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30% of employees here and 70% abroadKevin Murtaugh The latest "spin" in Silicon Valley is we survived three-plus years of dot-com bust, downsizing and off-shoring. It is now inevitable that Silicon Valley will resume its rightful place as the center of the universe for technology and technology companies. Offshoring, to state the obvious, is a hot topic not just in Silicon Valley but worldwide. I'm less interested in "proving" offshoring is "right" or "wrong" and more interested in "proving" the various arguments are false or, at best, disingenuous. Only honest debate and full disclosure of the relevant figures can lead to a debate which has any hope of ever being "won." Attaching numbers to the debate is difficult, but let's try. (What did you expect? That's what we do here). Among the confusions being sown are hard numbers applied incorrectly, percentages based on faulty or mis-represented assumptions and, of course, self-serving rhetoric. The latest Forrester report revised their forecast to 3.4M jobs (up from 3.3M) moving offshore. They tried to minimize the political impact by claiming, among the companies they surveyed, "58 percent are not using--or planning to use--offshore information technology service providers." Said differently, 42% of companies are considering offshoring their IT. Even though Forrester is "independent" they still have to make money in the marketplace. It sounds like they feel a need to "play the game" by minimizing the impact of their own figures. This is one of the more charitable explanations I can think of when Forrester says 3.4M, "represents less than seven percent of jobs in the categories covered by the study, which include 'management,' 'computer' and 'legal.'" You mean only seven percent of the workforce is even at risk? Then why is everyone all worked up about offshoring? Let's go back to the Bureau of Labor Statistics (BLS) April, 2004 employment numbers, using their new "special" adjustment ("Beginning in January 2004, data reflect revised population controls used in the household survey."):
There are several convenient assumptions in the Forrester estimates, not least of which is limiting the study to, "'management,' 'computer' and 'legal.'" Using seven percent and 3.4M you get 48.57M, implying Forrester used the same classifications as the BLS. However, there are explicit "'management,' 'computer' and 'legal.'" sub-groups within the 48.7M, "Management, professional, and related occupations." If you use just those categories, which match the terms Forrester uses, they add up to 24.6M. Then instead of the headline seven percent, 3.4M is 14%! ALL these figures ignore offshoring in other categories. Are lost manufacturing jobs no longer newsworthy? What about call centers? And the oft-cited low-cost medical diagnoses? Even accepting a limitation to the categories Forrester claims to cover, there are questions. At the risk of delving into military jargon, what is the ratio of tip to tail? When you offshore seven percent of management jobs, don't you have to also lose something on the order of seven percent of supporting service, sales and production/transportation jobs? If so, the number jumps from 3.4M up to 8.7M offshored jobs. (6.3% of all jobs for those keeping score at home.) Long-time readers will notice I am using numbers from the BLS, whose objectivity can reasonably be considered in doubt, to sow doubt about another report. Let's try another angle. A recent Electronics Supply and Manufacturing Magazine survey (ES&M, the successor to the long-running EBN, or Electronics Buyers' News, which went under during the latest downturn.) The poll asked: "Does your company outsource any design work to independent design companies?":
These results suggest outsourcing is planned by 60% of companies. After three-plus years of downsizing and offshoring, most companies are down to their best, brightest and most productive engineers. An argument can be made 60% significantly understates the potential due to "survivorship bias." Said another way, even after three-plus years of downsizing and off-shoring, 60% of the respondents in this survey STILL plan to move more work off-shore! The popular counter-argument to all of these numbers and percentages is to claim the next recovery will be driven by start-ups. Since the "law of large numbers" dictates Cisco, Intel, Oracle, Hewlett-Packard, Sun, etc. will not meaningfully drive large numbers of new hires at this point in their life cycles. Much to my surprise, the local paper went a long way towards debunking the start-ups-as-saviors myth last week. Carl Everett, "Mr. Offshore" at VC firm Accel Partners is, "the guy who goes after Accel start-ups that are slow to move and tells them why and how they need to outsource work to other countries." Mr. Everett is driving, "a growing trend among venture capitalists to urgently -- and mostly quietly -- push (Accel-funded) companies to tap into larger markets and cheaper labor abroad." Notice how artfully this is written. The comment on, "cheaper labor abroad" is preceded by, "tap into larger markets" as though cheaper labor is not the primary goal. Where are "larger markets" than the US for IT and networking gear, telecom equipment or consumer products? Follow the money... "A recent internal survey of 45 of Accel's portfolio companies showed that 38 percent had undertaken moves to hire abroad. By 2005, the plan is to knock that up to 75 percent." You may also notice the argument which Accel feels they can "prove" is based on, "pages of elaborate profit-and-loss tables to prove his point that hiring abroad saves costs and boosts profit margins." Show me the money... The part Accel wants taken on faith is, "profits... help companies hire at home and create more jobs in the long run." Yes, Stephen Roach's "labor arbitrage" gets companies ahead. Are these companies then likely to dilute, or even forfeit, their labor cost advantage and start hiring in Silicon Valley? Or will they increase staff in Asia hoping to further leverage their gains? Money talks... Another popular counter-argument to the negative impact of offshoring in Silicon Valley is the claim companies are only off-shoring low-level engineering tasks. "New" engineering requirements supposedly will only be performed here in Silicon Valley. Conveniently, this same article goes on to say Accel's Everett, "wants to make sure start-ups hold to his time-worn tenets for offshoring the right way... the foreign engineering teams should work only on a mission-critical project." In an effort to soften Mr. Everett's image, a blurb went out the following day in which he gave advice to a student hoping to earn credentials which would be immune to offshoring. Everett's advice to the student was to focus his education and career on biotech. You mean to tell me that by the next day he had already forgotten his claim about how the offshoring his firm is driving toady will lead to more jobs locally? My grandmother used to joke, if you "forget," then it must have been a lie. I think it was Ben Franklin who said it was much easier to remember what to tell people if you always told the truth... The relevant number from Accel is 75% of companies will be required to focus on hiring offshore. In case you think this is a fluke, another piece of the puzzle is found in, "Executives in valley, workers offshore," which discusses the VC firm NewPath. NewPath's offices overlook San Francisco Bay and include "several empty offices with gleaming glass windows, all awaiting new CEOs for fresh start-ups." NewPath is using a similar strategy to Accel but ups the ante. "NewPath is building its entire model on offshoring, and that alone. It plans to form companies here with executives sitting in the glass offices, and then do most of the hiring in India." Indeed, "NewPath is taking the premise (of offshoring) to a whole new level." NewPath's CEO is quoted as saying, "The business model for venture capital is broken." This is followed by "Venture firms can no longer continue investing the way they were. You have to get creative about going to China or India." NewPath finally gives a number we don't have to impute, infer or solve algebraic equations to find: "30 percent employees here, and 70 percent abroad, is the rough target NewPath has in mind for its investments." NewPath's' CEO, "waxes at length about the talent here, the educational opportunities, the diverse immigrant population -- even the weather and the scenic view of the bay. They both say they prefer to live here rather than in India." (What, no reference to Buck's Café in Woodside?) Yet, even with all these wonderful and unique attributes, NewPath explicitly plans to avoid hiring in Silicon Valley. A full 100% of their companies will focus on hiring offshore. Conclusion: If start-ups are going to drive a recovery in Silicon Valley employment, it will be despite hiring 70% or more of their engineers in Asia. ### For more insight into what's really happening in Silicon Valley, visit us. Kevin Murtaugh Copyright ©View
from Silicon Valley, 2004. All rights reserved. |
