FOR ONE BUSINESSMAN, OUTSOURCING PROBLEMATIC

Saturday, June 5, 2004

Let me introduce you to Scott Price, CEO of a small software company based in Keystone, who is outsourcing some of his company's work to India.

"Outsourcing is not all it's cracked up to be," he said.

We met by chance at the governor's 2004 Technology Summit, held at the Colorado Convention Center Thursday, and I jumped at the opportunity to learn about the "offshoring" story from the inside.

Price's company, LearnCentrix, provides software for companies to develop Web-based training for their employees. It has, at the moment, about 10 employees (most working online from various cities) and for about a year, it has been working with an Indian company on some projects.

"It has its challenges," Price said. "You get more software at lower cost. But the management overhead is significant."

When you have your own team, they know the context of the project, they can be creative. "Offshore is not creative," Price said. "You have to build specifications in great detail."

We were sitting in one of the meeting rooms at the convention center, at one of those big round tables hotels use for banquets. Price used the table as an example.

If you just tell someone to build a table like this, he said, it'll be round, and the right size and the right height.

But if your team is working on developing the table, someone who knows how the room is likely to be used will come and ask, "Hey, will you ever want to move this thing?" That's why hotel tables have folding legs, so the staff can quickly roll them into storage and stack them efficiently.

Price was quick to add that this is not an ethnic difference; Indian businessmen are extremely entrepreneurial and eager to tackle any project on offer. But they don't always have the same cultural context, so it takes more time and energy to manage an offshore operation.

Offshore firms don't have the same business model, either; if your business is writing code, or building stuff, to someone else's specifications, it is not part of your job to tell the client what the specifications should be. That's true in the construction industry, too, which is why having a single company both design and build a project is often more efficient.

But if there is a significant cost differential, then separating the project management and the writing of the software makes sense.

Software projects are nearly always late, Price reminded me. And when they're late and your own staff is working on them, they usually come in over budget, too. But if someone else has bid for the job, it may still come in late, but it won't cost more as a result.

So does this mean a company that does what Price does employs fewer Americans? At first glance, that seems obvious, but it isn't. Suppose -- I'm only guessing at the ratio -- he would have four programmers working on a project, and instead he has one person managing an offshore project. Why isn't that three jobs "lost"?

Because the company has to bid on contracts. If it has to price into its bid the risk of budget overruns, it will have to bid more, and sometimes that means it will not get the contract. That is, the true choice on a project may not be between one manager and four programmers, but between one manager and no programmers. The trouble is that no one can know when that would have happened. Only the departure of the three jobs is visible, which is what makes offshoring a political problem even though it isn't an economic problem.

Also, when two companies in different countries divide up the work on a project, it may not be clear which of them, if either, is outsourcing to another country. For instance, LearnCentrix has a Canadian partner in a project to develop a certification program for training call-center employees. Would it have made sense for either company to develop, in-house, the expertise of the other? That would mean more jobs in Canada, and more jobs in the United States, wouldn't it? No; the project would simply never have happened.

Of course, if you lose your job to outsourcing, it's a major loss for you. But people lose jobs all the time, for good reasons and bad, and outsourcing jobs to other countries represents only a tiny fraction of those losses. And the United States is "offshore" for the rest of the world, and a lot of other countries outsource here (think of the Japanese auto industry, for example).

It's politically tempting to make hay with bans on "exporting jobs" but it's a simple-minded solution likely to have worse consequences than just doing nothing. I wish politicians realized their limited ability to get economics right.