Corporate Slash-and-Burn Cultivation In Action

Outsourcing may be the next bubble to burst

The rage for outsourcing to “low wage” economies has yet to run its course, but there are already signs that companies coming into the game late will find the process far harder.

An article in The Economist for October 5th 2006 (subscription required) pointed to a growing problem affecting the world-wide corporate phenomenon of job outsourcing: a severe shortage of talent. It seems that corporations hastening to outsource skilled work to low-wage economies, like India, are finding the supply of skilled people is no longer there to make the process work as it did.

I have seen other news stories suggesting that the job outsourcing “bubble” is coming to an end. Writing in The Guardian for October 14th 2006, Ashley Seager said:

The rush to outsource work to countries such as India where labour is cheaper appears to be easing with the size of the global outsourcing market likely to shrink for the first time this year, research suggests. The third quarter has been the slowest for four years as the level of outsourcing by IT firms has fallen back, according to research from offshoring advisers TPI released yesterday.

That article suggests that the market is now “maturing,” and no future large-scale expansions are expected. The value of outsourcing contracts by companies around the world fell by 2% in the first nine months of this year, the first drop in a decade.

One possible reason for the decline is that everything that can easily be outsourced has already been sent overseas. That could, of course, be a part of it, but The Economist’s article suggests another process: poorer, Third World countries do not have the educational resources needed to maintain a constant supply of skilled people; and those now trained and experienced tire of working for low salaries at home. They take their skills and move to work in the very countries that earlier sent work their way! India is a prime example. A few years ago, it had a large pool of skilled, but under-utilized and under-paid people, especially in IT specialisms. As a result of India’s cultural emphasis on the importance of education—plus the legacy of English-style schools left from the days of the British Empire and the widespread use of English among educated people as almost a first language—it was ripe for British and American corporations to move in and exploit the waiting talent pool.

If this process continues, there will soon be fewer and fewer low-wage countries with a sufficiently educated workforce to allow for extensive outsourcing. Globalization is a two-edged sword: you can globalize work, but you will also globalize expectations and the market for scarce talent.

Now, it appears, outsourcing may be a victim of its own success. The school systems cannot keep up. More and more talented people are moving overseas in search of better incomes. As new corporations try to move in—too late—there are problems in finding enough skilled people for their work. Wages are rising as talent becomes scarcer. I wonder how long it will be before India is no longer a high-skill, low-wage haven for Western businesses? China is introducing labor reforms to outlaw sweatshops and exploitation and increase wages (a move strongly opposed by foreign employers, with American manufacturers to the fore, according to the Sunday Times). With their accession to the European Union, citizens of the former Soviet-bloc countries of Eastern Europe can work anywhere in Europe, following the natural urge to seek higher salaries than are paid in their home countries. If this process continues, there will soon be fewer and fewer low-wage countries with a sufficiently educated workforce to allow for extensive outsourcing. Globalization is a two-edged sword: you can globalize work, but you will also globalize expectations and the market for scarce talent.

Besides, outsourcing was only ever a quick-fix expedient to boost corporate profits in the short-term. In this, it is exactly like peasant slash-and-burn agriculture in countries like Brazil and elsewhere.

Outsourcing isn’t the first panacea likely to turn out to be a short-term “bubble,” and it won’t be the last. Like most of the others, those who got in early (and get out soon) will make a good deal of profit. For the rest, trailing along later and dumbly following what is, supposedly, best practice, there is little or nothing to be made and probably a great deal to lose. Besides, outsourcing was only ever a quick-fix expedient to boost corporate profits in the short-term. In this, it is exactly like peasant slash-and-burn agriculture in countries like Brazil and elsewhere. Those who grab a piece of virgin rain forest, cut down all the trees, sell the timber, and burn the rest of the vegetation, can grow massive crops in the hitherto undisturbed soil . . . but only for few years. With no nutrients put back, the soil fertility crashes and the crops fail. The farmer has “cashed out” many thousands of years of slow accumulation of nutrients in a few harvests. Now it’s time to move on and grab another piece of rain forest, leaving devastation behind.

It’s the same with outsourcing. Grab a short-term benefit by dumping expensive Western workers in favor of underpaid foreigners. But don’t put anything back into the countries whose people you are exploiting. That would raise costs again and ruin the economics of outsourcing. If local wages start to rise, move on elsewhere and repeat the process. First India, then China then . . . maybe Vietnam. But like the rain-forest, Third World countries where English is spoken and education has been almost to Western standards are finite in number. In time, you will run out of places to go. Then the party comes to an abrupt end.

We aren’t there yet, but maybe the early signs are just appearing. Then those organizations that stayed behind and invested in their original workers may have the last laugh.

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