November 5, 2005

View from Silicon Valley- Non sequitur

(c) copyright View from Silicon Valley, 2005.  All rights reserved.


"Do you walk to school or carry your lunch," was the classic example of a non sequitur when I was growing up.  (Never you mind what decade!)  Once in awhile somebody would try to answer, but anybody who thought for a moment, or two, quickly figured out one question had nothing to do with the other.  One of the snappier answers was usually along the lines of, "What does that have to do with the price of tea in China?"  When somebody answered like that, you knew they were paying attention.

It feels lately like the apologists for off-shoring are testing to see if we're paying attention.  They laid low for awhile.  We haven't seen their headlines for several months.  However, the rationalizations and touts for off-shoring, or "outsourcing" as they call it to try and make it sound less painful, are back.  Before we point out the non sequiturs and general foolishness of this week's claims, let's review a few points.

First, let's all take a deep breath here and concede a few points about off-shoring:
-Off-shoring is not going away and nobody can stop it;
-The earlier a company off-shores, the better chance they have of showing a financial gain;
-Even if a company's net from off-shoring is negative, the jobs will not come back;
-Regardless of when, or if, the 8-to-1 (or 10-to-1 or whatever) wage differential closes, selling to the Chinese and Indian middle classes still represents the next big wave of opportunity.

Second, let's review some of the prior claims:

In "McKinsey is twisting the data", July 24, 2004, we found McKinsey Global Institute sold their soul for some consulting contracts by loudly proclaiming companies save $1.14 for every $1 sent off-shore.  Maybe it wasn't just our web site pointing out that if this was actually true, why wouldn't companies off-shore everything?  Could it be because the average US employee returns more than $1.14 for every dollar spent?

When you dig into McKinsey's footnotes, you find they bastardized academic research showing lost jobs were eventually replaced but the new jobs averaged only 48% of the off-shored job's value.  Rather than see this as a problem, McKinsey simply added $0.48 to the "value" of off-shoring, raising the $0.66 on which we have agreed on to $1.14.  If you can think of a better adjective than chutzpah, drop us a line.

In "30% of employees here and 70% abroad", May 19, 2004, Forrester Research was not far behind McKinsey with their own claims (and their own need to win consulting contracts).   Forrester claimed only 3.4M jobs (7% of the affected categories) were ever at risk of being off-shored.  They also touted 58% of companies weren't even considering off-shore moves.

When you drilled down into their actual assumptions the "at risk" number was 14%, after you excluded manufacturing (therefore the actual at-risk total is much higher).  You don't have to be a statistician to figure out 42% of companies in Forrester's world are looking to off-shore.  Not to mention the complete debunking offered in the title of the article, a quote from NewPath bragging about how they demand all their start-ups hire 70% of employees off-shore.

Which, finally, leads to today's diatribe.  A "news" article describing a study, conducted by Global Insight, whose findings were in "stark contrast to a number of reports over the past few years which criticize global outsourcing as detrimental to the economy."

Oh, really?  I guess they don't read McKinsey?  Or Forrester?  (Or View from Silicon Valley?!?)

Global Insight claims, "Global sourcing (is) not the end of U.S. IT industry"  Based on this chart from Today's Engineer, we agree.  After all the number of engineers has not yet reached zero:

Global Insight goes on to say. "global outsourcing generated a net increase of U.S. jobs in 2005 of 257,042, and is expected to create a net number of 337,625 new jobs by 2010."
--Wouldn't you love to see the "research" they used to invent that number?

At the least, these aren't engineering jobs (see the chart).  Since engineering jobs pay higher than median wages, this tends to support the research McKinsey mis-represented and suggests "new" jobs, if we were to concede for a moment they were actually being "created" as a direct result of off-shoring, pay less than the ones they replace.  As a side note, let's also observe the pace of alleged annual job "creation" by off-shoring will slow from 250K+ this year to only 16K for the next five years.

Global Insight admitted, "global outsourcing does result in job losses and is initially difficult on those displaced, particularly in IT. However, he added that almost three-quarters of the 111,828 IT jobs lost between March 2001 and Sept. 2003 were due to factors other than outsourcing, including the telecom and dot-com busts."
--Here's another non sequitur.  Off-shoring and the dot-com bust were always two totally separate issues.  Nobody who is paying attention ever claimed off-shoring caused the dot-com bust.

A few of the other claims seem to say something.  But then you stop and think about them for a moment, or two, maybe not:
"There is a lag between the time workers get let go and the time they’re rehired,"
--No kidding?  And eventually we are all dead.

"In time, offshoring creates more jobs than it destroys."
--But the new jobs average $0.48 on the dollar.

"The U.S. economy benefits from global outsourcing because they help increase the U.S. Gross Domestic Product by $68.7 million in 2005."
--Another non sequitur. If they have research linking the two, they didn't give it up for this article?

"By 2010, he expects outsourcing to increase GDP by $147.4 million."
--When you've got a non sequitur working, it's always nice to double-dip.

"(O)utsourcing helps (companies) lower costs and improves profits, which he added are often reinvested in new products and services. Consumers benefit because outsourcing helps lower software and service costs, encouraging them to spend more."
--A long and detailed non sequitur sounds better than a short one.  There is a "small" problem here, since laid-off consumers tend not to buy a lot of software and services.

"(C)alled for increased emphasis on education and retraining to help workers displaced by global outsourcing, with government assistance."
--This pablum is widely accepted but it's really a non sequitur (or maybe a red herring!).  Exactly what should the government re-train people to do?  Will companies then promise not to off-shore people trained by the government in this skill?  I didn't think so...

"They also called for higher support of basic research and development"
--I'm getting tired of typing non sequitur.  This is more pablum with no relevance to off-shoring.

"(E)ncouraged deployment of a more diverse workforce with higher numbers of female and minority workers."
-- Again, this has nothing to do with off-shoring.

Conclusion:  Did you read this article carefully, or did your fingers grow cold?  Wait a minute, those two points don't have anything to do with each other either.   Soft of the like the article itself.

Global Insight is attempting to sound like "good guys" and create political cover for companies.  They must have done a study and decided they could compete with McKinsey and Forrester to win more consulting contracts if they would just put out more of this type of nonsense, err, "research."

As always, read beneath the headline.  Don't assume an article is full of the same pablum others are saying means their conclusions must be valid.