Wednesday, March 24, 2004

Innovation & Job Outsourcing

Several days ago I saw the end of an interview on PBS of Jack Welch, former head of GE. The part of the discussion I heard was Welch waxing eloquently about how good it is for business and the economy that the outsourcing of jobs was occurring. The arguments were standard, the type you’ve heard before, but then he added, “US companies need to innovate, innovate, innovate!”

Let’s look quickly at what some of the other pundits are saying about the subject:

Gartner estimates that one out of every ten jobs at US technology vendors or service providers will move overseas by the end of this year. By 2008, 25% of all traditional information technology jobs will be in emerging market nations. “These dislocations can be substantial. Work can move offshore very quickly, and it remains to be seen how quickly we can innovate to replace those jobs” states Michael Fleisher, chairman of Gartner. The industries hardest hit will be those with a high concentration of knowledge workers such as banking, health care and insurance.

Jonathan Krim, Washington Post, reports that more than 500,000 technology jobs were lost from mid 2001 to mid 2003.

“Software and technology service businesses are under siege by countries taking advantage of cheap labor costs and strong incentives for new financial investments” says Andrew Grove, Intel Chairman. “More ominously, the software and services industries – strong drivers of US economic growth for nearly two decades – show signs of emulating the struggles of the US steel and semiconductor industries.” He said that he is torn between his responsibility to shareholders to cut costs and improve profits, and to US workers who helped build the nation’s technology industry but who are now being replaced by cheaper labor.

Forrester Research predicts the loss of 3.3 million jobs in the US by 2015 due to outsourcing.

Forbes ominously warned, “Your job could be next. Among the outsourced are computer programmers, engineers, accountants and financial analysts, not to mention the thousands of less skilled workers who answer phones at call centers. Critics decry the job migration as shortsighted bottom feeding.” Later in the article, “Now, skilled workers are finding that education isn’t enough, not when an Indian worker is just as educated and is willing to do the same job for a fraction of the pay. A microchip designer or financial analyst makes $7,000 a month in the US. The same worker in India earns $1,000 a month, Business Week reported this year.”

“I think overall, long term, the US economy can take it. But there’s going to be a huge amount of restructuring pain,” said Rafiq Dossani, Stanford.

“What’s making the loss of jobs all the more scary for tech workers is the speed with which companies can now send jobs overseas because of today’s sophisticated communications technology. Thousands of jobs can literally be moved to India overnight,” said Arvinder Loomer, San Jose State.

“Indeed, say economists and historians, tech jobs seem to be moving to India faster that manufacturing jobs moved overseas in decades past,” reports Aaron Davis and Margaret Steen, Mercury News. Later in their article, they state, “The key to the valley’s (Silicon Valley) future, experts say, is a new wave of innovation, maybe in nanotechnology, biotech or something else.”

“Stephen Levy, director of the Center for Continuing Study of the California Economy said increased productivity at many high-tech companies means they’re able to post stronger earnings without hiring new people. We are in a turnaround, but it’s not strong enough to generate strong job growth, Levy said, I don’t expect substantial job growth in the near future.” Chris O’Brien, Mercury News

Kelley Beaucar Vlahos, Fox News, reports, “Courtney (WashTech) estimates that 600,000 US jobs have moved abroad. Global Insight international economic forecasting and data providers, figure the number closer to 300,000 white-collar jobs including less-skilled call center and telecommunications positions. But warns that the number could swell to 3.3 million by 2015.”

Thomas Friedman, New York Times, discusses what he calls “global work-flow platforms." “These work-flow platforms can chop up any service job – accounting, radiology, consulting, software engineering – into different functions and then, thanks to scanning and digitization, outsource each function to teams of skilled knowledge workers around the globe, based on which team can do each function with the highest skill at the lowest price. Then the project is reassembled back at headquarters into a finished product.” He sees this giving rise to a Darwinian environment where knowledge workers will be under increasing pressure to upgrade their skills.

Friedman also writes about the “Zippies” – “the huge cohort of Indian youth who are the first to come of age since India shifted away from Socialism and dived headfirst into the world’s service center. With 54% of India under the age of 25 – that's’ 555 million people – six out of every ten Indian households have at least one Zippy.”

Friedman reports, “We created a worldwide network which connected all the resource pools on the planet, and suddenly we changed the rules of the game”, said Nandan Nilekani, CEO of the Indian software giant Infosys – which last year received nearly one million applications from Indian techies for 9,000 software jobs. “You cannot wish away this new era of globalization," he added. “It will not go away.”

Friedman concludes, “As long as America maintains its ability to do cutting-edge innovation, the long run should be fine. Saving money by outsourcing basic jobs to Zippies, so we can invest in more high-end innovation, makes sense.”

Friedman confesses that he missed the revolution. “I was totally focused on 9/11 and Iraq. But now having spent 10 days in Bangalore, India’s Silicon Valley, I realize that while I was sleeping, the world entered the third great era of globalization.”

Globalization 1.0 – late 1800s to WW I, driven by decreasing transportation costs

Globalization 2.0 – 1980s to 2000, falling telecom costs and PC

Globalization 3.0 – undersea fiber optic cable, diffusion of PCs around the world, convergence of a variety of software applications

Globalization 1.0 shrunk the world from a large size to a size medium. 2.0 shrank the world from a medium to a size small. And, 3.0 shrank the world from small to a size tiny, according to Friedman.

We’ve gone through great transitions before in the US. In 1870, we were an agricultural economy. In that year 45% of the workforce was employed in agriculture. By 1880, the number began to fall and has continued to fall until the present day. Now only about 3% of the US workforce are employed in agriculture. This decrease was driven by productivity improvements made possible by innovations in equipment, pesticides, herbicides, genetics and workflow processes. There was dislocation, an enormous amount of it, as people streamed into the cities. But, at the same time, industrialization was taking hold and people could be trained to work in the factories that drove the industrial revolution in the US. People working in industry reached a peak of about 38% in 1950. From there on there has been a continual decline in the number of people working in industry. By 2010, BLS forecasts that about 15% of US workforce will be in industry. This time the decrease was due to innovation, automation and improved production technique and designs. But it was also due to offshore manufacturing. First plants were built by US companies abroad. Later, manufacturing was contracted out to vendors able to provide parts, subassemblies or the entire product. Then offshore companies competed directly in the US market. Where did those people go? They went to a large extent into service sector. For awhile, this was puzzling. How can an economy work with “everyone doing each other’s laundry?

In 1920, about 20% of the US workforce were employed in the service sector. By 1950, this had grown to 50%. By 1990, the service sector employed 80% of the US workforce. To help understand the issue, economists separated the service sector into two components – consumer services and producer services. Consumer services are those like the fast food industry and personal services. Producer services are those created by the information age, the knowledge workers.

Consumer services has varied between 15% and 25% of the US workforce since 1860. It seems to act as a buffer absorbing jobs during transitions.

The producer service sector grew from less than 5% in 1870 to almost 55% in 2000. It surpassed consumer service in 1902, agriculture in 1930 and industry in 1960. It is now the largest sector of the US workforce and this is what’s being outsourced.

However, there is a difference. In this transition, at least so far, we don’t see what the people being replaced by outsourcing are going to do.

Many suggest that these people need to be retrained to do other jobs. The health care industry is a growing market in the US. Should they be trained for a career in that field? But, we already know that many of those jobs are already subject to outsourcing. Besides, according to Gordon Lafer, University of Oregon, job training is a farce and gives false hope to unemployed Americans.

Lafer writes, “Whatever the problem. It seems job training is the answer. The trouble is, it doesn’t work, and the government knows it. The most comprehensive evaluation of training programs, conducted by the Department of Labor, followed 20,000 people over four years. For the vast majority, the government concluded that that training made no difference whatsoever.”

Are we going to ignore the problem? Many are suggesting already that the terms "outsourcing" and "global" are too hot. Businesses and politicians are adopting the terms "sourcing" and "worldwide" as potentially cooler terms in the hope that we will forget what actually is happening.

Are they going to go into the consumer service sector? If they do, it'll be a real step down in salary and potentially the creation of a two class society with the diminishment of the middle class and an accumulation of wealth at the top.

Shoshana Zuboff & James Maxim, in their book The Support Economy, envision a scenario in our future where technology enables the development of a new sector - the support economy - that they claim is the next episode of capitalism. They write, "History suggests that the next great era of commercial innovation will require more than the production or exploitation of new technologies, however creative the undertaking may be. The next revolution in wealth creation will draw life, first and foremost, from a profound grasp of the new society of individuals and its expression in a new kind of consumption. Only the full force of this understanding can ignite the entrepreneurial innovation capable of leading such a revolution and paving the way toward a support economy and a new episode of capitalism."

Willis Harman, a futurist, saw some of these changes coming. In the mid 1990s he wrote, “The far more attractive alternative involves a burgeoning of the third sector of voluntary and non-profit nongovernmental organizations. Since neither the commercial sector nor the public sector is capable of satisfying people’s needs and solving social problems, the public has little choice but to begin looking out for itself by establishing viable communities as a buffer against both impersonal forces of the global market and increasingly weak and ineffectual governmental authorities.” Should there be a transition from economic production, as Harman suggests, into community building? It might pay little or nothing, but job satisfaction has the potential of being high.

Are they going to go to high-end innovation as some suggest? Well, in my crystal ball, the next major innovations coming our way will probably be in the convergence of infomatics, genetics and nanotechnology. To participate meaningfully in this revolution is going to require multidisciplinary approaches. People will have to have a high degree of education in more than one of these fields. The problem is that this revolution is still a number of years away. Technology takes a long time to develop. Look at the technologies that have come tougher to create the productivity improvements that have led to our current situation. They're all 30 to 60 years old!

It will probably be some combination of these factors. And, I wholly support getting our children better educated in the physical sciences so that they can help produce the innovations of the nano-bio-info revolution. But, as you know, growing children into educated adults takes a long time. It seems to me that we can’t wait for the nano-bio-info tech revolution. The process of globalization is going on too fast. It seems to me that we need innovations now that increase the productivity on US knowledge workers ten fold so that they can compete globally and still make enough money to buy the products they make. We need innovations in the way we look at corporations, the nature of work and how we organize ourselves. We need innovations in how we fund business and reward workers. And, we need innovations in the way we measure success - corporate and personal.

I don't even want to pretend that I have the answers. I do think that the answers exist in innovation but what the nature and class of those innovations need to be, I'm not at all sure. I do know that we need a lot of attention, research and conversations on this topic. Our future depends upon that.

Mark Landler, New York Times, encapsulated the magnitude of the problem with this observation: "The fears are intensified by the rise of China, one of the prime destinations for jobs moving out of the United States and Europe. Goldman, Sachs issued a study here predicting that China's economy would overtake that of Germany within a decade, and surpass the American economy by 2014. Zu Min, an economic advisor to the president of China, was met with silence at a dinner last week when he asked Americans at the conference how their country planned to finance its economy when both blue-collar and white-collar service jobs were going elsewhere."

Paul Schumann

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