There has been a lot of debate over outsourcing increasingly skilled jobs overseas. It’s an emotional subject, bringing hope to some, fear to others. As always, one faction promotes progress while another seeks to restore the status quo.
One company recently compiled statistics on the profitability of outsourcing engineering to India and China. This company has offices in more than twenty countries, and research and development is done in many of them. Management was budgeting for the next five years and wanted to know where the biggest investments should go. So they tallied the total cost of an American engineer vs. India and China.
They list the advantages of remote development:
- 24 hour development
- Regional sales pull
- Global presence
- Closer to customers
- Cheaper Labour
- Tax advantages
- Availability of engineers
However, they estimated that 40% of their remote development budget was spent on hidden expenses:
- Additional management cost: +20%
- Travel by executives: +11%
- Customs and duty: +3%
- Rental car repairs: +3%
- Communication tools: +3%
Some intangible factors contribute to the rising cost of remote development, which the company estimated as 25-50% of their hidden expenses:
- Inefficiency of communication, frustration
- Infrastructure inefficiencies, upgrade expenses
- Time difference, synchronization
In fact, the cost of one engineer in China was estimated at $60,000 per year, whereas the same engineer in North America would cost $105,000 per year. That’s far from the 5x savings that executives predicted.
And the gap is closing. The relative economic growth of China and India, and the subsequent inflation, is predicted to bring the remote development almost to parity with a local engineer within 20 years.
So if the company knows that the return on investment of remote development is shrinking, why are they continuing to invest there? Here’s the shocker. The primary motivation to develop in these countries is not to save money.
It’s the availability of engineers. North American universities are producing fewer engineers, and the rate of new engineers is decelerating. The US is currently 5th in engineer graduations, and about to be passed by South Korea. Even in the heady days of the late 90′s, tech companies had trouble finding enough qualified applicants here. Meanwhile, half a million engineers graduate in China and India every year. That kind of talent pool is very attractive for companies that plan to grow quickly and want the cream of the crop.
We’ve been told the jobs that get outsourced are those that noone here wants to do. If that is the case, then we have only ourselves to blame for it. As our counterparts overseas reach parity in salary and standard of living, we must strive for parity in education and promote a culture that takes pride in its engineers.