Is Outsourcing Evil?

Over the past several years, I have frequently outsourced projects to freelancers and vendors to do work that my team didn’t have the skills to accomplish on our own.

A portion of that work was outsourced to overseas contractors many of whom are in India, Romania, Russia, and elsewhere.

In fact, I’ve outsourced over 110 projects over the past few years with probably 60% of those one-time projects going overseas. (With 95% of on-going work outsourced within the U.S.)

I’ve recently been criticized for this with one person calling me immoral and unethical. Besides the fact that this person is a Realtor with an axe to grind (layoffs in his area produce fewer home buyers), he raises an interesting question.

I have always been of the mindset that the money you make should be earned.

(Yes, in the era of bailouts and lobbying government for more profits, my perspective seems old fashioned.)

And if I can send work overseas and get a more cost effective solution, I will do it. (Though I have found that for certain projects paying more money to a US based contractor for a higher quality solution is a better deal)

Here’s my thinking on this. If I don’t find ways to give my clients better value for their money, they will find someone else who will.

I could hire a local person and pay 4 times as much, but unless there’s a big quality or convenience difference why should I?

I’m happy to spend 4 times more to hire someone locally, if they can give me a solution that is 6 times better, faster, or more effective…. you know if they find someway to EARN the higher fees. (there’s that word again: “earn”)

My critic argues that even if they local guy doesn’t earn it, I should waste my money to keep more jobs locally–so his business as a Realtor would be easier.

What do you think? Is outsourcing, and in particular offshoring, immoral or evil?

Am I an evil capitalistic pig with no heart? (I can live with it if I am, but I’m curious to know if I am)

I’m particularly interested in getting an international perspective on this topic.

So if you’re one of my readers living in Australia, New Zealand, Canada, Mexico, Argentina, Russia, Romania, Switzerland, UK, France, Germany, or South Africa, I’d love to get your thoughts on this too.

Post your comments below.

16 thoughts on “Is Outsourcing Evil?”

  1. US-UK Perspective

    Victor,

    I think the plight of the Realtor is a complete red-herring. The bigger question is where is your future? If the majority of local business innovation is eventually snuffed-out by taxes, regulations and other companies pushing their needs offshore – where will YOUR customers be? Those who are able to freely develop companies, build businesses and exploit opportunities the commercial world offers?

    ‘Big business’, government and foreign owned business is moving all sorts of business to other countries – without regard to the wider local impact. The US is still the largest domestic economy – but growth is not what it is in so many of the countries you might outsource to. In the UK an offshore bidder may well be able to ‘buy’ business as it does not have to pay VAT which a local business might well have to collect. Foreign owned business, typically, do not have the employment protection legislation which increases the local cost of doing business, or insurances, etc, etc.

    Is oursourcing ‘evil’ – no. Is it likely to contribute to stifling innovation and entrepreneurship in this country and others countries so quick to invest in the growth of the infrastructure, business and populations of ‘developing’ countries – I believe so.

    Coupled with the need the western world feels to compete on different terms by saddling itself with green obligations and employment legislation which are not hindering the growth of countries such as India and China – we are on a long slow decline. Outsourcing will help accelerate that decline, as gradually there will be less clients for you and other US based consultants and businesses – because those who want to grow fast and exploit opportunity will move to those countries you are helping to pay for the development of right now.

  2. What I always wondered is if someone like you who outsources to a person in India is evil, doesn’t that make that person in India evil too? Is your realtor evil if he recommends his client use a mortgage broker as opposed to the local bank? Am I evil if I go to the pharmacy near my office instead of the one in my hometown?

    I think the person who provides the best service for the best price deserves the business. I don’t focus on the sour grapes of what will happen if someone undercuts my prices and takes my business away.

    At the end of the day, if I allow someone to leave my business it is because I did not do everything in my power to make their experience with me unmatchable.

    It sounds to me like your realtor needs to focus on what he can do to succeed as opposed to wasting all his energy ranting about why he isn’t.

  3. I don’t see anything wrong with this. When I worked in corporate America, we took full advantage of offshore contractors. At one point, we had 400 H1Bs working on a $40Mil project! These guys were billing out at $25/hr, while their American counterparts wanted $125/hr. You do the math!

    In our own business, we utilize contractors extensively, but only use offshore guys for web design and other like-minded projects. Everything else stays local!

  4. Victor, I recently asked for bids on project through E-lance and I went with a bid in the USA even though it was a little more, but as a business man if the project cost considerably more here in the US I might consider the alternative as a smart business decision.As we say it is strictly business, its not personal.

  5. I’m actually in the US but the same concept applies.

    I should start by saying that your Real Estate pal is a bit off kilter… you are neither immoral nor unethical. Hiring abroad actually has nothing to do with either. At worst, it may be construed as improper, incorrect, or even amiss. Or for your friend, offensive. Perhaps he should spend his extra time (since he’s not selling homes in his area) educating himself on the true meaning of the words.

    Being a business owner myself, I sometimes have been faced with the same issue. I can actually see two sides to the coin. On the one hand, as a business owner, it makes more sense financially to outsource overseas. We do it to save money and still have happy clients. You are right too that the prospective client will go out to seek the best price… and they don’t care where the work is done as long as it’s done “cheaply.” Next time your friend goes out to purchase something, like electronics for example, ask him if it was an American made (or wherever you are from) item or was it made abroad? Hmm.

    On the other, in these economic times, I feel that we have to help our own country out… if my neighbor has been laid off from his job and needs to feed his family and I can offer him work, then chances are, I probably will. Yes, I may have to negotiate a bit more with him but some work for him is better than no work.

    I know we are all from the same planet, same world. I know that a worker in India or elsewhere should be allowed to work… I don’t deny them that. I just think that for now we should focus a little on our own backyards. You know, clean up our own mess before we try to clean up another’s.

    Is outsourcing evil? No, of course not. Sometimes saving that money means the difference of whether or not YOUR business will continue to run but like I said, if you get the chance to help out your own countrymen then maybe you should… perhaps you can hire your Real Estate buddy. I hear he may be looking.

  6. Victor,

    I don’t think evil or unethical are proper terms to use in this context. Contracting parties are not bound for social benefit of the contractors to my understanding. Therefore, it’s contractor’s responsibility to measure up on their own in their working culture. Of course, rate varies from market to market. This is no different from the Ricardos’s good old comparative advantage in international trade when it comes to productive factor, now human capital. This is fundamentally different from the fact that some US companies open factory in developing countries with poor working environment that’s under the par of any of its US factory standard.

    In addition, as a Canadian currently working for a US multinational company in China, I have two points to make. 1) China is trying to balance between growth and employment. As its export oriented economy is drastically hit by the western recession, the government actually leverages two means: to directly invest domestically to boast consumption (however it’s more or less government spending rather than consumer spending), and to require enterprises to secure employment. The latter has been enforced in many state-owned enterprises including banks. Many of my friends are middle and upper management who have to accept zero layoff policy to keep the underperformed or even the unperformed. Bearing this, work efficiency is further dragged, however business is by all means result oriented. If you are a manager, is this what you wish to happen to you? If you are a team member who would like to work effectively, is this what you wish to have a team mate who never performs?

    2) Making a living and improving quality of life is on almost every adult’s agenda. Americans are generally known for hard working. But those who have been benefited from the past growth may not demonstrate the same eagerness to work effectively. The changed attitude lowers efficiency and erodes work culture (e.g., tardiness, more non productive hours, etc.). While in developing countries, you would observe super hard working locals whose dreams are the capability to buy even some basic living stocks. They believe the only way to improve their lives is through hard work. Do you want to keep a tardy whose interest is mostly how to take from the company than to give, or reward this hard working person in another economy who exchanges his/her talent for a fair rate agreed by both parties to improve his/her life?

    I find this top quite alarming for us who are from developed countries. There are lots to learn from these overseas.

  7. Typo correction of my last sentence just posted:
    I find this TOPIC quite alarming for us who are from developed countries. There are lots to learn from these overseas, esp. in the fast growing developing economies.

  8. UK-US Perspective

    So the idea is that it’s somehow a Darwinian law exists that if there is a cheaper service (presumably of equal quality) elsewhere in the world – then it is reasonable that the local supplier, burdened by many different costs (like carrying the cost of a massive Social Security system – which will expand exponentially with the help of government subsidized heathcare) must lower their costs or die (or more rightly lower their costs, then die).

    Great – we have a future with less businesses, less employment and apparently a greater social security burden to pay for. Take a look at the UK – see if there is any significant sign of startups enterprises. There is not, because of the environment created by excessive public spending, high taxation and outsourcing of even the service economy that it had slipped in to after decimating it’s manufacturing industry in the 70’s.

    Instead startups will increasingly come from the markets which are being brought into existence by western spending now (and the last 20-30 years in increasing volume). So, will we be looking for international aid to pay for our social security, when the workers (which includes the business owners who drive economic growth) who have been saddled with the burden of it’s cost move to India, China, etc, etc.

    There are some very shortsighted dollars being spent – you save today in current dollar costs, only to pay in increasingly poorly funded SS in the future – those are VERY expensive savings, for the economy now and for the tax paying citizens of the future.

  9. Victor,

    There’s is nothing wrong with outsourcing overseas. It’s a wise business decision.

    What everyone needs to realize is not only are folks competing with others locally in their own countries, but globally, especially as the internet and other technology/services(Metro PCS only charges a $5 flat fee per month for unlimited international calls – no, I don’t work for Metro PCS nor do I even have their phone or services)make it easier & cheaper to communicate & do business overseas. Unfortunately, with lower cost of labor, overseas is proving to provide a better value. But I’m with you in your willingness to pay 4 times as much for 4 times the value locally. But until folks in the U.S. realize they now have competition overseas, you won’t find a lot of folks who are willing to or have found ways in the U.S. to deliver more value – it requires more work! And I don’t blame them either! If they can still get business delivering the value they do now with less work, I wouldn’t necessarily be looking for ways to deliver 2-4 times the value either as it may require 2-4 times the work! And if these folks don’t get with the times and realize there is global competition, they will lose business overseas soon enough and before they know it, they’ll be scratching their heads wondering where all the business went.

    Just because someone owns a business in the U.S. does not automatically mean they deserve your business versus someone overseas. They have to earn it. I think to appease your readers in supporting U.S. businesses – go ahead and get bids from U.S. companies and companies overseas and see which ones deliver the best value. I would be concerned if you’re just outsourcing your business overseas without giving a U.S. business a chance to earn yours.

    Competition only makes us better, right? Similary, if we only competed locally in regards to education, we’d be even further behind. Just knowing that other countries are exceeding us in the educational development of our their young people makes the U.S. realize we have to beef up our educational system if we’re going to have any chance of our young folks developing businesses to compete in this global economy now & in the future!

  10. I’ve been surprised by most people’s reaction. I was expecting more people to be opposed to outsourcing.

    I suppose as business owners, we play on both sides of the outsourcing game. We can lose business to competitors abroad, but we can also benefit from the same trend by lowering costs when it makes sense to do so.

  11. Hi Victor,
    I can answer your question in a 1000 different ways, but first and foremost – I seriously thought you were joking. You said you were surprised by the answers. Actually I am scared! Scared by the “strictly business” mentality!

    You asked for feedback from people from non-US countries – well you’ve got yourself a twofer – I am a Bulgarian who fled the homeland communist paradise 20 years ago and by chance wound up in US as a political refugee (going to hell and back several times in between time ;). I witnessed (and endured) the rise and fall of the East-European communism, and looks like I am experiencing the same here, in the good ‘ol US 🙁

    Communist society was based on one of the most noble notions – the brotherhood of men (and women 😉 where we don’t allow anybody to fall behind (glorious music in the background)! It’s not a problem for the whole society to help those few unlucky individuals that fell behind and pull them back in the collective, but if the fallen-behind are a lot, then the logistics of “helping” the lagging ones become REALLY tricky!

    So, taken to the extreme, when 95% of the camarades have fallen behind (in other words a few individuals tried to pull ahead), the wise leaders realized that if the whole society is going nowhere, nobody will be falling behind! Genius! …the rest is history 😉

    US society on the other hand was based on a very vigorous force (may be the most vigorous one) – greed. Everybody is out there tooth’n’claw triyng to rip as much for themselves as possible.
    When the initial sparse population grows to a point where there are more and more people competing for the same “goodies” – the game gets ugly – the unconstrained greed starts to rip the fabric of the society. So, if taken to the extreme, if anything goes – the society degenerates to the Chicago of the 1920’s and 1930’s.

    So, the wise leaders realized, that greed needs to be reined in, otherwise the US will be a history.

    Who do you think the first out-sourcers here in US were? The capitalists who would rather hire women and children – they can produce 1/2 of what a grown man can do for 1/5 of the wage. But you want to have bigger production out of the same manufacturing capital investment, since every item sold brings profit! All nice, but the underpaid weakling have only 1/2 the productivity – they are wasting your capital investment! So, you make them work 16 hours for the same wage! Problem solved!
    Oh, and the bonus – the jobless men take on alcohol and gangsterism with life expectancy of 45. Overworked women and children don’t last much longer – so you don’t have to pay pensions (glorious music in the background).

    Hey, nothing personal here either – just optimizing the profit – strictly business!
    If you (and the other business geniuses here) don’t see where the outsourcing is taking us as a society, I wander who do you think you will be selling your goodies to here in US, when the unemployment hits 30% or more.

    I know that there always will be geniuses that will try to invent the “perpetuum mobile” – i.e. getting something for nothing – but at least in the technological world cool heads understood that IN NATURE there is NO free lunch – so you cannot apply for a “perpetuum mobile” patent anymore.

    I hope that the dimwits in the business world will soon come out of the Dark Ages, drop all idiotic notions of “philosophers’ stones” and join the rest of us, who are trying to make living through hard work and keep our sanity and decency!

  12. Well, Victor, let me see if I can convince you that outsourcing is often a bad idea, in spite of the production cost differences.

    There are some products and industries that are not just price or cost related. Anything that has to do with our country’s security should be protected, and generally is, by federal security laws. We have been lax in this regard in the past, and have given away essential electronic, space and nuclear technology. This has happened not only by business outsourcing, but also by training nationals of other countries in our research laboratories and universities.

    Another area that has been severely outsourced, to the detriment of the customer or end user, is computer hardware and software support. Much of this is still being outsourced to India, and provides a much lower level of support due to the remoteness of the support technicians from the engineers who really know the technical details of the products.

    For example, Hewlett Packard Company had a reputation for being one of the best support organizations in the computer and instrumentation business several years ago. The primary reason was that the company policy was to have engineering, manufacturing , marketing and support for their products in the same location.

    Since they have discontinued that practice, and have been outsourcing their support overseas, I find that their ability to provide competent, timely and effective support has been badly compromised. This is primarily due to the time and distance barriers and the communication problems between the groups and organizations. These barriers, along with language and understanding barriers for the end users and organizational structures that compartmentalize the knowledge of the products have resulted in “scripted” solutions that are time consuming and difficult to apply to the actual problem in most cases. As a result, I find it is a huge waste of my time to use an outsourced “help” line to resolve my computer problems. (By the way, I worked in an HP support organization, and have extensive computer experience, so I can recognize when the solutions being offered are not applicable and can not solve the problem).

    Another example of what is lost by outsourcing is the manufacturing of products. Most executives, and their MBA’s that do cost effectivness analysis, have no idea of the value of the level of knowledge that is required to overcome production problems in manufacturing. Most of this type of knowledge can not effectively be documented, as much of it resides in heads of the personnel actually doing the work and solving the problems.

    When you contract out these services, your company loses effective access to the information and knowledge that directly relates to the cost, quality and efficiency of producing your product. For complex technical products, most of this knowledge is due to experience, and the personnel with that experience do not work for you.

    As a result, over time the “contractor” has substantial leverage to increase his prices and raise your cost. If you change to another manufacturer, you will lose access to this knowledge, and potentially create a competitor, or allow that knowledge to benefit your competition.

    So, your assumption of “all other things being equal” is often not the case. The use of outsourcing to achieve the lowest cost can end up being the least cost effective in the long run.

  13. Vince,

    I totally agree with your point about going local, paying more, but expecting to get more too. I am not 100% for or against outsourcing. I do both depending on the situation. I will say this, when I do hire locally and pay more… I expect and do get more. When the local person/firm is not doing anything differently or better or faster or more conveniently that someone who is in another state or country, why should I pay more?

    -Victor

  14. James,

    I think you raise an interesting point with your overseas tech support example. I have found overseas tech support less helpful than ones based in the US. I don’t know if it’s just a language/accent barrier or if the quality of overseas support isn’t as good, but I’ve noticed it in a few cases.

    But I guess the real question is would you pay more money for US based support?

    Given that outsourcing/offshoring tech support is fairly common in many high tech industries, it sort of leads me to think that while customers prefer US based tech support many are not wiling to pay for it. Personally, I probably would pay for premium support on a really mission critical, can’t afford any downtime, type system… and come to think of it my web host is US based and their tech support is 24×7… and also US based.. and I knowingly pay twice as much for the web hosting for the simple reason I can call a real live human being, they actually answer the phone, they actually are very competent, and my problems get solved very quickly.

    For other types of technologies that aren’t that important to me (say my toaster), I don’t really care what kind of support they offer and probably wouldn’t pay more for it.

    I’m a very strong believer that customers vote… and their vote counts for a lot. Ignore it at your own peril.

    I think the fastest way to go out of business is to ignore customers. The easiest way to grow a business is to listen to what customers want and give it to them. In some cases, outsourcing makes it much easier to give customers what they want. In other cases, in-sourcing / local sourcing is more effective.

    -Victor

  15. Hi Victor, A very interesting question. I agree with your conclusion but this perspective may interest you.

    Years ago, while living in the UK, I bought a new Toyota Landcruiser and was reprimanded by a German who told me that I should have bought a Range Rover. I asked him why. He told me that when buying a product you should consider the effect on your local community, then the wider community. He explained it further. When buying a car, you should choose one made in your town and if that is not possible, one made in your region or country and failing that one built in the EU and only when that is not possible should you consider an import from outside the EU. That’s why, he told me, the police in Stuttgart drive Mercedes Benz and the police in Munich drive BMW. I said that is a very interesting theory. Indeed if everybody followed it, then the local economy would tend to be stronger, so I asked him how he had come up with this theory and he explained that every German is taught this at High School. I can certainly confirm in my experience that it is very hard and often impossible to persuade German companies to buy imported products when German products or German sourced products are available.

    So suppliers in open economies like the USA and the UK face competition in their home market from German suppliers and meet significant obstructions when selling to the Germans. This leads to a balance of advantage to the German supplier. A small balance of advantage leads to higher volume, lower unit costs and more profits that can be reinvested for competitive advantage. In the long run, the small competitive advantage is compounded and results in a very large advantage. In the 37 years the UK has been in the EU, the UK has lost most of its manufacturing industry. It has got to the point where the engineering supply chain in the UK is now so weak, that the real cost of supplies often makes manufacturing in the UK uneconomic even compared to economies with higher wages.

    Therefore, when outsourcing you should really consider the ‘openness’ of the market to which you outsource. If those people are ready and willing to buy products from your country, then helping their economy also helps yours albeit somewhat less. When the country has an almost closed market like Japan or Germany and possibly China and India, then helping their economy will certainly not help you in the long run.

    There are advantages in openness, but as in so many things, getting the balance right is not easy.

  16. Victor

    I think the point you should consider is ‘customer value delivered’ is a function of (quality plus price)not that quality equals price. The old fashion notion is that price measures quality. This correlation is the evil in how companies use outsourcing.

    The key should be delivering unique value to your clients and not the lowest price product or service. The data seems to support the notion that people will pay a higher price for delivered value including customer experience. The evil in outsourcing is companies only look at the price and not value received by the customer.

    So ask yourself, would I outsource if labor prices were held constant? Are there really unique skills in other countries that are not available in your home country? If so, I contend you believe price does equal quality.

    I appreciate the realtor that got us thinking about this topic. However, the realtor should be on the side of outsourcing. Since outsourcing decesions based on price should actually increase bottom line for domesitc companies creating upward mobility for workers i.e., home buyers.

    Otherwise, the realtor is suffering from extreme skills degradation. In the bay area, realtors have benefited from years of windfall income due to the housing frenzy without much effort or skill. Today is a different economy and the strong will find ways to make money. But if you came to the profession in good times you might not know how. Sell what Sells…

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