Off-Shoring in a Changing World

The editor-in-chief of Information Week, Rob Preston, has a weekly column in the magazine. In the October 29, 2007, issue, Mr. Preston commented on the shifting state of competitive advantages. (I don't think this term should be identified with the economic concept of comparative advantage, though the two ideas have commonalities.) There should be general agreement on the main point of the column, which is that things change. That is such a commonplace thought that one might not think it worth a column, let alone comments upon that column, except that some of the examples Preston raises are often discussed in terms that would have us think that these are immutable and irreversible trends, rather than the ebb and flow of global economic life. Thus, I think Preston does his readers a service in reminding us that "this, too, shall pass."

His first point about high-tech labor is that American and European firms, seeking lower labor costs, have sent some work to India, China, and other offshore providers. At the same time, foreign workers have been allowed to enter the U.S. and Europe on favorable terms. So, foreign workers have some advantage over American workers in obtaining certain kinds of employment. However, as Mr. Preston points out, salaries for high-tech workers in India have been climbing, due to both local and international demand, while concerns about quality and public relations have dampened the ardor of American employers for off-shoring customer-facing functions. Thus, the pendulum swings back the other way.

At this point, let me insert a note about the new EU "blue card." The October 27 issue of The Economist reports on the European Commission's plan to issue a new document making it easier to recruit and retain highly-skilled foreign workers. The Economist understands countervailing trends as well as Mr. Preston does. A better immigration card "would do nothing to make Europe's economies more attractive in themselves. As long as those economies remain relatively undynamic, the most talented (especially English-speakers) will use their wits to look for work elsewhere." (Page 60) Interestingly, The Economist says that the EC estimates that the "blue card" will push the number of highly skilled non-Europeans in the work force up to 100,000, from about 70,000 today, while Information Week sets Europe's goal as attracting 20 million workers "over the next several decades." I suspect that the lower number is far more in line with what Europe might be willing to absorb.

Rob Preston goes on to look at the impact of currency fluctuations. For those of your who thought that the fall of the dollar vis-a-vis the loonie was a joke, in the past five years the dollar has fallen 39% against the Canadian dollar. If I were living in Ottawa now, as I did from 1986-1989, I would be a poorer man with my U.S. dollar-denominated salary, and the government would find paying for my housing much more expensive than it was 20 years ago. So, he says, "Suppliers in China, India, and elsewhere aren't as attractive as they once were, as they adjust the dollar prices of their products to ensure that they sell at the correct value." Therefore, some firms are turning back to U.S. workers for jobs they might have considered outsourcing to an offshore firm.

I have read elsewhere that the cost differential needs to be at least 20-30% before a firm considers off-shoring work now done in the U.S. Given the administrative headaches, the supervisory problems, and the risks in the quality-control area, there has to be a pretty good premium to justify taking this step.