INTELLIGENT SYSTEMS

 

Volume X, Number 4 October, 2003

 

A quarterly newsletter for clients and friends of Chenault Systems

 


Using Small Consulting Firms Keeps Jobs at Home

Instead of allowing your in-house information technology (IT) group to outsource software development projects to foreign countries (“offshore”) or using expensive large firms, who will also send programming offshore, why not use a small consulting firm, who will do all the work locally?  First, let’s review why development is moving offshore.

Hurtful federal taxes, inane regulations, lower hourly rates and a short-term outlook by American companies make offshore outsourcing very appealing at first glance.  In addition to fewer regulatory irritants and the seemingly obvious labor savings, personal vested interest often plays a part in the decision process.

Large corporations may outsource offshore for short-term savings.  Immediately, the bottom line looks better.  Stockholders are happy with the short-term results.  The CEO looks better, and likely he gets to stay a little longer.

In-house IT may outsource offshore to preserve the management hierarchy.  Fewer employees are needed, being replaced by less costly foreign labor.  The department’s bottom line looks better.  The CEO and CFO are happy.  IT management looks better, and maybe they get to stay a little longer.

However, other issues often overshadow the obvious cost savings.  It is true that other countries are catching up with America in education, training and work ethic; but, offshore groups still tend to have different cultures, work ethic, language, time zone, and lower technical ability, all making effective communication more difficult.  Good communication between team members, who know each other very well, is the key to success to any project.  Communication problems inevitably translate to delays and rework, which add to cost (but, in later fiscal quarters, which allow various groups to get their bonuses first … and possibly stay a little longer).

The stockholders may see their investments dwindle as capital pours out overseas and the project is not completed, or never reaches the envisioned end.  The United States tax base erodes as workers are “down sized”, forced to take lesser paying jobs if any at all.  Workers not finding jobs eventually require financial aid, drawing on the previously mentioned eroded tax base.  Fewer people being employed and or under-employed translates to a decrease in purchasing capital, which may even result in the corporation’s revenues decreasing.  No one wins … except possibly those drawing the bonuses…and they get to stay a little longer.

Outsourcing to large American consulting firms, which is the same story as above but just one level removed, may not be the answer either.  Large consulting firms outsource offshore to preserve large profit margins.  In addition, many large consulting firms have formed “strategic alliances” with well-known software companies, making them representatives of products, which tends to compromise consulting independence and objectivity.

Small firms tend not to ship work offshore.  They tend not to have strategic alliances with software companies.  These are the true points of difference.

It is our opinion the same work can be performed, for the same cost, with an experienced small firm that communicates and manages projects well.  The main difference is the work will be done locally while using more sophisticated consulting techniques, thus enhancing the consultant/client relationship.

If the offshore outsourcing trend continues, it is only a matter of time until Indian, Chinese and Russian workers will come to the same conclusion as their Japanese counterparts did some time back:  They too will demand higher wages.  Then, work will again migrate overseas, this time back to our shores.  Meanwhile, it will be our economy and our people that will suffer.  In the long run, shipping professional jobs overseas is bad policy.

To help stave off this outflow, we need to cut back income taxes and federal mandated benefits that impede the private sector and slow down wealth creation.  The following article is from WorldNetDaily, a newspaper from the Internet.

Downsizing Jobs,
Outsourcing Lives

By Ilana Mercer

Posted: May 28, 2003
1:00 a.m. Eastern

© 2003 WorldNetDaily.com

The wholesale exporting of manufacturing jobs from the U.S. to countries where labor is cheap was easier for this writer to chalk up to the smooth workings of the free market than was the loss of 560,000 high-technology jobs over the last two years. There's nothing like first-hand experience to bring about a rude awakening as to the direction the American economy is headed.

The breadwinner in this family, we presumed, was not in an easily displaced occupation. Relatively young, with a Ph.D. in electrical engineering and a stellar design record, it was not unreasonable to think that an economic powerhouse like the U.S. needed his skills.

Alas, by necessity, the outsourcing or the exporting of high-income and highly skilled work to places like China and India, where wages can be as low as one-tenth of what an American with similar skill-set commands, has been the topic of discussion around our dinner table.

According to CNN's Lou Dobbs, of the 2.5 million jobs that have been shipped abroad over the past two years, a large number are such high-productivity jobs.  A company like Ernst & Young, for instance, is outsourcing, albeit through a contractor, finance and accounting services to India.  Dobbs estimates that 1 million people across India “work for U.S.-based companies, like GE Capital, Oracle and Microsoft.”

The trend is growing.  The American economy will be employing fewer engineers, accountants, information technology workers, stock analysts, radiologists, architects and research and development scientists – all highly trained top earners who ought to form the backbone of a vigorous and vibrant economy.

A company like Ernst & Young, for instance, is outsourcing, albeit through a contractor, finance and accounting services to India.

And I'm talking the lock, stock and barrel loss of careers, not a temporary shortage of jobs.  When manufacturing jobs were lost en masse, economists promised we'd become a service-oriented economy, quips columnist Paul Craig Roberts.  Now that professional services and high-tech jobs are moving offshore, often with no more than a click of the mouse, what shape is the economy destined to take?

A very poor shape indeed, I venture. Exporting jobs to where labor is cheapest may be the most efficient allocation of capital, but it results in unemployment in the U.S. and is a contributing factor to a trade deficit that increases by an average of $1.5 billion a day.  To the argument that the cheap goods sold back into our markets offset the loss of exported jobs, there is only one humane response: Tell that to the unemployed who are too poor to purchase the goods.

If a company were to buck the tide and stay put, it would, however, soon go out of business because it's competing with dirt-cheap imports.  For their part, consumers expect that every new model Pocket PC should have more features yet, at the same time, be cheaper.

On the highway to Third-World status, we've thus been exporting high-wage jobs while importing one very costly problem: an abundance of poor, Third World legal and illegal immigrants.  This influx, encouraged by successive administrations, further increases unemployment and contributes to the suppression of wages.  The “real earnings of those in the top 10 percent fell 1.4 percent over the last year,” reports Roberts, with “the real weekly pay for the median worker falling by 1.5 percent.”

The allure of outsourcing is, of course, cheap labor, although it used to be that American workers, while expensive, were also highly productive – this was a very skilled, well-educated and highly capitalized work force. Weak property rights and a dicey rule of law in the Third World outweighed the enticement of a cheap labor force. On balance, it was once viable for companies to stay in the United States.  Things, however, have changed. Doing business in Asia, for instance, where the vast work force is now relatively skilled, is far less precarious and so much cheaper that companies are willing to risk diminished legal protections.

On the highway to Third-World status, we've thus been exporting high-wage jobs while importing one very costly problem: an abundance of poor, Third World legal and illegal immigrants.

In the U.S., companies must, moreover, endure endless, punishing, government-imposed regulations, which make doing business and staying competitive increasingly difficult.  To the cost of the assorted alphabet soup of regulatory agencies a corporation must pay off, add exorbitant corporate taxes and expenses like workers compensation insurance.

Factored into the wage price the corporation pays are large government-imposed costs.  The company's before-tax wage package must offset the cost of the income-tax burden as well as the cost of a government rape known as Social Security.  Put it this way: the top high-tech employee rarely sees more than $70,000 in after-tax income, despite the fact that on paper he has a six-figure income, which the company duly pays.  Without these onerous government taxes, this employee would cost the firm 30 to 40 percent less.

Consider that the annual Social Security burden alone on an American high-tech employee, borne by the employer, is the equivalent of the annual salary of a high-tech worker living well in India, and the logic of outsourcing is self-evident!

In the U.S., companies must, moreover, endure endless, punishing, government-imposed regulations, which make doing business and staying competitive increasingly difficult.

Government omnipresence makes the notion of free trade a misnomer – trade is anything but free.

True enough, the abler American worker will not be completely replaced.  The breadwinner in this family no longer does what he loves and is so good at doing, but rather, spends his days managing – correcting and coordinating – foreign workers, while watching colleagues being downsized and lose occupation and career.  Cheap is the choice, but there's a price to pay.

Reprinted with permission of the Internet newspaper WorldNetDaily.com copyright 2003.

To learn more about Ilana Mercer, visit www.llanamercer.com.

A logical comparison:

 

Traditional Large Firm

Chenault Systems

Average Billing Rate

Very large to maintain large profit margin

Reasonable to maintain client relationship

Percentage of Development Done Offshore

30%

0%

Number of “Strategic Alliances” with Software Vendors

Several

None, we are objective consultants

Quotes Worth Noting

“There’s much more to going offshore than sending out an RFP, selecting a vendor and doing it.  You have to go to extraordinary lengths to establish goals and objectives first.” -- Marty McCaffrey, Executive Director, United Technologies

“The vendors say you can throw offshore jobs over the wall and start saving money right away.  You have to build in up to a year for ironing out cultural differences.” -- Hank Zupnick, CIO of GE Real Estate