Wednesday, August 24, 2005

What happened to the "Giant Sucking Sound" of Outsourcing?

Information Technology

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What happened to the "Giant Sucking Sound" of Outsourcing?

Author: Ian Ippolito

The conventional wisdom is that outsourcing has been very bad for the U.S. Information Technology workforce. After all, now that a company can transfer the work of a $50/hour U.S. programmer to an equally skilled programmer in India or Romania and pay only $5/hour for the same job, what are U.S. workers to do? Ross Perot once famously described the result of job loss as the �Giant Sucking Sound��from the movement of the jobs overseas. Virtually every newsgroup, blog and magazine editorial quotes anecdotal evidence of someone who has lost a job in the recent down turn as validation of this theory. Almost all make dire predictions of the end of U.S. I.T. dominance .

It�s too bad that none of these people took the time to notice that the U.S. Bureau of Labor and Statistics survey last month showed the number of jobs in U.S. IT has rebounded to the highs of 2001. (see �Reliving the summer of 2001� in InformationWeek) If they had, we would have heard a completely different type of �Giant Sucking Sound�� a whole lot of people holding their breaths while forced to ask themsleves �If outsourcing is the awful bogey man I believe it to be�then WHY ARE THE JOBS STILL HERE?�

U.S. IT moves in cycles. 2001 was the height of the excesses of the dot com bubble (remember when people wouldn�t take a new job unless they got a 50% raise AND could bring their pet in to work?). And what goes up unfortunately must always come down. But when people lose jobs, the pain is real, and human nature is such that we need to blame something or someone for the injustice. And who is a more convenient and defenseless scapegoat than foreigners who can�t speak for themselves or defend themselves?

You�d think we�d know better about foreigner scape-goating. Remember when the Japanese were buying up marquis U.S. properties in the 1990s like Rockefeller Center? Everyone predicted they were going to own the country. That never happened. Their real-estate bubble busted, they had to leave town and haven�t been sighted since. And you�d think we�d know better from history about making simple assumption. In the 1700�s, the English gave themselves premature coronaries, because they obsessed over the fact that they couldn�t grow enough trees to power the wood power plants. The invention of the coal based steam engine propelled England into the industrial age, and reduced the dreaded �wood shortage� to a historical footnote.

Outsourcing HAS had an effect on U.S. I.T. but it has NOT been what the convention wisdom predicted. And understanding it is the key to having a real understanding of outsourcing.

The survey data shows that there are about 16% less programming jobs than in 2001. Everyone knew that heads-down coders would be affected by outsourcing (although that isn't exactly true either...something we'll examine further in another blog). On the other side of the ledger, I.T. management jobs have skyrocketed about 20% (70,000). Almost no one realized that those jobs would explode and practically offset the loss in programmers. And a person managing work tends to be paid higher than the people actually doing the work.

Where did these management jobs come from? I call it �Affordability Magnification�. Say you�re a typical IT manager in a small to midsize company with a budget of $1,000,000 for programming. Before outsourcing you ran 4-5 projects a year. Now those projects are just 1/10th the cost. If you still run 4-5 projects, you are going to have a ton of money unspent at the end of the year. The CFO would be more than happy to take it from you and give it to some other department next year�so you can�t do that. Instead, you�ll of course spend every last dime. And you�ll run 40 projects and hire a bunch of new project managers to manage them. And that is what we are seeing.

To those who think this is a surprising idea�I recommend a trip to library (or Wikiopedia) and a quick read of economics 101. Outsourcing is based on free-trade, and free trade predicts that when 2 countries trade�BOTH benefit, not just one. This is counter intuitive for all the reasons mentioned earlier. But free-trade predicts that people in each country will realign from jobs that the country can do less efficiently, to jobs the country can do more efficiently. And that makes both countries stronger. And that is what we�re seeing.

Yes, this does mean pain and problems for those affected�some of whom have invested years of training. And as a society we should be helping those people with benefits and retraining. But we also need perspective as well. Just like the economic cycle we talked about earlier�this is a cycle and not a novel thing at all. Disruptive technology is constantly displacing old industries as it creates newer and better ones. How many 8-track cassette engineers do you know of? Are any groups pushing for a ban on CDs to protect this specialized profession? And this cycle isn�t even unique to our century. For centuries, scribes (people who could write) were prestigious and highly paid for their advanced skills. But when the printing press was invented and took off in the 15th century, the scribe felt the pain of sudden unemployment. The cost of books dropped by a factor of 300, scribes made the shift to other professions, and society as a whole is more literate and better off than it was before. Today, there is no �scribe in America� program that advocates the banning of printing presses to protect the health of U.S. scribes.

So anyone that says that outsourcing has caused some unemployment is correct�and some heads-down coding jobs have left the U.S. for good. But anyone who says that outsourcing hasn't also created new jobs, and is somehow unpatriotic because of simply uninformed.

About the Author

Ian Ippolito is the the creator of , an open marketplace for computer programming where 2/3rd of the parties choose to outsource internationally. It has been studied by universities such as American University to learn more about outsourcing.


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