The Another World: Outsourcing From Inside

By Dmitrie Highduke
Posted Thursday, December 9, 2004

Speaking of outsourcing I mean a wider sense than just hiring of manpower from abroad for some remote work. I can mark out four types here:

1. Outsourcing itself. A US or Western Europe company (let’s call it “the West”) hires an employee from Eastern Europe, Asia, etc., i. e. from a country with more poor economy (let’s call it “the East”, though it is not quite correct). This employee performs remotely some part of the work for a company from the West.

2. A company from the West hires a company from the East that performs all the work content for an employer and gives the ready product. In this case an employer appears for a reseller.

3. Not quite outsourcing, but it is related to outsourcing. A company from the West orders a product or a service at a company from the East for private use that is much cheaper than an analogous product/service by a company from the West.

4. Not outsourcing at all. An employee from the East moves to the West and works at a company.

However we are not interested in the fourth type now. The problem of outsourcing arouses a lot of discussions. On the one hand – those who immediately order and perform, on the other hand – specialists from the West who are being ousted from the labor market by specialists from the East. And it is the only significant disadvantage of outsourcing.

Surely, for people who lose their jobs because of foreigners this disadvantage is very significant, but nevertheless we should take into account the fact that only in the USA there are 340000 vacancies for programmers. Programmers from the West have two ways out: improve their professionalism to the level that no outsourcer could compete with them or to move to the East and become outsourcers.

So what can be opposed to this disadvantage? There are quite a lot of advantages. The most obvious among them is the considerable disparity between manpower costs in the countries of the West and in the so-called Third World countries. There are a lot of reasons; it is a question for economists, but all that comes down to the fact that the cost of living in these countries is much lower than in the USA or countries of Western Europe.

On the other hand, the professionalism of programmers, designers, etc. from not market-economy countries is highly competitive with the professionalism of Western specialists. The education system in the Soviet Union (and later – in the countries that became the USSR’s successors) is considered to be one of the best in the world; many specialists go to the West to work there, others are engaged in outsourcing. I am speaking of the countries of the former Soviet Union, because working with outsourcers from these countries is more profitable than with their Asian colleagues and developer from other countries of Eastern Europe. Of course, the benefit lies in the lowest manpower costs.

Now let’s appeal to the figures. When managers of a software or web design company plan to have resource to outsourcing, they usually aim to cut down expenses to 30% and more. I suppose that starting not only from labor hours, but also technicality, expenses can be cut down to 50%. These figures may be a little bit different depending on outsourcer’s geographical situation. As I already mentioned, if working with such countries as Russia and Ukraine, the profit gets still more. And it is while the quality is of the same high level.

Year by year greater and greater number of Western companies realize the advantages of outsourcing and collaborate with Eastern companies. As the IDC’s and Meta Group’s research show, 60% of midsized companies resort to outsourcing in IT development and web design. Forrester Research foretells that within the next 15 years 3.3 millions of jobs and $136 billions will move abroad.

Comparing different types of outsourcing, namely – the first and the second types, it must be said that the second one makes more profit since the cost value in this case will be less. The same reason is for buying a ready product or service by a company that is situated in Ukraine or Russia. Some companies are engaged exceptionally in reselling. That means that they find clients, pass an order to an outsourcer, pass the ready product/service to a client and get the profit that amounts to 100% and more.

Harking back to the words of some people who tell that outsourcers “steal” Western specialist’s work, I could say as follows. Economy controls the situation. It is market.

About the Author
Dmitrie Highduke,
TheAnotherWorld,
(http://theanotherworld.com/)