Tuesday, August 22, 2006

outsourcing - bad for corporations but good for the world

There is ongoing discussion about whether outsourcing is good or bad. The general assumptions seem to be that it is bad for people who work in the computer industry (more competition for jobs and thus lower pay) and good for employers (more work done for less money).

I am not convinced that employers can get any benefit from outsourcing. The problem is that the pay rates for computer work are roughly proportional to the logarithm of the productivity of the person (at a rough estimation - it's certainly not linear). Therefore if you get an employee on twice the base salary you might expect ten times the productivity, and an employee on three times the base salary could be expected to deliver one hundred times the productivity. These numbers may sound incredible to someone who has not done any technical work in the computer industry, but actually aren't that exciting to people who regularly do the work. Someone who knows nothing may perform a repetitive task manually and waste a lot of time, someone who knows a little will write a program to automate it, and someone who knows a lot will write a program to automate it that won't crash...

Programmers in Indian outsourcing companies are paid reasonably well by Indian standards, but they know that it's possible to do a lot better. So all the best Indian programmers end up either migrating to a first-world country or running their own outsourcing company (there are a lot of great Indian programmers out there, but they aren't working in sweat-shops). The Indians who actually end up doing the coding are not the most skilled Indian programmers.

It might be better to hire cheap Indian programmers of average skill than cheap first-world programmers of average skill. But hiring a single skilled programmer (from any country) rather than a team of average programmers will be a significant benefit (both in terms of price and productivity). In addition to this there are the communication problems that you experience with different time zones (the idea that one team can solve a problem while the team on another continent is asleep is a myth) and with different cultures.

I am not convinced that outsourcing does any real harm to good programmers in first-world countries. If someone does computer work strictly 9-5 and never does it for fun then they are not a serious programmer. People who aren't serious about computers will probably be just as happy working in another industry if they get the same pay. Moving a few of the average computer programmer positions to India isn't going to hurt anyone, especially as the industry is continually growing and therefore there is little risk of any given programmer being forced out of the industry. The people who are serious about computers (the ones who program for fun and would do it even if they weren't paid to do so) are the most skilled programmers, they will always be able to find jobs. Will outsourcing reduce the income for such people? Maybe, but earning 5* the average income instead of 6* shouldn't hurt them much.

The final question is whether outsourcing is a good thing. I think it is good even though it's bad for first-world companies and not particularly good for programmers in first-world countries. Outsourcing benefits developing countries by injecting money into their economies and driving the development of a modern communications infrastructure (telephones, mobile phones, fast Internet access, reliable couriers, etc). I believe that the good which is being done in India by outsourcing money greatly exceeds the damage done to companies that use outsourcing services. Therefore I want this to continue and I also want to see outsourcing in other developing countries too. There is already a trend in outsourcing to eastern-European countries such as Russia, this is a good thing and I hope that it will continue.


hendry said...

Excellent angle there Russell.

Anonymous said...

Russell, as you probably know the outsourcing in NL is reaaly booming. In banking sector, where I'm working, they plan to outsource not just development but the complete IT! So only minimal busuness support and monitoring function are planned to stay.

This is negative because:
= Once complete IT is outsourced, the providing service company become a monopoly and could not be efficiently controlled.
= The whole country IT knowledge could degraded in [dead]loop of demand-offer cycle.

What do you think?


etbe said...

I wasn't aware of the status of outsourcing in NL, but expected it to be much the same as most first-world countries.

I agree that the outsourcing is bad for the company that outsources their critical infrastructure. But I believe that the benefits to developing countries make it a net positive for society.