The Monkey and the Calculator - The darker side of labor arbitrage
- Abe
- Feb 8, 2020
- 2 min read
Updated: Jul 19, 2020
It began when a 6th century Phoenician trader by the name of Regos found himself at the tip of the Iberian peninsula, a land that is now Portugal, as the story goes.
Like any consummate wine lover, his craving for his favorite Phoenician brew led him to convince the Iberian natives to make wine from the local berries. Word spread to his homeland. “They make great wine here and and its amazingly cheap.”
Getting someone else typically someone lower on the economic ladder to produce something or provide a service faster and cheaper so you can then do the important stuff in life is a basic premise of any free economy. Some call it outsourcing.
At its base, in the absence of rules and governance, outsourcing can be exploitative. It breeds intellectual laziness despite the claims that it frees us to do more important things like thinking, philosophizing and inventing, or so it goes.
Tax collection and agriculture in the Roman Empire were outsourced.
One step down is of course slavery - why pay these wretched coolies - a close to perfect zero-cost outsourcing model.
But instead of boosting the productivity of the slave owners, be they the Romans in Asia or Spanish in South America or the plantation owners of the southern states of the US, arguably their well-catered lifestyles eventually led to their downfall.
Outsourcing serves the common good according to Keynesian-leaning economists. Creating work, lowering the cost of production and increasing profits, therefore improving the well-being of the economy in general.
Outsourcing is no more an economic innovation (despite claims) than Amazon's drop-shipping service. Stumbled upon by a wine-loving trader, given new life by slave traders and re-branded as labor arbitrage by number-crunching accountants and market analysts.
Anyone can cut cost. Even a monkey with a calculator, eventually.
Yet CEOs who were brought in to save ailing companies were hailed as saviours when all they did was slash costs, shut down local operations and move jobs to cheaper markets to the glee of shareholders.
No doubt the material lives of the Iberian wine maker, the Indian programmer and Chinese iPhone assembler, as active income-earning participants in a global economy have improved.
But I have seen the darker side of outsourcing.
For over 3 years I managed a team of 200+ staff for a global airline that had outsourced its IT operations to my company, a global IT corporation.
We ran the airline's IT operations at 70% of their costs, reduced costs further by 35% by shifting work to India, China, Philippines and Easter Europe and delivered some 12-15% profit annually. Instead of running an operations at a rate of 250 computer servers per staff, we were stretched to cut cost further by increasing the server to staff ratio to 450 servers/staff. "Your mess for less" was the selling point to the client.
No innovation. Just pure book-keeping. You don’t need a spreadsheet to tell what happened to service and stress levels within the team and client.
Instead of harvesting the intellectual property and treasure trove of patents sitting in the vaults of most of these global companies, they find it more convenient to go down the path of least resistance.
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