Author : Nick Krym

Japanese Car Invasion vs. Offshore Outsourcing

In the early 1950s a small number of Americans began purchasing foreign cars after military personnel brought home unique vehicles at the end of their tours overseas. At roughly the same time the Japanese, in need of cash to re-build their country after World War II, went from exporting cheap household products and novelty items to heavy machinery and automobiles, both much more profitable.

In the mid-fifties, the Japanese Ministry of International Trade (MITI) and Industry provided strong incentives to manufacturers to produce a “people’s car”. In the mid-sixties, in order to increase Japan’s competitiveness in the world car market, MITI engineered a number of mergers of car manufacturers. In many ways, the modern Japanese motor vehicle industry was the creation of the Japanese Ministry of International Trade and Industry (MITI). Nissan acquired the Prince Motor Company and Toyota merged with Hino and Daihatsu. The results were spectacular – in 1962, Japan was the sixth largest vehicle manufacturer in the world and by 1967 it was the second largest.

Initially Americans, who had become used to the poor quality, but cheap, Japanese products, did not take Japanese cars seriously. But Toyota, Honda and other Japanese companies worked hard to change the perception and the `products; top level engineering design combined with new techniques and mythologies such as TQM and Lean Manufacturing produced less expensive and higher quality vehicles. To a growing number of Americans Japanese cars started making a lot of sense.

In meanwhile with the oil embargo of 1973, along with the strict pollution controls and safety regulations imposed by the U.S. Government, American manufacturers turned to cost savings resorting to building poor quality, poorly engineered automobiles. While American automotive industry was entering a self-inflicted death spiral Japanese engineers and workers continuing producing better and better cars. Inevitably Japan surpassed the US to become the largest manufacturer in 1980. And, then in less than two decades “For the first time since the early 1930s, General Motors cannot call itself the world’s largest automaker. Its sales fell behind Toyota in 2008, a year when G.M. celebrated its 100th anniversary and narrowly avoided a bankruptcy filing amid a significant downturn in the economy.

If you call the USA your home chances are you know that many factors played in that half a century long story of failure – inflated comp. packages of the industry execs, the unions, the cost of healthcare – just to name a few. It doesn’t make it any easier though to see the companies that produced Mustang, Corvette, Caravan and many other trendsetting and groundbreaking automobiles crumble to pieces.

Another very similar story started unraveling in front of our eyes in the early 90s. This time it affected many industries in a horizontal fashion. This time invasion initially came from several countries with India leading the pack. The invasion was going on multiple fronts and affected other countries beside US. It is called many names with Business Process Outsourcing (BPO) being the most popular. BPO covers many aspects of business with Information Technology being one of the prime targets.

In large degree India was perfectly positioned for a blitzkrieg: a great multitude of factors were there to ensure that invasion is fast, massive and irreversible: English, sheer numbers of qualified resources, cultural proximity, ease of migration, huge difference in the standards of living, and so on. Y2K craze presented a perfect opportunity for dramatic expansion… Considering the pace of the invasion and the circumstances it is amazing that the US IT industry is still around. Fortunately for many of us a few things went wrong and we still have our IT jobs… Some of those (mis)fortunate events had their roots in India some in the consumer countries, some are still going on at the same pace, some increased in influence, some faded away. Let me mention just few the most notable ones:

  • As with almost any gold rush activity “take money and run” (TM&R) attitude prevails. Many outsourcing businesses are proud of being profitable from the day one. Funny enough, that is one of strong indications of exactly the attitude. Being profitable from the day one typically means no substantial initial investment and/or exorbitant margins – both being clear symptoms of TM&R. TM&R attitude inevitably lowers customer loyalty and creates negative drumbeat; it is one of major reasons behind “bad name” of outsourcing.
  • Historically many offshore shops were created by “intermediaries” people with strong connections in say India and business connections in the States. I’ve seen many of those companies in mid 90s doing exceptionally well, some of them even made it to the top of lists such as INC 500. Underneath the marketing collateral they were just labor brokers connecting “human resources” with hungry resource consumers. The brokers were naturally interested only in “putting buns in the seats” and that was another contributor to the offshoring “bad name”.
  • Surging demand on the IT services created a tremendous opportunity for entrepreneurial minds of all sorts. All kinds of entrepreneurs went after huge profits whether they had skills or not… What happened in the offshoring industry during mid 90s makes me think of backyard steel furnaces of The Great Leap Forward. Every one and their brother were opening outsourcing outfits. To no surprise the results were akin to slabs of pig iron. And who was there to tell the difference between pig iron and carbon steel?
  • Ranking IT services is far from a trivial task for many reasons. One of the fundamental problems is that low quality of IT service could be hidden for years before it is recognized, think for example about billions of lines of code that had to be rewritten to deal with Y2K issues, many of them were written in 70s and 80s… Another inherit problem is “fox guarding the henhouse” so typical for large IT implementations. One more, very significant, is obscurity of IT issues for many business users; that one alone creates unlimited safe heaven for mediocrity and makes objective ranking exceptionally difficult if not impossible.
  • Fueled by great demand and lack of selectivity in the market offshore offering was gaining volume fast and by all means possible. Inevitably the quality of goods sold was dropping at similar rate. Lowering the bar affected the entire industry, even the most exclusive educational centers and other time-proven benchmarks of quality stopped working. For example not long time ago I had to fire a consultant for incompetence; it’s not such an unusual nowadays. Yet in this case it was, my team was stunned with the degree of his incompetence which was especially surprising considering that he had a masters degree from IIT.
  • As they say if you take a barrel of honey and mix it with a gallon of garbage you have a barrel of garbage. Despite large number of high quality of resources the overall quality of offshoring team was far from impressive and inevitably the quality of the services rendered by those teams was far from perfect. While many vendors recognized the problem and stared putting processes in place to ensure meeting reasonable expectations the “bad name” was building up. Producing redundant inefficient code was now attributed not to individual programs but to Indian developers as whole. New clichés were firmly established in the industry.
  • IT offshoring was there to fill in a burning need so despite the mediocre quality of the product the demand for it was not going down. Offshoring issues and challenges were bounced around mainly deep in the trenches and kitchens. The decision makers, movers and shakers were on a purchasing spree sometimes going offshore against any sense, outsourcing for the sake of outsourcing or just with no rhyme or reason. Call it a user error but nevertheless it contributed to offshoring large scale failures and “bad name” in a huge degree and cost buyers and their countries enormous amount of resources in out of pocket expenses, erosion of work force, and loss of knowledge pool…

All these (mis)fortunate events generally result in decrease in quality of services and productivity of resources with one common denominator – cost. However the difference in standards of living and thus average wages continues to be dramatic allowing offshore vendors still successfully compete in the market. However it is much more balanced competition than the one that delivered mortal blow to the US automotive industry. Engaging IT resources from allover the world in order to address needs of local organizations continues to be one of many powerful tools in hands of VPEs, CIOs and other IT execs. It is highly unlikely for offshore resources to displace or ruin local IT industry. Yet empty houses of Detroit should ring as rude reminders of fragility rather than invincibility of the IT industry as well.

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2 thoughts on “Japanese Car Invasion vs. Offshore Outsourcing”

  1. Nick, Comparing the IT industry to auto companies is completely missing the point which is why you are struggling to understand why the US IT industry still exists.
    Toyota kicks GM’s ass because they have a culture of fostering quality and reducing waste at every level or the organization. The workers on the assembly are tasked with directly finding better and more efficient ways of doing their jobs. This is in direct contrast to GM workers which are forced into repetitive tasks and only do they are instructed to. So, GM has much more waste in the processes, and thus lower profits.

    Now look at the offshoring business vs inhouse IT. If you were the Toyota of websites, you would not offshore your workers because they are the ones who can raise the quality of the product and reduce waste in creating it. Now the GM’s of websites will certainly offshore their IT workers because all they are looking at is reducing the cost per worker, regardless of the harm it causes their company. You think those offshore workers have any incentive to keep quality high. Of course not, their only looking to satisfy contracts and requirements. At some point the GM website companie’s codebase will become such a tangled mess that they won’t be able to compete any longer.

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