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Weekly Column

Body Count: Why Moving to India Won't Really Help IT

Status: [CLOSED]
By Robert X. Cringely
bob@cringely.com

There was a story in the news a couple weeks ago about how IBM was planning to move thousands -- perhaps tens of thousands -- of technical positions to India. This isn't just IBM, though. Nearly every big company that is in the IT outsourcing or software development business is doing or getting ready to do the same thing. They call this "offshoring," and its goal is to save a lot of money for the companies involved because India is a very cheap place to do business. And it will accomplish that objective for awhile. In the long run, though, IT is going to have the same problems in India that it has here. The only real result of all this job-shifting will be tens of thousands of older engineers in the U.S. who will find themselves working at Home Depot. You see, "offshoring" is another word for age discrimination.

India is a great place for high-tech. I visited Bangalore in 1997, and wrote a column about it that appeared right here. You can find a link to that column under the Links of the Week button on this page. Somehow all my 1997 columns seem to have disappeared from the archive, but I found the original (it also appears -- stolen -- here and there on the web) and will attempt to insert it in the archive. Wish me luck!

That column stands up very well and explains why India is such a great place for inexpensive software development. When I visited Bangalore, the era of "bodyshopping" was ending and "offshoring" was just getting started. Bodyshopping meant bringing to the U.S. engineers from India and other third world countries. They worked on short term visas, stayed together in crowded apartments, sent nearly all their money home to their families, and were paid paupers' wages by Silicon Valley standards. But offshoring is even better because it leverages not just cheaper labor, but a cheaper business infrastructure. Generally speaking, about six engineers can be employed in India for the cost of one non-Indian engineer in the U.S.

Moving technical groups to India is compelling for many reasons. There seems to be a limitless supply of good engineers in India, which will save lots of money in the short term. And those Indian workers will save lots of money in the long term, too, because they are generally younger to start with and their health and retirement benefits cost far less (if anything) compared to the benefits received by the U.S. workers being displaced.

If a U.S. employer said out loud, "Gosh, we have a lot of 50-something engineers who are going to kill us with their retirement benefits so we'd better get rid of a few thousand," they would be violating a long list of labor and civil rights laws. But if they say, "Our cost of doing business in the U.S. is too high, so we'll be moving a few thousand jobs to India," that's just fine -- even though it means exactly the same thing.

There is somewhere in almost every company a spreadsheet showing a cost-benefit analysis for every worker. It all comes down to a single lifetime number that is the difference between the expected earnings to the corporation that are made possible by the direct labor of that employee, and the total cost of that employee to the company in current wages and future benefits. Nobody admits the existence of this spreadsheet, which is probably illegal, but it is there. And at some point, it indicates in many cases that a worker has reached a condition where they are likely to cost the company more in future benefits than they will earn the company through future labor. At that moment, that employee becomes expendable. Forget that the business situation could change, altering the numbers. Forget that the employee, if he knew his job was in peril, might take action to improve his productivity. Forget that the negative number could easily be the result of a management error or misstep, and have nothing to do with the employee's effort. Forget that the calculation could be just plain wrong. No matter what happened to get the company and the worker to that place, it is in the interest of the company to get rid of the employee as soon as possible.

Older workers tend to make more money because they are in senior positions or have been with the company longer. They are closer to retirement so they have less time to earn, and are closer to receiving retirement benefits that only cost the firm money. They simply have to go, no matter what the law says, and companies find ways to help older employees leave.

From a typical employer's perspective, the perfect situation would be to have few, if any, retirement benefits, have employees remain with the company an average of five to seven years, and maintain the lowest possible average employee age in, say, the late 20s. If that sounds like Microsoft, it also sounds like every other high-tech company of note except perhaps IBM, which is where we came into this room.

So costs are out of line, that hidden spreadsheet is going berserk, and the best way out of this mess is to close a few divisions and ship the work to India. Even taking into account the logistical problems of having workers halfway around the world, costs of doing the same work will drop by 50 to 75 percent, with that savings dropping to the bottom line. Profits will skyrocket and Wall Street will be pleased.

But except for the numbers, nothing will have really changed.

I started in the computer business at Apple, and one of the statistics of which the company was most proud in those early days was how much revenue was generated per employee. Typically, it was in the range of $500,000 to $700,000, which was pretty amazing. I can recall Apple's first $1 billion year, and we had fewer than 2,000 employees at the time. The numbers at IBM back then were much lower, with $40 billion spread over more than 400,000 employees for an average of just under $100,000 per head. Figuring that the average IBM worker even back then was costing, say, $60,000 in wages and benefits, that left less than $40,000 per worker for capital expenditures, raw materials, consultants, advertising, company jets, and oh, profit.

In many ways, IBM is a different company than it was back then, but revenue per employee has barely budged. But it is not just IBM. Every big IT company is the same way, especially if services are a large component of what they sell. IBM, EDS, Accenture, they are all the same. And the reason they are the same is that these companies tend to think of their business in terms of billable hours. Yes, IBM also makes computers, but recently, they have made more money from billable hours than from building boxes.

Big IT companies think in terms of billable hours, and the way to maximize billable hours is by having lots of workers. Headcount is everything. It not only determines potential revenue, it also determines political power. If my division is bigger (has more people) than your division, I am more powerful you, you worm.

Since the start of the PC revolution, Information Technology has come to pervade the enterprise. Every desk has a computer, and every computer has a technician. A few years ago, experts started noticing that the productivity gains we expected for our MULTI TRILLION DOLLAR investment weren't coming through. "Next year," said the Chief Information Officer on his way to hiring a bunch of new people. "Next year." Only next year never comes.

The truth is that IT has led to many changes in the way we do business, and some of those changes are obvious improvements, but the success story is dragged down by the heaviness of the capital and labor investment required. If we save a head in accounting by adding a head in IT, are there any real savings? Certainly, there is in the eyes of IT management, because their power is enhanced by this scenario. Going beyond that, I'd say for the most part they don't really care. Considered in terms of Total Cost of Ownership, IT in large organizations is a train wreck.

Which brings us back to India and offshoring. So IBM and a number of other companies will send jobs to India. Profits will rise, but no head counts will drop. Head count will rise, in fact, because the heads are so much cheaper. Productivity for these offshoring companies will not rise. It will fall. It will fall simply because of the added overhead to support those longer information supply lines. And service to customers will not improve at all.

It is not that moving jobs to India is so bad, though I hate the weasel behavior behind some of it. It is simply pointless. What is needed, instead, is a new approach that diminishes the role of headcount in corporate power.

I am not talking about switching the orientation from headcount to costs. I am talking abut switching from headcount AND costs to true productivity -- getting the work done and the customer served as efficiently as possible. And this comes entirely down to hiring. It is not who you get rid of, but whom you keep.

Just as an example, there are programmers who are a hundred or a thousand times more productive than their coworkers, and every Silicon Valley startup is constantly on the lookout for that kind of genius. Those people work in big companies, too, but their impact is muted. What manager at any big company would trade 100 workers for one, no matter how smart the one? No manager would do that, and yet they should. Power and efficiency are in conflict here. And that's why we can scale up the software and the hardware, gaining efficiencies along the way, but we don't do that with people. It's not that we can't, we just don't. It is a disservice to customers and a drag on earnings. There is no rational justification at all for this headcount mentality, yet it still exists.

Productivity is producing more with fewer resources, usually with fewer people. It’s all about simplification, reducing or eliminating labor, improving tools, locking in on a standard approach and being smart about changes. Is this what IBM and others are doing? When was the last time a systems management product like Tivoli or OpenView really reduced IT labor? The IT business model is based on bodies. To improve profitability they are looking for cheaper bodies. They can't envision a business model where they can do more with fewer bodies. IBM has invested hundreds of millions in tools for its services division. Very, very little of it actually reduces the labor IBM needs to support a customer. This mindset is what is damaging the U.S. IT industry.

Ironically, there lies here an enormous opportunity for someone. An organization of talented people that can get its collective head around this problem and begin to see its industry, its work, and its goals in a different way will have a terrific advantage. IBM and companies like it are vulnerable.

And moving jobs to India won't change that.

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