45) Outsourcing Is Too Wild to Fit Economic Theory

Moline, Illinois, probably isn't a place that springs to mind when one thinks of pioneering efforts in services outsourcing.

Yet, it was in this city that in 1991, Satyam Computer Services Ltd., a fledgling Indian software company, launched "Little India", a simulation exercise in writing code for customers who may be thousands of miles away.

Satyam rented an office across the road from Deere & Co., the tractor maker based there with whom it had a contract for an onsite software project.

Ten engineers were assigned to the project at the new location. They could work only at night, accessing the Deere network via a 64 kilobits-per-second satellite link. None of them could contact the client directly.

The experiment, as Satyam Chairman Ramalinga Raju recounts in his article in Ed Cohen's book "Leadership without Borders”, was a success beyond expectations.

The next step was simple enough: Raju asked Deere, its first Fortune 500 client, if he could stretch the telephone lines a little. Deere agreed. Raju extended the communication link by 8,302 miles (13,361 kilometers) and took the work from Moline to Hyderabad in India.

It wasn't the first time ``offshoring'' was being tried: Texas Instruments Inc. had been doing in-house design-related software work out of Bangalore since 1986. It was, however, the first instance of a local Indian service provider supplying commercial software from India using a satellite link to a customer in the U.S.

Full Circle?

As telecommunications costs plummeted after the bursting of the dot-com bubble -- thanks to overinvestment in undersea fiber- optic cables -- the model gained widespread acceptance and became a political hot potato in the developed world.

Economists, however, were unfazed by the arrival of the ``flat world.'' Outsourcing was, after all, something that fit nicely into their models of how comparative advantages drive international trade from which ultimately everyone benefits.

The narrative is no longer that simple.

Of late, the business of outsourcing has started moving in a rather unexpected direction.

As the New York Times reported this week, ``India is now outsourcing outsourcing.'' Top Indian companies are hiring people of all nationalities -- including Americans -- and setting up development centers from China and Romania to Chile, Uruguay, and even the U.S.