Offshoring backlash: an ‘un-level’ playing field?

Basab Pradhan, an old IT industry hand and now entrepreneur, has written recently about the growing backlash against off-shoring, something that might play well into the hands of politicians in the Presidential race for 2008. He highlights that many dyed-in-wool free-trade advocates are now making noises about the previously unforeseen downsides of globalisation, and this Wall Street Journal article does not make pretty reading. Needless to say, reductionist economic analyses never quite paint the full picture.

Protectionist domestic industrial policies were what made today’s so-called industralised nations the ‘First World’. Nevertheless the First World, the North, whatever your preferred term may be, has been very active in attempting to prevent the Third World (or the Emerging Economies, the South, whatever you prefer) from exercising any protectionist measures in an increasingly globalised economy. For some examples, see under quantitative restrictions. They are also countering with increasingly complex measures, tantamount to non-technical barriers to trade, against the growing economic competitiveness of China, India and other similar players. For some examples, see under anti-dumping measures.

The tide may however be turning. Even outside the World Trade Organisation, companies from emerging economies are beginning to assert themselves, for instance, in this patent dispute where a Chinese firm is suing a US firm for IP violation.

Particularly in the context of the role of Information and Communication Technologies in national competitiveness, the US probably needs a different strategy now, rather than the simplistic and reductionist framing of offshoring as the root of all evil. A recent World Economic Forum report suggests that it has as much to fear from small European nations as it might have to fear from the emerging behemoths India and China.

Closing one’s eyes and ears to the new power balance shaping up might not be wise, especially for the Presidential hopefuls, even if it means that the road to 1600 Pennsylvania Avenue looks certain by playing this card.

31 thoughts on “Offshoring backlash: an ‘un-level’ playing field?

  1. Hi, Shefaly.

    Interesting points. Offshoring of tech services is attractive because overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required. Mr. Blinder’s suggestion that we emphasize “comparative advantage” is a distraction, a feint.

    His list of jobs to be offshored, transcriptionists to graphic designers to mathematicians, shows the absence of “comparative advantage” in all those areas. The concept is silly. Consider that the main barrier to offshoring work might soon be the means to facilitate the transfer of the product or service back to the US. Meanwhile, companies (from what I’ve read in Business Week) make noise about the poor quality, lack of integration, and lack of common culture of the offshored service providers with respect to the stateside company operations. Poor quality is addressed by education, lack of integration is addressed by new information technology, and lack of common culture, well, probably the biggest problem there is language training. However, those are temporary or imagined barriers.

    The pressure on US workers from offshoring is to reduce job standards, accepting work for lower pay or with less benefits, putting downward pressure on US living standards. I read that some time ago the US administration proposed a concept called “opportunity zones”, basically a way to bring back US companies that moved to Mexico, the Maquiladoras. The zones would provide a shelter from income and benefits requirements and a loosening of environment regs. Has not happened yet, but the visible trend in manufacturing, and in many IT environments, is to offshore to cheaper countries where quality of living standards do not interfere. Thus, for example, Chinese programmers work cheaper, for longer hours, with less benefits, etc.

    Mr. Blinder’s concept of comparative advantage distracts from where actions can be taken. Living standards, government regulation of environmental quality, and protection of workers rights must all improve. Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.

    -Noah

    Like

  2. Hi, Shefaly.

    Interesting points. Offshoring of tech services is attractive because overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required. Mr. Blinder’s suggestion that we emphasize “comparative advantage” is a distraction, a feint.

    His list of jobs to be offshored, transcriptionists to graphic designers to mathematicians, shows the absence of “comparative advantage” in all those areas. The concept is silly. Consider that the main barrier to offshoring work might soon be the means to facilitate the transfer of the product or service back to the US. Meanwhile, companies (from what I’ve read in Business Week) make noise about the poor quality, lack of integration, and lack of common culture of the offshored service providers with respect to the stateside company operations. Poor quality is addressed by education, lack of integration is addressed by new information technology, and lack of common culture, well, probably the biggest problem there is language training. However, those are temporary or imagined barriers.

    The pressure on US workers from offshoring is to reduce job standards, accepting work for lower pay or with less benefits, putting downward pressure on US living standards. I read that some time ago the US administration proposed a concept called “opportunity zones”, basically a way to bring back US companies that moved to Mexico, the Maquiladoras. The zones would provide a shelter from income and benefits requirements and a loosening of environment regs. Has not happened yet, but the visible trend in manufacturing, and in many IT environments, is to offshore to cheaper countries where quality of living standards do not interfere. Thus, for example, Chinese programmers work cheaper, for longer hours, with less benefits, etc.

    Mr. Blinder’s concept of comparative advantage distracts from where actions can be taken. Living standards, government regulation of environmental quality, and protection of workers rights must all improve. Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.

    -Noah

    Like

  3. Hi, Shefaly.

    Interesting points. Offshoring of tech services is attractive because overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required. Mr. Blinder’s suggestion that we emphasize “comparative advantage” is a distraction, a feint.

    His list of jobs to be offshored, transcriptionists to graphic designers to mathematicians, shows the absence of “comparative advantage” in all those areas. The concept is silly. Consider that the main barrier to offshoring work might soon be the means to facilitate the transfer of the product or service back to the US. Meanwhile, companies (from what I’ve read in Business Week) make noise about the poor quality, lack of integration, and lack of common culture of the offshored service providers with respect to the stateside company operations. Poor quality is addressed by education, lack of integration is addressed by new information technology, and lack of common culture, well, probably the biggest problem there is language training. However, those are temporary or imagined barriers.

    The pressure on US workers from offshoring is to reduce job standards, accepting work for lower pay or with less benefits, putting downward pressure on US living standards. I read that some time ago the US administration proposed a concept called “opportunity zones”, basically a way to bring back US companies that moved to Mexico, the Maquiladoras. The zones would provide a shelter from income and benefits requirements and a loosening of environment regs. Has not happened yet, but the visible trend in manufacturing, and in many IT environments, is to offshore to cheaper countries where quality of living standards do not interfere. Thus, for example, Chinese programmers work cheaper, for longer hours, with less benefits, etc.

    Mr. Blinder’s concept of comparative advantage distracts from where actions can be taken. Living standards, government regulation of environmental quality, and protection of workers rights must all improve. Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.

    -Noah

    Like

  4. Shantanu: thanks for your support! I look forward to your observations on my posts.

    Noah: you make several points to which I shall try to respond in brief. Do bear in mind that I refer largely to India in my examples and illustrations.

    “… overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required.”

    I would submit that this is a myth. Partly because it depends on how you define ‘less’. In pure dollar terms, translating Indian Rupees into US Dollars? May be. But salary levels are not small by any means. As for benefits, living in Europe must have spoilt me about holidays and health cover etc. But a vast majority of perks on offer – including paid leave – is quite attractive in India. Even in PPP terms, people can afford much better quality of life than the equivalent would buy in US Dollars, although quality of life itself is a culturally-loaded term.

    You are right about some of the imagined barriers cited, but on “The zones would provide a shelter from income and benefits requirements and a loosening of environment regs”, I would say it is a thinly disguised and very slippery slope of protectionism. The old compact – between the government and the governed – of protecting the poor and the under-privileged may need a serious overhaul in the changing world in which we live now.

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    The lower costs are dominantly a product of market forces, and that is already changing. The prices of 3-bed apartments in Bangalore are now approaching those of similar properties in major cities in England, which is not a cheap place to live by any means.

    However if costs were the only factor, then lower land prices (for instance) in Philippines would attract people away from India. The greater advantage is of scale: both in terms of supply of skilled labour and in terms of the size of the potential market. This scale may also not be sustainable or at least, realisable in line with the growth expectations of the businesses entering China and India, as HSBC is already finding to its dismay in China, where it cannot find suitable candidates to fill its expansion ambitions. And to think, technically HSBC is not even new to the territory (H & S therein stand for HongKong and Shanghai respectively), so no issues of cultural clashes etc should arise.

    As I mentioned, reductionist arguments – whether by economists or policy makers – are unhelpful and paint an unclear picture of the situation.

    Thanks for reading and I look forward to your comments.

    Like

  5. Shantanu: thanks for your support! I look forward to your observations on my posts.

    Noah: you make several points to which I shall try to respond in brief. Do bear in mind that I refer largely to India in my examples and illustrations.

    “… overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required.”

    I would submit that this is a myth. Partly because it depends on how you define ‘less’. In pure dollar terms, translating Indian Rupees into US Dollars? May be. But salary levels are not small by any means. As for benefits, living in Europe must have spoilt me about holidays and health cover etc. But a vast majority of perks on offer – including paid leave – is quite attractive in India. Even in PPP terms, people can afford much better quality of life than the equivalent would buy in US Dollars, although quality of life itself is a culturally-loaded term.

    You are right about some of the imagined barriers cited, but on “The zones would provide a shelter from income and benefits requirements and a loosening of environment regs”, I would say it is a thinly disguised and very slippery slope of protectionism. The old compact – between the government and the governed – of protecting the poor and the under-privileged may need a serious overhaul in the changing world in which we live now.

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    The lower costs are dominantly a product of market forces, and that is already changing. The prices of 3-bed apartments in Bangalore are now approaching those of similar properties in major cities in England, which is not a cheap place to live by any means.

    However if costs were the only factor, then lower land prices (for instance) in Philippines would attract people away from India. The greater advantage is of scale: both in terms of supply of skilled labour and in terms of the size of the potential market. This scale may also not be sustainable or at least, realisable in line with the growth expectations of the businesses entering China and India, as HSBC is already finding to its dismay in China, where it cannot find suitable candidates to fill its expansion ambitions. And to think, technically HSBC is not even new to the territory (H & S therein stand for HongKong and Shanghai respectively), so no issues of cultural clashes etc should arise.

    As I mentioned, reductionist arguments – whether by economists or policy makers – are unhelpful and paint an unclear picture of the situation.

    Thanks for reading and I look forward to your comments.

    Like

  6. Shantanu: thanks for your support! I look forward to your observations on my posts.

    Noah: you make several points to which I shall try to respond in brief. Do bear in mind that I refer largely to India in my examples and illustrations.

    “… overseas employees paid in $$’s cost less than Americans. Benefits Americans demand are not required.”

    I would submit that this is a myth. Partly because it depends on how you define ‘less’. In pure dollar terms, translating Indian Rupees into US Dollars? May be. But salary levels are not small by any means. As for benefits, living in Europe must have spoilt me about holidays and health cover etc. But a vast majority of perks on offer – including paid leave – is quite attractive in India. Even in PPP terms, people can afford much better quality of life than the equivalent would buy in US Dollars, although quality of life itself is a culturally-loaded term.

    You are right about some of the imagined barriers cited, but on “The zones would provide a shelter from income and benefits requirements and a loosening of environment regs”, I would say it is a thinly disguised and very slippery slope of protectionism. The old compact – between the government and the governed – of protecting the poor and the under-privileged may need a serious overhaul in the changing world in which we live now.

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    The lower costs are dominantly a product of market forces, and that is already changing. The prices of 3-bed apartments in Bangalore are now approaching those of similar properties in major cities in England, which is not a cheap place to live by any means.

    However if costs were the only factor, then lower land prices (for instance) in Philippines would attract people away from India. The greater advantage is of scale: both in terms of supply of skilled labour and in terms of the size of the potential market. This scale may also not be sustainable or at least, realisable in line with the growth expectations of the businesses entering China and India, as HSBC is already finding to its dismay in China, where it cannot find suitable candidates to fill its expansion ambitions. And to think, technically HSBC is not even new to the territory (H & S therein stand for HongKong and Shanghai respectively), so no issues of cultural clashes etc should arise.

    As I mentioned, reductionist arguments – whether by economists or policy makers – are unhelpful and paint an unclear picture of the situation.

    Thanks for reading and I look forward to your comments.

    Like

  7. Noah, Shefaly…both of you may find this article in today’s IHT interesting and thought provoking…

    https://www.iht.com/articles/2007/04/03/business/rupee.php

    I’m writing a post on it so will reserve my comments for now…but just a brief remark in response to Noah’s observation that:

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    I am with Shefaly that the market will decide this and it would be unwise (to say the least) for government(s) to attempt intervention in this regard…

    Interestingly, the IHT article quotes Ian Thomas, President Boeing India as saying: “In theory, we could place the work anywhere…we’re here because we found a level of sophistication”.

    Like

  8. Noah, Shefaly…both of you may find this article in today’s IHT interesting and thought provoking…

    https://www.iht.com/articles/2007/04/03/business/rupee.php

    I’m writing a post on it so will reserve my comments for now…but just a brief remark in response to Noah’s observation that:

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    I am with Shefaly that the market will decide this and it would be unwise (to say the least) for government(s) to attempt intervention in this regard…

    Interestingly, the IHT article quotes Ian Thomas, President Boeing India as saying: “In theory, we could place the work anywhere…we’re here because we found a level of sophistication”.

    Like

  9. Noah, Shefaly…both of you may find this article in today’s IHT interesting and thought provoking…

    https://www.iht.com/articles/2007/04/03/business/rupee.php

    I’m writing a post on it so will reserve my comments for now…but just a brief remark in response to Noah’s observation that:

    “Governments of countries that attract offshoring companies must progressively reduce their own comparative advantage, their lower cost.”

    I am with Shefaly that the market will decide this and it would be unwise (to say the least) for government(s) to attempt intervention in this regard…

    Interestingly, the IHT article quotes Ian Thomas, President Boeing India as saying: “In theory, we could place the work anywhere…we’re here because we found a level of sophistication”.

    Like

  10. Shefaly, reductionist thinking (for example, corporations do whatever helps their bottom line) about the problems of globalization can apply to decision-makers. Whether or not it does depends on the decision-maker. I did not understand your comment about Maquilas.

    Shantanu, I would not trust a quote from the president of a company, not when “right-sizing” and “off-shoring” are the issue and public comment is what he provides. Still, he rightly pays a compliment to the sophistication of the Indian workforce. India’s workforce is talented, educated, and motivated.

    Market forces could raise cost of living in countries positively affected by corporate investment and hiring, but they will not improve environmental regulations nor protect worker’s rights there. A government interested in foreign investment and hiring wants to loosen environmental regulations and ignore workers rights (for example, the right to unionize). Of course, US corporations will evaluate cost in monetary terms, and will not outsource to countries that cannot provide skilled talent. Nevertheless, I still believe that the financial cost of outsourcing is what attracts companies to offshore, and government intervention by the relevant governments(for example, India) is necessary to stem the tide.

    Consider this article in Computer Weekly about outsourcing to Eastern Europe,
    https://www.computerweekly.com/Articles/2007/01/31/221384/outsourcing-options-in-eastern-europe.htm

    Quote:
    “Low wage levels are comparable to India, while slow wage inflation and abundant output of talent from local universities look likely to keep the region economically competitive for at least 15 years.”

    US corporations have no more loyalty to the Indian workforce than they do to the American workforce. Eastern Europe’s economic competitiveness is their comparative advantage against US (and Western European) programmers. All costs related to doing business there are calculated when offshoring to Eastern Europe, wages being the obvious cost.

    Even if you buy a traditional economic argument, as in this article:
    https://news.com.com/2030-1014-5096283.html

    you might wonder what a liberalized US labor market looks like. Maybe it contains lower wages, vulnerable workers, debt-burdened underemployed, and anxious poor willing to retrain and work the inexhaustible supply of catering, retail, and personal care jobs available in the US. That does not scare a US corporation that wants to reduce a $60/hr US wage to a $6/hr Indian wage by moving software programmer jobs to India.

    Like

  11. Shefaly, reductionist thinking (for example, corporations do whatever helps their bottom line) about the problems of globalization can apply to decision-makers. Whether or not it does depends on the decision-maker. I did not understand your comment about Maquilas.

    Shantanu, I would not trust a quote from the president of a company, not when “right-sizing” and “off-shoring” are the issue and public comment is what he provides. Still, he rightly pays a compliment to the sophistication of the Indian workforce. India’s workforce is talented, educated, and motivated.

    Market forces could raise cost of living in countries positively affected by corporate investment and hiring, but they will not improve environmental regulations nor protect worker’s rights there. A government interested in foreign investment and hiring wants to loosen environmental regulations and ignore workers rights (for example, the right to unionize). Of course, US corporations will evaluate cost in monetary terms, and will not outsource to countries that cannot provide skilled talent. Nevertheless, I still believe that the financial cost of outsourcing is what attracts companies to offshore, and government intervention by the relevant governments(for example, India) is necessary to stem the tide.

    Consider this article in Computer Weekly about outsourcing to Eastern Europe,
    https://www.computerweekly.com/Articles/2007/01/31/221384/outsourcing-options-in-eastern-europe.htm

    Quote:
    “Low wage levels are comparable to India, while slow wage inflation and abundant output of talent from local universities look likely to keep the region economically competitive for at least 15 years.”

    US corporations have no more loyalty to the Indian workforce than they do to the American workforce. Eastern Europe’s economic competitiveness is their comparative advantage against US (and Western European) programmers. All costs related to doing business there are calculated when offshoring to Eastern Europe, wages being the obvious cost.

    Even if you buy a traditional economic argument, as in this article:
    https://news.com.com/2030-1014-5096283.html

    you might wonder what a liberalized US labor market looks like. Maybe it contains lower wages, vulnerable workers, debt-burdened underemployed, and anxious poor willing to retrain and work the inexhaustible supply of catering, retail, and personal care jobs available in the US. That does not scare a US corporation that wants to reduce a $60/hr US wage to a $6/hr Indian wage by moving software programmer jobs to India.

    Like

  12. Shefaly, reductionist thinking (for example, corporations do whatever helps their bottom line) about the problems of globalization can apply to decision-makers. Whether or not it does depends on the decision-maker. I did not understand your comment about Maquilas.

    Shantanu, I would not trust a quote from the president of a company, not when “right-sizing” and “off-shoring” are the issue and public comment is what he provides. Still, he rightly pays a compliment to the sophistication of the Indian workforce. India’s workforce is talented, educated, and motivated.

    Market forces could raise cost of living in countries positively affected by corporate investment and hiring, but they will not improve environmental regulations nor protect worker’s rights there. A government interested in foreign investment and hiring wants to loosen environmental regulations and ignore workers rights (for example, the right to unionize). Of course, US corporations will evaluate cost in monetary terms, and will not outsource to countries that cannot provide skilled talent. Nevertheless, I still believe that the financial cost of outsourcing is what attracts companies to offshore, and government intervention by the relevant governments(for example, India) is necessary to stem the tide.

    Consider this article in Computer Weekly about outsourcing to Eastern Europe,
    https://www.computerweekly.com/Articles/2007/01/31/221384/outsourcing-options-in-eastern-europe.htm

    Quote:
    “Low wage levels are comparable to India, while slow wage inflation and abundant output of talent from local universities look likely to keep the region economically competitive for at least 15 years.”

    US corporations have no more loyalty to the Indian workforce than they do to the American workforce. Eastern Europe’s economic competitiveness is their comparative advantage against US (and Western European) programmers. All costs related to doing business there are calculated when offshoring to Eastern Europe, wages being the obvious cost.

    Even if you buy a traditional economic argument, as in this article:
    https://news.com.com/2030-1014-5096283.html

    you might wonder what a liberalized US labor market looks like. Maybe it contains lower wages, vulnerable workers, debt-burdened underemployed, and anxious poor willing to retrain and work the inexhaustible supply of catering, retail, and personal care jobs available in the US. That does not scare a US corporation that wants to reduce a $60/hr US wage to a $6/hr Indian wage by moving software programmer jobs to India.

    Like

  13. Noah: thanks for your thoughts. My comment re Maquilas simply meant to say that creating economic zones with special regulations (whether for labour or the environment) is a slippery slope where any one could descend. The US could start on a path of protectionism in the guise of more pro-labour laws, equally an emerging economy like India or China could make it difficult for multinational firms to enter and compete in domestic markets.

    The US labour market is already very liberalised. In the UK – and the newly annexed Eastern European countries – firing an incompetent worker takes considerable time. I asked to see some of my friends’ employment contracts in the US. Senior consultants/ managers with 10-15 years’ experience are still employed ‘at will’ whereas a manager with equivalent seniority in the UK will have at least a 3-month notice, which, when added to the due process of enabling exit, becomes more like 6 months in practice. This means that while the said manager in the US can walk out tomorrow, the manager in the UK has 3 to 6 months to serve. This fluid mobility of skilled labour is one of the key contributors to the hitherto-unreplicated Silicon Valley model of innovation.

    It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.

    I see your point about Eastern Europe and also see its attractiveness for ‘near-shoring’, which may even please some VCs following the 20-minute rule for investments. But I also see the following:
    1. The issue of scale still applies to them;
    2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;
    3. The costs are therefore going to rise and they shall have to compete with off-shore entities on economic terms

    Also see the Economist’s cover story this week:
    https://www.economist.com/opinion/displaystory.cfm?story_id=8960441

    Like

  14. Noah: thanks for your thoughts. My comment re Maquilas simply meant to say that creating economic zones with special regulations (whether for labour or the environment) is a slippery slope where any one could descend. The US could start on a path of protectionism in the guise of more pro-labour laws, equally an emerging economy like India or China could make it difficult for multinational firms to enter and compete in domestic markets.

    The US labour market is already very liberalised. In the UK – and the newly annexed Eastern European countries – firing an incompetent worker takes considerable time. I asked to see some of my friends’ employment contracts in the US. Senior consultants/ managers with 10-15 years’ experience are still employed ‘at will’ whereas a manager with equivalent seniority in the UK will have at least a 3-month notice, which, when added to the due process of enabling exit, becomes more like 6 months in practice. This means that while the said manager in the US can walk out tomorrow, the manager in the UK has 3 to 6 months to serve. This fluid mobility of skilled labour is one of the key contributors to the hitherto-unreplicated Silicon Valley model of innovation.

    It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.

    I see your point about Eastern Europe and also see its attractiveness for ‘near-shoring’, which may even please some VCs following the 20-minute rule for investments. But I also see the following:
    1. The issue of scale still applies to them;
    2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;
    3. The costs are therefore going to rise and they shall have to compete with off-shore entities on economic terms

    Also see the Economist’s cover story this week:
    https://www.economist.com/opinion/displaystory.cfm?story_id=8960441

    Like

  15. Noah: thanks for your thoughts. My comment re Maquilas simply meant to say that creating economic zones with special regulations (whether for labour or the environment) is a slippery slope where any one could descend. The US could start on a path of protectionism in the guise of more pro-labour laws, equally an emerging economy like India or China could make it difficult for multinational firms to enter and compete in domestic markets.

    The US labour market is already very liberalised. In the UK – and the newly annexed Eastern European countries – firing an incompetent worker takes considerable time. I asked to see some of my friends’ employment contracts in the US. Senior consultants/ managers with 10-15 years’ experience are still employed ‘at will’ whereas a manager with equivalent seniority in the UK will have at least a 3-month notice, which, when added to the due process of enabling exit, becomes more like 6 months in practice. This means that while the said manager in the US can walk out tomorrow, the manager in the UK has 3 to 6 months to serve. This fluid mobility of skilled labour is one of the key contributors to the hitherto-unreplicated Silicon Valley model of innovation.

    It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.

    I see your point about Eastern Europe and also see its attractiveness for ‘near-shoring’, which may even please some VCs following the 20-minute rule for investments. But I also see the following:
    1. The issue of scale still applies to them;
    2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;
    3. The costs are therefore going to rise and they shall have to compete with off-shore entities on economic terms

    Also see the Economist’s cover story this week:
    https://www.economist.com/opinion/displaystory.cfm?story_id=8960441

    Like

  16. Thanks for clarifying about Maquilas. Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?

    “2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;”

    It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.

    “It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.”

    Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.

    The fluidity you refer to in the Valley turns employment into time on a meat hook. “Worker benefits” is, at least in the US, a relative term. People shift jobs less because they seek greater benefits, than because they need more money. The pleasures of a job or the culture and environment of a company are irrelevant, and contracting or regular employment for (unofficially) short stints is a Valley standard. Employees work longer hours, under worse conditions, with little trust they can keep their job, or even that their entire dept won’t be outsourced. Or so I believe.

    From The Economist article you quoted:

    “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.”

    What do the NGO’s say?

    Like

  17. Thanks for clarifying about Maquilas. Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?

    “2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;”

    It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.

    “It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.”

    Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.

    The fluidity you refer to in the Valley turns employment into time on a meat hook. “Worker benefits” is, at least in the US, a relative term. People shift jobs less because they seek greater benefits, than because they need more money. The pleasures of a job or the culture and environment of a company are irrelevant, and contracting or regular employment for (unofficially) short stints is a Valley standard. Employees work longer hours, under worse conditions, with little trust they can keep their job, or even that their entire dept won’t be outsourced. Or so I believe.

    From The Economist article you quoted:

    “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.”

    What do the NGO’s say?

    Like

  18. Thanks for clarifying about Maquilas. Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?

    “2. Sooner than later, they will start complying with the labyrinth of laws – governing labour, compensation, hiring and firing – that the EC imposes on member states and the costs and terms of employment will become more regulated, as I described earlier;”

    It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.

    “It may come as a surprise to you, but in India, at present, this is how the ITES industry is operating. People sometimes change jobs overnight, making it already hard for employers to keep hold of experienced people in a competitive market. Hence the rise in wages and benefits.”

    Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.

    The fluidity you refer to in the Valley turns employment into time on a meat hook. “Worker benefits” is, at least in the US, a relative term. People shift jobs less because they seek greater benefits, than because they need more money. The pleasures of a job or the culture and environment of a company are irrelevant, and contracting or regular employment for (unofficially) short stints is a Valley standard. Employees work longer hours, under worse conditions, with little trust they can keep their job, or even that their entire dept won’t be outsourced. Or so I believe.

    From The Economist article you quoted:

    “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.”

    What do the NGO’s say?

    Like

  19. I had followed this thread with interest. Let me add my two (hundred ?) cents.

    “Offshoring” resulted not just because it offered US employers labor cost arbitrage – it improved their operating efficiencies as well. For instance, just as Toyota and Samsung forced western MNC’s to rethink how to make cars and consumer electronics, today’s young thrusters threaten the MNC veterans wherever they are complacent.

    Offshoring is no longer an option for US MNCs, it is a necessity now. No matter, how shriller the cry may get, it exposed their profligate ways. Be it the clearly out of whack executive compensation or the balance sheet imploding healthcare / pension obligations for unionised blue collars. [DaimlerChrysler is the most recent example – so much so that it will have to *pay* a willing buyer to buy the company out because of $ 19 billion long term healthcare liabilities of its unionized retirees. Daimler-Benz AG paid $ 36 billion for the company in 1998 and in 2006, it has lost $ 1.475 billion and is put up for sale].

    Carlos Ghosn, CEO of Renault-Nissan on his recent trip to India marveled at the low cost of high quality engineering and design talent.

    Ah…as far as Mr.Alan Binder’s views are concerned – the timing of his rant and the sudden turnaround in his stance reeks of opportunism. [I won’t grudge him that – who doesn’t like to make a quick buck ?]. Presidential election around the corner, candidates would be looking up to anyone for suggestive sound bytes. He hasn’t failed them (or their speechwriters) this time around.

    Coping with a new brood of competitors was never going to be easy. Some of today’s established multinational companies will not be up to the task. But others will emerge from the encounter stronger than ever. And consumers, wherever they are, will gain from the contest.

    The options are – stand still and go out of business OR recognize change and go with it.

    That said, I would also like to warn the Indian outsourcing companies on their “illusion of control” over the global IT market, spawned by a few years of sustained success in Application Development and Maintenance (ADM). On other areas such as System Integration, remote infrastructure management or even testing services, they are lagging far behind.

    The cost competitiveness is also fast eroding because of local wage spiral owing to high rate of attrition and shortage of employable engineers. Increasingly outsourcing deals of late has considered non-India options because of turnover and inflation concerns and uncompetitive pricing. ( it should sooth the nerves of the first world-ers who worry about low labor standards prevailing in the third world).

    Time is a great leveler of all imbalances, including Asian labor standards. 🙂 Giving the reductionist theories a little `ism’ic twist – Capitalism at its best sometimes would even mean Socialism at its worst.

    Like

  20. I had followed this thread with interest. Let me add my two (hundred ?) cents.

    “Offshoring” resulted not just because it offered US employers labor cost arbitrage – it improved their operating efficiencies as well. For instance, just as Toyota and Samsung forced western MNC’s to rethink how to make cars and consumer electronics, today’s young thrusters threaten the MNC veterans wherever they are complacent.

    Offshoring is no longer an option for US MNCs, it is a necessity now. No matter, how shriller the cry may get, it exposed their profligate ways. Be it the clearly out of whack executive compensation or the balance sheet imploding healthcare / pension obligations for unionised blue collars. [DaimlerChrysler is the most recent example – so much so that it will have to *pay* a willing buyer to buy the company out because of $ 19 billion long term healthcare liabilities of its unionized retirees. Daimler-Benz AG paid $ 36 billion for the company in 1998 and in 2006, it has lost $ 1.475 billion and is put up for sale].

    Carlos Ghosn, CEO of Renault-Nissan on his recent trip to India marveled at the low cost of high quality engineering and design talent.

    Ah…as far as Mr.Alan Binder’s views are concerned – the timing of his rant and the sudden turnaround in his stance reeks of opportunism. [I won’t grudge him that – who doesn’t like to make a quick buck ?]. Presidential election around the corner, candidates would be looking up to anyone for suggestive sound bytes. He hasn’t failed them (or their speechwriters) this time around.

    Coping with a new brood of competitors was never going to be easy. Some of today’s established multinational companies will not be up to the task. But others will emerge from the encounter stronger than ever. And consumers, wherever they are, will gain from the contest.

    The options are – stand still and go out of business OR recognize change and go with it.

    That said, I would also like to warn the Indian outsourcing companies on their “illusion of control” over the global IT market, spawned by a few years of sustained success in Application Development and Maintenance (ADM). On other areas such as System Integration, remote infrastructure management or even testing services, they are lagging far behind.

    The cost competitiveness is also fast eroding because of local wage spiral owing to high rate of attrition and shortage of employable engineers. Increasingly outsourcing deals of late has considered non-India options because of turnover and inflation concerns and uncompetitive pricing. ( it should sooth the nerves of the first world-ers who worry about low labor standards prevailing in the third world).

    Time is a great leveler of all imbalances, including Asian labor standards. 🙂 Giving the reductionist theories a little `ism’ic twist – Capitalism at its best sometimes would even mean Socialism at its worst.

    Like

  21. I had followed this thread with interest. Let me add my two (hundred ?) cents.

    “Offshoring” resulted not just because it offered US employers labor cost arbitrage – it improved their operating efficiencies as well. For instance, just as Toyota and Samsung forced western MNC’s to rethink how to make cars and consumer electronics, today’s young thrusters threaten the MNC veterans wherever they are complacent.

    Offshoring is no longer an option for US MNCs, it is a necessity now. No matter, how shriller the cry may get, it exposed their profligate ways. Be it the clearly out of whack executive compensation or the balance sheet imploding healthcare / pension obligations for unionised blue collars. [DaimlerChrysler is the most recent example – so much so that it will have to *pay* a willing buyer to buy the company out because of $ 19 billion long term healthcare liabilities of its unionized retirees. Daimler-Benz AG paid $ 36 billion for the company in 1998 and in 2006, it has lost $ 1.475 billion and is put up for sale].

    Carlos Ghosn, CEO of Renault-Nissan on his recent trip to India marveled at the low cost of high quality engineering and design talent.

    Ah…as far as Mr.Alan Binder’s views are concerned – the timing of his rant and the sudden turnaround in his stance reeks of opportunism. [I won’t grudge him that – who doesn’t like to make a quick buck ?]. Presidential election around the corner, candidates would be looking up to anyone for suggestive sound bytes. He hasn’t failed them (or their speechwriters) this time around.

    Coping with a new brood of competitors was never going to be easy. Some of today’s established multinational companies will not be up to the task. But others will emerge from the encounter stronger than ever. And consumers, wherever they are, will gain from the contest.

    The options are – stand still and go out of business OR recognize change and go with it.

    That said, I would also like to warn the Indian outsourcing companies on their “illusion of control” over the global IT market, spawned by a few years of sustained success in Application Development and Maintenance (ADM). On other areas such as System Integration, remote infrastructure management or even testing services, they are lagging far behind.

    The cost competitiveness is also fast eroding because of local wage spiral owing to high rate of attrition and shortage of employable engineers. Increasingly outsourcing deals of late has considered non-India options because of turnover and inflation concerns and uncompetitive pricing. ( it should sooth the nerves of the first world-ers who worry about low labor standards prevailing in the third world).

    Time is a great leveler of all imbalances, including Asian labor standards. 🙂 Giving the reductionist theories a little `ism’ic twist – Capitalism at its best sometimes would even mean Socialism at its worst.

    Like

  22. Noah, thanks again. One by one:

    “Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?”

    No, that is not what I think. But I think that once a market is used to the liberalisation, any protection applied will be seen as protectionist. It is a bit like trying to sell a product you have hitherto given away for free. I do not mean sampling such as handing out water bottles at the railway station or doing a pilot project for a fixed fee.

    “It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.”

    The East European nations are post-communist nations. By their standards, the Anglo-Saxon model of the UK and the less liberal market regimes of Western Europe are already quite different. If anything, the East European governments would have had to be more sympathetic in the past than they can manage now that they are part of the EU, with its free movement of labour across borders. My comment was in reference to the cost of compliance with EU directives, incurred both by governments and businesses, which will affect the whole cost structure.

    “Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.”

    I am afraid I have to disagree with you there. Competition for employees is already an issue for out-sourcing companies (that is providers of out-sourcing) and in addition to salaries etc., it affects the scalability proposition.

    ” From The Economist article you quoted: “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.” What do the NGO’s say?”

    I have not been following the NGOs’ arguments in this area for a while, but if you consider that Unions might be NGOs or non-profits, two of the largest unions in the UK and the US are considering a merger. See: https://news.bbc.co.uk/2/hi/business/6531749.stm

    Also, Greenpeace sees Chinese firm Lenovo (now the name on IBM’s ThinkPads) as the most eco-friendly electronics firm. See:
    https://news.bbc.co.uk/2/hi/technology/6525307.stm

    In all sorts of phenomena in society, there are many players including for-profit and non-profit organisations. They all do their thing till there comes a point, when things just have to change. And so they will, in India and other offshoring nations too – in terms of costs, employee rights and environmental awareness.

    Just as an additional comment, I was recently asked by a large Indian IT firm to mentor some of their young, emerging leaders. Then with a laugh, I was told not to start getting them interested in things like a lifestyle, their rights to a holiday and the protection offered them as employees in UK law. Needless to say, the discussion is still ongoing, since we cannot agree T&Cs.

    Like

  23. Noah, thanks again. One by one:

    “Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?”

    No, that is not what I think. But I think that once a market is used to the liberalisation, any protection applied will be seen as protectionist. It is a bit like trying to sell a product you have hitherto given away for free. I do not mean sampling such as handing out water bottles at the railway station or doing a pilot project for a fixed fee.

    “It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.”

    The East European nations are post-communist nations. By their standards, the Anglo-Saxon model of the UK and the less liberal market regimes of Western Europe are already quite different. If anything, the East European governments would have had to be more sympathetic in the past than they can manage now that they are part of the EU, with its free movement of labour across borders. My comment was in reference to the cost of compliance with EU directives, incurred both by governments and businesses, which will affect the whole cost structure.

    “Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.”

    I am afraid I have to disagree with you there. Competition for employees is already an issue for out-sourcing companies (that is providers of out-sourcing) and in addition to salaries etc., it affects the scalability proposition.

    ” From The Economist article you quoted: “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.” What do the NGO’s say?”

    I have not been following the NGOs’ arguments in this area for a while, but if you consider that Unions might be NGOs or non-profits, two of the largest unions in the UK and the US are considering a merger. See: https://news.bbc.co.uk/2/hi/business/6531749.stm

    Also, Greenpeace sees Chinese firm Lenovo (now the name on IBM’s ThinkPads) as the most eco-friendly electronics firm. See:
    https://news.bbc.co.uk/2/hi/technology/6525307.stm

    In all sorts of phenomena in society, there are many players including for-profit and non-profit organisations. They all do their thing till there comes a point, when things just have to change. And so they will, in India and other offshoring nations too – in terms of costs, employee rights and environmental awareness.

    Just as an additional comment, I was recently asked by a large Indian IT firm to mentor some of their young, emerging leaders. Then with a laugh, I was told not to start getting them interested in things like a lifestyle, their rights to a holiday and the protection offered them as employees in UK law. Needless to say, the discussion is still ongoing, since we cannot agree T&Cs.

    Like

  24. Noah, thanks again. One by one:

    “Do you think that countries where worker’s rights are not protected and environmental regulations are weak or unenforced are countries engaged in protectionism?”

    No, that is not what I think. But I think that once a market is used to the liberalisation, any protection applied will be seen as protectionist. It is a bit like trying to sell a product you have hitherto given away for free. I do not mean sampling such as handing out water bottles at the railway station or doing a pilot project for a fixed fee.

    “It seems you’re excusing the inequity imposed on workers by unsympathetic governments by saying that eventually those governments will be sympathetic, hence the real problem is sympathetic governments.”

    The East European nations are post-communist nations. By their standards, the Anglo-Saxon model of the UK and the less liberal market regimes of Western Europe are already quite different. If anything, the East European governments would have had to be more sympathetic in the past than they can manage now that they are part of the EU, with its free movement of labour across borders. My comment was in reference to the cost of compliance with EU directives, incurred both by governments and businesses, which will affect the whole cost structure.

    “Maybe you think that the abundance of cheap labor available off or near shore is not a problem because that labor’s costs rises as competition for employees heats up in a liberalized global market. Considering that corporations are willing to move (and do move) to other countries to find (vastly) cheaper labor, I must disagree. Competition for employees is not an issue for out-sourcing companies, unless you mean competition for the very, very cheapest.”

    I am afraid I have to disagree with you there. Competition for employees is already an issue for out-sourcing companies (that is providers of out-sourcing) and in addition to salaries etc., it affects the scalability proposition.

    ” From The Economist article you quoted: “In developing countries (never mind what the NGOs say) multinationals tend to spread better working practices and environmental conditions; but when emerging-country multinationals operate in rich countries they tend to adopt local mores.” What do the NGO’s say?”

    I have not been following the NGOs’ arguments in this area for a while, but if you consider that Unions might be NGOs or non-profits, two of the largest unions in the UK and the US are considering a merger. See: https://news.bbc.co.uk/2/hi/business/6531749.stm

    Also, Greenpeace sees Chinese firm Lenovo (now the name on IBM’s ThinkPads) as the most eco-friendly electronics firm. See:
    https://news.bbc.co.uk/2/hi/technology/6525307.stm

    In all sorts of phenomena in society, there are many players including for-profit and non-profit organisations. They all do their thing till there comes a point, when things just have to change. And so they will, in India and other offshoring nations too – in terms of costs, employee rights and environmental awareness.

    Just as an additional comment, I was recently asked by a large Indian IT firm to mentor some of their young, emerging leaders. Then with a laugh, I was told not to start getting them interested in things like a lifestyle, their rights to a holiday and the protection offered them as employees in UK law. Needless to say, the discussion is still ongoing, since we cannot agree T&Cs.

    Like

  25. Krishna, thanks for stopping by. Juxtaposing Noah’s comments with yours demonstrates cleanly the differences between the questions being asked in the US and what really is in the consideration set of Indian growth ventures and established players just now.

    Noah’s comments are more at a macro-level whereas by discussing specific segments, where the Indian offshoring business has not made headway, you are discussing opportunities and gaps in the offering. Just another illustration of the difference between what is important from the US and from the Indian ICT industry’s point of view.

    As such I think making a case for any particular trajectory is a bit of an academic discussion right now. All we can do is define some scenarios, and assign probabilities based on several factors, and then keep doing our thing as we wait for things to pan out as they might, given the complexity of politics in the mix.

    Thanks for reading.

    Like

  26. Krishna, thanks for stopping by. Juxtaposing Noah’s comments with yours demonstrates cleanly the differences between the questions being asked in the US and what really is in the consideration set of Indian growth ventures and established players just now.

    Noah’s comments are more at a macro-level whereas by discussing specific segments, where the Indian offshoring business has not made headway, you are discussing opportunities and gaps in the offering. Just another illustration of the difference between what is important from the US and from the Indian ICT industry’s point of view.

    As such I think making a case for any particular trajectory is a bit of an academic discussion right now. All we can do is define some scenarios, and assign probabilities based on several factors, and then keep doing our thing as we wait for things to pan out as they might, given the complexity of politics in the mix.

    Thanks for reading.

    Like

  27. Krishna, thanks for stopping by. Juxtaposing Noah’s comments with yours demonstrates cleanly the differences between the questions being asked in the US and what really is in the consideration set of Indian growth ventures and established players just now.

    Noah’s comments are more at a macro-level whereas by discussing specific segments, where the Indian offshoring business has not made headway, you are discussing opportunities and gaps in the offering. Just another illustration of the difference between what is important from the US and from the Indian ICT industry’s point of view.

    As such I think making a case for any particular trajectory is a bit of an academic discussion right now. All we can do is define some scenarios, and assign probabilities based on several factors, and then keep doing our thing as we wait for things to pan out as they might, given the complexity of politics in the mix.

    Thanks for reading.

    Like

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