The News – 06/28/05

In this Issue:	Recommended Reading
A Different Kind of Outsourcing – Noshoring Shameless Self-Promotion Dept. The Raw File I’d Rather Be Lucky Than Good Privacy, Economics, and Price Discrimination on the Internet Geeks Are Doin' It For Themselves	I realize this is the only newsletter you’ll ever need, but if you want more in-depth detail, check out: Stan Hustad’s The Coaching Connection Management Signature's The Express Read

A Different Kind of Outsourcing – Noshoring

Outsourcing of US jobs, especially in highly-skilled areas such as Information Technology (IT), has been a hot topic for the past few years. Decried by demagogues and alarmists, it is nonetheless an inexorable trend in corporate America, and one that will not go away.

Those of you who have been following the outsourcing trend may be familiar with the terms offshoring and nearshoring.

• Offshoring refers to the practice of sending American jobs to India and Communist China (sorry for the political reference there). A Cornell University/University of Massachusetts–Amherst study estimated that a total of 406,000 jobs left the United States in 2004, about twice the amount offshored in 2002.

• Nearshoring refers to the practice of sending those jobs a little closer to home, generally to places like Mexico and Canada, which can hardly be said to be across any shores.

Now despite what offshoring’s supporters may say, there are a number of very real challenges that make offshoring not the slam dunk you might think. Sure, US companies can pay foreign laborers obscenely low wages – about seven years ago I paid a crack Microsoft programmer in Madras, India $12 an hour to do work equivalent to an $85-an-hour programmer in the States. And the guy was really good.

But, as I learned then and as many companies are learning today, there are plenty of cultural, language and time-zone barriers that can get in the way of productivity when you offshore.

My classic example involves a co-worker of mine while I was at ACNielsen. She was managing a group of Indian workers who were working onshore at ACNielsen headquarters. All spoke excellent English and were talented programmers. During a meeting in which she was explaining what was to be done, she asked many times if everyone understood what she said. “Yes, yes,” they exclaimed and nodded their heads vigorously. After the meeting, though, one-by-one they sheepishly came to her and confessed that they hadn’t understood several key concepts.

Luckily, the programmers were concerned enough with the quality of their work to seek out the answers in private. But in public, they were too eager to please and unable to ask for clarification for fear of offending, a cultural difference that drove my colleague crazy, and actually caused a fair amount of rework on the project.

I had my own experiences with these cultural differences when I had a team of programmers in Madras working on a cutting edge project creating an interface between MS Mail (the precursor to Outlook) and the Nielsen Website. We were 12 and a half hours (someone please explain the half hour!) apart time-wise, and one day we were trying to schedule our next conference call. Like an insensitive ugly American, I considered my calendar and suggested 8 am the next Friday. While I thought I detected a little reluctance on their part, they quickly agreed. Only after I hung up the phone did I remember that not only were we 12 and a half hours apart, they were also on the next day. I had scheduled the call for 8:30 pm Saturday night, a fact they would never in a million years have pointed out to me.

And let’s not even talk about the fact that China doesn’t have workable intellectual property laws, or any real enforcement efforts against piracy, or that India’s modern infrastructure is at best on shaky ground.

As far as offshoring’s poster child, significant operational savings, is concerned, there have been many studies that show, due to rework, communications difficulties, and travel, most offshoring projects don’t show nearly the savings they advertise. A Deloitte and Touche study found:

• 38 percent of participants who gave cost savings as their primary reason for outsourcing paid additional or hidden costs for services they believed were included in their contracts
• 44 percent of those who outsourced because they lacked in-house expertise found that their vendors did not have the capabilities to provide the expected level of quality and cost savings, resulting in the companies bringing operations back in-house
• A staggering 44 percent of participants did not see cost savings materializing.
  
  

The study concludes: “Real-world experiences suggest that the potential for cost savings has been overstated.” The lack of savings is not limited to IT outsourcing. Gartner found that 80 percent of organizations that outsource their customer management operations purely to cut costs will fail to do so.

While these cost saving problems are common to all kinds of outsourcing, not just offshoring, a City University of New York study found that offshoring added an average of $12 an hour to the raw wage of a worker – more than doubling it – and that New York firms were saving an average of 20 percent, not 50 percent or 60 percent as they may have thought.

So it’s not all rosy offshoring to workers who do not share your culture. And while nearshoring to Canada may seem to avoid cultural problems, as Canadians will tell you, we have similar, but not identical cultures (go Leafs, eh?). But at least workers and managers can be in the same time zone.

It’s the Code Boat

Recently, Alert SNS Reader Tim Plas sent along an item about what can be termed really-really-nearshoring. Seems that a former supertanker captain and his partner plan to put 600 software engineers on a foreign-flagged luxury liner three miles off the coast of Los Angeles. The San Diego company, called SeaCode, will pay US taxes and provide its guests, er, inmates, er, programmers with private living quarters, laundry service, three squares a day, and medical care. The founders plan on paying foreign workers two to three times as much as they would make in India or China while still offering prices that rival offshore deals.

Although the shipboard programmers represent a loss of US programming jobs, the founders point out that Americans will make up as much as half of their shipside staff and their onshore support team in San Diego will consist entirely of US workers. They figure 90 percent of the company's revenues will flow back into the US economy through the purchases of food, supplies, maintenance, fuel, and Internet and phone service.

Right now the company is looking for financing and a ship to purchase for anywhere from $10 million to $300 million. They claim to have already raised an undisclosed amount and are backed by Barry Shillito, a San Diego angel investor and former assistant secretary of defense.

OK, call me crazy, but considering the overhead of a multimillion dollar ship and its upkeep plus all those expensive American support costs, how the heck can this company still pay its captive programmers two to three times the rate in India and China and still save outsourcing US companies money? The idea of getting a bunch of programmers together on a cruise ship is not new – see the Perl cruises – but having them live and work there 24/7/365 is certainly novel.

Forbes describes SeaCode’s scheme to skirt various immigration laws thusly: “All they need to do is classify their workers as ‘seamen,’ so that they're protected by international maritime laws that skirt the need for those pesky immigration visas. The workers will fly in and out of Los Angeles International and board the ship with a sailor's card from the Bahamas, where the ship likely will be registered. This lets the company avoid U.S. payroll taxes on the foreign coders.”

SeaCode dubs their concept Hybrid-Sourcing^TM calling it “an innovative engineering service which creates high-end software engineering jobs in the U.S.” These altruistic entrepreneurs also claim to be “bringing back jobs that had already left the country,” while avoiding several important US taxes and regulations.

The founders say they’ve had lots of resumes from US programmers. NetworkWorld quotes them as saying, “The new engineers will not be making as much as they would here in the US. But if you take away someone's living expenses, they really don't do bad at all. They don't need an apartment, they don't need a car, they don't need to make meals or do their laundry. So for somebody coming out of school the pay is going to be pretty good.” Yeah, and they don’t need any stinkin’ freedom either, I’ll bet. Hope some of the programmers are of the opposite sex, although I doubt the Code Boat will ever turn into the Love Boat.

 This whole idea reminded Tim Plas of the various cyberpunk novels of the ‘80s and ‘90s, such as Snow Crash and Cryptonomicon by Neil Stephenson and Islands in the Net by Bruce Sterling. I agree. That dystopian data haven future is trying to be born. (Although, the first offshore data haven, HavenCo’s effort on Sealand, is bumping along under the watchful eye of the hulking threat just off its borders – the UK.)

Nearshore data and nearshore programmers are concepts that represent a huge amount of risk – for potentially exploited workers, for displaced workers, for governments, and for anti-terrorist forces.

Noshoring Keeps Jobs Here

Frankly, I like the idea of outsourcing to the American hinterland better than sending our jobs packing. Companies such as Cross USA and Rural Sourcing are creating programming centers in the wilds of Minnesota, Arkansas, New Mexico, and North Carolina and offering clients 30 percent to 50 percent lower costs than most domestic consulting firms.

Now while you may argue that rural folks in these places don’t necessarily share your culture (especially if you’re a Packers fan, or a Democrat), they generally are native English speakers and are at most a couple of time zones away.

Plus, they tend to be very loyal employees. Where else are you going to work if you’re a C++ coder in Sebeka, Minnesota, especially if you’re addicted to hunting, fishing, and an easy commute?

Add to this the likelihood your coders will have at least a basic understanding of the business processes you’re dealing with, and noshoring is a winner.

And here’s the best part: These folks are Americans; they pay the same taxes we do; and if you need to fly out to see them, you don’t need shots.

It’s time to give our rural brethren a chance at saving your company money. And save a projected 540,000 US IT jobs by 2015.

NetworkWorld
Thanks to Alert SNS Reader Tim Plas for the pointer.

Briefly Noted

• Shameless Self-Promotion Dept.: It’s here: A wireless networking company called The WiMAX Guys. Our main business is new installs for people who want to set up wireless hotspots such as hotels, warehouses, apartment buildings, and office buildings or hotzones that cover cities. We also sell a knowledge-based Web portal called the MAX K-Base. Check out our main Website at www.TheWiMAXGuys.com.
  
  My wife created a bit of a stir when her op-ed piece was published in the Minneapolis StarTribune newspaper after the election. Her article, “Two Nations, Handcuffed Together,” has been commented on or linked to by more than 85 Websites. She’s now created a Website to capitalize on her newfound pundit status. Check it out at www.debellsworth.com.
   
  Coming At Some Point: A new eBook, Be On the Wave Or Under It™ will collect the best of SNS’ insights over the last couple of years, along with additional material from CTOMentor white papers and new material. It will make a great gift for associates and friends in need of a guide to the latest and greatest technology. Watch for more information in upcoming SNS issues.
  
  Several issues ago I debuted SNS Begware, an opportunity for you, gentle reader, to express your appreciation by tipping your server via PayPal. See the sidebar for more info. Total in the kitty so far: $91.48. Thanks Dave!
  
  
• The Raw File – SNS is dedicated to delivering the scoop on the latest and greatest. However, I collect lots of information that never makes it into the newsletter before it gets old. I’ve collected all this aging info into a page called The Raw File. This page is the raw information I gather for SNS articles. It’s not pretty, and some may be a little incoherent, but chances are there are still things in TRF that might be news to you. So therefore, use The Raw File at your own risk – it’s 45+ pages of the best stuff that didn’t make it into SNS.
  The Raw File
  

• I’d Rather Be Lucky Than Good – Not long after I published the last SNS, a couple of new major data losses hit the news, including a massive security breach at Citigroup, owner of a lot of my credit card debt. It was a low-tech deal, however, with a cardboard box containing computer tapes with personal information on 3.9 million customers of its storefront consumer-finance unit being lost by UPS. The loss happened despite what the company termed “enhanced security procedures.” Makes you wonder what they lost that they haven’t told anybody about.
  
  And recently health giant Kaiser was fined $200,000 for posting patient information on its Website for four stinking years!
  Mercury News
  Wall Street Journal (requires subscription)
  
  
• Privacy, Economics, and Price Discrimination on the Internet – Alert SNS Reader Prof. Andrew Odlyzko, director of the University of Minnesota’s Digital Research Center, sent along a link to his fascinating paper exploring the relationship between economics and privacy. Rather than being attacked by black hats with nefarious motives or clueless operatives, “Privacy appears to be declining largely in order to facilitate differential pricing, which offers greater social and economic gains than auctions or shopping agents.”
  
  Those of you who saw the Spielberg/Cruise movie Minority Report know what the professor is referring to: the ability for vendors to take information they know about you to tailor their offerings to you. It’s also the same process that enables vendors to tailor their pricing to you, just like the multi-tiered and imponderable airline pricing system.
  
  Prof. Odlyzko highlights the central paradox of all this privacy stuff. We may get outraged when Citigroup or ChoicePoint or Lexis/Nexus spill the beans on our private lives, but we don’t really want to do anything about it. “One of the many privacy puzzles is that even though the public shows intense concerns about loss of privacy, it is not doing much to protect itself. Privacy-protecting technologies have not fared well in the marketplace, and very minor rewards are enough to persuade people to sign up for grocery store loyalty programs. So are people being irrationally paranoid, or is there something else that the loss of privacy might bring, that they instinctively fear?” Read the paper for some ideas on the answers.
  Privacy Paper (PDF)
  
  
• Geeks Are Doin' It For Themselves – Alert SNS Reader Roger Hamm must have too much time on his hands. He sent in a link to a fascinating site called GeekDIY. DIY stands for Do It Yourself, and geeks, being perhaps more solitary than the rest of us, naturally gravitate towards doing it themselves – everything building their own projection TVs to building an MP3 player out of an Altoids box and a traveling autonomous refrigerator robot.
  
  Roger comes by this fascination naturally. His brother is one of the originators of the world famous HellCycler.
  GeekDIY