Monday, April 05, 2004

Offshore Outsourcing – Half the Argument

I’m sure by now you’ve read protectionist/union/information worker arguments against offshoring of industry, and the managerial/economic arguments in favor of it. We are hearing the same argument from the Seventies in manufacturing again. Unfortunately, like armies training for the last war, we are missing the point on both sides.

Most economic arguments in favor of offshoring involve Adam Smith’s Invisible Hand. Basically, supply and demand naturally force costs down and productivity up over time as technology moves forward. In the case of labor, work naturally flows into economies where labor is cheaper. Therefore labor flows from the United States to India and from Europe and Japan to the United States. Apparently in manufacturing this is a net gain for the US. I highly doubt it is a net gain for information services, however. Counter-protectionists seem to always lump them together.

Many alarmists behind this argument in favor of offshoring state that we cannot become protectionist, because by doing so we will block jobs coming into the US as well as out of it. There is a big apples-to-oranges problem with this argument. We could still construct “roach motel” standards that allow jobs to check in from Europe and Japan in the manufacturing sector but not check out so much to India in the IT sector. Since they are different continents and different sectors, why would this be so difficult? Will Europe punish us for what we do to India? I doubt it. And even if they try, can we not punish them in return? Isn’t it at least worth trying?

Europe already wants to punish us with tariffs for having “abnormally low taxes” and stealing their jobs, so I truly doubt any US policy towards India makes a difference to them. Europe doesn’t need an excuse to hate us – envy does quite nicely. France, despite recent clammor to the contrary, has hated us for liberating their "godlike" nation since they kicked American troops out in the Sixties. But that's another topic.

There is a second issue that is far more dangerous, and far more insidious, that makes Adam Smith’s argument from The Wealth of Nations (1776) a tad obsolete. In his time, all was labor and material – just as a materialist would have told you all was energy and matter. Today, both in the fundamentals of economics as well as cosmology, there are actually three vectors – labor (energy), material (matter) and INFORMATION. While the crafts of 200 years ago contained innovation and product secrets and so on, they were minimal compared to the information-heavy infrastructure of today. Adam Smith has no place in his theories for it, or for what it does to the economic and military security of a nation.

In a slightly extreme example – let’s assume I’m an Islamic extremist who has recently taken over Pakistan. Since I “ran on a platform" of using the nuclear arsenal in the service of Allah, where will I get the most bang for the buck in terms of nuclear target? If I nuke a US city, I risk retaliation on a region wide scale. I could target a major Indian city, since they are the hated enemy of my nation. How about both? I could target Bangalore, wipe out a thriving part of India’s economy, and take out a vast amount of the West’s information architecture in a single blow.

There are other issues, much softer of course, in this track. Do we really trust someone in another nation with medical records, banking records, and so on? Blackmail and identity theft are hard enough to control within our borders – what about in a third world nation with minimal extradition and investigative ability?

A Modest Proposal

The first two have to do with simple security. The last four have to do with basic disaster recovery. Both are highly regulated in banking, yet supposedly the top ten banks offshore - fancy that. (Truth told, Bank One's CEO froze all offshoring some time ago, but since then they were taken over by another bank that is strongly in favor of offshoring. Source: Chicago Tribune)

1) Ban the offshoring of medical and financial information for consumer protection purposes. A democratic politician in California is catching hell for simply suggesting that companies that offshoring medical information DISCLOSE that they are doing so. That is, they can still do it; they just have to admit to it. As a conservative Republican who feels truth is important; I back her 100 percent on this issue.

2) Ban the offshoring of military and finance information for security purposes. Basically – if it’s covered by The Patriot Act, don’t take it outside the US. The Clinton administration was justly criticized for giving away the store in terms of military secrets to the Chinese – something they had to steal by forcing down a E2B spy plane after he left office. But I suppose that’s “politics by other means”, isn’t it? That said, aren’t corporations doing the same thing now with other critical data and processes?

3) No company, subject to audit, may offshore a working HUMAN knowledge of how its internal processes work, practically down to the line of code. The company must have human knowledge of how to restore and maintain that capacity within its US offices.

4) All code, processes, and documentation must be backed up within the US.

5) Projects done offshore must be documented at a minimum ISO 900x standard and the processes recorded and audited in the US. In other words, the audits must take place here, not there. No fox guarding the henhouse.

6) A recovery scheme must be in place to A) function without the offshore facility immediately if it becomes cut off and B) can be replaced within the United States before the lack of support becomes an issue impacting the company economically or in terms of security.

This simple common sense – the extension of disaster recovery and ISO standards to offshore work. To do otherwise is to fix a fence in your yard while letting your children play in the street.

In a related security issue, we have already let the barn door wide open when it comes to chip manufacturing. Taiwan is a much lusted-after target of the Communist Chinese, who would love to both consolidate their grip on the last of the Republic and take out the vast majority of our microchip industry in a single pounce. I’m sure we would be several years just getting the basics of chip manufacturing restored in the US if we lost Taiwan. If you are THAT upset about labor costs, fine, put it in Jamaica or somewhere close, but FOR GOD’S SAKE, at least have 10-year-old chip foundry equipment in a in a salt mine somewhere. Perhaps there should be a regulation that if the electronics fail, the car, truck, or train still operates using cruder methods. Only aircraft have this security built in by using WWII technology.

What military incompetence does quickly, a politicians and capitalists can do slowly with sufficient pointy-haired boss-ness and lack of moral prospective. Capitalism is like Democracy – it doesn’t need regulation when it has wisdom. But where wisdom is lacking, regulation needs to limit the influence of foolishness and in some cases evil, both from within and without. Now if we could just regulate the foolishness of the legal profession. However, the two can play against one another. If all law were put to this standard, that of limiting foolishness and evil or not existing, we would have far fewer laws that make far more sense, and would move us forward as both an economy and a civilization with minimal drag.

But law is an issue for another day.

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