Tech Outsourcing and the Dwindling CS Major

In my discussion a few days ago about the Anita Borg get-together at Google, I discussed the impact of outsourcing, the loss of tech jobs, and parents refusal to pay for science degrees as interconnected.

Karl Schoenberger of the Mercury News SF Bureau actually decided to drill down on some of my assumptions. So for those of you who wanted more, I'm going to let him cross-examine me for your reading pleasure:

Karl: I can see how taxpayers subsidize free trade when the US Treasury and the Fed have policies in place that weaken the dollar against foreign currencies, making our merchandise trade more competitive.

Lynne: As seen with such stars as Enron, you can do a lot with clever macro economics. Lots of fast, little transactions add up fast. And it can take a while before the accountants with the eyeshades see the net conclusion.

Karl: But I'm a little unclear how that affects trade in the service industries. Wouldn't a weaker dollar make software outsourcing and overseas call centers relatively more costly, and suppress that flow? Econometrics is not my forte, but maybe you can explain.

Lynne: Boy you ask a lot for an email! I'll try to boil it down the way I've heard it explained and hopefully not lose my way - it's all in the productivity. Productivity doesn't necessarily stay the same while expense drops. This is a hidden basic assumption. There's always cause and effect here - an interaction - where the impact of one lags the other in time.

The gist is that the weakened dollar may not necessarily offset enough in the trailing end of the transaction due to disposable income reentering the economy on the front end if the rules of the game change during the process of the transaction. This is obvious if you're looking at economics from a strictly mathematical systems viewpoint, and most of the Nobels nowadays are won by a careful analysis of closed and open systems.

For example, you expend a certain amount of money to get a service, like a contract. The problem is that you aren't necessarily getting back what you got back before once you go outside of your legal / accounting business environment - you've left your well-understood closed system for a larger one. Your basic assumptions of business process now may no longer apply, and you've got to reexamine them. Effect lags cause here due to the lack of experience and information to build a new set of fundamental assumptions, where in the US we have a consistent cause-effect reinforced by law and regulation.

Since outsourced services, to follow your point, take longer to receive the results (due to the communications / distance / culture effects), the expense reduction does not coincide with the productivity, so a few quarters of offset may distort the net effect of the outsourcing - e.g. it may look initially better / worse, then later worse / better. So in cost accounting terms, we lose the visibility of tracking the specific contributions in a cause and effect way.

International operations must operate on larger time intervals, the hype notwithstanding of instant communications, because people don't work globally at the same time and same efficiency of computers. The decision time still takes the amount of time you trust to make the decision. If you don't intuitively know the people / trust them / have a daily relationship, the deal flow takes a great deal longer to bring to closure - it's tough enough right now here in the US, and no one's meeting their quarterly targets because the relationships are fractured. Think how tough it is to build new relationships outside the US.

It's true, you can hire a guy who knows a guy who has an in with some high level official who... and so on, but seriously, if the competitive landscape is slow to change, the net effect is a transient change and management structures can compensate. But if the landscape changes faster than the ability to respond, the cost advantage is drowned by the losses incurred in using it.

An example of where the subsidies come from is in the capital used in underwriting foreign operations yet receiving tax breaks for reinvestment intended for improving domestic productivity. Many other examples like this exist in the current domestic tax code, that are now externalized through foreign money flows. This was not intended when the tax codes were written, and it isn't illegal to use it in a novel way, but it still wasn't intended to be used this way.

The accounting tricks are in the catagorization - they ARE currently claiming to improve domestic productivity by outsourcing. The counter to this is seeing this as an evasion not unlike Union Carbide's involvement in Bhopal, whereby their attempts to avoid environmental / safety costs eventually led to many deaths that would have been avoided if these safety and environmental regulations had been implemented as in the US, along with the subsequent death of that company (which was sold).

For an example of this, let's look at Intel's investments in China, including underwriting graduate education, while cutting such programs in the US and claiming that the US doesn't have enough "well educated" people to be employed. Does this really hold water? At a basic level, it defies common sense to say this to out of work US graduate degree holders - I have heard from these people, and they exist and make their market decision, which is to tell their children to abandon technology and innovation.

Remember Lincoln's words - "You can't fool all of the people all of the time". We've reached that level here.

These things have precedence. Think back to the 60's when we had "the rise of the multinationals". It's just a variation on that cycle - but this one promises to be extra brutal to US interests. Remember, the system is larger and the assumptions don't hold as they did for a smaller US system.

Do the multinationals really have it all figured out for shareholders? I'm not so sure. And do you trust them to make good decisions for the benefit of our country's interest? Probably not.

The kicker for this really came from Sarbanes Oxley - I chatted with a gentleman a few weeks back who really knows this cold and has his own views here - but that's another story.

Karl:Your note of unemployed parents encouraging their kids to study business is frightening. Pretty soon we'll have brokers trading college student futures at the commodities arbitrage exchange in Las Vegas and Atlantic City.

Lynne: I hope not (laughing).