Outsourcing to add 22m US jobs!

[Ashok Mash]

Now, hows that for a change?
Times of India is quoting Diana Farrel of McKinsey Global Insitute, and based on McKinsey's investigation, every dollar invested in outsourcing, $0.58 is saved and can be redistributed to investors and customers. Here is the full article, and here's a discussion about it on Slashdot.
This may be a corporate version of the outsourcing scenario, but I think there is some truth in their claim. Profits of American firms who outsource is very real, and that has to go somewhere!

[Arjun Shastry]

How did they arrive at that precise fraction 0.58? and 22 Mn jobs?Can anybody explain how economists find those numbers?

[Robin Davies]

Interesting!
I am attending a conference in London on Outsourcing presented by the British Computer Society.
I will convey my views on the subject after this date.

[Jeroen Wenting]

OK, let's see.
I invest $1 in outsourcing. For that I save $.58 which I can use to hire 22 million people.
Given that number I'd have to fire about 40 million in the first place, so the employee force shrinks by 18 million.

[Kishore Dandu]

Well.
There is a section in "Dilbert's principles" dedicated to consultants such as Mckinsey.
What they do is, charge around 300 bucks an hour and produce either something that we already know(or summary of different people's ideas from the company where they are consulting) or bunch of vague numbers which will have no true real life meaning.
Dan.

[Jason Cox]

$0.58 is saved and can be redistributed to investors and customers.

Notice the wording. Any money saved seems to be going straight to the pockets of the corporate bigwigs.
I like how these consultants assume that big business is going to do what is best for the country. If that were the case, we wouldn't have things like anti-trust laws.
EDIT - Oh crap, I am a consultant myself. Although I like to think I have more integrity than that.
[ February 10, 2004: Message edited by: Rob Aught ]

[Mark Herschberg]

Well, if you believe in free markets, then this will happen as follows (I'm using an example with round numbers)
1) A company does a yearly product release at a cost of $10M in labor.
2) The company decides to outsource, builing the 2004 product for only $5M.
3) The company saves $5M. Since people here are skeptical, we'll assume that half the money is given to investors and executives, the other half goes back into the corporate balance sheet.
4) The company now has $2.5M sitting around. They'll use it to launch new products. COmpanies generally don't simply keep money in the bank. But even if they do, then the bank can invest it, and it will work similar to what happens in step 5.
5) The investors and executives now have $2.5M. What do they do? Shove it under their mattresses? Of course not, they invest it. They might buy stock or bonds to raise coporate value. Alternatively they might put it in the bank, in which case the bank then invests it (either through a loan or private investment). Either way, the money goes to coporations who believe that if they can borrow $2.5M they can turn a profit.
6) The reinvested $5M is then used for new ventures which create new jobs and new opportunities.

Does this mean the number of jobs is constant? Of course not. The US population went from approximately 80% farmers to less than 5%. The money and time of the 75% is now more efficently used elsewhere (i.e. in the business world). However, during the transition, many farmers lost out because although the economy could refocus in a decade or two, many people can't.
Fundamentally, this is the Theory of Comparative Advantage.

--Mark

[shay Aluko]

Originally posted by Mark Herschberg:
Well, if you believe in free markets, then this will happen as follows (I'm using an example with round numbers)
1) A company does a yearly product release at a cost of $10M in labor.
2) The company decides to outsource, builing the 2004 product for only $5M.
3) The company saves $5M. Since people here are skeptical, we'll assume that half the money is given to investors and executives, the other half goes back into the corporate balance sheet.
4) The company now has $2.5M sitting around. They'll use it to launch new products. COmpanies generally don't simply keep money in the bank. But even if they do, then the bank can invest it, and it will work similar to what happens in step 5.
5) The investors and executives now have $2.5M. What do they do? Shove it under their mattresses? Of course not, they invest it. They might buy stock or bonds to raise coporate value. Alternatively they might put it in the bank, in which case the bank then invests it (either through a loan or private investment). Either way, the money goes to coporations who believe that if they can borrow $2.5M they can turn a profit.
6) The reinvested $5M is then used for new ventures which create new jobs and new opportunities.

Does this mean the number of jobs is constant? Of course not. The US population went from approximately 80% farmers to less than 5%. The money and time of the 75% is now more efficently used elsewhere (i.e. in the business world). However, during the transition, many farmers lost out because although the economy could refocus in a decade or two, many people can't.
Fundamentally, this is the Theory of Comparative Advantage.

--Mark

How about this
correct step 6:
6) The reinvested $5M is then used for new ventures which create new jobs and new opportunities IN INDIA

[shay Aluko]

Originally posted by Mark Herschberg:

Fundamentally, this is the Theory of Comparative Advantage.

--Mark

I think you got it wrong, i did some economics too. The theory of comparative advantage basically postulates that: you do what you do best , and i do what i do best and we can trade and we are both better of right? but what if you can do everything i can do, not neccessarily better but cheaper , much cheaper , who's better off?. we need to think about it carefully. The theory of comparative advantage works well in a proper regulatory environment, otherwise all we are doing is a race to the bottom.

[Matt Cao]

Hi Shay,
You must have read LA Times today about President Bush supports outsourcing blue and white collars jobs. He will reinvent 401K package, rewrite Social Security Benefits process. Your definition of comparative advantage do falling in the new. It mentions the two white collar jobs such as programming and radiologist are not comparative advantage to be done in US.
Regards,
MCao

[Steven Broadbent]

A consultant is someone who charges 300 to steal your watch and tell you what time it is.

[Jason Cox]

Originally posted by Steven Broadbent:
A consultant is someone who charges 300 to steal your watch and tell you what time it is.

That's not true. I give the watch back after the 300 is paid in full!

[Mark Herschberg]

Originally posted by shay Aluko:
but what if you can do everything i can do, not neccessarily better but cheaper , much cheaper , who's better off?

Product selection is a binary decision, either you buy it or you don't. it's a combination of price, speed, quality, etc. Cheaper is only one measure.
The reality is India cannot do everything better than people in the US. At some point it becomes chaper to hire a US worker for the job.

Originally posted by shay Aluko:

How about this
correct step 6:
6) The reinvested $5M is then used for new ventures which create new jobs and new opportunities IN INDIA

Good point. How do we know whether it will be invested in India or the US? Capital market theory claims that the money will flow to where it gets the best ROI. When the US companies start ventures more profitable than those in India, the money will be invested here. If US companies compete in areas in which Indian companies offer better returns, the money goes there. Sounds fair to me.
"Race to the bottom" a misnomer, it's a "redistribution of resources." As the foremost free market nation, this is our dog food we're eating.
--Mark

[Jeroen Wenting]

Originally posted by Mark Herschberg:
Well, if you believe in free markets, then this will happen as follows (I'm using an example with round numbers)
1) A company does a yearly product release at a cost of $10M in labor.
2) The company decides to outsource, builing the 2004 product for only $5M.
3) The company saves $5M. Since people here are skeptical, we'll assume that half the money is given to investors and executives, the other half goes back into the corporate balance sheet.
4) The company now has $2.5M sitting around. They'll use it to launch new products. COmpanies generally don't simply keep money in the bank. But even if they do, then the bank can invest it, and it will work similar to what happens in step 5.
5) The investors and executives now have $2.5M. What do they do? Shove it under their mattresses? Of course not, they invest it. They might buy stock or bonds to raise coporate value. Alternatively they might put it in the bank, in which case the bank then invests it (either through a loan or private investment). Either way, the money goes to coporations who believe that if they can borrow $2.5M they can turn a profit.
6) The reinvested $5M is then used for new ventures which create new jobs and new opportunities.
--Mark

Incorrect.
$10 million is normally spent.
That would keep say 2000 people in a job.
Instead of $10 million they now pay $5 million to India to an outsourcing company there and lay off 2000 workers.
The $5 million thus saved is invested in creating a corporate presence in India which in a few years will save $2 million from the $5 million a year now spent on outsourcing.
At home there's still 2000 people unemployed.
In 20 years time, the Indian company gets nationalised. 10 years after that it starts to expand to the US, builds an office there and drives the original owners out of business.
That's the way it went in steel, electronics, cars, etc. etc.

[Arjun Shastry]

Originally posted by Jeroen Wenting:

In 20 years time, the Indian company gets nationalised. 10 years after that it starts to expand to the US, builds an office there and drives the original owners out of business.

Not necessary.
Microsoft started India operation in 1987 and still Bill Gates sits right there in Seattle!.
Texas Instruments is there since 1984 and its headquarter is still in USA.
HoneyWell is in India since many years and hasn't replace Honeywell USA.
Sun Micro is there since late 80s yet its Palo Alto office still exists!!.
{
That's the way it went in steel, electronics, cars, etc. etc
}
I think this logic won't apply in IT/Software etc.Men and months are not interchangable here unlike in Steel,Cars.You can have Car plant in cheaper country and its 24x7 operation might produce thrice as many cars than 9to5 job.But I think that won't work here.Can we say confidently that 'Time required for some project involving N programmers can be reduced to half by hiring 2N programmers?"
[ February 11, 2004: Message edited by: Capablanca Kepler ]

[Terimaki Tojay]

Originally posted by Jeroen Wenting:

In 20 years time, the Indian company gets nationalised. 10 years after that it starts to expand to the US, builds an office there and drives the original owners out of business.
That's the way it went in steel, electronics, cars, etc. etc.

Got any proof to back this up?

[Natalie Kopple]

The Economic Times "India Will Eat Our Lunch and China Our Dinner" at
http://economictimes.indiatimes.com/articleshow/msid-487969,curpg-2.cms
[ February 11, 2004: Message edited by: Natalie Kopple ]

[Natalie Kopple]

"Jobs, Jobs, Jobs" by Paul Krugman, Professor in Economics, Princeton University, February 10, 2004
http://www.nytimes.com/2004/02/10/opinion/10KRUG.html

[Matt Cao]

Hi,
Could you please summarize it. I don't like to register so many things that I do not using everyday.

If it is about jobs offered, then it is based on fictatious demand. It is usually happened during the major election years. This time have tax cut factor involved. A country could not afford to cut taxes all the times when it decision makers making a boo-boo.
Regards,
MCao

[Tim Holloway]

Originally posted by Terimaki Tojay:

Got any proof to back this up?

Last week, Ford was bumped from its #2 position by Honda.
The last TV sets manufactured in America were around 1990 (made by Zenith). I don't even know if Zenith is still around. Neither TVs nor VCRs are made in the US at all anymore. Neither are the engines for laser printers.

[Sadanand Murthy]

Originally posted by Tim Holloway:

Last week, Ford was bumped from its #2 position by Honda.
The last TV sets manufactured in America were around 1990 (made by Zenith). I don't even know if Zenith is still around. Neither TVs nor VCRs are made in the US at all anymore. Neither are the engines for laser printers.

Just last week I bought a new cannon inkject photo s560 printer. At the bottom of the box it says 'made in thailand'.
This has been going on for over 2 decades now. US has lost its manufacturing base; and IMHO for an economy to be sustainable over a very long period of time with growh the nation needs a strong manufacturing base. Service sector alons cannot prop the economy up for long.
As regards the automobile industry. Japanese auto manufacturers have assemply lines & factories in many US cities, providing several thousands of Americans jobs, contributing a ton of money to the US economy. So, for Ford to lose its #1 position to Honda shouldn't cause any flutter amongst Americans. I personally believe that Japanese name brands are more reliable than their American counterparts.

[Paul McKenna]

Originally posted by Tim Holloway:

Last week, Ford was bumped from its #2 position by Honda.
The last TV sets manufactured in America were around 1990 (made by Zenith). I don't even know if Zenith is still around. Neither TVs nor VCRs are made in the US at all anymore. Neither are the engines for laser printers.

Tim, Zenith is still around in India. Much the same way Royal Enfield a British motorcycle manufacturer ceased to exist in Britain but still exists in India. Sometimes manufacturers lose their original base and relocate simply to survive.

[Mark Herschberg]

Originally posted by Sadanand Murthy:

Just last week I bought a new cannon inkject photo s560 printer. At the bottom of the box it says 'made in thailand'.
This has been going on for over 2 decades now. US has lost its manufacturing base; and IMHO for an economy to be sustainable over a very long period of time with growh the nation needs a strong manufacturing base. Service sector alons cannot prop the economy up for long.

I think you need to reread your history. it actually dates back to the 60's (and maybe even 50's) when cheap Japanese electronics began hitting the US markets (remember that back then, Japan wasn't a modern, economic powerhouse, but a nearly third world nation with cheap labor). Nearly 50 years later, the US still has the strongest economy is the world. Why? Because we adapt and find more efficent use of our resources.
--Mark

[Sadanand Murthy]

Originally posted by Mark Herschberg:

I think you need to reread your history. it actually dates back to the 60's (and maybe even 50's) when cheap Japanese electronics began hitting the US markets (remember that back then, Japan wasn't a modern, economic powerhouse, but a nearly third world nation with cheap labor). Nearly 50 years later, the US still has the strongest economy is the world. Why? Because we adapt and find more efficent use of our resources.
--Mark

US has the strongest economy is the world even today because, in addition to the point you made, US has a system in place that doesn't stifle such adaptation & ingenuity. And the 50s & 60s were great times for inventions & advances in technology & most of these were happening in US. That is what helped US. But now, with most things becoming hitech, most advances in nanotech & biomedicine, the common person will find it hard to compete or survive in this market. I'd still like to see the manufacturing base improve in US. That will improve the economy.
I don't know much about US economy & the influx of Japanese products in US in the 50s & 60s. Did that drive US companies out of business (I'm asking, this is not rhetorical)?

[Rufus BugleWeed]

I don't know much about US economy & the influx of Japanese products in US in the 50s & 60s. Did that drive US companies out of business (I'm asking, this is not rhetorical)?

Yes it did, it continues today. Oldmobile is going out of business. Toyota is now the number 2 car maker. US electronic firms, steel mills, and textile industries have been hard hit by foreign competition.

[Jeroen Wenting]

Originally posted by Terimaki Tojay:

Got any proof to back this up?

Ask again in 20 years

[ChanSan Mehbubani]

Originally posted by Rufus BugleWeed:

..US electronic firms, steel mills, and textile industries have been hard hit by foreign competition.

But wasn't globalization your concept?Who the made that theory that only worldwide market competition is the solution to make consumer happy?

[Ashok Mash]

On a national lever, I believe the issue of outsourcing is not as big as it might appear to most of the ranchers, as people who have direct affect of changes in the industry. Also, just like how Americans continued to do well and comfortable after the automobile/textile industry changes, I believe they will continue doing well even if IT/callcentre/backoffice outsourcing goes many folds of what its today.
After all, its driven by American firms, who sees the profit in the whole idea, and once they realise their profits as hard cash, assets or IP, its benefiting American economy, at a higher rate!
Well, I guess its Indians who needs to be worried as they are really walking a slippery slope. India doesn't have any compelling reasons to keep her client's, except relatively cheaper English speakers workers, which when China and other catch-up, I wonder what India will do next!?

[Rufus BugleWeed]

The steel, auto and textile workers displaced by cheaper labor in other parts of the world did not all continue to do well and live comfortably. Neither are the IT workers being displaced today.
Considering outsourcing has been going pretty well for the last few years when are these 22M jobs going to start appearing? IMO George Bush is going to be the first prez since Herbert Hoover, 1928 - 1932, to have a net job lose in his term. Then again, he's going to lose his job, too.

[Mark Herschberg]

Originally posted by Rufus BugleWeed:
The steel, auto and textile workers displaced by cheaper labor in other parts of the world did not all continue to do well and live comfortably. Neither are the IT workers being displaced today.

Quite true, but the US economy did do better. Hence we see the motivation, the benefits to the many outweigh the loss to the few. Granted, it sucks to be the few, but history has shown the many aren't good at hearing the faint cries.
(In the above statement, I don't claim the morality to be right or wrong, I'm just arguing the process, based on history.)
--Mark

[Rufus BugleWeed]

The few are multiplying -

Today, the House minority leader, Representative Nancy Pelosi, Democrat of California, pressed the attack. "There are more than eight million � more than eight million � Americans who want to be working but are not," she said in a news briefing. "Many of them have lost their jobs due to outsourcing."
"I'm sure American workers are shocked by the president's embracing of outsourcing," she said a moment later.

[Rufus BugleWeed]

Ashok did you see the post from the guy in Dallas, Texas who had to sell his furniture so he could eat? Did you not hear about the guy in California who committed suicide when faced with the task of training H1-B's to provide a cheaper replacement for his and his peers services?
BTW, you never answered my question about whether or not India provides protection to its workers for age discrimination. Would you be offended if I called a society that does protect its aging workers, primitive?

[Ashok Mash]

Originally posted by Rufus BugleWeed:

Ashok did you see the post from the guy in Dallas, Texas who had to sell his furniture so he could eat? Did you not hear about the guy in California who committed suicide when faced with the task of training H1-B's to provide a cheaper replacement for his and his peers services?

In fact, I didn't. But considering that something like that happened, I will have great difficulty in understanding why! One of the great virtues that I have come to notice in the West is versatility � ability (and freedom) to do different types of jobs, unlike in India where you generally tend to get stuck into one profession which you have experience and expertise in (due to sheer amount of competition in the every industry one might want to move into.). Did this person sell his furniture because he had no other means to find a job or is it because he couldn�t give up his flashy cars, his big house with a attached swimming pool, or is it because he was lazy to continue learning and stay competitive? Well, I haven�t read the post anyway!
BTW, you never answered my question about whether or not India provides protection to its workers for age discrimination. Would you be offended if I called a society that does protect its aging workers, primitive?
I think (now I am no expert in these affairs) India does provide protection against age discrimination at work place. I do not have any links or resources to prove this, but I would be surprised if someone proves me wrong. Indian Laws and Practices are modeled after the British and American systems, and over the last fifty years, they couldn�t possibly have missed out or ignored such important points.
And if you wish to call Indian systems �primitive� based own what you know about it, I may feel offended, however, you are fully entitled to your own opinion, and I can only agree to disagree with you.

[Ashok Mash]

Originally posted by Mark Herschberg:

Quite true, but the US economy did do better. Hence we see the motivation, the benefits to the many outweigh the loss to the few.
...
--Mark

Thats exactly my point - Thanks Mark!

[Tim Holloway]

Originally posted by Mark Herschberg:

Quite true, but the US economy did do better. Hence we see the motivation, the benefits to the many outweigh the loss to the few. Granted, it sucks to be the few, but history has shown the many aren't good at hearing the faint cries.
(In the above statement, I don't claim the morality to be right or wrong, I'm just arguing the process, based on history.)
--Mark

Yes, but the question at hand, is are the benefits really accruing to the many? The US is by no means unique in being a country where around 80% of the wealth is in the hands of 20% of the people. What has given it much of its stability is that the other 80% have historically seen that they had a reasonably good shot at joining that 20%.
The problem with exporting jobs is that it threatens to tilt the ratio from 80/20 to 90/10. When large groups of people start feeling that the only direction they can move is down, elected leaders start losing their jobs.
Also, just to reiterate, the major problem here isn't really that our own jobs are under threat (another 29 local IT workers lost their jobs this weeek, BTW). We may be the poster children, but we're only representative of the number crunchers and the draftsmen and the other workers who do work with knowledge rather than menial manual skills. That is, we're the trades that the unemployed factory workers were expected to re-educate to.
The ultimate problem here is that while knowledge work can be shipped freely, cost of living can't be. We'd have to see destructive inflation in the Third World and/or devastation in the quality of life over here in order to balance back out in any reasonably short time.
And, in fact, the Job-worth-less Recovery is nothing less than the leading edge of that destructive wave.

[Steven Broadbent]

Very well put Tim, you hit the nail right on the head.

[Jason Cox]

Historically speaking, we've never seen a large migration of knowledge based jobs away from our shores before. It's easy to reference manufacturing jobs being off-shored, but I submit that knowledge-based jobs such as software engineering are fundamentally different from assembly lines.
The closest historical event that resembles what is happening now is the so-called "Brain drain" from Britian where many of their top minds moved to the US. In fact, much of America's technological achievements have been possible due to not only our own people, but from the contributions of foreigners coming to our country to work.
Not only did the US benefit, but the UK economy continues to be weak to this day. You can also look at Germany, where many businesses send work out of country, and see their economic conditions. The question I have to ask is, do we want this for the US?
The fact is, it is easy (and somewhat patronizing) to say "reinvent yourself". To actually do it is not so easy. Especially since those who are in most dire need to do so no longer have the resources to do so. Furthermore, what are they to do? I know many people out of work who would gladly jump on the next big thing, but no one seems to know what it is.
The last time we saw American jobs go overseas en masse, there was an upward ladder of jobs to climb. There were generally enough jobs left here for those who couldn't move up to at least move laterally. A few were left behind, which is unfortunate but understandable. The question is, where is there to move up from knowledge? What can a US worker do that an Indian worker can't? A lot of what has been suggested insinuates that US workers are somehow smarter, cleverer, more creative, or simply better than someone overseas. Those are very arrogant assumptions.
The real issue here is that it is not good enough for our leaders to say "This will help the economy and make new jobs" if they can't answer the question "What new jobs and when?"
What I am seeing is a lot of DOWNWARD mobility. That is what concerns me. I am seeing the middle class shrink. I am seeing a lot of people being denied the chance to achieve "The American Dream".
What's really silly is that in the past when blue collar jobs went overseas, a lot of people who went to training and education never had degrees before. They were told that by getting a college education they could better their lives. Now we're telling people who have been to college and studied for a specialized field that they have to go back and get another education. I've never heard of such a thing happening before. Is it getting so ridiculous that we have to return to college every few years to play catch up with the current trend?
If so, I suspect the rising costs of college will force some people to be left behind, and that 90/10 ratio that Tim mentioned above will become a reality rather quickly.
[ February 13, 2004: Message edited by: Rob Aught ]

[JiaPei Jen]

Robert B. Reich, the Maurice B. Hexter Professor of Social and Economic Policy at Brandeis University, and was the Secretary of Labor under former President Bill Clinton.

On the face of it, the "trickle-down" theory -- by giving rich people tax breaks so they'll turn around and invest in new factories and equipment and research and development -- makes sense. But we're in a global economy now, which means rich Americans don't have to invest their extra money in America. In fact, they'll take those savings and invest them anywhere around the world where they can get the highest return. The investments trickle out, rather than down.

In the new global economy the only national asset that doesn't trickle out�on which our future growth uniquely depends � is our people. The only sure way to grow the American economy is not from the top down by giving bigger tax breaks to the rich, but from the bottom up by making more Americans more productive.

The big long-term problem we face isn't the number of jobs. It's the quality of those jobs. The great American middle class is shrinking, as good middle-class jobs disappear. Grow the economy from the bottom up and we can restore middle-class prosperity.

[Ashok Mash]

Hmm, the �trickle out� theory is very interesting indeed, and especially since its from a famous scholar, there must be some truth in it.
However, I have my doubts about it though! See, as long as the offshore investments returns profits back to the USA based investors, and again their re-investments brings back more profit, how does it a �trickle out�? Well, the actual �investment� amount (spending on physical assets, human resources etc) can be considered trickled out, but wouldn�t the tax generated from the high profits compensate it? Also wouldn�t the cheaper services and products (for instance, cheaper Dell PCs or cheaper/faster health services, assuming some sort of outsourcing model works behind these two) benefit the overall growth of American Economy and hence lifestyle of its people?
This could get less beneficial to America, if foreign software firms were to produce and sell their own IP products, like OS�s and other applications, in American markets, which is more like the consumer goods manufactured in China!
[ February 15, 2004: Message edited by: Ashok Mash ]

[Matt Cao]

Hi,
I keep hearing the word cheaper product. That is a marketing strategy word not financial. If a product diffused into many levels both vertical and horizontal, where vertical is standed for price and horizontal is standed for geographical which quality assumed already built within the processes. Then a consumer in the third world still could afford the product with western brand name without going through the counterfeit route or smuggling.
You are still have to paid for the product price according to the living standard of your geographical. What an average westerner consumer sees the product price cheaper now is just because outsourcing is not in full throttle yet. When microsoft came out with pioneer products, they were cheap too.

There is no such thing as add new jobs. Those jobs are morphed from outsourcing process.
Regards,
MCao