Recently, while engaging in my other passion (international relations), I was reading the latest issue of Foreign Affairs, and ran across an interesting essay regarding the increasing outsourcing--or, the term they introduce which I prefer in this case, "offshoring"--of technical work, and I found some interesting analysis there that I think solidifies why I think programmers shouldn't fear offshoring, but instead embrace it and ride the wave to a better life for both us and consumers. Permit me to explain.

The essay, entitled "Offshoring: The Next Industrial Revolution?" (by Alan S. Blinder), opens with an interesting point, made subtly, that offshoring (or "offshore outsourcing"), is really a natural economic consequence:

In February 2004, when N. Gregory Mankiw, a Harvard professor then serving as chairman of the White House Council of Economic Advisers, caused a national uproar with a "textbook" statement about trade, economists rushed to his defense. Mankiw was commenting on the phenomenon that has been clumsily dubbed "offshoring" (or "offshore outsourcing")--the migration of jobs, but not the people who perform them, from rich countries to poor ones. Offshoring, Mankiw said, is only "the latest manifestation of the gains from trade that economists have talked about at least since Adam Smith. ... More things are tradable than were tradable in the past, and that's a good thing." Although Democratic and Republican politicians alike excoriated Mankiw for his callous attitude toward American jobs, economists lined up to support his claim that offshoring is simply international business as usual.

Their economics were basically sound: the well-known principle of comparative advantage implies that trade in new kinds of products will bring overall improvements in productivity and well-being. But Mankiw and his defenders underestimated both the importance of offshoring and its disruptive effect on wealthy countries. Sometimes a quantitative change is so large that it brings qualitative changes, as offshoring likely will. We have so far barely seen the tip of the offshoring iceberg, the eventual dimensions of which may be staggering.

To be sure, the furor over Mankiw's remark was grotesquely out of proportion to the current importance of offshoring, which is still largely a prospective phenomenon. Although there are no reliable national data, fragmentary studies indicate that well under a million service-sector jobs have been lost to offshoring to date. (A million seems impressive, but in the gigantic and rapidly churning U.S. labor market, a million jobs is less than two weeks' worth of normal gross job losses.)¹ However, constant improvements in technology and global communications will bring much more offshoring of "impersonal services"--that is, services that can be delivered electronically over long distances, with little or no degradation in quality.

That said, we should not view the coming wave of offshoring as an impending catastrophe. Nor should we try to stop it. The normal gains from trade mean that the world as a whole cannot lose from increases in productivity, and the United States and other industrial countries have not only weathered but also benefited from comparable changes in the past. But in order to do so again, the governments and societies of the developed world must face up to the massive, complex, and multifaceted challenges that offshoring will bring. National data systems, trade policies, educational systems, social welfare programs, and politics must all adapt to new realities. Unfortunately, none of this is happening now.

Why Offshoring

Blinder first describes the basics of "comparative advantage" and why it's important in this context:

Countries trade with one another for the same reasons that individuals, businesses and regions do: to exploit their comparative advantages. Some advantages are "natural": Texas and Saudi Arabia sit atop massive deposits of oil that are entirely lacking in New York and Japan, and nature has conspired to make Hawaii a more attractive tourist destination than Greenland. Ther eis not much anyone can do about such natural advantages.

But in modern economics, nature's whimsy is far less important than it was in the past. Today, much comparative advantage derives from human effort rather than natural conditions. The concentration of computer companies around Silicon Valley, for example, has nothing to do with bountiful natural deposits of silicon; it has to do with Xerox's fabled Palo Alto Research Center, the proximity of Stanford University, and the arrival of two young men named Hewlett and Packard. Silicon Valley could have sprouted up anywhere.

One important aspect of this modern reality is that patterns of man-made comparative advantage can and do change over time. The economist Jagdish Bhagwait has labeled this phenomenon "kaleidoscopic comparative advantage", and it is critical to understanding offshoring. Once upon a time, the United Kingdom had a comparative advantage in textile manufacturing. Then that advantage shifted to New England, and so jobs were moved from the United Kingdom to the United States.² Then the comparative advantage in textile manufacturing shifted once again--this time to the Carolinas--and jobs migrated south within the United States.³ Now the comparative advantage in textile manufacturing resides in China and other low-wage countries, and what many are wont to call "American jobs" have been moved there as a result.

Of course, not everything can be traded across long distances. At any point in time, the available technology--especially in transportation and communications⁴--largely determines what can be traded internationally and what cannot. Economic theorists accordingly divide the world's goods and services into two bins: tradable and non-tradable. Traditionally, any item that could be put in a box and shipped (roughly, manufactured goods) was considered tradable, and anything that could not be put into a box (such as services) or was too heavy to ship (such as houses) was thought of as nontradable. But because technology is always improving and transportation is becoming cheaper and easier, the boundary between what is tradable and what is not is constantly shifting. And unlike comparative advantage, this change is not kaleidoscopic; it moves in only one direction, with more and more items becoming tradable.

The old assumption that if you cannot put it in a box, you cannot trade it is thus hopelessly obsolete. Because packets of digitized information play the role that boxes used to play, many more services are now tradable and many more will surely become so. In the future, and to a great extent already, the key distinction will no longer be between things that can be put in a box and things that cannot. Rather, it will be between services that can be delivered electronically and those that cannot.

Then came the second Industrial Revolution, and jobs shifted once again--this time away from manufacturing and toward services. The shift to services is still viewed with alarm in the United States and other rich countries, where people bemoan rather than welcome the resulting loss of manufacturing jobs⁵. But in reality, new service-sector jobs have been created far more rapidly than old manufacturing jobs have disappeared. In 1960, about 35 percent of nonagricultural workers in the United States produced goods and 65 percent produced services. By 2004, only about one-sixth of the United States' nonagricultural jobs were in goods-producing industries, while five-sixths produced services. This trend is worldwide and continuing.

We are now i nthe arly stages of a third Industrial Revolution--the information age. The cheap and easy flow of information around the globe has vastly expanded the scope of tradable services, and there is much more to come. Industrial revolutions are big deals. And just like the previous two, the third Industrial Revolution will require vast and usettling adjustments in the way Americans and residents of other developed countries work, live, and educate their children.

So what does this mean?

But now we start to come to the interesting part of the article.

But a bit of historical perspective should help temper fears of offshoring. The first Industrial Revolution did not spell the end of agriculture, or even the end of food production, in the United States. It jus tmean that a much smaller percentage of Americans had to work on farms to feed the population. (By charming historical coincidence, the actual number of Americans working on farms today--around 2 million--is about what it was in 1810.) The main reason for this shift was not foreign trade, but soaring farm productivity. And most important, the massive movement of labor off the farms did not result in mass unemployment. Rather, it led to a large-scale reallocation of labor to factories.

Therein lies the flaw in the argument: the amount of productivity required to achieve the desired ends is constant in the agriculture industry, yet a constantly-changing dynamic value in software. This is also known as what I will posit as the Groves-Gates Maxim: "What Andy Groves giveth, Bill Gates taketh away."

The Groves-Gates Maxim

The argument here is simple: the process of growing food is a pretty constant one: put seed in ground, wait until it comes up, then harvest the results and wait until next year to start again. Although we might have numerous tools that can help make it easier to put seeds into the ground, or harvesting the results, or even helping to increase the yield of the crop when it comes up, the basic amount of productivity required is pretty much constant. (My cousin, the FFA Farmer of the Year from some years back and a seed hybrid researcher in Iowa might disagree with me, mind you.) Compare this with the software industry: the basic differences between what's an acceptable application to our users today, compared to even ten years ago, is an order of magnitude different. Gains in productivity have not yielded the ability to build applications faster and faster, but instead have created a situation where users and managers ask more of us with each successive application.

The Groves-Gates Maxim is an example of that: every time Intel (where Andy Groves is CEO) releases new hardware that accelerates the power and potential of what the "average" computer (meaning, priced at somewhere between $1500-$2000) is capable of, it seems that Microsoft (Mr. Gates' little firm) releases a new version of Windows that sucks up that power by providing a spiffier user interface and "eye-candy" features, be they useful/important or not. In other words, the more the hardware creates possibilities, the more software is created to exploit and explore those possibilities. The additional productivity is spent not in reducing the time required to produce the thing desired (food in the case of agriculture, an operating system or other non-trivial program in the case of software), but in the expansion of the functionality of the product.

This basic fact, the Groves-Gates Maxim, is what saves us from the bloody axe of forced migration. Because what's expected of software is constantly on the same meteoric rise as what productivity gains provide us, the need for programmer time remains pretty close to constant. Now, once the desire for exponentially complicated features starts to level off, the exponentially increasing gains in productivity will have the same effect as they did in the agricultural industry, and we will start seeing a migration of programmers into other, "personal service" industries (which are hard to offshore, as opposed to "impersonal service" industries which can be easily shipped overseas).

Implications

What does this mean for programmers? For starters, as Dave Thomas has already frequently pointed out on NFJS panels, programmers need to start finding ways to make their service a "personal service" position rather than an "impersonal service" one. Blinder points out that the services industry is facing a split down the middle along this distinction, and it's not necessarily a high-paying vs low-paying divide:

Many people blithely assume that the critical labor-market distinction is, and will remain, between highly educated (or highly-skilled) people and less-educated (or less-skilled) people--doctors versus call-center operators, for example. The supposed remedy for the rich countries, accordingly, is more education and a general "upskilling" of the work force. But this view may be mistaken. Other things being equal, education and skills are, of course, good things; education yields higher returns in advanced societies, and more schooling probably makes workers more flexible and more adaptable to change. But the problem with relying on education as the remedy for potential job losses is that "other things" are not remotely close to equal. The critical divide in the future may instead be between those types are work that are easily deliverable through a wire (or via wireless connections) with little or no diminution in quality and those that are not. And this unconventional divide does not correspond well to traditional distinctions between jobs that require high levels of education and jobs that do not.

A few disparate examples will illustrate just how complex--or, rather, how untraditional--the new divide is. It is unlikely that the services of either taxi drivers or airline pilots will ever be delivered electronically over long distances. The first is a "bad job" with negligible educational requirements; the second is quite the reverse. On the other hand, typing services (a low-skill job) and security analysis (a high-skill job) are already being delivered electronically from India--albeit on a small scale so far. Most physicians need not fear that their jobs will be moved offshore, but radiologists are beginning to see this happening already. Police officers will not be replaced by electronic monitoring, but some security guards will be. Janitors and crane operators are probably immune to foreign competition; accountants and computer programmers are not. In short, the dividing line between the jobs that produce services that are suitable for electronic delivery (and are thus threatened by offshoring) and those that do not does not correspond to traditional distinctions between high-end and low-end work.

There is currently not even a vocabulary, much less any systematic data, to help society come to grips with the coming labor-market reality. So here is some suggested nomenclature. Service that cannot be delivered electronically, or that are notably inferior when so delivered, have one essential characteristic: personal, face-to-face contact is either imperative or highly desirable. Think of hte waiter who serves you dinner, the doctor you gives you your annual physical, or the cop on the beat. Now think of any of those tasks being performed by robots controlled from India--not quite the same. But such face-to-face human contact is not necessary in the relationship you have with the telephone operator who arranges your conference call or the clerk who takes your airline reservation over the phone. He or she may be in India already.

The first group of tasks can be called personally-delivered services, or simply personal services, and the second group of impersonally delivered services, or impersonal services. In the brave new world of globalized electronic commerce, impersonal services have more in common with manufactured goods that can be put in boxes than they do with personal services. Thus, many impersonal services are destined to become tradable and therefore vulnerable to offshoring. By contrast, most personal services have attributes that cannot be transmitted through a wire. Some require face-to-face contact (child care), some are inherently "high-risk" (nursing), some involve high levels of personal trust (psychotherapy), and some depend on location-specific attributes (lobbying).

• Face-to-face contact. Agile methodologies demand that customers be easily accessible in order to answer questions regarding implementation decisions or to resolve lack of understanding of the requirements. Instead of demanding customers be present at your site, you may find yourself in a better position if you put yourself close to your customers.
• "High-risk". This is a bit harder to do with software projects--either the project is inherently high-risk in its makeup (perhaps this is a mission-critical app that the company depends on, such as the e-commerce portal for an online e-tailer), or it's not. There's not much you can do to change this, unless you are politically savvy enough to "sell" your project to a group that would make it mission-critical.
• High levels of personal trust. This is actually easier than you might think--trust in this case refers not to the privileged nature of therapist-patient communication, but in the credibility the organization has in you to carry out the work required. One way to build this trust is to understand the business domain of the client, rather than remaining aloof and "staying focused on the technology". This trust-based approach is already present in a variety of forms outside our industry--regardless of the statistical ratings that might be available, most people find that they have a favorite auto repair mechanic or shop not for any quantitatively-measurable reason, but beceause the mechanic "understands" them somehow. The best customer-service shops understand this, and have done so for years. The restaurant that recognizes me as a regular after just a few visits and has my Diet Coke ready for me at my favorite table is far likelier to get my business on a regular basis than the one that never does. Learn your customers, learn their concerns, learn their business model and business plan, and get yourself into the habit of trying to predict what they might need next--not so you can build it already, but so that you can demonstrate to them that you understand them, and by extension, their needs.
• Location-specific attributes. Sometimes, the software being built is localized to a particular geographic area, and simply being in that same area can yield significant benefits, particularly when heroic efforts are called for. (It's very hard to flip the reset switch on a server in Indiana from a console in India, for example.)

But even if this analysis doesn't make you feel a little more comfortable, consider this: there are 1 billion people in China alone, and close to the same in India. Instead of seeing them as potential competition, imagine what happens when the wages from the offshored jobs start to create a demand for goods and services in those countries--if you think the software market in the U.S. was hot a decade ago, where only a half-billion (across both the U.S. and Europe) people were demanding software, now think about it when four times that many start looking for it.

Footnotes

¹ Which in of itself is an interesting statistic--it implies that offshoring is far less prevalent than some of people worried about it believe it to be, including me.

² Interesting bit of trivia--part of the reason that advantage shifted was because the US stole (yes, stole, as in industrial espionage, one of the first recorded cases of modern industrial espionage) the plans for modern textile machinery from the UK. Remember that, next time you get upset at China's rather loose grip of intellectual property law....

³ Which, by the way, was a large part of the reason we fought the Civil War (the "War Between the States" to some, or the "War of Northern Aggression" to others)--the Carolinas depended on slave labor to pick their cotton cheaply, and couldn't acquire Northern-made machinery cheaply to replace the slaves. Hence, for that (and a lot of other reasons), war followed.

⁴ An interesting argument--is there any real difference between transportation and communications? One ships "stuff", the other "data", beyond that, is there any difference?

⁵ And, I'd like to point out, the shrinking environmental damage that can arise from a manufacturing-based economy. Services rarely generate pollution, which is part of the clash between the industrialized "Western" nations and the developing "Southern" ones over environmental issues.

Resources

"Offshoring: The Next Industrial Revolutoin?", by Alan S. Blinder, Foreign Affairs (March/April 2006), pp 113 - 128.