Outsourcing and Congress

- by Paul Murphy, -

One way or another anti-outsourcing legislation seems likely to pass through both houses of congress relatively soon. Whether this comes about through the house initiative led by Bernard Sanders or through other routes isn't important; what is important is that most of the proposals being discussed have bipartisan support and outlaw the use of government dollars to support foreign jobs at the expense of American workers.

From the long run economic and military perspectives this kind of reflex protectionism is counter-productive. In the long run, free trade produces balanced budgets and better jobs while ensuring that authoritarian regimes like Communist China's come to an end. The problem right now, however, is that the process is out of balance with the negative consequences arriving a lot faster than the benefits.

What knocked the process off kilter is well known too: Clinton made two deals with North Korea, one in 1994 and the other in 1999. In both cases those arrangements were mediated by Communist China, which got provisional most favored nation [MFN] status for its help in the first go-round and permanent MFN as well as WTO membership in the second. With the controls attendant on conditional MFN lifted in 1999, Communist China made increased exports to the United States a national economic objective while continuing to block imports from the US. In an environment where the goverment owns the country, that support for contract manufacturing quickly led to a disproportionate movement of manufacturing jobs from the United States to China, and consequently set off a frensy of competitive bidding for American manufacturing jobs by other Asian governments trying to hold market share.

As a result a lot of good people in both Canada and the United States are now either unemployed or underemployed and politicians on both sides of the Congress are reading polls telling them it's time to do something. No one yet knows in detail what that something will be, but it's a pretty good bet that the eventual compromise will attempt to slow the imbalance while providing political cover for those involved. Thus two elements seem almost certain to emerge as parts of the eventual concensus legislation: first the new law will likely prevent the export of personal information for offshore processing, and secondly it will almost certainly prohibit the expenditure of taxpayer dollars on foreign sourced IT services if those services could be provided by Americans.

Both of these restrictions are vitally important to the IT industry. The prohibition against sending personal information out of the country for processing will stop the export of jobs -and therefore of the IT support for those jobs- in areas such as personal financial planning and health care claims processing. That will kill the the profitability of the financial management outsourcing services offered by companies like IBM and thus stop the targetting of those jobs and their IT support for offshore consolidation. More immediately, the requirement that federal dollars not be spent on foreign services where American equivelants are available will make foreign sourced software support and development a thing of the past.

Federal dollars don't make up a big percentage of out-sourced IT services dollars, but this tail will wag the much bigger dog of state and private sector out-sourced IT support because of the short term impossibility of untangling the financial impact of different classes of out-sourcing contract. For example, when a company like HP offers Windows support as part of the purchase price of a PC the service is internally priced on the basis of marginal cost plus a small contribution to overhead- meaning that pricing assumes shared use of an existing infrastructure. Thus the cost of adding support for another thousand PC users for a company which already supports a million or more is close to zero because the only variable cost analysts need be concerned with is the pennies per hour paid a foreign support worker.

Take away that prepaid infrastructure, however, and the picture changes. Now the cost of adding support for the next thousand users is about the same as adding it for the first thousand users and companies like EDS, HP, or IBM will have a much smaller cost advantage over the in-house IT department.

The legislation as currently proposed in both houses has provisions that will create this situation because the prohibition against spending federal dollars off-shore makes co-mingling, the process of spreading infrastructure costs across multiple clients, virtually impossible. Sorting out co-mingled costs on a pro rata, or proportionate, basis has a long history in military procurement, particularly for national offset programs, but would fly directly in the face of clear legislative intent, and is therefore likely to be unacceptable. As a result a supplier like HP or IBM will need to prove that none of the costs associated with something like a leased PC reflect co-mingled services - and doing it will require an internal "Chinese wall" that will take at least a year to set up.

It should be obvious therefore that the biggest potential IT industry losers, at least in the short term, are Accenture - which could be virtually wiped out in the US - EDS, IBM, HP, and Oracle while companies like Sun and Peoplesoft will be essentially unaffected. Dell, interestingly, has been putting its defenses in place for some time, with the probable ability now, or very soon, to sell a PC whose warranty support costs demonstrably flow only from an investment in American workers.

The other companies, of course, aren't sitting still either, but they appear to be focusing their efforts on lobbying for exceptions and special clauses to let them continue co-mingled support products - and that's where you get your chance to play. It doesn't matter which side of the political aisle you're on or whether you believe, as I do, that this legislation is fundamentally uninformed -a "fair trade act" requiring the US to apply Communist China's own rules on imports from the United States to imports from Communist China would be fairer and more effective- you should get to work and make sure your representatives in both houses know you support action on both kinds of restrictions.

In doing this, don't be discouraged by the fact that the lobbyists on the other side have more money and access than you do. Remember, elected representatives usually want the lobbyist's money only so they can use it to buy your vote - which you can give or withhold directly.

Paul Murphy wrote and published The Unix Guide to Defenestration. Murphy is a 20-year veteran of the IT consulting industry.