Should Indian Outsourcing Be Banned?

by Krishna on April 11, 2009

James McGovern, of Enterprise Architecture, writes:

So, if quality can be lower in enterprise in-house software, then that allows for lower-quality resources from Indian outsourcing firms to maintain it. Remember that good is good enough and it doesn’t make sense for architects to expend such energy churning on better ways of developing higher quality working software.

Indian outsourcing has caused many to lower their standards and therefore the opportunity to abuse is rampant. Methodologies such as extreme programming encourage merciless refactoring while Indian outsourcing has taught us that refactoring is nothing but overhead as you have to write comprehensive documentation in order to get working software. Sometimes the effort but into documentation makes refactoring a non-starter.

McGovern’s recent posts have been pretty cynical about Indian outsourcing and I suppose it has some roots in his actual experiences. So I am not going to quibble and say he is wrong, because he will be obviously right with what he has experienced personally. That being said, I think he has a limited view of why many companies outsource outside the United States, including to Eastern Europe, India and East Asia.

What I am writing below is based on meetings and conversations with CEOs, VPs and other executives in charge of outsourcing decisions. Obviously, you cannot take any one person’s word at face value, but when you hear the same reasons cited by multiple people, you start seeing trends. Let me start with saying that cost is a major factor, but not for the common reasons you would think. No executive talks of costs in the context of replacing existing costly resources with new inexpensive resources. Instead, the typical reasons cited are as follows:

  1. There is an unfulfilled project need, but the existing software development team is busy with tasks. How do we increase the development team without incurring too much additional cost?
  2. The existing team is busy with maintenance tasks. How do we get them to work on new tasks and move the current maintenance work to someone else without incurring too much cost?
  3. We have a project that is low on our priorities, but would be very helpful to get done. If we can get it done at a lower cost, it could go up the priority list and approved faster.
  4. We are uncertain about our revenue stream and do not want to add long-term obligations on our payroll.
  5. We want someone who has done this kind of work before and can therefore do this at a lower overall cost. (In many cases, the existing development team does not have any experience in the new work that is being proposed to be outsourced.)

Cost is an important (if not the most important) factor because it is the easiest and most unambiguous one to measure. The compensation of most executives is determined by how much money they could make or how much they could save. But to assume that they are only obsessed with the bottom line figure is wrong. If that were the case, every action could be taken by only considering the short-term cost analysis, where you don’t want to introduce any new costs.

But as you can see, in the above cases, although the executives are trying to save money, overall they are increasing costs. They are not shutting down the existing development team. They are augmenting the team with new members for the purpose of performing projects that add to the company’s value. This adds more costs, so what the executives are doing is not so much as reducing costs, but reducing the rate of growth of expenses.

They could do this in a variety of ways, of course: Hire permanent workers, hire consultants, hire interns, buy off-the-shelf products, outsource to a local firm, outsource to a firm somewhere in the United States, outsource to someone outside the country, automate. And each has its pros and cons. The cost of the project is affected by risks of each approach and this includes quality too, because poor quality increases maintenance costs too.

There are two arguments that cannot simultaneously exist, which is that foreign programmers are both inexpensive and of poor quality. If an inexpensive foreign programmer produces code of really poor quality, the rational thing to do for a cost-conscious executive would be to use only domestic programmers. There would be no point in outsourcing if a programmer in an outsourcing country is more expensive than one in the United States because their poor quality cancels the benefit of their lower per-hour costs. One could argue that maybe some executive are dumb, but that does not account for the tens of thousands of jobs that have been outsourced.

The assumption that Indian outsourcing is associated with low quality may be satisfying to some United States programmers, but it is a dangerous assumption for several reasons.

  1. Even assuming that Indians are bad programmers and executives only outsource based on per-hour cost, there are plenty of inexpensive outsourcing destinations for software development. Eastern Europe is particularly strong in software outsourcing and they have very competitive rates combined with excellent developers coming out of first-class universities.
  2. It is difficult to envision sustained low quality from any outsourced-to country. It will improve quality through greater exposure and experience, or die a quick death. Unless you think that any country is culturally indisposed to quality, which I find hard to digest. They used to say that about the Japanese in the ‘50s. Look what happened.
  3. If outsourcing is ever banned, employers and executives will look to control costs through other means. If a company is not growing fast enough to exceed its costs, it will bleed people and go out of business. In any eventuality, people will lose jobs. Outsourcing is a good scapegoat, but it is only the symptom of a larger concern within the company.

I call it dangerous because it doesn’t help the displaced American programmer from understanding the high-level economic trend that is causing the job loss. Both national parties in the United States (and most parties in the Western world) are non-protectionist. They favor free markets and open trade. This means a much more competitive market for all companies. Blaming any one element that causes job losses in a particular sector is missing the bigger picture.

For instance, as Nick Carr wrote in “The Big Switch”, a trend that will cause the loss of many IT jobs is the rise of cloud computing. It will mean the end of many system and database administration jobs, as small and large companies move their data and processing to the servers of Amazon, Google and Microsoft. Is it worthwhile to complain that cloud computing may perhaps have less performance than a finely-tuned Oracle machine on a Solaris box? It may be satisfying to think you (as a sysadmin) have been replaced by an inferior solution, but that satisfaction is all you get.

What is the answer for the American programmer? If you cannot lower one’s wages, you has to provide greater value. Quality is greater value, but that may not be enough to justify those higher salaries. Corporations (and smaller companies) with access to the entire globe may not agree to the monetary value you place on your existing skills and quality. So the right answer is what new portfolio of skills will appeal better to employers and executives?

Better code quality is not enough. If you improve it, there is no guarantee that the Eastern Europeans and Filipinos will not equal you tomorrow because they are learnable skills. But the American programmer will always have the strength in understanding American businesses, rules, customs and traditions. They can be better analysts and managers. Although the Internet has dulled this advantage, Americans can take greater advantage of the wealth of experience in Silicon Valley and other technology hotspots as well as the many first-class universities in the US to become better architects and designers in emerging technologies. Finally, they can embrace globalization to obtain greater value through mixing and matching development resources from across the world.

{ 18 comments }

johnbender April 11, 2009 at 11:11 pm

“One could argue that maybe some executive are dumb, but that does not account for the tens of thousands of jobs that have been outsourced.”

They don’t have to be “dumb” to focus on the cost to work done ratio. Most of the people writing checks don’t have a real grasp on the impact of quality code on future costs.

I’m not for banning outsourcing but I wish those check writing folk would apply the same intelligence they do when buying a car to custom software: you get what you pay for.

Anonymous April 12, 2009 at 5:30 am

“No executive talks of costs in the context of replacing existing costly resources with new inexpensive resources.

At least one executive would have, if you had talked to him. I know; I was one of the victims of his decision(s).

In 2005, my employer at that time (a division of a large U.S. based multinational), published plans to outsource significant amounts of work to an Indian outsourcing agency (Tata, if memory serves me correctly). Against the strong advice of many of his senior managers, this executive went ahead with the outsourcing plans.

I, with over 20 years of relevant industry experience, was replaced with a young Indian developer, fresh out of school, and no industry experience.

Now, don’t mistake my attitude. I have nothing against the young Indian who replaced me. He was intelligent and very personable. No, my anger is directed against executives who undertake such programs, purely for reasons of personal advancement and without regard for the negative consequences. I, and those who remained in the company, cannot see any other reason for the outsourcing.

The company was, at that time, making a healthy profit. There was enough work to do, and perhaps more than the development resources could accomodate. But, rather than offshore the legacy work, this executive actually offshored work which was related to frontline development efforts.

This executive convinced his superiors that by offshore outsourcing, he could drive development efficiency to such a level that the division’s profits would be increased by an order of magnitude (and I’m not exaggerating); this despite historical evidence that perhaps only a doubling of profit would have been possible.

No, I’m afraid that there’s much more to the outsourcing story than you or the other analysts are seeing. Outsourcing *is* being used as a means of driving personal ambitions. It may well be that there are good and valid reasons for outsourcing. I haven’t heard them.

And how did things work out, you may ask? After a brief employment hiatus over Christmas, I found employment with a much better company, at essentially the same level of seniority and remuneration, and under much better working conditions.

My Indian replacement? Sources tell me that soon after the outsourcing happened, he found better employment with a different Indian company. I did say that he was intelligent.

The executive? Apparently he was “sideways” promoted within the company.

I wonder how many times this kind of story has been repeated in corporations? Probably many more times than you analysts are aware of.

From my perspective, offshore outsourcing is just one more strategy that executives in huge, decaying corporations employ in an attempt to climb the corporate ladder. How long can such antics continue before the corporation falters? Probably quite a while because of the “corporate inertia” effect.

Krish April 12, 2009 at 7:35 am

@Johnbender

You are right. Some executives don’t spend enough time to understand the true costs of outsourcing or other initiatives. In fact, outsourcing can be more expensive during the initial stages than using local programmers and turn out to be much more expensive if proper attention is not paid to quality.

Individual incidents aside, it is difficult to believe that executives as a whole have made a conscious decision to ignore quality in calculating costs. I would have supposed that research firms like Gartner would have caught onto that.

Krish April 12, 2009 at 8:02 am

@anonymous

Your story is probably true for many large corporations. I think the keyword is “decaying”. Companies that cannot find new revenues through growth have to find savings through cost cutting. I suppose outsourcing becomes one of those tools.

Kannan Kartha April 12, 2009 at 9:09 am

I understand the key message. But, the critical part is to get systems up and live as soon as one firm can. Speed to market! As far as competency is concerned, there is no question that there is no dearth of quality programmers in the US, but when an enterprise has IT system implementation in mind, in-house talent is not sufficient to get it live with the speed that benefits the company.

@Krish – Did not understand the deal with “South” Indian?

Krish April 12, 2009 at 9:22 am

“South” Indian? I didn’t understand your reference, Kannan. Could you elaborate?

Kalpesh April 19, 2009 at 1:39 am

Here is what I posted on James's blog.

That is really a narrow view.

What does it mean by lower-quality resources from Indian outsourcing?

You get what you pay for. The code is first developed in US by "architects" & then companies want to maintain it without spending too much.

BTW, what kind of software companies like microsoft are developing? the shelf life of software has changed. Look at any software and it has changed every few years or replaced by a new one.

When did vista come out? When is windows 7 coming out?

You might be a smart guy but you need balance in your views when making gross generalizations on "low-quality".

If you have money, you can buy BMW. If not you can buy a chevy/ford (low-quality american cars).

Does that sound sweet?

Kalpesh April 19, 2009 at 1:49 am

Krish,

Money is the reason they outsource. Who cares for quality?

And if you care about it, pay for it.
If companies are paying less to any worker, it doesn’t mean that the worker is low quality. He is doing low quality work is because he is not expected to produce high quality.

Really good people in IT will do better anywhere. Let those be in India or US.

And free trade is a BS. It is free till it works in my favor. EU is better to say it openly, US is not.

US companies have a way to push thru lobbying/corruption and they care less about people. profit is what matters.

Displaced workers are scared to death saying “outsourcing” is the cause. Let me ask, who did it? why they did it? did they consider job lose for US workers?

Krish April 19, 2009 at 7:51 am

A lot of points there, Kalpesh. The low cost of Indian workers is primarily due to the lower cost of living in India and not a function of the quality of the work produced. As India becomes richer, you will see that the costs go up. Right now, we have people from IITs working at a fraction of the costs of an average American programmer. That is how the costs work.

As for free trade, there is some corruption, but except in some areas, generally there is open trade, because of the possibility of retaliation by other countries. Also, in general, if one country does not favor open trade with certain countries to protect their internal crops or products, the other countries can take their business elsewhere. It is not a perfect world, but it is better than you make it out to be.

Kalpesh April 19, 2009 at 1:09 pm

Krish,

There is a difference between low cost vs low quality.

People working for low cost don’t make them low quality. It is just that they are not expected to produce high quality.

Don’t the americans know this when they buy chinese mfgd goods?

Kalpesh April 19, 2009 at 1:17 pm

Ah, the perfect world 🙂

I wish we would really know what goes on behind the scene at every meeting where nation’s head come on some common issue.

It is a jungle. And, it is not a simple equation – “if one country does not favor open trade with certain countries to protect their internal crops or products, the other countries can take their business elsewhere”

Protectionism is here to stay and it has to be. Countries like India will be swamped by West if they don’t protect their local industries (agriculture to be specific).

Our knowledge is limited to what is shown on TV and that too has become propaganda tool for companies.

See this http://video.google.com/videoplay?docid=3833110324043445440 when you get a chance.

Krish April 23, 2009 at 11:33 am

Kalpesh, I watched the video and I think Vandana Shiva is misguided. She has some very incorrect romantic views about how people live in traditional villages. Apparently, she ignores the statistics about infant mortality, malnutrition, overpopulation, disease, starvation, illiteracy, etc. associated with the low-scale farmers in India. These farmers and their families live from hand to mouth. What the supposedly evil corporations are doing is offering them a way out of their misery.

First, we are only looking at one sector of the population which is being affected. If globalization results in lower prices, all consumers benefit, but farmers suffer. So, should we protect farmers so that the rest of the population continues to pay higher prices? Should farmers continue to use outdated techniques that produce lower yields and thus lower revenues for themselves?

Consider other industries. Do we stop Google from making web-based products because it affects the developers working at Microsoft and other *desktop* software companies? Do we ban websites and blogs because it affects the livelihood of thousands of journalists and reporters at newspapers? Why are farmers any special?

If a corporation is only concerned with pure profits and fleeces its customers, it cannot survive for long. If farmers (the customers of the grain companies) did not benefit at all, that company could not continue to be in business. We see this for other products such as televisions, clothes, etc. Why should it be different for grain corporations?

As for monopolies, if they charge a higher price than warranted, it invites other entrants into the marketplace because of the potential of making profits. This increases innovation in the long run. So the monopoly cannot remain complacent. Many free market democracies have regulatory mechanisms against monopolies, though they are not used as much as they probably should be.

You also have to look at history and the big picture. The suicides of farmers are very tragic, but the long-term trend towards industrialization will continue and we need to provide adequate social safety nets. Most developed countries have had this transition from an agrarian-based economy to an industrial economy, and India will have to make the same transition if it wants to improve the living conditions of its people.

Finally, I don’t deny that corporations have their bad side too. That is where democracy comes in. We have to hold our representatives accountable for prevent illegal activities. But a corporation simply interested in creating commercial products for profit is a legitimate thing.

Kalpesh April 23, 2009 at 11:58 am

Here is my views on your reply

"She has some very incorrect romantic views about how people live"
– We are nowhere near to comment on this. I (and you as well) don't have even the basic understanding of a life in village and poor farmers. So, anyone else commenting on it when working with them might have some fairness in it. It is easy to use broadband internet & blog it out and speak about farmers than to be there and see it for oneself.

"should we protect farmers so that the rest of the population continues to pay higher prices?"
I am not talking about protection. Tell me one thing, how has the food price gone up from time to time? has the earth asked for more money to produce? What price component in production of grains has changed significantly for the rise in prices? (assuming there is large demand for it & there is domestic supply for it as well).

"Do we ban websites and blogs because it affects the livelihood of thousands of journalists and reporters at newspapers?"
No.

Blogs/Websites don't replace journalism.
Blog is just one more medium like TV.
The blog that most people write (as far as news is concerned) is their view of some news/books.

The news is already out there because some journalist covered the story. There could be very few bloggers who are journalists. The reverse of this could be true.

"Why are farmers any special?"
They are not special. But they don't have collective voice & they don't blog 🙂

"we need to provide adequate social safety nets."
Completely agree.

In the end, democracy is BS unless people are active and keep watch on people who are our representatives. It doesn't take a lot for representatives to create laws that favor big companies. And, we as individuals don't dictate the law as much as people lobbying on behalf of big companies.

It is quid pro quo. Big cos pay for politicians and politicans create laws or provide relief in form of less taxes/duties to big cos.

There is a quote which says "Eternal vigilance is the price of liberty"

Kalpesh April 23, 2009 at 12:03 pm

Coming back to the topic, the term “low-quality” is different from “low-cost”

The former applies to quality, later to the price.

Kalpesh April 23, 2009 at 12:07 pm

I am offended because some “smart-ass” makes big generalizations to say Indians are “low-quality”.

The work outsourced is not of “rocket-science” quality. So, people working in west who lost their jobs should shout at their employers instead of shouting at their Indian counterparts.

It is companies who wants to cut costs to remain effective in world market and hence outsourcing.

Krishna Kumar April 24, 2009 at 9:09 am

"We are nowhere near to comment on this. I (and you as well) don't have even the basic understanding of a life in village and poor farmers. So, anyone else commenting on it when working with them might have some fairness in it. It is easy to use broadband internet & blog it out and speak about farmers than to be there and see it for oneself."

I would have agreed with that if Vandana had pointed out the problems in our village. But she is apparently saying that life in the villages following traditional agricultural methods is perfect. She ignores all the statistical facts about poverty, disease and malnutrition. I don’t have to stay in a village to understand this. These facts are easily available on any website.

“In the end, democracy is BS unless people are active and keep watch on people who are our representatives. It doesn’t take a lot for representatives to create laws that favor big companies. And, we as individuals don’t dictate the law as much as people lobbying on behalf of big companies.”

True and false. In the United States, there are many activist groups (labor, environmental, religious, etc.) that lobby on the behalf of ordinary citizens. Consider the fact that thousands of laws have been passed in various countries to protect the rights of citizens against unethical behavior by companies.

Just because we have democracy doesn’t mean that it will work automatically. People have to participate in civic activities and try to influence their government.

Claire Richardson June 10, 2010 at 2:33 pm

There is a rapid growth of outsourcing these days as manufactures try to cut cost and maximize profit.

Jack Smith July 27, 2010 at 1:57 pm

outsourcing is really necessary specially if you want to cut the cost of production.”;.

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