Wednesday, May 09, 2007

of software and sewercaps

The rationale behind outsourcing is very simple, so simple that everyone gets it. Let's review, because it will help me make the point of this post.

If the Total Costs are less than Sales Revenue for a given good or service, you make money -- you, being the merchant or producer. If you can lower your total costs by lowering the cost of your labor, and keep your Sales Revenue about the same, you make more money, all other things being equal (which they aren't but no bother for now).

In the case of outsourcing, you can certainly lower your Labor Costs, but you pay more in Delivery Costs. Delivery costs for software and telephone support are nearly nothing, compared with, say, delivery costs for real stuff, like cars and stuffed animals and everything else that's made over there.

Delivery Costs are a function of, among other things, the weight and bulk of the thing being delivered. The heavier it is, for sure, the more it's going to cost to ship it.

Just a little mental exercise and you can sketch out the landscape about what ought to be profitable to outsource. On one end of the extreme, you have things that weigh nothing, like software. It's deliverable by wireless, in fact. At the other end, you have heavy, bulky things, like rocks. Speaking of rocks, the largest component of the cost of rocks is shipping. In some places, you can get 'em for free. But getting them where you want them is the trick. That's where you expenses go off the chart.

So, tell me, in light of this, why did New York City outsource cast-iron manhole covers to India?

Even if they were giving the iron away, do you really think it's cheap to send those things around the world, to a unionized port? No, I hardly believe it, without even looking at the figures. I think they'd have had to pay us to take them, in order to cover the shipping. Some kind of deal would have had to have been cut.

Nonetheless, right here in New York City, even in the Financial District, where I live and work, where the sharpest bean counters in world allegedly work, one sees "India" cast into all those heavy manhole covers.

Of course, this is also home to some of the sharpest deal-makers around, and fhe Indians I've met aren't too shabby, either. I suspect that's why we outsourced manhole covers halfway around the world.
It's just a hunch.
Now, while I'm on the subject, let's talk about corporate hypocrisy and outsourcing. The first idea that is operative in this sphere is the one that says if a PR Campaign claims "A," it's because someone is trying to distract you from "B."

So when the world's largest bank, for example, keeps hounding you about how much they're spending to combat global warming, you ought first ask yourself, "what is it that they are trying to keep me from knowing about them?"

Another operative fact is this: outsourcing is labor arbitrage, plain and simple. "Arbitrage" means that you can buy something in one market and sell the exact same item for more money in another. The profit in arbitrage comes from irrational price discrepencies, which happen all the time. The more inefficient the market, the more common they are. Market inefficiencies arise from knowledge and capital discrepancies, among other things. Outsourcing, then, is a euphemism for taking advantage of irrational labor pricing.

What, besides collective bargaining, can misprice labor? How about collective oppression? Here's some food for thought. Someone ought to compare the standard-of-living indeces of the countries that everything is getting outsourced to, to those that it is getting outsourced from. You don't need to be a mental giant to see that, the reason jobs are flying to Asia is because there's a large and ready supply of advantageously priced labor there.

So when the big bank is laying off you and your neighbors to raise money to plant some more trees in its heroic effort to save the globe from warming, you might want to ask them about their trade in labor arbitrage; and their complicity with regimes that enable it.

Picture a bunch of fraternity boys in the Hamptons spending $15,000 for dinner. It's bound to be a pretty dirty story, for anyone who bothers to connect the dots. But eventually the marketplace, the Invisible Hand, will catch up to them.


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