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August 17, 2003

I.T. outsourcing & the bureaucracy

Robert Cringely has two articles related to I.T. outsourcing. The first is titled Body Count: Why Moving to India Won't Really Help IT and the second is called May the Source Be With You: IT Productivity Doesn't Have to Be an Oxymoron, but Outsourcing Isn't the Way to Achieve It. The underlying problem has to do with bureaucratic inefficiency (a conflict between the proximate incentive of division managers & the ultimate goal of a given company). I have excerpted some interesting parts below, you should read both columns in full, Cringely is all about hyperbole, he's a tech columnist after all, and he has his biases, but he's always entertaining....

Update: I have to include the sequal to Foreign Customer Service SUCKS!.... There were a few things I left out. Not only does DELL's customer service suck, their automated touch-tone system sucks. For instance:

  • Tech Support guy tells me he can't track my order, but he'll forward me to the automated service tracker
  • Automated service tracker wants my service tag, I enter it
  • Automated service tracker forwards me to another set of touch-tone options, another one among these is listed as automated service tracker, so I select it
  • Automated service tracker #2, which has a malesque voice instead of a female one, asks me to enter the service tag, I do, and I'm forwarded too....tech support guy!

Something is really wack at DELL. On the other hand, a shitty automated help system is CHEAP compared to people, and shitty foreign customer service is CHEAP compared to native English speaking customer service, so profits are probably going up. Should I even add that I asked them to look at my modem because it was acting up *twice* and the form that shows what the technician tested indicates that the modem wasn't examined?

From article one:

There is somewhere in almost every company a spreadsheet showing a cost-benefit analysis for every worker. It all comes down to a single lifetime number that is the difference between the expected earnings to the corporation that are made possible by the direct labor of that employee, and the total cost of that employee to the company in current wages and future benefits. Nobody admits the existence of this spreadsheet, which is probably illegal, but it is there. And at some point, it indicates in many cases that a worker has reached a condition where they are likely to cost the company more in future benefits than they will earn the company through future labor. At that moment, that employee becomes expendable....
Big IT companies think in terms of billable hours, and the way to maximize billable hours is by having lots of workers. Headcount is everything. It not only determines potential revenue, it also determines political power. If my division is bigger (has more people) than your division, I am more powerful you, you worm.

Since the start of the PC revolution, Information Technology has come to pervade the enterprise. Every desk has a computer, and every computer has a technician. A few years ago, experts started noticing that the productivity gains we expected for our MULTI TRILLION DOLLAR investment weren't coming through. "Next year," said the Chief Information Officer on his way to hiring a bunch of new people. "Next year." Only next year never comes.
Which brings us back to India and offshoring. So IBM and a number of other companies will send jobs to India. Profits will rise, but no head counts will drop. Head count will rise, in fact, because the heads are so much cheaper. Productivity for these offshoring companies will not rise. It will fall. It will fall simply because of the added overhead to support those longer information supply lines. And service to customers will not improve at all.
Just as an example, there are programmers who are a hundred or a thousand times more productive than their coworkers, and every Silicon Valley startup is constantly on the lookout for that kind of genius. Those people work in big companies, too, but their impact is muted. What manager at any big company would trade 100 workers for one, no matter how smart the one? No manager would do that, and yet they should. Power and efficiency are in conflict here. And that's why we can scale up the software and the hardware, gaining efficiencies along the way, but we don't do that with people. It's not that we can't, we just don't. It is a disservice to customers and a drag on earnings. There is no rational justification at all for this headcount mentality, yet it still exists.

From article two:
Now another question: Why are Linux computers gaining in popularity with large organizations while Macs, which are based after all on BSD Unix, aren't? While there is certainly a lot to be said for Linux in competition with various flavors of Windows (Linux is faster, more memory-efficient, more secure, has more sources of supply, supports many more simultaneous users per box in a server environment, and is clearly cheaper to buy), the advantage over Macintosh computers is less clear.

Again, it comes down to the IT Department Full Employment Act. Adopting Linux allows organizations to increase their IT efficiency without requiring the IT department to increase ITS efficiency. It takes just as many nerds to support 100 Linux boxes as 100 Windows boxes, yet Linux boxes are cheaper and can support more users. The organization is better off while the IT department is unscathed and unchallenged.

I am not claiming that every organization should throw out its PCs and replace them with Macs, but the numbers are pretty clear, and the fact that more Macs don't make it into server racks has to be based on something, and I think that something is CIO self-interest.

Macs reduce IT head count while Linux probably increases IT head count, simple as that.
What's ironic in this IT outsourcing is that the end game has not the big U.S. companies winning, but their Indian subcontractors. This isn't rocket science, and the Indians are going to quickly see that they can cut out their U.S. employers and go directly to the customers. It won't happen immediately, but eventually every U.S. outsourcing vendor will try to bring the work back in-house for this very reason. And we'll be paying for it all.

Godless comments:

Cringely is often smart, but he's being dumb in these articles. He's correct that outsourcing is partly a legal way to get around anti-age discrimination laws in the US. But it's more than that - it's about getting competent programmers at much lower prices than in the US. Part of that is because of US regulations (like hiring & firing restrictions, etc.) and part of that is because of purchasing-power-parity considerations. That is, the "anti-age discrimination" laws are just one of many hiring & firing regulations that drive up the price of skilled labor.

All the rest about "selfish IT departments" is foolish. If the IT departments were so selfish and non-productive, at least a few companies would start to pare them down as the reductions would positively impact the bottom line. That's capitalism at work. Oh yeah, and as for the bit about why people don't use Macs on the server side? It's because they suck (expensive + limited software).

Outsourcing's success or failure will also be capitalism at work. Maybe these Indian & Chinese programmers really are as uncreative and foolish as the guys at Zazona and VDare think. If so, the product will suck, and we'll see a return to US programmers, as it will negatively impact the bottom line.

Personally, I consider such objections (often filled with cultural ad-hominems against "suttee", etc.) to be the wishful thinking of displaced nativists. This kind of economic nationalism was encountered and defeated in the 80's when union workers tried to prevent foreign competition from Japan. It's rearing its head again in response to skilled outsourcing and "trade deficits", as populists like Buchanan jump on the bandwagon. The fact is that free trade boosts the standard of living of the consumer, and those who're rendered obsolete need to just suck it up and retrain. Tariffs and protectionism hurt everyone, as the recent steel tariffs fiasco shows:

Before the tariff, 5 percent of the steel used in the United States was imported. Because of the new 30 percent tariff, the other 95 percent also has risen in cost, said Alexander. This means that many automotive parts can no longer be bought at a reasonable price. If the steel tariffs continue, there will be a wave of plant closings, predicts Alexander.

" What we did in trying to save steel jobs is destroyed a lot of steel-consuming jobs," he said.

Buchanan's philosophy is just nationalism plus socialism. Like its economic handmaiden (autarky), we need not be reminded of the long list of failures such an ideology has occasioned.

Posted by razib at 02:21 PM

"the advantage over Macintosh computers is less clear."

Erm, how about the fact that Apple doesn't even manufacture the kind of computers most companies need - i.e. low-cost minitowers? Oh, that, and they have a decent markup over PCs.

(This coming from a mac user btw - i lub my iBook, but I'm not a zealot. Yet, at least =P)

Posted by: Döbeln at August 17, 2003 04:01 PM

Well, I read both articles and the guy has a point but there's a lot he doesn't mention. I have an hypothesis, for which I have only anecdotal evidence, albeit drawn from 20 years experience in the industry, that most if not all of the IT sector is held together with chewing gum and bailing wire.

I believe that starting in the early 1990's the "hotness" and visibility of IT reached a critical level and began to attract many non-IT types who wished to advance their careers by attaching themselves in some fashion to the rising star of IT. Since only a few people can actually code (GC loves his math but believe me simple entity modeling and structured logic is terra incognito to the vast majority of business types) this created a situation in which a kind of Soviet bureaucracy grew up around IT with more and more non-technical types influencing more and more development decisions. There was even a subtle form of disdain for people who did the nitty-gritty on the part of those who made presentations and created "specification" documents that were vague and almost unusable in many cases.

To create a business process that is robust as well as being an adequate model of reality and then implement it in software requires considerable thought and a quasi-scientific method. And it takes time. None of those requirements were being met in the new environment in which huge documentation was required for management but basic skills, tools and data were ignored.
I saw this pattern at Nortel, divisions of IBM, the US and Canadian governments and Ford Motor Company. I've heard similar stories from people I trust at GM, Motorola other major corporations. I don't know what it's like at Microsoft but I have to say their products seem flakier than they were 10 years ago.
Take it with a grain of salt if you wish - I am rather disgruntled - but I saw what I saw.

So your experience with Dell customer service doesn't surprise me at all. I suspect we will see more, not less, of this sort of thing in the future.

Posted by: John Purdy at August 17, 2003 07:24 PM

well-another thing, is that since the non-tech people don't know what the fuck is going on half the time, the tech people can whatever the hell they want to them and they'll buy it, leading to projects that take a long time because contracters can bill more hours, etc. Joel Spolsky talks about that sort of stuff sometimes, and asserts that having a project manager from an engineering background is a must...

Posted by: razib at August 17, 2003 08:01 PM


This is regarding your comment somewhere re: Buchanan and anti-free trade thought etc...

I couldn't care less either way (free trade vs. anti free trade) because I don't really understand academic economics anyway... but I would like your critique on Buchanan's latest in www.amconmag.com (one of his standard rants against free trade)... the point I'm trying to make is that to a layman like me, a lot of what he says makes a lot of sense... but I'm sure it must be wrong for otherwise free trade wouldn't be considered such a great thing...

Posted by: turkey time gobble gobble at August 17, 2003 08:32 PM


Ok, thanks for biting...

There are 2 things especially that I want a perspective on...

1) "It doesn't matter whether we make potato chips or computer chips"... does it really not matter? it may not matter where the stuff is made.. but doesn't it matter who owns the facilities where the stuff is made??

2) Trade deficits: by having a $500 billion trade deficit per year, what america is really doing is giving $500 billion to foreigners... who keep coming back to buy pieces of america... it's not inconceivable that at some time in future, a majority of assets (land, buildings etc.) in america are owned by foreigners... is that good ?? i've heard, for instance, that a large part of miami (or some other city in florida) is already owned by the Saudi royal family...

and a little, slightly-leftist rant from me...

>>individual energy conservation: i feel that US has gone off the deep end in terms of energy use... my house is heated 24 hours during winter even though i'm out for 12 hours (i'm aware that it's not so simplistic and even shutting it off when i leave is a problem because it'll take a couple of hours at least to warm up the house when i get back etc... but still)... during summer, the building i work in has its airconditioning on for 24 hours of the day... i know this is not unusual but standard in most of USA... isn't this sheer waste? are we the only crazy ones?? what is the situation in germany for instance? i wonder if they keep their buildings climate controlled 24/7/365 ??

Posted by: turkey time gobble gobble at August 17, 2003 11:13 PM

get a mac and stop moaning

Posted by: Fredrik at August 18, 2003 01:01 AM

i've heard mac's support sux too....

Posted by: razib at August 18, 2003 02:28 AM

A bit offtopic, but as regards free trade and the trade deficit: what we have been selling (to finance our trade deficit) is not so much real estate (though there is some of that) as financial instruments. Stocks and US treasury bonds. The $500 billion annual deficit that the federal government runs this year will help to prop up the dollar's value, which will not help US manufacturers sell their products (though it does make raw materials easy to get).
The overall picture is complicated. It would be easy to rant and say that our manufacturing base is being eroded, and I do think there is some distortion in that direction. But in the long run the ones who are really screwed may be the foreign holders of those financial instruments, who are currently financing our fine standard of living and may not get as much for their dollars as they are banking on. So I'm sort of ambivalent...

Posted by: bbartlog at August 18, 2003 07:49 AM

i've heard mac's support sux too....
I don't think so


Posted by: fredrik at August 18, 2003 08:42 AM

Sorry that computer is still troubling you Razib.

Most companies outsource their customer support nowadays, I don't know if Dell does or not. They pay contractors on a per call basis. I used to work for a company that contracted out to companies doing this. The pressure is extreme to get the number of calls as high as possible. So keep in mind that as soon as that rep answers the phone his goal is *not* to fix your problem but to get you off the phone ASAP. We used to require our reps to have at least 80 calls in an 8 hour day, including breaks. The make or break point is around 4.5 minutes. The model they use shows that when you make that first support call they start losing money on you, and if you make one call the likelyhood that you will call again is dramatically increased. They'd rather cut you loose than mess with you. Its a simple business calculation.

Expect customer support at Info services type companies to get worse before it gets better and learn how to fix your system yourself, that's my advice.

Microsoft's support is good BTW, I had some trouble when I first installed XP and they spent about 45 minutes on the phone with me (my dime). They fixed it too.

Try their e-mail support. Might work better for you. Might be difficult with no modem though. :/

Posted by: Katy at August 18, 2003 12:05 PM

Like I say, Apple's support may or may not suck, but I never have to call them, so who cares?

And as for free-trade vs. not - it's a complex issue, and not amenable to soundbite. But keep in mind one thing: Ricardo's original defense based on comparative advantage only holds for immovable factors of production, i.e. California has a good climate for making wine, so it trades with Maine, which has good waters for lobsters. Californians are better off spending their time making wine than fishing for lobsters, and vice versa. In a world where the factors of production are easily movable, it is not clear that comparitive advatage is the win-win situation Ricardo claimed.

If a factory (or call center, or coding shop) can be just as productive in California as in India, but locates in India because of lower wages, then it is not clear that the U.S. is better off (although India probably is). What the U.S. gains in profits and lower costs to consumers it loses in wages paid. In the California - Maine example, it makes sense to trade because both will be better off in their own currency, since the output per hours worked is greater overall. But in the case of U.S. - India, the cheaper costs are an artifact of the relative exchange rates - the work itself isn't been done any better, but since the overall productivity of Indian society is so much less, an hour of worker's time is worth less there, in the local currency. It's not a true productivty gain. It's greater productivity that increases the wealth of a society, not cheaper labor - which is all India can offer the U.S. right now.

Of course, there are other issues involved than pure comparative advantage - like the impact on innovation of protected industries - but those can be tricky, too...

Posted by: jimbo at August 19, 2003 04:14 PM