Enterprise Initiatives

This blog focuses on Enterprise IT topics such as Enterprise Architecture, Portfolio Management, Change Management, Business Process Management, and recaps various technology events and news.

I found this piece of research from Duke University that discusses outsourcing, labor shortages, and graduation rates of engineers. This is a very long article so I will try to summarize it for you.

First, the researchers tackled the issue of graduation rates. They questioned the data that is reported by the popular media and policy makers which state that the....

United States graduates roughly 70,000 undergraduate engineers annually, whereas China graduates 600,000 and India 350,000....China and India collectively graduate 12 times more engineers than does the United States....

The researchers found major flaws in the above mentioned numbers. They found that the definition of engineer varies widely in China and India from the definition in the US. Comparing the graduation numbers by using source data from the different governments does not give us an apples to apples comparison. The researchers shared this example....
We were told that reports sent to the MoE from Chinese provinces did not count degrees in a consistent way. A motor mechanic or a technician could be considered an engineer.

What they found is that the US is graduating nearly as many engineers as India. China does have more graduates but not as a percentage of their overall population. So the theory that there is a shortage of engineers coming out of US colleges seems to be false. Based on this finding, they tried to answer the following questions:
What skills would give U.S. graduates a greater advantage, and would offshoring continue even if they had these skills?
44% of the respondents said the US engineering jobs were more technical then outsourced technical jobs versus 1% who said the outsourced jobs were more technical. Then they found that over 80% of the companies surveyed were able to fill onshore engineering jobs in four months or less which shows that there is no labor shortage.

So if we are graduating enough engineers and there is no labor shortage, what is the driver? What they found is that the driver is pure cost reduction. High salary demands and rising health care costs are causing employers to look offshore for cheaper alternatives. Other benefits are the 24x7 work days accomplished by having teams work in the US by day and offshore at night. Work ethic and long hours also contributed to outsourcing.

I have read a few articles recently claiming that US companies are seeking offshore development due to superior technical capabilities and innovation. What this report tells me is that it is still all about cost. I would love to see another report done about the total cost of ownership of outsourcing. I agree that you can get the job done cheaper offshore, but I wonder if executives understand the true costs. It is much more complicated then taking an offshore resource's hours and multiplying it by $25 to compute their cost. There are many other costs like infrastructure costs and software licenses, the cost of your own onshore resources who must manage them, review their designs and code, and the overhead dealing with communication and cultural issues.

I am not here to criticize outsourcing or to discourage people from engaging in it. I understand why companies are pursuing outsourcing and there are many success stories. I just found this research interesting because it disputes some of the myths about labor shortages, talent levels, and graduation rates. It clearly shows me what I already knew which is it's all about cheap labor.


  1. Matt Perez  

    > It is much more complicated then
    > taking an offshore resource's hours
    > and multiplying it by $25 to
    > compute their cost.

    Yes. The Total Cost of Engagement (TCE) includes a lot more than just the rate. This write up on TCE breaks down the components and TCE Scenario describes an example.

    I am not unbiased in the matter, but I tried my best to be fair in the analysis from my own experience outsourcing to India and other locales. Even using the most conservative numbers, the best you can do in India is to save 15% on a dollar.

Post a Comment

Subscribe to: Post Comments (Atom)

My favorite sayings

"If you don't know where you're going, any road will get you there"

"Before you build a better mouse trap, make sure you have some mice"