Category Archives: Offshored and out

Manufacturing is changing, and so is productivity

Two excellent articles on increasing productivity, and why this will not result in many new jobs:

Davison describes the new kind of manufacturing, where everything is done by multi-step, highly complex machines, producing small series, requiring very high-skilled workers with rather sophisticated education. But they also need unskilled workers doing simple things, like moving parts between machines. The problem is, the pay scale for the second type is very low, and the difference in training to get to the skilled level so high, that no company will provide it:

For Maddie to achieve her dreams—to own her own home, to take her family on vacation to the coast, to have enough saved up so her children can go to college—she’d need to become one of the advanced Level 2s. A decade ago, a smart, hard-working Level 1 might have persuaded management to provide on-the-job training in Level-2 skills. But these days, the gap between a Level 1 and a 2 is so wide that it doesn’t make financial sense for Standard to spend years training someone who might not be able to pick up the skills or might take that training to a competing factory.

It feels cruel to point out all the Level-2 concepts Maddie doesn’t know, although Maddie is quite open about these shortcomings. She doesn’t know the computer-programming language that runs the machines she operates; in fact, she was surprised to learn they are run by a specialized computer language. She doesn’t know trigonometry or calculus, and she’s never studied the properties of cutting tools or metals. She doesn’t know how to maintain a tolerance of 0.25 microns, or what tolerance means in this context, or what a micron is.

The reason Maddie – hardworking and dedicated – has a job is simply one of distance: Shipping fragile parts to China for the unskilled operations is too risky and expensive. So Maddie has a job, but not career prospects. And the company’s management is facing very hard competition – their customers see them as a distributor – and is constantly scanning for things that can be outsourced or bought from another vendor.

Mandel describes the differences in productivity increases from improving productivity in domestic production – doing things smarter – and lowering cost by bargaining and optimizing the supply chain before it reaches the domestic organization. Both show up as productivity improvements, but have vastly different effects on domestic jobs:

But here’s the rub: both of these corporate strategies— domestic productivity improvements and global supply chain management—show up as productivity gains in U.S. economic records. When federal statisticians calculate the nation’s economic output, what they are actually measuring is domestic “value added”—the dollar value of all sales minus the dollar value of all imports. “Productivity” is then calculated by dividing the quantity of value added by the number of American workers. American workers, however, often have little to do with the gains in productivity attributed to them. For instance, if Company A saves $250,000 simply by switching from a Japanese sprocket supplier to a much cheaper Chinese sprocket supplier, that change shows up as an increase in American productivity—just as if the company had saved $250,000 by making its warehouse operation in Chicago more efficient.

This is known as import bias, and may be a problem, as it overestimates domestic productivity increases. Mandel goes on to show that this bias affect both left and right, and the difference in views is largely one about how to effectuate a change: Stimulus or tax relief.

Both authors advocate better data and better education as a way out, but quick fixes they aren’t. This is a real puzzler.

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Stimulus Bill Restricts Hiring of Internationals

This is going to help the US economy?

Under a recently passed amendment to the federal stimulus bill, companies participating in the Troubled Assets Relief Program—a government financial-rescue plan implemented last fall—will face more restrictions in hiring H-1B visa holders, foreigners with at least a bachelor’s degree and “highly specialized knowledge” in a particular field.

[…]

Firms that have accepted TARP funds would be required to demonstrate that they have made concerted efforts to employ and avoid laying off U.S. citizens before hiring H-1B visa holders, said Kevin Casey, the University’s chief lobbyist.

I can only repeat (almost) what I said in the comments:

As an HBS graduate who works with software and technology companies both in Europe and the US, I can only bemoan this measure as uniquely shortsighted – and very helpful to European and Asian software companies, who can hire graduates from top US schools. For mysterious reasons, the US don’t want them once they have been trained and can contribute to the economy.

The fact that large companies now are putting their software research and development (not maintenance ) centers in Canada (just across the border in Vancouver) or in India speaks volumes. On the other hand, it may make it easier for me to find people…

I think the best solution for the US economy is Tom Friedman and others’ idea to allow a few million Chinese, Indian or Korean immigrants, provided they buy a house. Talk about a shovel-ready project….

(Via Greg Mankiw.)

Update March 11: This is indirectly hurting American export of education (where there is an $11.2b trade surplus. I have heard similar from other academics recently. I suppose this is good news for the Norwegian School of Management (we’ll get more and  better foreign students since the USA offers a less attractive proposition), but still, this is bad news overall.

Consulting as system and profession

Toppin, G. and F. Czerniawska (2006). Business Consulting: A Guide to How it Works and How to Make it Work. London, The Economist.

This is a useful but uneven book. Its main contribution lies in the development of a model called “the Business Consulting Ecosystem”, which describes the various entities in the consulting profession and how they interact. There are also good descriptions of how the industry has evolved over time and good interviews with many consultants and clients. I particularly liked chapter 11, which describes the markets for ideas and how companies try to capitalize on them, though that may be because one of the companies described is Index, which I worked for in the nineties.

On the negative side, the latter part (second half) of the book and the conclusions feel quite a bit like a Powerpoint presentation, with bullet points giving the outline and filler text added in. The book is also slightly dated, since it was published in 2004 and things have moved on a bit, though it does report on the transition to outsourcing and the increasing polarization between advisory consulting and implementation.

So, smart in parts, useful in general, but uneven when it comes to drawing decisive conclusions. Sounds like the consulting business.

IBM and the other Indian companies

Excellent article about IBM and the company’s foray into India – echoes the sentiments I heard from outsourcers when I was there. IBM and Accenture legitimizes the Indian outsourcers, most importantly in the eyes of the local politicians and the public, and legitimizes their strategy to move to higher-level work, in the process improving profits and finding believable career paths for their engineers, who will want to break out of SAP fiddling and support calls at some point.

A walk around Infosys’ Hyderabad campus

As part of a three-week visit at the Indian School of Business, I saw Infosys‘ campus in Hyderabad last Friday. It is extremely impressive, with park-like surroundings. My friend and colleague Ramiro Montealegre and I met with a group of managers in the Enterprise Solutions practice, as part of a joint research project. We then joined a group of ISB students for a presentation of the Hyderabad operation and a tour around the campus.

The Hyderabad campus houses 8,000 employees (or "infoscions", as Infosys terms them) and last year did export business to the tune of $250m. The campus (which by no means is Infosys’ largest, that is in Bangalore and Mysore) has training facilities with on-campus accomodation for 700 students. There are two large food courts, the obligatory cricket ground, mini-golf and all kinds of recreational facilities for the increasingly hard-to-recruit engineers (though they do receive 1.65 million resumes per year.)

I will let the pictures speak for themselves – it is quite a complex. 

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GM and IT outsourcing

Tony D. has some reflections to offer on GM’s current IT sourcing process – essentially saying that they are trying to copy BPX’s famous "divide and conquer" strategy without taking into consideration that the implementation part of that deal was a qualified success, at best. I wasn’t really surprised that BPX had had problems with their very creative deal, but confess to not having followed it after the initial story was published.

Tony is the man on outsourcing deals: His article gives some idea on how complex such a decision really is, and how much the history of the corporation shapes the thinking. As Click and Clack once said, when you have had a very small car for a while, you get so frustrated that you err on the other side, getting a huge monster just to make up for all those years with a mailbox-on-wheels. I wonder if GM is doing something similar: Setting up a deal that will give them total power to squeeze their multiple outsourcers – a position that looks great when the contract is signed but turns out to be untenable in the long run. In an outsourcing relationship, you need to worry about the long-term economic health of your partners. There, too.

Strong dollar, not offshoring and imports, behind US job losses

Interesting report on the causes of US job losses by Martin Neil Baily and Robert Z. Lawrence for McKinsey Quarterly (free registration required): Strong dollar and weak domestic demand is behind the disappearing US jobs, not primarily offshoring and imports from China. The remedies lie in weakening the dollar against, primarily, the Chinese Yuan, and in reducing the budget deficit. (These goals would appear to me to be somewhat in conflict, given that China is propping up the dollar by buying US treasury bonds).

The analysis of the IT job market is especially interesting and gives some reason for reflection: 

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