Insourcing: The hoax that GM, Uncle Sam are trying to pull

President Barack Obama is bashing his Republican opponent Mitt Romney for encouraging outsourcing and contrasts this with his own record of helping domestic companies keep jobs in the US. The US Congress will consider legislating a Bring Jobs Home Act which will snip tax breaks to companies that ship jobs overseas, and incentivise those bringing them back to the US.

As if on cue, General Motors (GM) has been reported as saying that over the next three years it will reduce outsourcing of its IT services by 90 percent - and resort to insourcing (i.e. do all the software work in-house by recruiting thousands of US nerds and geeks).

InformationWeek quoted the new Chief Information Officer of GM, Randy Mott, as saying that he would reduce outsourcing to 10 percent.

All three of them - Obama, the US Congress, and GM - are selling US citizens a pipedream in the run-up to November's presidential election. They might abandon all these ideas after November, or, if they insist on persisting with this foolishness, they will pay a high price to Bring their Jobs Home.

Let's start with GM's foolishness first.

President Barack Obama is bashing his Republican opponent Mitt Romney for encouraging outsourcing. AP

GM is not a free agent - even though it is a listed private sector company. Obama's government gave it a bailout in 2009 when it filed for bankruptcy. Once out of Chapter 11, GM became a public sector company a 61 percent shareholding for Uncle Sam. This shareholding has now been reduced to around 26 percent after a public float in November 2010 - but the government is clearly the controlling shareholder with a minority stake.

GM is talking insourcing today not because it makes business sense, but because Obama wants it to - to show that world that his rescue of GM has worked, and how this is helping bring jobs back to the US.

The Obama bailout for GM (a bum deal, according to analysts) included nearly $50 billion as loans or grants, and another $30 billion in share investment. Tax credits (on past losses) of nearly $45 billion were revalidated. While the loans could presumably be repaid and the shares can be sold, the problem is the GM share - which was floated at $33 in 2010 - is quoting below $20 right now. Obama missed his chance to exit at a decent valuation.

But that's another story. The point is: GM is talking insourcing because it owes Obama a big favour for the bailout in 2009. The company hasn't even paid back all its loans, but has reported a huge profit in 2011 - $7.6 billion - and doesn't pay a dime in taxes to Uncle Sam.

If GM's announcement is about helping Obama with his campaign themesong - that he is bringing jobs back to America (when jobs growth is anaemic) - the chosen route (insourcing) is rather daft. According to Rob Preston of InformationWeek, the purpose of GM's insourcing is not to cut costs, but merely to reverse its overwhelming reliance on outsourcers. He adds: "(CIO Randy) Mott will need to hire thousands of people as it brings software development and other skills in-house."

What he doesn't talk about is the huge cost of insourcing - which will come back to bite GM once the elections are over, the tax credits run out, and the bills have to be paid.

As Chris Murphy writes in InformationWeek: "Insourcing IT on that scale will require GM to go on a hiring binge for software developers, project managers, database experts, business analysts, and other IT pros over the next three years."

And guess what this hiring binge will cost?

David Schepp, writing in AOL Jobs, suggests that insourcing means kissing goodbye to cost savings.

According to computations by Staff.com, which allows companies to hire through the net, a software developer who would cost $14,000 in India would cost $94,000 to hire in the US. A senior web developer would cost $19,800 in India, and $1,07,000 in the US. Is GM keen on paying four times more for the same work?

Given the cost advantages that can be harnessed through the net, even if GM decides to abandon its existing IT vendors, which include Wipro, it would still make sense to outsource work.

Reuters

So, when GM's future is far from assured, its decision to insource 90 percent of IT work at a much higher cost carries little logic. One InformationWeek survey of business technology professionals in 2011 showed that only 4 percent were thinking of bringing outsourced work back to the US. GM, clearly, is not is august company.

Next, it is also important to call Obama's own bluff on outsourcing. And that of the US Congressmen who are sponsoring the Bring Jobs Home Act.

The idea may play well in an election-bound US, but it goes against the basic tenets of capitalism and comparative advantage. Asking US companies to bring IT jobs home is no different from India raising tariffs on US products. GM doing insourcing or legislating the Bring Jobs Home Act is like imposing a tariff on Indian IT brainpower, whether through onshore presence or offshoring.

This does not mean the US lawmakers won't actually enact protectionist legislation for political reasons, but it won't last.

The insourcing versus outsourcing issue is usually decided by companies on three parameters.

One is relative costs. If it's significantly cheaper to outsource, companies will do so. As the Staff.com figures show, currently outsourcing is a no-brainer.

Two, relative costs do not matter if the strategic value of owning a technology is overwhelming. Apple will always develop its technology inhouse to retain tight control of the IPR, but it will build its iPads and iPhones in China. It will thus both insource and outsource. But does the same logic work for GM?

Three, insourcing makes sense only if the value created in-house is greater than the value that can be created outside. It is worth recalling the GM once owned one of the biggest technology companies, EDS. It was sold both because GM needed the money, and because EDS's growth as part of GM would have restricted its growth. Genpact was sold by GE once its value as a standalone BPO giant became significantly larger than as a captive unit.

GM's effort to reinvent insourcing is like turning the clock back to the EDS era.

India should not spend much time fretting about GM's insourcing nonsense. It will fall apart under the weight of its own contradictions.