Foreword
Kevin Murtaugh lives and works in Silicon Valley, and he is also the editor of "View from Silicon Valley." His straightforward, insightful writings about what is really happening in the area are always popular with Gillespie Research readers; I'm Sure the current offering will prove no exception. By special permission, we are pleased to bring you Kevin's latest article, and when you have a moment, be sure to visit his website View from Silicon Valley-- Doug Gillespie
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NOTE: The following material does not necessarily represent the views of Gillespie Research Associates.
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May 19, 2004
View from Silicon Valley- "30% of employees here and 70% abroad"
(c) Copyright View from Silicon Valley, 2004. All rights reserved.
The latest "spin" in Silicon Valley is we survived three-plus years of
dot-com bust, downsizing and off-shoring. It is now inevitable that
Silicon Valley will resume its rightful place as the center of the
universe for technology and technology companies.
Offshoring, to state the obvious, is a hot topic not just in Silicon
Valley but worldwide. I'm less interested in "proving" offshoring is
"right" or "wrong" and more interested in "proving" the various
arguments are false or, at best, disingenuous. Only honest debate and
full disclosure of the relevant figures can lead to a debate which has
any hope of ever being "won."
Attaching numbers to the debate is difficult, but let's try. (What did
you expect? That's what we do here.) Among the confusions being sown
are hard numbers applied incorrectly, percentages based on faulty or
mis-represented assumptions and, of course, self-serving rhetoric.
The latest Forrester(*) report revised their forecast to 3.4M jobs (up
from 3.3M) moving offshore. They tried to minimize the political impact
by claiming, among the companies they surveyed, "58 percent are not
using--or planning to use--offshore information technology service
providers." Said differently, 42% of companies are considering
offshoring their IT.
Even though Forrester is "independent" they still have to make money in
the marketplace. It sounds like they feel a need to "play the game" by
minimizing the impact of their own figures. This is one of the more
charitable explanations I can think of when Forrester says 3.4M,
"represents less than seven percent of jobs in the categories covered by
the study, which include 'management,' 'computer' and 'legal.'"
You mean only seven percent of the workforce is even at risk? Then why
is everyone all worked up about offshoring?
Let's go back to the Bureau of Labor Statistics (BLS) April, 2004
employment numbers (&), using their new "special" adjustment ("Beginning
in January 2004, data reflect revised population controls used in the
household survey."):
Management, professional, and related occupations: 48.7M
Service occupations: 22.5M
Sales and office occupations: 35.1M
Natural resources, construction, and maintenance: 14.1M
Production, transportation, and material moving: 18.0M
There are several convenient assumptions in the Forrester estimates, not
least of which is limiting the study to, "'management,' 'computer' and
'legal.'" Using seven percent and 3.4M you get 48.57M, implying
Forrester used the same classifications as the BLS.
However, there are explicit "'management,' 'computer' and 'legal.'"
sub-groups within the 48.7M, "Management, professional, and related
occupations." If you use just those categories, which match the terms
Forrester uses, they add up to 24.6M. Then instead of the headline
seven percent, 3.4M is 14%!
ALL these figures ignore offshoring in other categories. Are lost
manufacturing jobs no longer newsworthy? What about call centers? And
the oft-cited low-cost medical diagnoses?
Even accepting a limitation to the categories Forrester claims to cover,
there are questions. At the risk of delving into military jargon, what
is the ratio of tip to tail? When you offshore seven percent of
management jobs, don't you have to also lose something on the order of
seven percent of supporting service, sales and production/
transportation jobs? If so, the number jumps from 3.4M up to 8.7M
offshored jobs. (6.3% of all jobs for those keeping score at home.)
Long-time readers will notice I am using numbers from the BLS, whose
objectivity can reasonably be considered in doubt, to sow doubt about
another report. Let's try another angle.
A recent Electronics Supply and Manufacturing Magazine survey (ES&M, the
successor to the long-running EBN, or Electronics Buyers' News, which
went under during the latest downturn.) The poll asked:
"Does your company outsource any design work to independent design
companies?":
No, but thinking about it: 11%
No, and no plans: 29%
Yes, only to re-engineer mature products: 13%
Yes, only when internal design engineers committed: 23%
Yes, and will be outsourcing more in the future: 24%
These results suggest outsourcing is planned by 60% of companies. After
three-plus years of downsizing and offshoring, most companies are down
to their best, brightest and most productive engineers. An argument can
be made 60% significantly understates the potential due to "survivorship
bias." Said another way, even after three-plus years of downsizing and
off-shoring, 60% of the respondents in this survey STILL plan to move
more work off-shore!
The popular counter-argument to all of these numbers and percentages is
to claim the next recovery will be driven by start-ups. Since the "law
of large numbers" dictates Cisco, Intel, Oracle, Hewlett-Packard, Sun,
etc. will not meaningfully drive large numbers of new hires at this
point in their life cycles.
Much to my surprise, the local paper went a long way towards debunking
the start-ups-as-saviors myth last week(#).
Carl Everett, "Mr. Offshore" at VC firm Accel Partners is, "the guy who
goes after Accel start-ups that are slow to move and tells them why and
how they need to outsource work to other countries."
Mr. Everett is driving, "a growing trend among venture capitalists to
urgently -- and mostly quietly -- push (Accel-funded) companies to tap
into larger markets and cheaper labor abroad."
Notice how artfully this is written. The comment on, "cheaper labor
abroad" is preceded by, "tap into larger markets" as though cheaper
labor is not the primary goal. Where are "larger markets" than the US
for IT and networking gear, telecom equipment or consumer products?
Follow the money...
"A recent internal survey of 45 of Accel's portfolio companies showed
that 38 percent had undertaken moves to hire abroad. By 2005, the plan
is to knock that up to 75 percent."
You may also notice the argument which Accel feels they can "prove" is
based on, "pages of elaborate profit-and-loss tables to prove his point
that hiring abroad saves costs and boosts profit margins." Show me the
money...
The part Accel wants taken on faith is, "profits... help companies hire
at home and create more jobs in the long run." Yes, Stephen Roach's
"labor arbitrage" gets companies ahead. Are these companies then likely
to dilute, or even forfeit, their labor cost advantage and start hiring
in Silicon Valley? Or will they increase staff in Asia hoping to
further leverage their gains? Money talks...
Another popular counter-argument to the negative impact of offshoring in
Silicon Valley is the claim companies are only off-shoring low-level
engineering tasks. "New" engineering requirements supposedly will only
be performed here in Silicon Valley.
Conveniently, this same article goes on to say Accel's Everett, "wants
to make sure start-ups hold to his time-worn tenets for offshoring the
right way... the foreign engineering teams should work only on a
mission-critical project."
In an effort to soften Mr. Everett's image, a blurb went out the
following day in which he gave advice to a student hoping to earn
credentials which would be immune to offshoring. Everett's advice to
the student was to focus his education and career on biotech. You mean
to tell me that by the next day he had already forgotten his claim about
how the offshoring his firm is driving toady will lead to more jobs
locally? My grandmother used to joke, if you "forget," then it must
have been a lie. I think it was Ben Franklin who said it was much
easier to remember what to tell people if you always told the truth...
The relevant number from Accel is 75% of companies will be required to
focus on hiring offshore.
In case you think this is a fluke, another piece of the puzzle is found
in, "Executives in valley, workers offshore,"(##) which discusses the VC
firm NewPath.
NewPath's offices overlook San Francisco Bay and include "several empty
offices with gleaming glass windows, all awaiting new CEOs for fresh
start-ups."
NewPath is using a similar strategy to Accel but ups the ante. "NewPath
is building its entire model on offshoring, and that alone. It plans to
form companies here with executives sitting in the glass offices, and
then do most of the hiring in India." Indeed, "NewPath is taking the
premise (of offshoring) to a whole new level."
NewPath's CEO is quoted as saying, "The business model for venture
capital is broken." This is followed by "Venture firms can no longer
continue investing the way they were. You have to get creative about
going to China or India."
NewPath finally gives a number we don’t have to impute, infer or solve
algebraic equations to find: "30 percent employees here, and 70 percent
abroad, is the rough target NewPath has in mind for its investments."
NewPath's' CEO, "waxes at length about the talent here, the educational
opportunities, the diverse immigrant population -- even the weather and
the scenic view of the bay. They both say they prefer to live here
rather than in India." (What, no reference to Buck's Café in Woodside?)
Yet, even with all these wonderful and unique attributes, NewPath
explicitly plans to avoid hiring in Silicon Valley. A full 100% of
their companies will focus on hiring offshore.
Conclusion: If start-ups are going to drive a recovery in Silicon
Valley employment, it will be despite hiring 70% or more of their
engineers in Asia.
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*- www.forrester.com/my/1,,1-0,FF.html
**- http://www.my-esm.com
&- ftp://ftp.bls.gov/pub/suppl/empsit.cpseea19.txt
#- http://www.mercurynews.com/mld/mercurynews/business/8675869.htm
##- http://www.mercurynews.com/mld/mercurynews/business/8675870.htm
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