A discussion with Bob Cringely

Bob Cringely is a tech columnist for PBS, and the author of what I consider to be the best history of Silicon Valley yet (and one of the best titles ever made): Accidental Empires: How the boys of Silicon Valley make their millions, battle foreign competition, and still can’t get a date. (Amazon). However, in a recent column, he made some statements about offshoring that I deeply disagree with – so I sent him an email. We had a quite interesting discussion, I think – at least, interesting enough to post here. (And, of course, his feedback email address has the text “click here to tell Bob he’s a dipstick”, hence the subject line…..)
(This had been very lightly edited: Some spellings fixed, links, and formatting.)


Subject: Well, not exactly a dipstick….
From: Espen Andersen
Date: Tue, 03 Feb 2004 13:29:39 +0100
To: Bob Cringely
Bob,
normally, I think your columns, which I read quite frequently, are great. However, your recent column on outsourcing has some gaping logical holes:
You state: “Let’s understand something here: I am NOT advocating protectionism, I am advocating customer service, rational self-interest, and competitive advantage. If a resource doesn’t give you a competitive advantage, you can outsource it without any damage. But if it is a key differentiator, NEVER outsource it.”
If you are not advocating protectionism (which you seem to do other places in the column, though), you surely can’t object to the offshore outsourcing market springing up. So what you mean, I think, is that outsourcing, especially of customer service, is a bad idea because it means giving up the competitive advantage of domestically located customer response.
Let’s assume (for this is by no means certain) that locating a customer service call center, for instance, abroad means lower cost but also worse performance.
Now for a competitive advantage to exist (and forgive me for being professorial here, but it comes with the territory,) it must be
a) valueable – that is, customers must be willing to pay for it – if not, it is a competitive liability
b) unique – if everyone has it, it is not competitive advantage, but at best competitive parity.
Furthermore, if you want a competitive advantage to be sustainable, it must also be hard to copy. (And if you really want to get formal, it also has to be exploitable by the company, but let’s assume it is).
Now, some companies are outsourcing and some are not – creating a nice little test case to see whether your theory holds. If domestically located customer service is a competitive advantage, then those companies having that will prosper – because their customers are willing to pay the added cost (and then some, for profits) it implies. If customers would rather have cheap, but bad services, then those companies who have outsourced will prosper.
In the long run, domestic and foreign salaries and performance will converge, of course.
Fiddling with this mechanism will result in a net total economic loss. For the employee having his or her job outsourced, this is hard to see, of course. The rational economic choice would be to move pension money to funds that only invest in companies that do not compete with the interests of the future pensioneers – and take the hit in pensions this implies.
On a personal level, you can take a hit in salary to better compete with offshore outsourcing – who, after all, will have higher administrative costs because they are far away and culturally different.
Alternatively, you could make a decision that the knowledge necessary to answer questions in a customer service call center is no longer enough to live on, and rebuild yourself into a more competitive player in the global knowledge economy by investing in your knowledge – go back to school, for instance.
I, as a professor, would like that. See you around.
Espen Andersen (www.espen.com)
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Subject: Re: Well, not exactly a dipstick….
From: Bob Cringely
Date: Tue, 3 Feb 2004 17:33:49 -0500
To: Espen Andersen
Dear Espen,
Thank your for your very thoughtful message. I think what we have here is a misunderstanding. So what I’d like to do is explain myself a bit further and ask you to respond saying whether I am finally making some sense.
The issue as I see it is not that companies ought not to be allowed to outsource whatever they like (THAT would be advocating protectionism). I just think the whole risk/reward scenario here is screwy. Generally speaking, outsourcing IT services results in poorer service and a cost savings that is very short-lived.
Companies that do it pretend that service doesn’t deteriorate, but it does and they pretend that the cost savings will be permanent, which it isn’t.
The real goal here, as always, is to get earnings-per-share up so institutional investors will bid-up the stock and CEOs will get hefty bonuses. The fact that this comes at the expense of lost long-term competitive advantage doesn’t matter to the CEO, who thinks in terms of the next quarter and has, on average less than two years to go in his present position. Nor does it matter to the institutional
investor that holds the shares generally less than a year. Both parties are exhibiting trading mentalities, not investing or managing.
If I was advocating protectionism I’d write something like, “We ought to make this illegal.” As a longtime reader I’m sure you’ve noticed that I am fairly clear about my feelings. But all I am asking for here is to recognize the reality of the situation — that it is being ruled by trading, not investing or managing.
Now to your suggested experiment. Yes, I suppose on some level it would be useful to compare the results of companies that do outsource IT versus those who don’t. And I hope someone does that study (maybe you?). But I fear that the experiment will be tainted by the fact that those who do outsource are effectively changing the playing field for those who don’t — transferring knowledge, capital, and business relationships overseas that might have remained here, thus weakening the domestic industry even for those who choose not to outsource.
Does this make better sense?
All the best,
Bob
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Subject: Re: Well, not exactly a dipstick….
From: Espen Andersen
Date: Sat, 07 Feb 2004 09:29:15 +0100
To: Bob Cringely
Bob,
thanks for the answer – this is an interesting discussion. And I certainly agree with your later column about the importance of writing full sentences. But I am not sure you are making sense to me (but then again, that might be me).
First of all, a language clarification. We are discussing outsourcing, but really should use the word “offshoring”, since nobody seems to make remarks about loss of competitiveness unless the work is shipped abroad. Offshoring is just a continuation of what started in 1957, when Bank of America introduced centralized check processing. They stopped sorting and posting checks in the basements of each of their bank branches and instead did it in two central locations (SF and LA). The company used information technology to move work (nobody talked about the loss of competitiveness for the individual bank branch) and after a few years had 40% lower processing costs than the competition and used that competitive advantage to become the world’s largest bank. Moving this to a separate company is just a question of how well you can specify the performance and agree on the economics, moving it somewhere else is largely a question of factor costs, which is why many call centers are in the rural Mid-West. However, when things are shifted abroad, we are suddenly concerned about competitiveness? No, what we are discussing is offshoring, not outsourcing per se, and that turns this into an argument about the competitiveness of nations (or regions) rather than companies.
Your main point is that the current increase in IT offshoring is driven mainly by short-term trading interests, and that this will hurt companies in the long run. I agree with you that a lot of CEOs are too concerned with quarterly results and the opinions of the analysts and institutional investors – or at least it may seem so. From a theoretical perspective, however, this should not matter. If it is so that a long-term perspective gives a competitive advantage, then those companies that are not overly focused on short-term results should have an advantage. The evidence here is mixed, but there are many examples of companies with a long-term perspective (or, alternatively, enough cash kept away from the traders to survive a short-term technology change) and a successful history – SAS, IBM, 3M, GE, Intel and for that matter Microsoft comes to mind. Competition will solve that riddle.
Now, does offshoring hurt long-term competitiveness of a region? I think that depends on your point of view. In the short term, offshoring causes pain for those involved. In the long term, the US IT industry (or, more precisely, the competitive cluster that is Silicon Valley and other high-tech areas,) will have to adapt by focusing on those parts of IT provision where lower labor costs don’t matter that much. In other words, either automate the work, beating low labor cost through process innovation, or switch to other kinds of work (meaning, stuff that is harder to do) where the customers are looking for solutions to problems and are willing to pay for the solution on a value rather than cost basis. In other words, do something new and hard where your skills cannot be copied – as Intel did when they exited the memory chip business and moved to making processors in the 80s.
I may be reading too much into your arguments here, but isn’t it a little ironic when representatives for the IT industry, who for years have prospered by using their technology to automate and/or move other people’s work around, suddenly start to sound suspiciously like the UAW? Countries that meet competition with competition and that maintain their openness, will prosper in the long term – for a good discussion of this, see David S. Landes (1998) The wealth and poverty of nations (Amazon), in my view (and many others’) the best book on the subject on long-term competitiveness of nations.
I am tempted to quote Landes when he says (p.266) that “European tariff history tells a story of popular, almost instinctive, protection punctuated by episodes of administrative, elitist moves in the direction of freer trade. [..] The contest lies between lowbrow vested interests on the one hand, highbrow economic reasoning on the other.” Are we, perhaps unintentionally, pandering to forces that are not in the long term interest here? (Next step: National security scare tactics, as offered by Lauren Weinstein in the next issue of the CACM .
Whether driven by short-term trading interests or long-term technology evolution (and both forces are at work here), I think offshoring is a natural development that will be economically beneficial, in the long term, to all involved. It will be painful to some in the short term. The IT industry, and those that work there, should treat it as a signal to move to parts of the value chain where customers are not yet satisfied and price-conscious. Doing that is hard work and some will not make it. That is the price of prosperity and continued innovation.
Respectfully,
Espen Andersen
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Subject: Re: [Fwd: Re: Well, not exactly a dipstick….]
From: Robert Cringely
Date: Tue, 2 Mar 2004 11:23:37 -0500
To: Espen Andersen
Dear Espen,
[…] Yes, we are talking about offshoring.
The problem I have with your argument is your use of the term “in theory.” Yes, in theory a lot of things should be different but aren’t. I am unmoved by theory in the face of practice and suggest that you ought to be, too.
Your argument is a purely economic one (theories are like that) and ignores issues like national security and even corporate security. The California hospital that recently had its medical records held for ransom by an overseas transcriptionist is a perfect case in point. The transcriptionist, a subcontractor, wanted to be paid her $0.03 per record as promised. The hospital was paying $0.18 per record and several middlemen stood in the way. This is not secure. When the software controlling my local nuclear powerplant is dependent on an overseas programmer who can’t even be named, much less held accountable, I am concerned.
But at the heart of all this is the stutter step our technical economy is making. this is covered in some detail in my latest column. You argue that this is all natural and will take care of itself. I say that’ the argument of a man with a job and what’s really happening here is that the traditional forces that would have helped to generate those new jobs making harder, more expensive stuff, are being withheld.
It WILL sort itself all out, but if tradition had been followed that would already be the case. Now my concern is that when things inevitably get back in gear, will there still be a technical workforce to do the jobs or will they have been permanently displaced?
All the best,
Bob
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Subject: Re: [Fwd: Re: Well, not exactly a dipstick….]
From: Espen Andersen
Date: Tue, 02 Mar 2004 17:59:58 +0100
To: Robert Cringely
Dear Bob,
seems we’ll have to agree to disagree. (Incidentally, I don’t use the term “in theory”, but I do use theory. And I will publish this discussion in my blog, if it is OK with you.)
Another macroeconomic point, though (can’t help myself): I don’t think the US economy (or its workers) really has much to worry about, since it is very dynamic (if you think things are slowing down in the US, try Europe…). The US is first to experience white-collar offshoring because of internal high competition and the fact that you speak English – and so do Indians. By the time offshoring hits Europe, the US job market will have rebounded and US companies will be even more competitive – taking on Europe.
In Germany and France the unemployment rate hovers at around 10% and the labor market is very rigid (hard to fire people, so employers are reluctant to hire). That’s where offshoring will hit hard – though it will be cushioned by the social security net. For the US, and especially for IT workers, I am not worried, at least not in the long term. And I don’t think they should be, either.
Espen
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(another message, sent half an hour later, when I had read Bob’s excellent column on how venture capitalists should try to kick-start Silicon Valley again, a point I agree completely with.)
Tue, 02 Mar 2004 18:30:28 +0100
Oops – answered this one without having read your latest column. Turns out we are a lot closer to agreement anyway. Well, great! (Incidentally, US openness to immigration – of people and ideas – is a key competitive advantage.).
Let me round off with a quote from David Landes, an economic historian. In fact, the final paragraph from his book “The Wealt and Powerty of Nations”:
“[…] In this world the optimists have it, not because they are always right, but because they are positive. Even when wrong, they are positive, and that is the way of achievement, correction, improvement, and success. Educated, eyes-open optimism pays; pessimism can only offer the empty consolation of being right.
The one lesson that emerges is the need to keep trying. No miracles. No perfection. No millennium. No apocalypse. We must cultivate a skeptical faith, avoid dogma, listen and watch well, try to clarify and define ends, the better to choose means.”
Cheers,
Espen
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And that is where the discussion stands, at the moment.
Espen

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