Thursday, July 26, 2007

Small Tech's & Outsourcing

Business Week columnist Vivek Wadhwa wants to tell us "Why Small Tech Companies Aren't Outsourcing." He says:

A common misconception is that today's outsourcing trend was driven by the tech industry. Even The Wall Street Journal ran a recent front-page article saying that Silicon Valley had helped power India's outsourcing boom by shifting sophisticated technology jobs there.

While the industry does indeed outsource, it has had a minimal impact on the trend as a whole, according to new research. The leading outsourcers have actually been large corporations such as General Electric (GE), Citibank (C), and American Express (AXP). Many of them sent abroad their IT systems, which are different from the innovative software products that tech companies develop.

In fact, few tech companies outsource core product development, because it just isn't practical to send this type of innovation offshore. Most are small or midsize businesses and can't achieve the economies of scale that larger businesses stand to gain from outsourcing.

The tech industry has never made up more than 15% of the outsourcing market, says Carnegie Mellon University professor Ashish Arora, who has researched outsourcing extensively. Banking, finance, and insurance account for about 40%, followed by telecom (17%), and manufacturing (12%). Arora includes the product development that companies such as Microsoft (MSFT), Adobe (ADBE.O), and Cisco (CSCO.O) perform in their offshore locations in his estimates.

New research by Columbia University professor Amar Bhide helps explain why tech companies don't outsource core product development.

Bhide interviewed the CEOs of 106 tech companies and concluded that the problems with outsourcing innovation greatly outweigh the advantages. His report, set to be released on July 20 at the Kauffman-Planck Summit on Entrepreneurial Research in Dana Point, Calif., suggests fears of outsourcing in the tech industry are greatly exaggerated.
The rest of Wadhwa's column is here.

Folks, I can't bring much first-hand experience to what Wadhwa says but I've been impressed by his obvious expertise in the areas he writes about.

He's saying things we don't often read in our newspapers or hear on the evening news.

I think Wadhwa's worth following, especially for those of you in the tech field.


Anonymous said...


"I think Wadhwa's worth following, especially for those of you in the tech field."

I am in the telcom semiconductor business located in Dallas Texas. Wadhwa is totally wrong. He merely needs to speak with firms like Cisco, Tellabs, Motorola, General Bandwidth and many others to understand what is happening.

First, the assembly was outsourced. This started in earnest in the late 90s. Then the software work was outsourced. This picked up steam around 2001-2002. More recently, H/W development and design sites have been formed (mainly in China).

All you need to do to verify this is look at SIA (Semiconductor Industry Association) world wide semi revenue numbers for the last 15 years.

For the last decade, the US has exhibited zero revenue growth while world revenues have tripled. In the US telcom industry, the revenue growth has actually been negative.

Logically, if you look at the incredible number of graduating science and engineering students in India and China, you will realize that our technology lead has disappeared.

Outsourcing has occurred at ALL levels of US tech firms.