Outsourcing – Lessons

US Companies with large local development organizations have been restructuring to include offshore resources from China and India for well over a decade. Sufficient information is now available to review how these efforts are working and if you are interested in doing this now, here are some things to consider:

1. Resource costs are still low: The most apparent of all is immediate reduction in short-term resource costs. Despite improved economic conditions over the decade in India and China, this still remains a reality and a primary motivator for out-sourcing. As these large populations have among them large rural populations, when one city gets expensive another steps right in and keeps the cost of a comparable engineering resource at about 1/3rd to 1/4th the cost in the US. Labor laws and standard of living expectations are increasing the cost but there seems to be a careful effort by these governments to manage that such that they continue to remain attractive to outsourcers in the US. Electronic city/cyber city creations, keeping their currency low, seeding the US with outsourcing firms are all proven strategies employed in particular by these two countries. It is a fact that the gap between resource costs in the US and these countries has reduced. Due to a sustained poor economy in the US and double digit growth in these countries, costs have gone down in the US and increased there. However, the costs are still quite depressed overseas for it to make a difference in slowing or reversing this outsourcing trend.

2. Culture: Among the foreign teams, expectations to not only tolerate but appreciate their cultures has grown steadily. This is evidenced by keeping local work hours, following local holiday schedules, allowing English to be spoken with an accent or in China, limiting English speakers to those who interface with the US alone, using local names and expecting Americans to become familiar with those names are all trends that have changed from an “act American” philosophy a decade ago to local pride. American teams can no longer expect offshore teams to work odd hours to overlap with them. All teams have to be flexible in working very early or very late. US teams are now expected to be specifically trained in the cultures of these foreign teams where a decade ago it was okay to be agnostic and expect these foreign teams to know and appreciate US culture.

3. Regulations: Regulations are still relaxed in offshore centers. However, several US laws regarding foreign operations, be it in customs and immigration, labor laws, taxation and anti-corruption practices have become more stringent and require open and clear operations with well kept records. It has now become essential to train US employees who deal with foreign resources in these matters.

4. Intellectual property: Long term employee-employer commitment and loyalty has declined dramatically in the US. Most opportunities are considered short term. While the goods and bads of that trend are for a separate and important debate, what’s relevant to this discussion is that with outsourcing comes letting go of intellectual property rights. NDAs and other employment contracts that require confidentiality and attribution and limit scope of engagement to somehow contain IP are meaningless. Growing people through allocation of activities grows creative thinking, maturity and confidence. This will contribute to local intellectual property rise competing with US IP. Due to this maturity and confidence, component development has grown into full product development and you can now see full organizational structures including customer facing business and sales teams in offshore locations. A well developed online supply chain has further greatly reduced the need for a US front-end presence. They can sell direct to US customers.

5. Local people and the US economy: Offshore intellectual property development is a good lead into this crucial impact of offshore development. US locations used to control architecture and design and outsource just development (coding). As coders grow they naturally want to participate in design and start controlling larger pieces of the project. This is essential for loyalty, commitment, excitement and other soft but critically needed behavior from offshore centers. Over time an offshore team consumes what’s traditionally done in the US. As their ability matures, there is more pressure on US management teams to outsource “richer” jobs, as now they can. Architecture is outsourced. US technical leaders are expected to take up positions overseas if they wish to remain or grow in that function. Entire product development is now outsourced with only integration, service and some customer facing teams, especially for support purposes in the US. The tide has turned so to speak, where the “good” R&D jobs are abroad and the jobs less popular among engineers such as integration and customer support are in the US. This trend further precipitates lack of development opportunities for junior US engineers and almost perfects the cycle of outsourcing. What was once optional is now a necessity.