Smalltalk Tidbits, Industry Rants

The title says everything that needs to be said about Boeing's outsourcing troubles with the Dreamliner. From the Wall Street Journal:

The plan calls for suppliers to ship mostly completed fuselage sections, already stuffed with wiring and other systems, to Boeing facilities around Seattle so they could be put together in as few as three days. Existing production methods can keep a plane the size of the Dreamliner in the final-assembly area for a month.

But many of these handpicked suppliers, instead of using their own engineers to do the design work, farmed out this key task to even-smaller companies. Some of those ended up overloading themselves with work from multiple 787 suppliers, Boeing says.

The company says it never intended for its suppliers to outsource key tasks such as engineering, but that the situation seemed manageable at the time. "We tended to say, 'They know how to run their businesses,'" says a Boeing executive familiar with the company's thinking.

On a multi-million dollar project, with the future of the company in the mix, they assumed their suppliers knew what they were doing. Maybe they needed to call their moms and ask where assuming gets you...

Technorati Tags: management

Jason Calacanis addressed the uproar over his proposal to pay the top users of Digg to switch to Netscape's portal today. The funny thing is, this is nothing more than outsourcing:

The media elite are *very* threatened by this idea--just as they were threatened by the concept of paid bloggers. Why, because by making a wider talent pool drops the pay rates they're accustom to getting. There are thousands of great writers who got their start by free blogging who are now getting paid. Those new folks have lower pay expectations and the $1-a -word crowd was really pissed off about it. I remember someone in the stock photography business who got upset by me offering my pictures for free for commercial use. His problem was that my photos were as good as stock in many cases, and I was gonna take money away from the stock business. You know what, I don't care! It's *my* work and I can do what *I* want with it. This is the new world we've built here, and talent rises, wins, and gets to decide for THEMSELVES if they want to get paid or not. It's not Mike Arrington's choice, it's the content creators choice. For photos and blogging I choose to not get paid--for some of my others skills I want to get paid.

A couple of months ago, I spoke to a photographer about the stock photo problem - she came with us on a girl scout trip to talk to the girls about photography. Sure enough, the prices you can get for a portfolio of stock photos has cratered - it's really the same thing that's happening with online music. You hear a lot about music, because the RIAA is fighting tooth and nail to maintain their old business model. You don't hear as much about photography, because the people being impacted don't have an association that makes noise.

What Calacanis is doing is more of the same. Until very recently, being an editor was an elite job, open to a relatively small number of people. Sites like Digg and Netscape (and Flickr, del.icio.us) make it possible for anyone to be an editor. Are most people cut out for that work? No, not really. However, in a population base as large as the English speaking West, there are plenty of people with good instincts who are willing and able to do that work. As with photography, it's not necessarily their full time job, so they're happy to get paid pennies compared to what an editor at a large newspaper makes.

That last bit - being willing to take smaller compensation - is what drives the current editor class nuts. There's nothing they can do about it though - just like music and stock photography, prices are going to be driven down.

Technorati Tags: management

James McGovern is a little over the top in his title for the linked post, but I think he touches on a good point with this anecdote:

My friends thesis was based on the fact that the enterprises who go down the outsourcing route tend to lower their expectations for individual consultant productivity when pursuing outsourcing arrangements. He stated once an American company has failed at attempting outsourcing to India, he gets to come in and pick up the pieces at a higher rate. He also mentioned that this allowed his 100% US firm to staff a lot lower on the food chain that prior to outsourcing. Clients generally don't do individual interviews anymore which has afforded him the ability to place less optimal resources on projects. In the past, he worked for one of the spinoffs from the big four consulting firms who had the notion of partner. While the partner would bill out at higher rates, they wouldn't necessarily bill 100% of their time to a client. He noted that the Indian outsourcing model had the same notion of a partner only that they stayed at a single client to work on relationship-oriented issues. He believes this is another opportunity for him to take folks who are losing their technical ability to not only make them billable but to do so at extreme rates.

I'd disagree that you can get away with sending sub-standard consultants in at high rates for any period of time. Clients will notice, and that will be that. On the other hand, the offshoring experience may well lower expectations, and James touches on that with this: "He noted that the Indian outsourcing model had the same notion of a partner only that they stayed at a single client to work on relationship-oriented issues." When the consultants are 12 timezones away, that's probably most of what gets done. There's not going to be any direct technical collaboration, nor is there going to be any communication between the developers and the end users. It's a complete return to the 1970's glass house of IT approach: toss the requirements over a wall, wait N months, and see what comes back.

That approach didn't work well back then, and I see no reason for it to work well now.

Well, I'll say this for IBM - they are trying out an interesting marketing spin on offshoring:

In a letter to the Financial Times, IBM CEO Sam Palmisano says his multi-billion dollar investments in offshore production facilities are part of a campaign to transform the company from classic multinational (read: evil, exploitive, outdated, bad for world peace) into "a new actor" known as "the globally integrated enterprise." The GIE, says Palmisano, is a benevolent form of industrial organization that creates lasting wealth and meaningful jobs around the world. It can even disarm terrorists--figuratively, at least. Sounds like a corporation your mother could love, even if she's a raving anarchist. But is this really why IBM is spending $6 billion in India?

Read the rest - I don't know how well this will work, but it's proactive, at least. I still say they are hiring too fast in India, though.

I commented on the "IBM bets on India" story the other day in the context of Apple's pullout - it occurred to me that I should look at it on its own. The gist of the story: IBM is on a hiring spree in India:

IBM said Tuesday that it will triple its current level of investment in India over the next three years, bringing its total spending in the country during the period to $6 billion. The plan aims to vastly increase the range of IBM's offshore computer services offerings. Those services are designed to help businesses cut costs, but critics say they also threaten U.S. tech jobs.

...

IBM currently employs 43,000 workers in India, up from 23,000 just one year ago. At the same time, the Armonk, N.Y.-based company has been quietly trimming payrolls in the U.S., where its staff complement is now less than 150,000. IBM officials were not immediately available to comment on how plans for India would impact the U.S. operations. On a Web site operated by current and former IBM staffers, www.allianceIBM.org, posters routinely share news about layoffs at IBM sites around the country.

They hired an eye popping 20,000 employees in India last year, which tells me something that the business analysts are missing: they are growing staff way, way too fast. I don't care whether you are hiring in your own backyard or on another continent - there's simply no way to manage that hiring pace effectively. Palmisano can boast all he wants:

"If you are not here in India, making the right investments and finding and developing the best employees and business partners, then you won't be able to combine the skills and expertise here with skills and expertise from around the world, in ways that can help our clients be successful," said Palmisano. "I'm here today to say that IBM is not going to miss this opportunity."

But he's making a huge error - and I don't mean in terms of where he's hiring (although, readers of this blog will recall that I don't have confidence in that, either). He's simply hiring too many people too fast, and he's going to end up with the same kind of hangover that the dot-bomb firms experienced in 2001. I wonder how quotable he'll be then.

The other question I'd have is on how they are planning on managing development. Here's their stated goal:

The announcement comes on the heels of a plan IBM unveiled in March, under which the company is moving all development of business solutions based on service-oriented architectures to Bangalore.

That may or may not work well. The big question I'd ask is this: Where is project and product management located? If the answer for either one is "in the US", then I'd guess that the problems are coming down the pike. It's a 9 hour gap between the US east coast and India, and 12 hours from the US west coast. That make communication very hard, because someone has to be willing to work during non-business hours - on an ongoing basis. That's not a scalable solution. If you want offshoring to work, you have to be willing to place the management right there with the developers, in my opinion.

I have some experience in this area - we have a geographically spread team. Most of it is in North America, but we have some support staff in India, and a few developers and partners in Germany. The 9 hour time gap between the west coast and Germany makes it hard to manage communication - there are short windows in which it can occur. We only have a few people that far off - if the entire staff were 9 or 12 hours away from me, my life would be hell. Bottom line, if IBM hasn't accounted for that, then they have some rough sailing ahead.

Indian public sector employees are realizing that outsourcing doesn't all flow to the shores of India:

According to India's Economic Times, Indian workers employed by the country's reserve bank this week held demonstrations to protest possible plans by the bank to outsource some routine jobs to the private sector. The Times provides the following quote from K K Sharma, secretary of the All India Reserve Bank Employees Association: "We have two main demands--implementation of the revised pension scheme and no outsourcing of jobs from RBI."

The article makes it sound like the jobs are likely just being privatized, but from there? Who knows? I've seen other reports of jobs moving from India to China, Vietnam, (etc).

None of this is new, of course - textile jobs migrated from France to England, then on to New England. From there they went to the US south, and then migrated to Asia (and South America). Heck, even the patent/copyright fights aren't new - English manufacturers complained bitterly that New England plants were stealing their patented designs. Everything old is new again...

I suspect that China's new "no email server without a license" law will have a few unintended consequences - it'll probably play a role in any offshoring decisions. Why? The simple cost (monetary and bureaucratic) in getting a license, and the need to monitor otherwise inocuous conversations:

China's new rules also prohibit use of email to discuss certain vaguely defined subjects related to 'network security' and ' information security', and also reiterate that emails which contain content contrary to existing laws must not be copied or forwarded. Wide-ranging laws of this nature have been used against political and religous dissenters in the past.

Ignore the politics of free speech for a minute, and just consider the notion of having a few developers in China - and having to consider which technical issues are safe to discuss.

Well - it looks like the reality of offshoring/outsourcing savings differs from the hype - the savings are 10% - 15%, not 60%:

Outsourcing of information technology and business services delivers average cost savings of 15 percent, a survey found on Thursday, disproving market claims that outsourcing can reduce costs by over 60 percent.

After professional fees, severance pay and governance costs, savings range between 10 percent and 39 percent, with the average level at 15 percent when contracts are first let, according to outsourcing advisory firm TPI.

Well. The question you then have to ask yourself is this - is a 15% savings worth the hard to measure, but real annoyance your customers face when dealing with disempowered support staff they can barely understand? Proving that management is often immune to reality, the article goes on to state:

Cost reduction remains the primary motivation behind current outsourcing contracts, but an increasing number of companies are outsourcing primarily to improve quality, at 21 percent now versus 11 percent in 2004.

*Cough*. Yeah, I've always felt that I get better service when I deal with a remote call staff. I have to repeat everything I say, and if my problem doesn't fall into the "is it plugged in?" bag, I have to escalate out of of their domain anyway. Which is always hard. Better quality my posterior.

This CIO.com story has an interesting take on the spread of distance enabling technology - the take being that the technology is making it less reasonable to send small/medium jobs offshore. I'd argue that "large" jobs are probably a mistake, unless you properly split them into a set of small/medium ones - which in turn makes easy communication more relevant than sheer lower cost.

Of course, the trump to all this will be if firms in India (China, etc) start moving up the food chain. IMHO, it makes little sense to offshore a bunch of developers, when project management (and up) is still in North America - the timezone difference makes proper communication nearly impossible. Look back at the experiences of the big US automakers though - it was when nimbler foreign competition started taking on the whole job and shipping competing cars that they ran into trouble.

I had someone in comments the other day ask me who was going to challenge Microsoft. I rather expect that the CEO of GM, circa 1960, had the same smug thought...

Here's one of the downsides of outsourced hosting that I'm not sure is solveable - if the thing being hosted is critical to your business, who cares about it more: you, or the hosting company? If there's a problem, who will be more highly motivated to fix it? That seems to be the sentiment behind this story from CNet:

In a meeting here with reporters on Friday, Gianforte said reliability and cost issues mean the company isn't interested in managed hosting services, including the $1-per-processor-per-hour Sun Grid.

He tried turning over his servers to a managed hosting company seven years ago, he said, and the move was a "miserable failure" that has since been reversed. Managed hosting companies want control over computers, but RightNow needs to be the boss in order to keep its equipment running around the clock. "We need control to get that kind of reliability," Gianforte said. Nothing has changed in the last seven years to change his mind, he added.

There's also the cost thing:

It doesn't make financial sense, either, Gianforte said. Running his own data center, including engineers and other staff, costs 6 percent of revenue, and he expects that to drop to 4 percent in the next two to three years. One of his top competitors, SAP, pays IBM much more than that to host its software-as-a-service offering, he said.

That certainly sets a target for any outsourcer who wants to get business, now doesn't it?