Not outsourcing overseas can slow the US economy down, is it? I do appreciate just how counterintuitive and preposterous that sounds!
But, it’s not so ridiculous when you take into consideration what companies ‘give up’ in exchange for having a ‘hire locally only’ mindset.
Are we looking at our economy all wrong?
The mistake we make when wanting to improve the health of an economy is to focus on ‘more jobs’. I believe this is a mistake because the creation of more local jobs does not automatically translate into a healthy economy. If it did, then more government-created jobs would be a straightforward solution, which obviously is not the case. It’s something that former British Prime Minister Tony Blair and the Labour government tried in the late 1990s and throughout the early 2000s in the UK. While it felt good at that time, rather unsurprisingly, it didn’t work in the long run. It simply resulted in ever-mounting levels of national debt, which, in turn, has led to an indefinite period of austerity (and that really is not good).
But if ‘more jobs’ is not the answer, then what is? Perhaps, the really important question to ask is, “Where do the jobs come from?”
If ‘more jobs’ is not the answer, then what is?
Instead of focusing on ‘more jobs’, what I believe we should be doing is focusing on the health of our entrepreneurial environment. After all, it is business that creates jobs in the first place. Our focus on jobs is a good example of the confusion between cause and effect. Jobs do not make an economy strong. A strong economy creates a lot of jobs. If we go to the root, the secret to both, a strong economy and job creation, is entrepreneurialism. There can be no doubt in the fact that American entrepreneurialism is one of the major reasons why the US economy became so successful in the first place.
The American entrepreneurial environment is the most vibrant in the world. Take Microsoft, Facebook and Apple, for example – three world giants of the modern era. The success of these giants is partly due to American attitude towards business. All three companies were founded by college dropouts (and that too from highly prestigious universities). You would be hard-pressed to find such a mindset towards business elsewhere in the world, a mindset wherein students are so courageous and so aggressive in the pursuit of their dreams. You would also be hard-pressed to find an environment where students can raise huge sums of capital so easily!
The financial crisis of 2008 and its fallout have led some to believe that the ‘American Dream’ is over. This may be the feeling within the country, but the rest of the world still sees many success stories that indicate the big dream is still well and truly alive.
India, for instance, literally produces a trillion software developers a year. But when you are studying software development in India, the vast majority of students aspire to go and work for Microsoft, not create the next Microsoft (incidentally, the CEOs of both, Microsoft and Google, are Indian-born Indian Institute of Technology graduates).
Or take the even better example of Europe (rather, the European Union). Just like the US, the EU comprises first-world countries. The EU also has a larger population than the US (over half a billion versus 325 million for the US at the time of writing. It is set to change soon with Brexit). There is no doubting that the EU, like India, also produces huge numbers of talented software developers. Yet, when it comes to software, US corporations, and not the European ones, dominate the scene. Of the top 10 software companies in the world, 9 are American, with SAP as the sole European representative.
Given the comparability between the US and the EU nations in terms of culture and education, American firms seem to be disproportionally over-represented. Of course, there will be different reasons for that. My belief is that the American success story has been possible because of its culture – rather the attitude towards entrepreneurialism.
The phrase ‘the American Dream’ itself represents what I mean by this attitude towards entrepreneurialism. Whether you believe that dream is over or not, the reality is that the rest of the world never even had a dream to begin with. America was the only nation to even coin such a phrase. In comparison with the rest of the world, the US has an incredibly vibrant entrepreneurial culture. This is one of the key reasons why the American economy is the largest and most powerful in the world.
What does this mean for us going forward?
If entrepreneurialism is one of the most important facets of a strong economy and job creation, then surely what we should be focusing on is ensuring that we have an even stronger and even more vibrant entrepreneurial and start-up culture. [As a side note, by ‘start-up culture’ I do not just mean start-up/ new businesses launching. In fact, I am of the opinion that we have got the word ‘start-up’ all wrong.
The definition of ‘start-up’ should encompass established and existing businesses expanding and experimenting beyond their current core products and services. When an established business goes beyond its core competencies, it operates without the experience of a stable operating history in that competency. As such, any new project or department should be regarded as a start-up].
We thus need to ask two questions:
A simple barometer for an increasingly vibrant entrepreneurial culture is quite simple. It is one where we have more and more new and established businesses creating more and more new products, services, innovations and technologies. The more of this we have, the more job creation we will have and the healthier our economy will be. Entrepreneurialism, innovation and experimentation are thus all inextricably linked.
Of course, there are many factors that contribute to creating a vibrant entrepreneurial culture, like national infrastructure. Nonetheless, arguably one of the most critical components (for the US) can be summed up in one word,‘experimentation’. What we should want and what we need is:
But what leads to greater innovation and experimentation?
One reason that we have already covered is – attitude. But there are many other factors too. Improving the quality and robustness of education in our schools is another (for instance, greater exposure to learning coding and greater interaction with technology as a whole at school).
Making it easier for start-ups and businesses to experiment in the first place is another reason. If we want more ‘start-ups’ (again, whether from new or existing business), we need to reduce ‘entrepreneurial barriers to entry’. We need to make it easier for companies to experiment. We need to make it easier to launch new projects.
Chemistry provides us with a fitting analogy. Remember those graphs your teacher would show you at school regarding the ‘minimum activation energy’ required for a reaction to take place? By reducing the surface area of the elements, we reduced the activation threshold. That is exactly what we need to do with an economy, reduce the ‘threshold of business’, so that entrepreneurialism becomes easier. We need more business catalysts. If we do that, the by-product naturally will be more local job creation.
So, how can we make it easier for either individuals or an already established business to experiment? How can we create more business catalysts?
Government policy is one obvious answer. This is why many governments provide funding, grants and loans to start-ups and also often create special economic zones for start-up businesses.
Where governments do not support start-ups and slam infant businesses with red tape, the negative impact on the economy is clear to see. India is a classic example. For many decades after Independence, starting a business in India was a nightmare. You would get buried in government red tape right from day one. It could take weeks, if not months, to just incorporate your business entity. The result was a sputtering and weak economy. And even to this day, starting and running a business in India is difficult. You often find yourself spending countless hours engaging with government departments over trivialities that in the Western world would either be non-existent or a mere formality.
Governments should do more to reduce bureaucracy, red tape and even in some cases – regulation. Labor laws are a good example. I whole-heartedly believe in and support the rights of workers. Overly stringent labor laws can backfire and be counter-productive. For instance, when it comes to software development, projects often last for a handful of months. This is quite simply just the nature of software development. The world has changed. It is increasingly fast-paced.
If you want to experiment with a lot of different projects in software, you may only need a developer for a few months. But our labor laws are not abreast of these times as they are designed for indefinite positions. Technology is increasingly requiring ‘parachute employees’ and at the same time our labor laws are increasingly mandating we provide long-term security. There needs to be a conversation about the needs for small businesses too, especially when you consider the highly technical and rapidly evolving digital economy we must now do business in. While large multinationals can pay twice as much for contractors, this simply is not feasible for small businesses. The result is that it is harder for small businesses to innovate.
This sentiment of needing ‘parachute employees’ was expressed by Bob Hess, the CEO of Paragon Print Systems, in a case study that we filmed with him in 2015 (you can watch the case study by clicking on the link:
“The advantage is being able to start a project, scale up and scale down. It is typically not something you can do with your own employees. If you hire an employee in your company, you are really looking to have a permanent member of your workforce and the training side might take several months. You scale up the project, but when the project is done, you generally have to have more work or lay the employee off. That is not a good workflow, so with Virtual Employee, you can hire an employee for a project, start and stop, and you may not have the project for several months and then you hire for the next project.”
Not only this, many of my friends, who are in senior managerial positions in the UK, often tell me that they cannot terminate staff despite consistently poor performance from some of their team members. We recently had a client from Sweden tell us that it is literally impossible for him to fire staff in Sweden. He went on to say that the process can take years, and he said it with so much sincerity that we were left wondering whether he was exaggerating!
Another one of our clients from the US, with whom I filmed a case study in 2014, also explained his frustration at being falsely sued by a former employee, which ended up costing him $10,000 (you can watch that case study here:
If decision makers have to think twice about hiring staff, this is going to prohibit and not encourage more experimentation.
A new tax system could also be used to encourage greater experimentation. I strongly believe there is immense innovation ‘locked up’ in established businesses. Many well-established businesses are like a piece of coal. They have immense ‘untapped energy’ stored within them, which needs an ignition in order for it to be released. There is immense potential and opportunity already residing within our already established and profitable businesses. Governments should thus encourage and try to stimulate established businesses to go beyond their comfort zone.
A more lenient tax system/tax breaks could be implemented for businesses that launch new projects that are beyond the ambit of their current core competencies or where they invest heavily in new areas of R&D and innovation. I know such a policy would be highly controversial, vulnerable to abuse and some may even argue unfair. But wouldn’t such a policy also encourage millions of businesses to start pushing the envelope overnight? I believe so.
Just imagine the immense impact that millions of businesses having a more daring attitude to experimentation would have on job creation and technological advancement. Keep in mind that it is a courageous mindset for experimentation that created those profitable businesses in the first place. All I am advocating is to further foster an already winning formula.
I would advocate a different and significantly more lenient taxation policy and tax breaks for new businesses. We all know most businesses fail within their first year, and that even amongthose that do survive that crucial first year, many still don’t get past their third year. Given these grave-like numbers, would it not be more beneficial to do everything that we can to support the survival of a start-up business? Is it really logical to have the same tax policy for an infant business as one that has been operating for more than 20 years, even if the former is profitable? Would it not make more sense to have a more long-term view?
To have a more investment-centric mindset, that is, I will not tax you now, but bank on being able to recoup more from you 3, 5 or 10 years down the line by way of the fact that you did not cease to operate after just one or two years in operation.
If governments implement such policies, what you will get is greater experimentation – just the thing that we need to ensure a vibrant and diverse entrepreneurial environment.
But is there anything else that we can do to make it easier to experiment?
Are there any other entrepreneurial barriers to entry, ones which a government cannot influence (at least not in the immediate or near future)? Yes, and they are so obvious and we are so accustomed to them that we probably do not even identify them as barriers. They are things like, time to market, access to talent, high salaries, capital investments and scalability. Factors such as these contribute to either stifling or promoting experimentation. If you disagree, just take a look at the impact technology has had on entrepreneurialism in the past decade alone.
One way we can (and already have) reduced the aforementioned barriers to entry is via innovation and technological advancement. Universal high-speed internet, the cloud and open source software means you can now (as millions already have done) start a business from your home. Because of these advancements, it now costs a fraction of what it did, say, 10 or 20 years ago to start a business.
Twenty years ago, if you wanted to start an ecommerce business, you would have had to hire a web developer right from the very outset; a heavy expense for any start-up to bear. But now, creating a website has become so easy that in some cases, you don’t need a web developer to start with. And even if you do, it may only be a few hours of assistance from a freelance developer that you need. In other words, it’s now significantly cheaper to launch an ecommerce website. Now you can launch, keep your costs to a minimum and once you start generating some revenue, then take the risk and bring on board a full-time web developer.
Such advancements in technology make it so much easier to, as they say, “take a punt”. Starting an ecommerce business is radically different and a far less risky proposition than it once used to be. Let alone reduce your expense, technology has almost completely eradicated the web development expense all together (at least at the time of launch). Technology is completely changing the game and the dynamics of business start-ups.
Another example of how technology is making entrepreneurialism and business easier is that of hardware. Where even just 10 years ago a young business would have had to waste time and money on setting up server rooms, now with Amazon’s web services, a start-up can have as secure a hosting environment as an enterprise corporation! And that, too, with just a few clicks of a mouse and without any capital investments. This is an amazing level of progress within the space of just a few years. More importantly, it is an example of how technology is increasingly making business easier.
The key takeaway is very clear. As technology continues to advance, the number of entrepreneurs or solo entrepreneurs goes up. The easier you make it to become an entrepreneur, the more entrepreneurs there will be. Humans are innately resourceful. The progress that mankind has made within the space of just 10,000 years is testimony to this. Make it as easy as possible! Give people the tools, resources and the most fertile environment possible and the rest will take care of itself.
However…technological advancement is not the only answer
Just as technology reduces overheads, capital investments, increases time to market and gives businesses greater agility, outsourcing overseas lowers each of these barriers to entry too. That this is a fact surely is not up for debate. When you outsource, employee salaries are, of course, significantly lower. Not to mention, you also have no overheads nor support staff management. Outsourcing is also on demand. Thousands of times, over the past 10 years, we have provided talent for companies within days/weeks. Talent that would have taken our clients months to find had they recruited themselves locally.
Hence, whatever your opinion on outsourcing overseas is at this point (whether you perceive it as good or bad), my hope is that we agree on 3 points:
Just because outsourcing is beneficial in some respects does not mean that overall it is good for the US economy
Even if I have been successful in convincing you that outsourcing conveys some benefit to the US economy, you may be of the view that overall it still has a negative impact. So, let’s consider why you may think this.
Why do most individuals hold the view that outsourcing is not good for the US economy? Let’s answer this question succinctly. Essentially, outsourcing is an import and we all know from basic economics that the more we export and the less we import the better the shape our economy will be in.
Hence, irrespective of the fact that outsourcing enables more experimentation, because it is an import, most will still view it unfavourably. Outsourcing means US dollars are leaving the country, funds that could be invested locally are now being invested overseas. It does not take a rocket scientist to deduce that this simply cannot be beneficial. Outsourcing means that someone locally lost a job and this simply cannot be beneficial.
Why this view of outsourcing is inaccurate
When you look at outsourcing superficially, it looks bad. US dollars are leaving the country. Locally, people are losing jobs, etc. The perception of outsourcing is not good. And most of us do not have the time to undertake a deep and comprehensive analysis to see first-hand and appreciate the actual ground reality of the businesses that are outsourcing.
As someone intricately linked with outsourcing, I am fortunate to have a comprehensive picture through the experiences of my clients. And what my clients tell me is that their projects were simply not getting off the drawing board, despite a sincere effort to hire locally. Outsourcing enabled them to finally hit the ‘launch’ button. Surely there can be no better vindication of the positive impact of outsourcing. Unfortunately, most people don’t get to speak to small business owners as I do and thus see this ground reality.
The only way to break the inaccurate perception of outsourcing is if we appreciate and realize that not all imports are equal. There are two types of imports. The first type of imports is constructive; they enable you to create something of value, like raw materials. The value of importing raw materials is surely obvious. If you stopped importing raw materials such as cocoa beans and sugar, there would be no Hershey’s or Coca Cola – this obviously would hurt the US economy. The reason behind importing raw materials is that it is beneficial because it is not an end product or service. Rather, their import enables you to create an end product or service. They are a ‘value addition’. They provide an economy with something of value that it did not possess. By adding to an economy a raw material it does not possess, it enables that economy to increase the breadth of products and services it can now build.
The second kind of import is an end product or service. A good example of this is German and Japanese made cars. The importing of Lexus cars provides no intrinsic value to the US economy.
In short, some imports are valuable, while other imports add no value. The mistake we make when it comes to outsourcing is to misunderstand the type of import it is and the value it adds by way of what it enables us to create.
Importing manpower (which essentially is what outsourcing is) in business terms is the equivalent of importing a raw material. Why? Because it is not an end product or service. You import sugar and create Coca-Cola. You import software developers from India and then go on to create the end product of software. Yes, outsourcing means that it is Indians who built the software, but that does not mean the product is not still ‘made in America’. There is and can be no debate on this. It is an American firm that will after all own and sell the software, the tax from the profits of which shall be paid in the US. Importing manpower can thus be beneficial, for it enables the US to create something of intrinsic value.
It has been anticipated that there is a shortfall of 1.5 million data scientists in the US. What do you do, when there is a demand for say 2 million data scientists, but there are only, say, half a million data scientists available within the country? This is why the ‘someone lost a job locally because of outsourcing’ argument often fails. More often than not, if outsourcing did not take place, it would not have resulted in someone getting hired locally anyway. There often is no local job to be outsourced in the first place. And even if there were, say, 2 million data scientists in the US, how many small businesses can afford to fork out over $125,000 to employ one?
Consider this. The US imports software developers, but it then also, as a result, exports software to the entire world. If the US were importing software from India, that is, then you know your economy is no longer leading the way. That is not the case. Given that India imports from the US all of its software, despite the fact that Indians play a significant contributory role in creating the very software they are importing, one could argue that in this respect the US economy is in a very healthy position. Furthermore, perhaps India would have a better chance of exporting software to the US if its developers were not already working for US corporations. By hiring Indian developers, US firms neutralize any cost advantage Indian firms have over them. The US is leveraging imported Indian talent to then go back and export to it. That is smart economics.
More importantly, importing manpower enables more US firms to create more products and services of value. The lower the threshold of business, the more the people that can be a part of the entrepreneurial landscape. Outsourcing now means it is not just the large multinational corporations that get to have all the fun. Outsourcing enables individuals to create software they simply would not have dreamed of hitherto creating locally. Keep in mind that the number of individuals that get VC funding is minuscule (one such example of this is Ike, who dropped out of college to create a social media platform. You can watch his journey of hiring Virtual Employee software developers in India here:
The end product/service has the biggest impact on an economy
The real measure of the strength of an economy is the number of end products/services you create and how many of those are exported. That is where the biggest impact on the economy will be. Why? Because it is simply a fact of business and economics that for every $1 you spend on importing raw material, you go on to create $10-$100 in value in the end product/service. The greatest impact on an economy is at the end of the chain.
We thus need to concentrate on the end product/service. This is why I said at the beginning that we need to focus on entrepreneurialism and not jobs, because truly innovative and valuable entrepreneurialism occurs at the end of the chain, at the product/service level. In contrast, jobs are at the beginning of the chain. While still positively beneficial to an economy, they, nonetheless, pale in comparison to the contribution an end product/service has on an economy.
The US has the strongest economy in the world not because its organizations employ the most people, but because American-made products and services dominate pretty much every single industry you can think of. Whether it is Hollywood movies, Levis jeans, Microsoft software, Apple iPhones, social media websites, defence contractors, construction and food and beverage. American end products and services dominate not just in the US, but around the world.
This can be demonstrated with a hypothetical example. If European firms were to hire every single American, so that every American was employed (by a European company) and no one was unemployed, would the US economy be in a better or worse state than it currently is in now? While, of course, European firms investing in the US would have a positive impact on the economy, that benefit is insignificant in comparison to the impact products/services sold by US firms has on the economy. In this hypothetical example, there would be no Microsoft, Facebook or Apple. Hence, in this hypothetical example, despite the fact that more Americans would now be employed, the US economy would nonetheless be in a far worse economic situation. This is because most of America’s wealth would be lost due to there being no American-made end products/services; in other words, where the majority of an economy’s wealth is generated.
We must focus on entrepreneurialism and end products/services – this will have the biggest positive impact on the economy. What anti-outsourcing advocates completely ignore is that outsourcing enables more US firms to create more products/services that have intrinsic value. Anti-ousourcing advocates are ignoring the positive impact the end product/service has on the wealth of the nation and the fact that such an end product/service may not have been created without the aid of offshoring.
Outsourcing is thus a scenario whereby you are losing a cent, but creating a dollar in return. Yes, a ‘cent’ is lost to the economy; those funds go overseas and are invested overseas. But if you create a dollar worth of value in return, is it really logically to focus on the ‘cent’ that is ‘lost’? If we spend millions importing sugar, but with that, if go on to create a billion-dollar company like Coca-Cola, we need not be concerned.
Now that we have established that end products/services are significantly more impactful to an economy than raw materials, the flaw in the anti-outsourcing argument becomes glaringly obvious. Why are anti-outsourcing advocates not focusing on imports at the end of the chain, where the biggest impact is?
If the outsourcing of jobs to India is detrimental to the US economy, is the importing of German and Japanese cars not many folds worse? When you buy a foreign-made car, there is absolutely no value being added to the economy (unless you include aesthetic value). In fact, they end up creating more Detroits! By contrast, if a one-man band located in a remote part of the US (where hiring local tech talent would be very difficult) was to hire a remote software developer in India, we immediately pounce on it and fail to appreciate the value such a move is adding to that local economy. The ‘is outsourcing good or bad debate’ is thus a highly ironic one.
The same applies to the ‘Made in China’ debate that is currently raging due to President Trump’s rhetoric. The point everyone seems to have missed is the fact that Americans don’t want to make Nike shoes, they want to wear them. And even if they wanted to make Nike shoes, they nor anyone else in the world is going to spend $250 on a pair of sneakers. Outsourcing these jobs to China enables American firms to dominate on a world scale.
This is another example of why we must focuse on the end of the chain, why we should focus on end products or services being sold by American firms. Without Indian or Chinese workers to help us along the way, we often would not be in a position to have as many American products/services as we currently do. This reflects just how poor our understanding of the impact of outsourcing and imports are on the US.
You cannot thus, on the one hand, take an anti-outsourcing stance and, on the other, buy German cars, drink French wine and wear Italian clothes. Those that argue against outsourcing but then buy German cars are frankly contradicting themselves. If anything, when you buy a German-made car, you are helping foreign-based corporations directly compete against American-based corporations. This is not the case when it comes to outsourcing. Outsourcing enables US firms to not only out-compete foreign firms, but compete in more marketplaces.
The biggest contradiction and flaw in the anti-outsourcing argument is the failure to acknowledge the lucrativeness of the end product/service. In short, if we believe hiring software developers in India is detrimental, then surely we must also acknowledge that using German SAP software is even worse although this contradiction goes unnoticed.
A few years ago, I was at a marketing conference in the US. Naturally, you get talking to and networking with a lot of entrepreneurs. Whenever I suggested to fellow entrepreneurs that we could help them with some of their talent crunches, my suggestions were very quickly flat-batted and met with disdain. It was clear that they were not fans of outsourcing, probably because they, too, think outsourcing is ‘not good’ for the US. What was very interesting was that many of these entrepreneurs were using a software called VWO (Visual Website Optimizer), an A/B testing software for websites.
In the CRO (conversion rate optimization) market, there are two big players in the field. VMO is one. And the other is Optimizely. VMO is an Indian company and Optimizely is a US-based firm. No one has an issue with American firms using VMO software. But, if Optimizely were to have hired the individuals at VMO, many would have cried foul – “America first!”
We have no issue with importing software/services despite the impact of such actions being detrimental to the economy. The former takes funds away from US corporations, the latter enables US corporations to increase their market share. We have got our understanding of outsourcing completely the wrong way around!
Had Optimizely, hypothetically, hired the folks over at VMO, Optimizely would have now been the sole player in the market. Outsourcing would have enabled them to neutralize foreign competition. They would not only dominate in the US, but also overseas (VMO has eaten into their market share on both fronts). The most important thing we can do to help the US economy is to focus on entrepreneurialism, to focus on products/services – not necessarily just jobs. If we do that, more local job creation will take place organically. To view an economy and job creation only through the lens of local vs. offshore employment is to view a complex environment from only one perspective.
Perhaps we fail to see these ironies because outsourcing is visually very concrete. When you see a US firm hire software developers in India, it creates a very concrete image. Not to mention a psychologically painful and sticky one; the thought of losing local jobs understandably creates strong emotions and fear. In turn, it is very easy for the media and politicians to leverage these fears and emotions and use them to advance their own personal agendas. Our minds perform a very quick heuristic game of mental association. Indian developer equals American developer got displaced (irrespective of the fact whether an American software developer would have got hired in the first place), and this rouses our patriotic sentiments.
By contrast when you buy a BMW, this does not create a concrete image. You simply see a car, you don’t see any Americans losing any jobs, even though that is exactly what is happening when you don’t buy an American-made car. Furthermore, importing foreign-made goods and services often has a positive emotional foundation. We like driving BMWs, eating Belgian chocolates and buying high-performance Sony TVs.
The second reason we fail to see the above-mentioned irony is because, as outlined at the beginning, we think in terms of jobs, rather than entrepreneurialism. The word ‘jobs’ strikes a chord with our emotions; it’s something we instinctively want to think about and protect. Only if we shift our thinking will we truly understand and appreciate what has the most significant impact on an economy.
Why increased experimentation in the long-run pays off even if we have to outsource to do it
When thinking about the health of our national economy and the impact outsourcing has upon it, there is one more critical cohort analysis that we need to undertake. Just as the creation and contribution of a product/service has the greatest impact on an economy; likewise, established businesses have a far greater impact on an economy than start-up enterprises.
It is not just that we want our nation to create more products/services; we then want those enterprises to grow and become established and profitable businesses. The more profitable a business becomes and the longer it is in operation the significantly greater its contribution to the economy will be in terms of local job creation, tax revenue and innovation.
As a rule of thumb, the contribution that a software development company with a 2-year operating history has will pale in comparison with the contribution a software development company with a 20-year operating history has on the economy. Once we fuel more experimentation, we need to do everything we can to give these enterprises the best chance of staying on course for the long haul.
In the book, The Lean Startup, Eric Ries advocates that start-ups should be judged differently. Because start-ups don’t have a long and stable operating history, we must use different metrics to judge their productivity as opposed to gross metrics (often vanity metrics).
Likewise, in terms of a businesses contribution to a local economy, what I am advocating is that we view start-ups (a new business or an established one) in a different light to that of already established projects, departments and companies.
A project/department has two phases. The ‘growth start-up’ or ‘incubation’ phase and the ‘established phase’. As most projects die and are small in the incubation phase, their contribution to the economy is negligible (and accordingly, we should not focus on the contribution they are making, whether in terms of tax or job creation). You don’t thrust a child basketball prodigy into the NBA at the age of 16, no matter how good he might be. You will get a lot more if you are patient. Businesses can leverage outsourcing to make it easier to get to the established phase and once there, that is when they can really ‘cash in’.
Which is a better scenario? A US firm with a 2-year operating history having only a ‘hire in the USA’ policy and lasting 5 years. Or a US firm with a 20-year operating history that outsources to India. The latter scenario will result in more local US jobs and more tax revenue generation, isn’t it?
The A-D model of business
Outsourcing is but yet another channel and method for helping us achieve both these objectives.
To truly appreciate and understand the true and long-term impact of outsourcing, we should take the following view of a nation’s entrepreneurial landscape:
What we want is more and more projects launched.
Once launched, categorize these projects differently; identify that these projects are in the growth phase. The growth phase is very hostile and the probability of death is high. Hence, the objective of phase B is to get to phase C as quickly as possible, the ‘established phase’. To do this, we need to give our project the best possible chance of surviving this phase, that is, we need to make this phase less hostile.
We know we have arrived at phase C when our project has been profitable and stable for a prolonged period of time (it varies from industry to industry).
Phase C will organically result in phase D; hiring locally and in much greater numbers than the project could have done in phase B. In phase B, the start-up is not profitable; your number of hires is thus bootstrapped. In phase D, you are profitable and likely to be growing; you can now hire in much greater numbers. It is only once we arrive at this phase that we should judge the contribution that a project is making to local employment.
In this respect, the debate about whether outsourcing is ‘good or bad’ boils down to two different mindsets about job creation. One mindset that looks at how much a project can potentially contribute in the long run and one mindset that focuses purely on the immediate impact of its activities on local job creation.
Say, you hired 3 software developers in India to make launching a new project more viable (phase B). If a year down the line the project is successful, you organically will start hiring several staff locally (phase D). By contrast, if you insist on hiring locally in phase B, take 6 months to recruit a developer (and then only hire 1 as opposed to 3 developers, if your budget is small), you are significantly handicapping your project’s chances of success.
Yes, you might have hired one developer locally, and thus are making a ‘local contribution’ (albeit a very small one), but your project may not ever get beyond that small level of contribution. On the other hand, while to begin with, you may have hired 3 developers offshore to give your project an initial ‘trigger’, in the long run, you may end up hiring significantly more than 3 staff locally because hiring offshore has made it easier to get to stage D. Sacrificing the success of a project, ‘phase C’ for the ‘trigger’, phase A-B is counter-productive; it should be the other way around. If hiring offshore enables a new project to be launched and helps it grow to a point where, in the long term, it helps in local job creation, then not outsourcing in such a scenario slows down the US economy.
’Hiring locally vs. hiring offshore’ is not a mutually exclusive debate or scenario. The mistake we make is to see it as an ‘either-or’ situation. Of course, US firms should hire locally. But that does not also mean (nor is this in conflict with the fact) that there cannot be circumstances where it is beneficial to the US economy for US firms to offshore; such as:
It is for the same reasons that we have brain drain. Just as skilled migration has a positive impact on a local economy facing a local talent crunch, the same principles are at play with outsourcing.
Olivier Cant (the CEO of Exxoss, a Belgium-based Infrastructure-as-a-Service company), in the following short video explains how hiring Virtual Employee’s software engineers in India enabled his company to hire more staff locally:
The virtuous circle of entrepreneurialism and job creation:
Viewed in this light, outsourcing to India can help Western economies unlock immense business opportunities. As I have touched upon above, immense potential is ‘locked up’ within already established businesses because too many entrepreneurs have the fear of failure. Established businesses often get into a ‘comfort zone’, – they are making a healthy profit, and they do not want to potentially risk and jeopardize all of that by going beyond what they know.
For a national economy, however, when established businesses get into a comfort zone, it causes stagnation. Hence, in addition to helping not only new businesses, outsourcing to countries like India can be instrumental in unlocking the huge job creation potential tied up already within existing businesses, just like it did for Exxoss. As Olivier said, it simply would not have been possible to run the new projects he did with Virtual Employee locally because of the costs and risks involved.
The link between hiring offshore and (in the long-term) creating local employment is not always easily identifiable. It is not apparent because once again the links are not ‘concrete’. ‘If I hire an employee locally, how on earth is that hurting local employment? That is completely crazy, of course, it is not!’ That would be the reaction from most people. But the reason these links are not concrete and easily identifiable is because we are making the mistake of viewing start-ups in the same vein and light as we do for established projects. It is a bit like saying increasing taxation for start-up businesses is good for the economy because it increases the governments ‘coffers’. Until we break entrepreneurialism down into the A-D model I have proposed above, the benefits of outsourcing will continue to be hard to perceive and appreciate. This is also why we implement the absurd policy of taxing a start-up business as we would a billion-dollar business. We are unable to see the fallacy in such an approach because we don’t think in terms of the A-D model.
In the hypothetical scenario I gave earlier of a start-up ecommerce business, I made the point that now due to advancements in technology; you often do not have to hire a web developer to start your business. One could thus say technology is hurting the local economy because technology has prevented a developer from getting hired.
This, of course, is incorrect. The developer, in most cases, would not have got hired anyway. Technology did not prevent a web developer from getting hired in the example above; rather it has helped to create a business for an entrepreneur who otherwise would have not had one. Technology helped to create a business that one day might go on to hire a developer. Had technology not improved as it has, most start-ups would not have even bothered to incorporate a web developer because the costs simply would have been too high.
Just as it is easy to misread the relationship between technology and job creation/ job loss, so too is the case with outsourcing and local job creation. We must not just look at what we think we are losing (again, as mentioned above, often we are actually not losing anything because not hiring offshore does not necessarily result in someone being hired locally). We also must look at what we are gaining, that is, by leverage both technology and outsourcing, we get more people going into business.
We cannot condense the impact of outsourcing to simply that of ‘someone locally did not get hired’. We must wait for the experimentation to complete before we can deduce the true local impact of outsourcing overseas (that is, because anti-outsourcing advocates have tunnel vision and too short-term an analysis that their arguments do not add up). This can take many years. If we do this, the revenue that will be generated locally in the established phase will far outweigh what was sent overseas in the growth phase. Like technological innovation, outsourcing is thus another solution we can leverage to achieve all-round, higher levels of experimentation within an economy.
Does this mean an established department outsourcing hurts a local economy?
There are two reasons for this.
Firstly, where an established department seeks to either break a plateau or stimulate much higher levels of growth than are currently being achieved, that department will have to once again experiment, that is, go through another ‘growth’ phase. While an established project can take on greater risks and experimentation than a start-up project (and thus make hiring locally more feasible), this does not mean an established project can take on every risk.
When the level of risk surpasses a certain threshold, outsourcing, even for an established department, can be the solution to greater experimentation and thus potential growth. In this scenario, the A-D model simply repeats itself. Even an established project can go through a growth phase equivalent to that of a start-up’s growth phase. It simply depends on the scope of experimentation. If outsourcing enables you to achieve greater opportunity gains than you could by not outsourcing, the positive impact of outsourcing on the economy holds true.
Further, many established businesses avail our services because they cannot recruit locally the skilled staff that they need, particularly where they are facing competition from larger corporations. In this scenario, such companies take either one of two actions. Either they outsource the position, or they do nothing.
Where such businesses do nothing, that is, not outsource a position they cannot fill locally, they are acting in detriment to the local economy for reasons that by now should be apparent and they are inhibiting growth and experimentation. We thus come full circle to the point I made at the beginning of this post.
I am myself, for instance, a business owner (VirtualEmployee.com is an outsourcing company based in India). One job vacancy I have struggled to fill recently is that of ‘senior content marketer’. It sounds a little ironic me saying this, as one of the biggest advantages of outsourcing is access to talent. We, VirtualEmployee.com, are in the business of helping other companies overcome their talent shortage woes, and now here I am in the same boat as many of our clients – struggling to close a position.
Am I contradicting myself? No, I am not. Outsourcing can and will help you when you are faced with local talent shortages. But that does not mean outsourcing can help you close every single position in every single domain on the face of the planet. Outsourcing is not a ‘magic pill’.
Secondly, just because I am struggling to close my position for a senior content marketer does not mean you cannot outsource content-writing/ marketing (content marketing is still a different role) to India. The vacancy I have created is very bespoke and based on my very specific and niche content/marketing expertise. I am not looking to close a ‘standard’ senior position. Let’s not get overly sidetracked by these details, however.
The key points here are: ‘What are the ramifications of not being able to close this position?’ ‘What is the opportunity cost of being unable to close a job vacancy for such an extended period of time?’ Let’s consider them.
To measure the opportunity costs of not being able to close this position, first we need to consider, ‘Why do I want to close this position in the first place?’ Well, because I have an elaborate and comprehensive plan to expand the scope of our current digital marketing and content marketing activities. One that I am confident can significantly increase the number of leads our company generates. [I appreciate you have no reason to take my word on this, but for the sake of argument and for the purposes of this post, let us just hypothetically imagine that I am indeed right, that is, my plan would significantly increase VirtualEmployee.com’s leads.]
Given this, the opportunity costs that have arisen from not being able to close this position quickly are immense. Not only in terms of VirtualEmployee.com’s growth, but critically also in terms of local employment and the contribution to the Indian economy.
So, if out of frustration, I decided to hire a remote content marketer in, say, the UK, would I be hurting the local Indian economy? Would the outsourcing of a position that I have been unable to fill locally in India be detrimental to the local economy?
Of course not. It is clearly absurd to think this. If I could successfully outsource this position to the UK, is it not very clear-cut that outsourcing would be benefiting the local economy in Delhi (provided my digital marketing strategy did reap the rewards anticipated). If, by outsourcing to the UK, greater company growth was stimulated, what would be the net result? More jobs would be created locally. Simple.
Outsourcing to the UK in such a scenario is clearly adding value to the local economy. It is providing the local economy with a solution, with a skill set that simply does not currently exist in the local market. In this respect, outsourcing is a value addition and that value is the prevention of opportunity cost losses.
This is critical, because it makes Indian companies more competitive on the global market. If by hiring a remote content writer in the UK, I am able to generate more leads and clients for VirtualEmployee.com, is this not helping us outcompete, say, Filipino or Ukrainian outsourcing companies? Is there not a clear link between outsourcing and a more robust and competitive local economy? The dynamics behind this hypothetical example of VirtualEmployee.com outsourcing to the UK and US firms outsourcing to India are the same.
When outsourcing, we must ask what the opportunity costs/gains are before coming to a conclusion about the positive/negative impact of outsourcing. Such a calculation is rarely made.
‘Faster time to market’ might sound like a fancy ‘slogan’ marketers throw around to make outsourcing seem appealing, but I assure you it is not. The personal pain-point I have shared is not the exception, it is the norm, something all entrepreneurs face – even large multinational corporations (remember Bill Gates recommending an easing of H1B visa restrictions?)
It is one of the biggest drivers of why clients come to us. Robert Hess, the CEO of Paragon Print Systems, whom I mentioned earlier is one example. He was taking up to 6 months to hire developers locally! If you think in terms of opportunity cost loss and apply the compound effect, having projects stall for 6 months is in no way good for a local economy and local employment.
The reason we fail to identify this unacknowledged truth is because, instead of the A-D model I advocate, we use the following formula: hiring locally = more local jobs. But as should by now be apparent, this is inaccurate.
What we must not forget is that an insistence on hiring locally can result in a plan being stuck on the drawing board, that is, it is not even at stage A, it is at point zero. It is going nowhere, generating zero opportunity for my business or leads and thus contributing zero to the local economy. Outsourcing often enables going from point zero to point A and point B. At point B, I am now only a step away from phase C, the point at which it will be very easy to hire locally. Outsourcing often increases the probability of one day easily being able to hire locally and that too on a mass scale.
This is best exemplified by start-up businesses. Many individuals with a bright idea cannot experiment simply due to a lack of funding. If outsourcing enables new businesses to start off and get a foothold, surely that is beneficial?
This point and the A-D model of entrepreneurialism that I have proposed was echoed by Ike (who I already mentioned earlier in this post). Ike was studying at a university, but decided to drop out and develop a new social media app. Short of funds, he hired several of Virtual Employee’s developers in India. This is what he had to say, when I asked him what his response would be to anti-outsourcing campaigners:
“Well, I’d ask those people to take a more long-term view or try to see things in a big picture. As a start-up company, you don’t necessarily have the funds to build the team locally at any point in time. That can be an extremely capital-intensive venture. By outsourcing that work, we were able to secure a foundation and a future for our company so that one day we would have the infrastructure in place to support a local team. I’d say that it’s really better late than never and that at the end of the day, we do make a contribution to the American economy and it really actually can’t happen unless we do outsource that work for some time. Outsourcing is necessary for a lot of companies. Without Virtual Employee, we wouldn’t be here. There’s just no way that we could have afforded to do the things that we have done overseas, in this country,” (click here to watch Ike’s case study)
In this passage, Ike truly hits the nail on the head. What a lot of anti-outsourcing campaigners are not appreciating is the principle of ‘better late than never’. Is it better that a start-up doesn’t even start, or is it better that a start-up is able to eventually make a ‘contribution’ even if initially it has to outsource?
The fact is that without outsourcing, many US start-ups would be unable to launch and this would stifle US innovation (a lot of consumers never realize that the software or technology that they are interacting with was initially developed in India). Often, there simply is no other viable local alternative. It is, for instance, simply not feasible for the vast majority of university students to start developing software that would require the hiring of developers that earn $80,000/annum (and more often than not recruiting such developers would not be easy). If start-ups such as Launch Pad Pro did not outsource, it is not as though they would then go and hire a developer locally (unless they got considerable VC funding). Rather, they simply would never get to stage A or B. You simply would not get as much experimentation and as many start-up projects without outsourcing.
Viewed correctly, outsourcing is a business incubator. It is a strategy we can lean upon that can provide an infant project with an environment which aids growth (and with growth will come local job creation. Of the many start-ups that we have worked with over the years and that I have spoken to, they all have the intention to eventually hire locally once they are in a position to do so). Outsourcing is in this respect enabling more of what makes an economy successful.
If you want to promote local employment, ask any CEO and they will tell you the biggest driver of local employment is company growth. If you need to stimulate and incubate that initial growth by outsourcing, then that in no way is a detriment to the local economy. If it takes you months and years to launch a project, you are going to hinder your company’s growth because that project is not contributing anything to the local economy.
We must realize that what makes the US economy so great and strong is the fact that you have individuals like Ike. An economy where students have the courage to leave university and try new ideas and businesses is what distinguishes the US economy from many other nations, even developed ones. Instead of reprimanding and scolding the actions of such organizations, we should rather praise their entrepreneurial spirit.
The health of an economy/local economy is always about focusing on the bigger picture. If you are racking up huge levels of opportunity cost losses by not offshoring, then in the long run, the US economy’s true potential will not be realized. We are so focused on phase B, we totally forgot about the most integral phase, which is phase C.
In conclusion, business success, job creation and the strength of an economy are all about opportunity costs. We must do what enables us to seize the greatest opportunity cost gains. My argument is that outsourcing helps us to do just this and hence why the position of anti-outsourcing advocates is too narrowly framed and thus inaccurate.
Outsourcing not only reduces the barriers to entry to project launches, it can also be used to help us overcome our cognitive biases towards opportunity costs – the topic of my next blog post How Outsourcing Can Help You Overcome Opportunity Cost Cognitive Biases
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