Offshore Snakeoil?

About 10 years ago, people were flocking into the software field. Everybody and his mother who knew what a font tag was decided to jump onto the dotcom bandwagon. It is so funny how the tables have turned since then. Nowadays, nobody wants to come near the software industry, for fear that the industry will be outsourced to India or China or some third-world country. As someone who is in the software industry, this trend is somewhat unsettling. If my job can be picked up and moved to Bangalore at a moment's notice, that certainly doesn't make me feel very safe. The main question is whether or not the offshoring frenzy is just a short-term fad or a long-term trend. I tend to believe that it will end up being a short-term fad. Hopefully I am right.

Others have quite eloquently discussed the pros and cons of offshore outsourcing of software development from the point of view of individual companies. Basically it boils down to cheaper labor versus inefficient production with a dash of abdication of intellectual assets. However, I do not see much discussion of the viability of offshoring from a macro-economic point of view. That is, is large scale offshoring feasible for an entire sector of the economy.

I think the main macro-economic issue is whether or not the third-world economies where offshoring is popular have the capacity to support the demand from the first-world software industry. At the moment, the answer seems to be yes. You never hear of companies whose offshoring effort fails because they cannot find workers. There are plenty of body shops that stand ready, willing, and able to provide cheap software developers. That is because the demand for such services is still quite low when compared to the supply. However, if the offshoring trend continues to grow, there will eventually reach a point where body shops cannot locate enough educated workers. That means that at some point, the price of obtaining such workers will increase as competition for this limited resource intensifies. Because the main benefit of offshoring is lower costs, any increase in the price of offshoring will offset this benefit, making the case for offshoring weaker and weaker.

Literary Ed: But India and China have such huge populations. Certainly there is very little chance that there will be a labor shortage, right?

That is an interesting argument that I hear from time to time. The fact of the matter is that these countries have a huge amount of poverty, by Western standards. Technology has not penetrated into these countries. In India, there is something like only seven computers per thousand people, which is low compared to Western nations. This is not the type of economy that can produce a large number of tech savvy individuals. Also, higher education is a limited resource that is only open to the "best and the brightest", so there is a limit to the number of educated software engineers that these countries can produce. This is in contrast to here in the West where higher education is available to pretty anyone who has the desire to learn.

On the other hand, if these economies were ever to improve to the point where they were on par with the US, there would no longer be a wage gap between the US and these countries. Again, this would pretty much wipe out any benefit of offshoring.

The other issue in terms of the supply of labor is the fact that a lot of the best and brightest are lured away from these countries by the promise of higher wages in the West. Here in the US, there are thousands upon thousands of educated software developers coming into the country on H1-B visas. These people end up making several times the salary that they would make in their home counties. It is not unheard of for these workers to work for a few years, make a killing in the US, and then return to home with a king's ransom, comparatively speaking. This only compounds the issue of the limited supply of educated people. The only way to curb this brain drain is by closing the salary gap.

Finally, it would seem like at some point, the software companies would emerge in these countries that would further siphon off the resources used for offshoring. With all of this supposed talent, why just be the cheap labor force for American companies. Why not start your own software companies and sell your own software, rather than just writing software for others? That's where the "real" money is, after all. It would seem as if this would have other ramifications for American software laborers like myself. If the American software industry were supplanted by the Indians or Chinese, I might be on the unemployment line, too. On the other hand, maybe these foreign companies would offshore their work to the US, in the same way that Japanese companies now employ American factory workers.

In summary, I have my doubts that offshoring will end killing the American software developer. There may be some limited amount of offshoring that will end up taking away jobs here and there. However, I do not think that large scale offshoring of the entire industry will be a viable option. The costs would just be too great as the demand for offshore labor drives up salaries.