlock children, their unemployment benefits and workers’ compensation, their slip and fall torts, their wear and tear on our public infrastructure, and the cost of their drunk driving, drug use and other crimes. We outsource pollution, its adverse effects on our health, and its clean-up costs. Neither the employees nor their employers are here to vote and seek political handouts.
—  Former Bain Capital partner and Mitt Romney supporter Edward Conard extols the virtues of “cheap offshore labor” in his book “Unintended Consequences.” Conard was for a long time the head of the manufacturing practice at Bain Capital. As we speak, Sensata Technologies, which is owned by Bain Capital, is preparing to offshore 170 jobs from a manufacturing plant in Freeport, Illinois to China.

Most people can at least identify the wealthiest neighborhoods in their town, but what about the richest person living in their state? You just might have to take a look at a new map made by the real estate trends blog Movoto to figure that out.

“So how did they get to where they are? Are they all self-made entrepreneurs, or were they just lucky? Do they hoard all that wealth, or do they give back?” Chris Kolmar, chief “armchair economist” for Movoto, asked.

The real estate blog found that these elite are a mix of entrepreneurs and those who inherited grand wealth.

“Of the wealthiest in each state, roughly half are founders of companies. Another major path to wealth is inheritance, with the Waltons being the most striking example,” Kolmar wrote, citing the founder of Walmart, Sam Walton, and how a few of his family members are the wealthiest people in their states, including Texas, Wyoming and Arkansas.

Taking it a step further, Movoto also found that higher education doesn’t necessarily equate to more wealth.

“From an undergraduate education to the coveted Ph.D., most members of the list have some sort of college degree. But years spent studying on campus isn’t necessarily a prerequisite to striking it rich. Bill Gates, a college dropout, is the wealthiest of them all,” Kolmar wrote.  ”On the other side of the academic spectrum, Delaware’s Robert Gore holds a Ph.D. but ranks second to last in terms of his net worth.”

Check out Movoto’s blog post to play around with an interactive version of the map and learn more about these well-off people.

youtube

We talk about offshore processing of asylum seekers a lot in Australia, but it’s important to understand its broader context.

Check out this animation which explains how the logic of “offshoring” underpins so much in our economy and politics. We do not just offshore refugees we do not want to house, but jobs we do not want to do, labor we do not want to pay for and protect fairly, income we do not want to pay taxes on, industries too dangerous/unwholesome and pollution and waste we do not want to suffer. What the First World “offshore” is basically its problems, so its economies look like successes while the Third World takes the brunt.

This short animation summarises John Urry’s new book, ‘Offshoring’.

silicon.com
Outsourcing, offshoring: Not all it's cracked up to be

CFOs feel it’s too risky while local authorities are warned to think twice before taking the plunge…

NEWS

Caution is the watchword for finance bosses and local government looking at outsourcing and offshoring ITPhoto: Shutterstock

Despite the growth of outsourcing, the associated risks are putting off many finance professionals and local government organisations.

CFOs see the offshoring of finance and accounting functions to low-cost locations as a riskier strategy than using cloud computing, according to research by analyst house Ovum.

Of the CFOs and senior financial executives quizzed by Ovum, 38.5 per cent said they view offshoring to India as unacceptable risk, while 44.2 per cent said the same about South and Central America. Just 29 per cent said the same about cloud computing.

Another major factor in businesses not wanting to pursue the “high-risk strategy” of offshoring is loyalty to staff, with 44 per cent saying this issue is holding them back.

Ovum lead analyst Peter Ryan said loyalty to staff is unlikely to be the only motivation because the desire to keep people with relevant skills will also be a factor.

Other major concerns about offshoring cited by the businesses surveyed are a loss of control over processes and the practice not delivering sufficient savings to be worthwhile. Many companies not already outsourcing said they wouldn’t be persuaded to do so even by cost reductions of up to 20 per cent.

Ovum’s Ryan said one of the major challenges for outsourcing companies is to show they “can deliver efficiencies beyond arbitrage through use of low-cost labour locations”.

Meanwhile, local government IT body Socitm has warned that outsourcing IT - especially a whole service - remains risky for local government organisations due to financial risks and a reduced ability to respond to change.

Discussing the pitfalls of outsourcing in more detail, Socitm’s research arm, Socitm Insight, said figures over the past decade suggest processes actually become more expensive if they are outsourced.

Socitm also warns against outsourcing information assets along with technology because this practice can make organisations less able to exploit data effectively to generate further efficiency savings.

In addition, if organisations outsource business IT because they are unable to manage it themselves, it suggests they’ll be equally unable to manage a contract. According to Socitm Insight, they may also be handing over economies of scale and savings that they ought to be able to make themselves.

Another area of risk is that local government organisations could lose valuable inhouse expertise by outsourcing processes, making them less able to challenge supplier recommendations.

In terms of ability to cope with change, outsourcing arrangements are often long-term and fail to address future requirements.

Author of the Socitm Insight report Martin Greenwood said outsourcing “should not be considered an inevitable response to austerity”.

He added that even smaller authorities - that could potentially benefit from outsourcing through economies of scale and extra capacity to react to rapid developments in IT - should first look at collaborating with other local authorities and services rather than automatically going down the outsourcing route.

A Change of Heart - Changing The Engine While The Car Is Running

“To do two things at once is to do neither” (Publilius Syrus)

A common dilemma facing businesses is ‘How can we develop the next big thing if we have to continue supporting our current offerings?’. After all it’s our current offerings and its customers that are paying the bills and we can’t ignore that can we?!?

Of course not, so let’s multitask. We’ll allocate 50% of each person’s time to doing new development and 50% to sustaining our current offering. It’s mathematically perfect and a great way to fully leverage each person’s expertise but hopelessly flawed in practice. The false economy of multitasking is well documented in both business and life. Not only is it flawed in organizational applications but its avoidance is at the very heart of software Service Oriented Architectures (SOA) with its emphasis on the single responsibility principle (SRP) and separation of concerns.

In our case, with the teams having completed basic Agile training, we were eager to move forward with our Agile transition. But knew we could not abandon sustaining business with our existing customers while we did it. Add to this the stigma associated with software maintenance and we had a hard choice to make.

  1. Continue having everyone do maintenance but set aside half their time to participate in the transition. Which we knew would translate to a very slow transition at best and no transition at worst.
  2. Leave a few of our key team members behind on maintenance while the rest moved forward with the transition. This would definitely keep the business happy but would do little for the morale and retention of the few left behind.
  3. Outsource the maintenance activities so that everyone could be part of the transition. This of course would require extra cost but bearing in mind the false economy of the first option and the potential for operational efficiencies - would it really in the long run?

We chose option 3 and went with a local outsourcer who had offshore operations based in India. The offshore workers were quick-to-learn, eager to please and unlike their North American counterparts had no issue working on software maintenance. Rather, they saw it as a great opportunity to gain North American experience and eventually a ticket to the riches of the West.

The thought of offshoring to India sent shudders through the organization. They had tried it once, failed miserably and were still paying off the technical debt incurred. The big difference this time though was scope of the work being offshored. We weren’t offshoring the future of our core competency but rather the maintenance of a shrinking legacy code base. We made sure any offshoring work candidates fulfilled the following criteria:

  1. Existing well-defined processes for workflow and governance.
  2. Work that requires low interaction with the business and customers.
  3. Work that can be performed during prime shift in offshore location.

Still it was not going to be easy. We were now planning to use an offshore transition to enable our Agile transition. A transition within a transition!

Under the guidance of a dedicated Release Manager with technical oversight and support from the development team, the offshore transition plan and operational models took shape. The development team spent countless hours bringing the offshore team up to speed going through the following phases:

  1. Knowledge Transfer
  2. Work Shadowing
  3. Guided Work
  4. Solo Work

It was tedious work for our development team members. They would often lament how much quicker they could do the work themselves rather than having to explain it to someone else to do. Their only solace was knowing that the faster the offshore team came up to speed, the faster they would be freed to participate in the Agile transition.

After 3 months, early results of the offshore transition were promising and dissipated any earlier objections to offshoring.

  1. We achieved a full crossover of ongoing maintenance responsibilities.

  2. We freed up all employees including those that were previously dedicated to legacy maintenance work to participate in the agile transition and new development work.

If you’re entering into an offshoring engagement solely to achieve cost savings, you will be sorely disappointed. Depending on the scope of work and operational model used, there may not be any cost savings. The real value for us behind offshoring was:

  1. The potential for quality improvements such as increased documentation and process enhancements to ease the transition.
  2. The opportunity to leverage the talents of your key employees towards improving core competencies and building new business value rather than maintaining legacy value.

We had our (Agile) cake and were able to begin eating it too!

Next post: Behind Every Great Transition…

fibre2fashion.com
Chinese firm to set up garment factory in Senegal

A China-based company has signed a memorandum of understanding (MoU) with the Agency for the Promotion of Investments and Major Works (APIX) to set up a garment manufacturing factory in Senegal, located on Africa’s west coast, local media has reported.

The MoU signed earlier this month by representatives of APIX and C&H Garment Company envisages an investment of $25 million, according to an Agence Ecofin report.

The clothing factory will come up in Diamniadio industrial park, about 30 km from capital Dakar, and will initially employ 1,000 people when it goes operational by June 2016. Later on, the factory will be expanded to increase employee strength to 5,000, the report said.

All production at the factory, being set up under Emerging Senegal Plan (PSE), will be meant for exports. The project aims to benefit from local availability of labour, export opportunities available on the integrated market of the West African Economic and Monetary Union, and the strategic proximity of Senegal with importing countries, specifically the US and the EU.

Nike does not manufacture its own products. It only designs and markets them. About 550,000 workers are employed in 700 factories in 50 countries to make Nike products, the majority in Asia. The contractors tend to pay close to the minimum wage. This cheap labour enables Nike to spend a great deal on design and marketing, pay large executive salaries, maintain large profits, and still keep the cost of the shoes affordable to the middle classes in affluent countries. Shoes that cost $16.75 to manufacture are sold for around $100 in the US.

Since Nike spends so much on marketing and so little on the product itself, it is clear that the reputation of its brand is all-important. The writer Naomi Klein has noted: ‘In many ways branding is the Achilles heel of the corporate world. The more these companies shift to being all about brand meaning and brand image, the more vulnerable they are to attacks on image.’ So Nike was in trouble when its contractors were accused of manufacturing Nike products in sweatshop conditions, using child labour, paying less than the minimum wage, enforcing overtime, subjecting employees to verbal abuse and sexual harassment and running factories like prison camps.

— 

Putting the Boot In

(Sharon Beder, ‘Putting the Boot In’, The Ecologist 32(3), April 2002, pp. 24-28, 66-7)

Watch on benjamintomkins.tumblr.com

Innovation, Where Does It Come From?

WSJ confab of @mattwridley, @jonahlehrer, @stevenbjohnson, and @petersims considered the sources of innovation. Thumbs down on brainstorming, thumbs up on warm showers.

Another view comes from MIT President @SusanHockfield: keep manufacturing close, don’t send it offshore. Plus a call for Silicon Valley to actually build something.

Relocalización, ¿el mundo deja de aplanarse?.

La globalización es un hecho innegable y sus efectos en la ricardiana división internacional del trabajo palpables. La guía más accesible para entender ambos aspectos es el famoso “The world is flat” de Thomas Friedman, donde conceptos como outsourcing, offshoring (si no quieres leer el libro y quieres tener una explicación sencilla de ambos conceptos mira aquí) son explicados con numerosos ejemplos reales de empresas que han visto como entre finales del siglo XX y el comienzo del actual, con los imparables avances de las tecnologías de la información (TIC) han rediseñado sus procesos, productos, servicios y negocios para hacerlos globales en el más estricto sentido del término.

Hay dos países que se han convertido en símbolo de esa nueva globalización por su capacidad para atraer gran parte de esos procesos que desde los países más desarrollados se han deslocalizado: China e India.

Ambos gigantes asiáticos han pasado a convertirse, en gran medida, y con una óptica muy generalista, en las fábricas del primer mundo y el soporte de primer nivel de muchos servicios de multinacionales anglosajonas.

Pero el pasado mes de julio una noticia que pasó inadvertida, al menos en España, me llamó la atención: una empresa británica dedicada a los Call-Center repatriaba sus actividades localizadas en Bombay (India) a Burnley (Inglaterra). La semana pasada, otra noticia similar, me hacía pensar en un posible cambio de tendencia en la economía global: la relocalización.

Como decían en mi añorada “Rubicon”: “connect the dots”. Cierto es que la unión de dos puntos puede ser un argumento bastante pobre para probar un retroceso en uno de los aspectos claves de la globalización, pero al menos puede servir como base de discusión sobre el tema.

En los comentarios de la segunda noticia que leí (y que había servido en parte para la misma) enlazaba a un interesante post de la Harvard Business Review sobre el regreso de la industria manufacturera a los EE.UU. Aquí lo reducían a un problema de costes laborales, ya que se espera que la escalada salarial continúe en China reduciendo cada vez más el diferencial con respecto a otras fuerzas laborales. Esto, unido al factor de la productividad pone en duda la rentabilidad de la deslocalización de ciertas industrias en favor de los países desarrollados.

Si a los factores salariales y de productividad le añadimos poderosos incentivos como infraestructuras y suelo barato en áreas industriales-mineras deprimidas, como era el caso de Burnley, y ayudas (y presiones) públicas para repatriar empleos en una coyuntura como la actual, pueden ser el cóctel perfecto para recuperar parte del tejido industrial desaparecido en las últimas décadas y alejar el fantasma de la deslocalización en estos tiempos tan difíciles. Algo que muchas administraciones venderían como un éxito a sus ciudadanos.  

Pero también se me ocurren otros escenarios posibles a la luz de esas noticias. ¿Se podrían reforzar esos procesos de deslocalización que trajo la globalización y expandir su red a países que se están incorporando en fechas recientes a los mercados globales como pudieran ser Vietnam o Laos, por poner algún ejemplo? ¿Serán los famosos BRIC los que empiecen su propio ciclo de división internacional del trabajo, alimentando sus cada vez más importantes mercados locales vía offshoring gracias a los países de sus áreas de influencia más cercana en una primera fase e incluso a través de los miembros más desarrollados de la OCDE en una segunda fase enfocada en los productos y servicios de mayor valor añadido?

Quizá se están sentando las bases para que se invierta el famoso “Designed in California, assembled in China”, previo paso de un “Designed in California, assembled in Houston”. El tiempo lo dirá.

It's Offshoring, not Outsourcing.

Read this in a business management blog about America’s concern with “outsourcing” (which they really mean concern with “offshoring”):

“The underlying problem is that profit driven companies need talent and leadership and the faulty US educational systems are not producing the sufficient numbers to meet the need.”

I’ll try and keep this rant semi-brief.

This is the reality of the American education systems. Kids go to school and screw around, don’t do their homework, play sports, etc., and parents spend all their time complaining and blaming their teachers, their schools, and the government for not giving their child the proper “education” and “skills” they need.

Then the children grow up. They learn to blame others for their issues, they skate by in college (because EVERYONE goes to college these days) and then they get into the real world and are thrown into the work place. And they’re not leaders. They’re not even that smart. So our workplace becomes flooded with dumb people that just do enough to get by.

And we wonder why our jobs are being offshored.

Bottom line: All our “great jobs” are being given to someone overseas who is willing to work harder than we do, for less money. 

If you want your job back, stop complaining about how unfair the reality of the world is, because the entire time that you’ve been complaining, someone in India or China is working their a** off to be better than you. 

Why We Are Lucky To Have Lael Brainard On Fed's Board

I read about some appointments President Obama is making for the Federal Reserve’s Board of Governors, and I saw a female face.

Lael Brainard

Binyamin Appelbaum, Obama to Nominate 3 to the Board of the Fed

President Obama plans to nominate three people to the Federal Reserve’s Board of Governors, including Stanley Fischer, former head of the Bank of Israel, as the Fed’s next vice chairman, the White House said on Friday.

Mr. Obama also plans to nominate Lael Brainard, a former Treasury Department official, to an open seat on the seven-member board, and to nominate the Republican financier Jerome H. Powell, on the board since 2012, to a new term.

“These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy,” Mr. Obama said in a statement.

[…]

Another nominee, Ms. Brainard, 51, joined the Obama administration in 2010 as Treasury under secretary for international affairs — in effect a senior diplomat for the nation’s financial interests. She stepped down in November. That expertise could prove valuable to the Fed as it navigates the global impact of its actions and seeks to foster international coordination on issues of monetary and regulatory policy.

Mr. Obama praised her as “one of my top and most trusted international economic advisers during a challenging time not just at home, but for our global economy.”

I looked into her background, and she’s run the economics steeplechase: master’s and doctorate in economics from Harvard (National Science Foundation Fellow). She graduated with highest honors from Wesleyan UniversityWhite House Fellow, a Council on Foreign Relations International Affairs Fellow, a Marshall Scholar elect, and a member of the Council on Foreign Relations, and Aspen Strategy Group.

And I read a paper she co-authored in late 2005 with Robert Litan called Services Offshoring, American Jobs, and the Global Economy. This was written looking back at the 2001 recession, which was surprisingly slow to turn around, a precursor to (or earlier part of?) our current Great Recession, and as she and Liton explore its terrain we same the same inequalities and precariousness of economics that have become the foreground issues of our day.

The starting point of their discussion is that offshoring has an impact on the economy that is almost the same as technological advance:

The authors write [citations removed],

International trade works much like technological change. Economists such as Catherine Mann of the Institute for International Economics, who point to offshoring’s overall benefits to the U.S. economy, typically argue that it helps lower costs and prices. A recent study by the consulting firm McKinsey and Co. estimates that the net cost savings of moving some jobs offshore is about 50 percent. This is far lower than the sometimes 80 to 90 percent wage differential between U.S. and foreign workers (because of costs incurred for coordination and telecommunications), but still sizable. In turn, lower inflation and higher productivity allow the Federal Reserve to run a more accommodative monetary policy, meaning the economy can grow faster, creating the conditions for higher employment. Mann estimates that economic growth would have been lower by 0.3 percent a year between 1995 and 2002 without foreign outsourcing in information technology.

[…]

Offshoring, like trade and technology, is a process of creative destruction whereby workers in affected industries face the very real possibility of losing not only their jobs but also their healthcare. Even worse, some workers fall down the economic ladder when they have no choice but to take new jobs at lower pay and thus face the prospect of lower lifetime earnings. This concern is particularly acute because it comes at a moment when anxieties about jobs and wages are at fever pitch. Against the backdrop of a breathtaking acceleration in manufacturing job losses over the past few years, the jobs picture remained bleak much longer into the recent recovery than in any previous postwar recovery.

[…]

This plays into a broader set of distributive trends that have been quite negative for American workers since the end of the 2001 recession. As Federal Reserve Chairman Alan Greenspan noted in April 2004, “virtually all of the gains in productivity have ended up in rising profit margins and hence in a decline in the proportion of that national income going to compensation of employees.” Two years into the current recovery, the profit share of income grew 33 percent (on a pretax basis) compared with only 3 percent during the recovery of 1992–93; worker compensation, meanwhile, remained down 4 percent—a steeper decline than during any previous recovery in the last four decades. At the same time, the administration’s tax policies have exacerbated rather than offset these trends by shifting the tax burden away from wealth and towards earned income. 

[…]

Now that college-educated, white-collar American workers will increasingly be in competition with highly qualified workers in the developing world, won’t they be subject to the same pressures?

In his new book, BusinessWeek’s chief economist Michael Mandel worries that that the answer to this question is “yes,” and he may well be right. If Mandel’s assumption is correct, the “skills premium” that educated workers earned in the past may be pushed down in the future, thus reversing a decades-long trend. 

Things have only gotten worse, and Brainard and Liton’s policy recommendations have largely gone unimplemented: most importantly, these two (the others regulatory and data-collection oriented):

Give American workers the knowledge and skills they need to compete in the global economy. America will not be able to hold onto the world’s highest paying jobs if the number of college graduates with degrees in physical sciences, math, and engineering continue on a downward trend. This requires concerted action at all levels: strengthening the kindergarten through twelfth-grade curriculum; encouraging more American teenagers to invest in science and engineering higher education; and restoring funding to community colleges and retraining programs that have recently experienced cuts. 

[…]

Address the dislocation faced by workers in the services sector. This is the most urgent priority. Although Congress made far-reaching reforms to the Trade Adjustment Assistance (TAA) program in 2002—including adding a healthcare benefit—it ultimately rejected efforts to extend the program’s reach to services workers. Software programmers are now suing the DOL to gain access to the same extended unemployment insurance and retraining benefits long guaranteed to trade-impacted manufacturing workers. Congress could make the suit moot by making clear that service workers are covered by TAA.

Wage insurance should also be a central part of the safety net for displaced services workers. In 2002, Congress amended the Trade Promotional Authority Act to include a program providing wage insurance to workers who are over fifty and can prove that trade is a “major cause” of their displacement.Service workers displaced by offshoring should be eligible for that benefit, and it will almost surely be necessary to lower or eliminate the age requirement and raise the compensation limit (now $10,000 per year) to reflect the higher income of many dislocated service workers.

I confess that I have never heard of wage insurance, but it’s clear that not only manufacturing jobs have been lost to offshoring. I am uncertain of the status of the TAA program, but I know that the education situation in the US today is far worse than it was in 2005, given the layoffs in primary and secondary education, and the rapid increase in the cost of college and the diminishing value of a degree.

And, since her area of economics is international trade – which impacts the economy like technology – I hazard that she can see into the ways that technology is changing our world, both for good and bad. 

We are lucky to have her on the Fed Board.

Update - 6:53am 11 January 2014 – ten minutes later, I am still reading the NY Times editorial page, and see the headline No Jobs, No Benefits, and Lousy Pay, which open with this: 

There is nothing good to say about the December employment report, which showed that only 74,000 jobs were added last month. But dismal as it was, the report came at an opportune political moment. The new numbers rebut the Republican arguments that jobless benefits need not be renewed, and that the current minimum wage is adequate. At the same time, they underscore the need, only recently raised to the top of the political agenda, to combat poverty and inequality.

The rise of a populist agenda in the US has to include an understanding of impacts of international trade on the economy. A ‘flat world’ isn’t a law of the universe like gravity, but is instead the outcome of myriad policy decisions that benefit some and harm others. I hope that Lael Brainard will help in changing that headline.