An Elephant in the Room?

In his book Innovator’s Dilemma, Clayton Christensen described how great companies may choose a path to their own demise by following a seemingly sound logic of focusing on their best customers.  They do so when they progressively cede lower value parts of their markets to companies that introduced disruptive technologies good enough for lower end markets, but not yet good enough for the higher and often more profitable end.  Established companies fail when those disruptive technologies improve and ultimately challenge them at the higher end.  The last high-value bastion of camera film technology, for example, the making of major motion pictures, is now under full competitive assault from RED® cameras and other high-end digital cameras when only just a decade ago, no serious film maker could ever have considered a digital solution.

So the question, can entire cities, industries, and even countries fail in high cost (developed) regions of the world by following the same fundamental path to demise as these individual companies when they, as a collective whole, leverage disruptive equivalents overseas to domestic employment (outsource jobs to save money)?  The logic used in favor of outsourcing jobs to save money is fundamentally the same as that used to cede markets to disruptive technologies.  Move lower value tasks to regions of the world where people have good enough skills to perform those tasks and are willing to work for much less money than domestic labor.  Keep the higher value work at home for domestic employees.  The potential problem develops when the definition of “lower value” creeps upward, which is a natural state of affairs when overseas regions rightfully follow their own aspirations to commercial greatness.

IP professionals within developed countries have felt pressure from an upward creep in the value of IP services outsourced overseas.  For example, people who buy services such as patent searching no longer need to sacrifice quality when they outsource work to India.  Quality was an issue just a few years ago.  And companies in India can charge much less per hour of work than companies in high cost regions.  Legal services outsourcing (LPO) that once only involved routine back office clerical work now bumps right up to the limit of full legal services at the associate attorney level that legal jurisdictions allow…and in the absence of restrictions, such as required licenses to practice law granted by state bars in the United States, there is no reason that properly trained overseas professionals could not continue their ascent up the legal value ladder.

In other professions, such as those within the R&D community, few barriers to outsourcing jobs overseas exist.  Managers in high cost regions of the world can leverage lower cost R&D talent overseas without necessarily sacrificing the quality of their results.  Engineering educational programs in India, China, and other developing regions are excellent.  Of course many engineers in these overseas workforces will become formidable competitors to their employers in the future.  But there is no dynamic in open markets that can prevent companies in high cost regions of the world from accelerating the creation of lower cost competition overseas when they outsourcing jobs and therefore know-how – any more than there was a dynamic that would prevent major US airlines from selling their surplus airplanes to the very discount carrier startups that would drive most of them into bankruptcy protection.  Even if collectively it was in the interest of all the companies in high cost regions of the world to keep their work at home, once one company defects, the defector gains too much of a cost advantage for the others not to follow suit.  It is the same fundamental dynamic that occurs when one company slashes their prices.  Others follow suit or lose business.

So where does this lead for a developed world where employees are used to high wages?  From the perspective of the developed world, I decided to look at it from both a pessimistic and an optimistic lens.

1. Possible result viewed from a pessimistic lens

For the consumer in a region of high wages, lower cost products and services allowed by outsourcing jobs can be a good thing, except that all consumers need to be surrounded by business successes that offer good jobs inside their communities if they wish to stay good consumers for very long.  Outsourcing creates a classic strategy dilemma in regions where wages are high.  If one enterprise outsources jobs in order to lower operational costs, then one has a great advantage.  If all outsource jobs, then none has an advantage.  In fact, all could be at a disadvantage in much the same way that companies often accomplish nothing with price wars in terms of changing market share except to lower margins for everyone just to stay in the game.  The reduction in the pool of well-employed prospects who can buy products domestically further reduces demand and therefore prices, and overseas customers do not necessarily make up the difference since their wages may be too low to afford the completed products.  Somewhere along the way, the lessons that Henry Ford taught one hundred years ago when he decided to pay his workers enough to be able to afford the products they made, seems to have faded from the landscape.  Much of the developed world now depends upon products made by people overseas who earn so little they could not possibly afford to buy such products themselves and so do not also create markets.  The wealth they create concentrates at the top.  That state of affairs is, shall we say, quite 1800s, even though we live in the 2100s.

2. Possible result viewed from an optimistic lens

Any successful product solution tends to do one of two things:

  1. It fills a recognized need directly
  2. It indirectly fills a recognized need by removing a burden

Burdens come in many forms, and if an otherwise disruptive outsource solution can relieve a burden for a highly paid domestic workforce for a low cost, then the domestic force can focus resources upon the most salient aspects of their business at home.  This follows the recognized principle that one of the chief inhibitors of innovation and creativity is to be overburdened with other work and not have the time or money to devote to invest in new ideas.  Thus outsourcing can open opportunities to push the envelope of business possibilities that would not be possible if an enterprise was dominated by burdens it could otherwise outsource.  Put another way, rather than seek an economy built around making computers, high wage regions can build economies around the solutions that computers can make.  In the absence of lower cost outsourced solutions, many new businesses that ultimately do hire domestic employees would never even get started.

So which one is true?  Could it be both?  Is there something else also?  Does outsourcing jobs to save costs really just reflect something businesses have always done, drive down costs, no different in principle than using robotics and even less sophisticated automation to build products using ever smaller workforces?  Machines themselves are moving further up the value chain, even emulating high value intelligent thought.  Software to perform legal tasks without the presence of lawyers is getting ever more sophisticated.  Airplanes fly without pilots and may even be less prone to inflight error that their human piloted counterparts…Backup human pilots could sit anywhere in the world.  Machines are even learning how to invent for R&D.  Jobs recently sent overseas may come back in ways that do not need many workers at all, at least not in the way we are used to…something I thought about when I was able to buy groceries using an automated teller instead of an employed human being…and I have to admit that’s algorithm does a much better job of recommending interesting purchases than any human bookseller I have ever met.

One Comment on “An Elephant in the Room?

  1. American companies (and the government) have learned the hard way some of the regrettable consequences of fever-pace outsourcing. After all of the IP that U.S. companies have given away to developing countries for free — via irresponsible and excessive outsourcing, as well as from sheer laxity in patent protection — these same developing economies are now presenting the U.S. with serious competition.

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