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Offshore -- Cringely Comments

As this seems to be the hot topic on this board of late, and with good reason, his take is interesting.  I just doubt that the people in charge of offshoring are really interested in "long term."  Most I have met, plan to be around for 5 - 10 years and then cash out and retire. 

As he points out, it is a perfect option for reducing the benefits cost.  And IBM is not the only company.    At the company I am any questions are met with "but the savings is incredible..."  and "We need team players." 

It's good to be a consultant...

Thursday, August 7, 2003

I don't really understand the connection older workers have to increased retirement costs.  I guess some companies still have pension plans where the company is caring for workers after retirement.  However, don't most large companies have 401k programs now?  That costs the same whether the employee is 20 or 60?  What am I missing here?  Maybe he thinks younger employees don't take advantage of 401k type programs?

Thursday, August 7, 2003

Statistically, they don't take advantage of 401k plans, and they are _much_ easier on the health care plans, vacation and sick leave.  They rarely have children and they are at the lowest income level they will see in their careers.  So benefits as a portion of salary are less.

Thursday, August 7, 2003

Older employees are more expensive because they get paid more.  They are also less likely to put in unpaid overtime.  And generally some of the benefits, pension plans, etc. are to be paid while said employee is retired.

Flamebait Sr.
Thursday, August 7, 2003

Instead of investing their pensions funds wisely a lot of companies now have hugh pension deficits.

So the sooner you get rid of the older workers the less cash you need to put back into the pension fund.

Thursday, August 7, 2003

Here is how I interpreted his article.

It seems that Cringely is talking about two types of IT corporate IT environments:

1) Consulting firms/Staffing firms that service corporations
2) Corporate IT departments

and that moving IT jobs offshore and keeping head counts the same or increasing them won't do much good.  He seems to be arguing that American companies should be looking to increase productivity by using fewer bodies not more and that hiring the right people is the most important thing.


Typical industrial age thinking at work here?
I believe that the IT services type of American companies (IBM, Accenture, EDS, etc.) are taking the "hire a bunch of specialists" approach to software development (or at least want to go in this direction).  In other words, these companies believe that they will eventually be able to mass produce a better service/product by using lots of very specialized but lower-payed workers.  You can call this approach to software development as, "it worked for McDonalds and Wall-Mart" if you wish.

One Programmer's Opinion
Thursday, August 7, 2003

Many of the older workers who are approaching retirement age have been at the company for 20+ years, having joined the company when traditional pension plans were in place.  So companies figure they can save millions by getting rid of them a few years before they become eligible to collect retirement. The writer of the article suggests that one way they can get rid of lots of them without seriously damaging their productive capacity is to replace them with offshore workers.

Of course, you won't find these corporations doing anything to jeopardize the pensions of their top executives.

T. Norman
Thursday, August 7, 2003

it's even worse here in Germany: our largest private bank set up a special foundation just for its top executives with the single goal to secure their pensions in case the bank had to file Chapter 11 (i.e. its German equivalent).

Johnny Bravo
Thursday, August 7, 2003

As someone above observed, Cringely's main point is one that's common on JOS - that offshoring is essentially a short-term, dumb management fad.

Where he says that there's an opportunity for a smart company to cream the IBM's and others who are outsourcing extensively, do you know the company that came to my mind?

Yep. Microsoft. I know they do some offshoring too, but I think it's more controlled and, look at their recent figures. They're offshoring 2,000 but hiring 3,000 in America.

Thursday, August 7, 2003

Offshore software development is something done by companies in US and West Europe for at least 10-15 years, now.

It is not something new.

Also, it generally works well, when done right. If a company can make good specifications and track a team remotely, then they can send their software offshore.

So, I don't see it as a fad.

Maybe it's unfair to people in the US.

But - as I live in East Europe - was it fair when, 70 years ago, the russians came with their army and their tanks, and shoved communism down our throat?

Before that, my country had a good economic situation and was firmy capitalist. Then russians came, with an army 100 times (!!!) larger than my country's army, and set us up for communism. :-(

Life is very unfair.

However, I have read the Cringley article. He says that IBM develops software offshore in order to get rid of engineers who want to retire.

This is really bad and unethical.

I am wondering - in the US, if I retire from company X, does company X have to pay my retirement benefits?

This is very strange!

Because here, company X pays to an insurance company while the worker is .. working, and then the insurance company pays the retirement money, and NOT the company the workers are working for.

It seems a much better arrangement to me.

A software developer in Eastern Europe
Friday, August 8, 2003

Yes, offshore has been going on for 10-15 years.  The companies like GE and Citibank that have been doing it for that long went into it gradually with their eyes open to the pros and cons.  The sudden rush by almost every company to do it now is what makes it a fad.

In America there are few laws protecting employees, compared to other developed countries.  At many companies, pension plans are nothing more than a promise to pay retirement benefits after a certain age -- they often aren't backed with much real funds. The companies pay for the benefits out of their cash flow after the people retire.  Some companies now have multi-billion dollar pension liabilities awaiting them and they aren't likely to have the money to pay everybody.  If the company goes bankrupt, your pension may disappear with it, because they don't have to pre-fund the pension to a third-party like an insurance company while the person is working.

T. Norman
Friday, August 8, 2003

> At many companies, pension plans are
> nothing more than a promise to pay
> retirement benefits after a certain
> age -- they often aren't backed with
> much real funds.

This is amazing. Both in my country (in East Europe) and in West Europe countries like Germany the companies pay to an insurance company (which is owned by the state, and guaranteed by the state).

The insurance company then pays the monthly retirement pensions to the retired persons.

The pensions are not a lot of money, compared to the former wages of the employees, but at least you won't starve and won't be homeless.

The monthly retirement pension is about 60-70% of the former monthly salary.

This seems to me like a much better arrangement.

A software developer in Eastern Europe
Friday, August 8, 2003

There is two methods for paying pensions here, in Russia. As it is described above, companies pay to the insurance fund, which is owned and controlled by a state, and also there are private pension funds available. You can use one of these on your own. These funds are licensed by a state.

Friday, August 8, 2003

Just so all of the programmers from Europe don't get the idea that we're completely cut-throat over here in the US:

In the U.S., traditional pensions, "defined benefit plans" in the local-speak, are governed by a law called ERISA, which sets out specific rules for the actuarial assumptions, contribution rates, investment return assumptions, etc., etc., that a company pension must follow.

For example, when the stock market in the U.S. tanked (again) last year, General Motors, which has one of the largest pension funds in the country, had to write a huge check to cover the shortfall. You can look at the ERISA rules, and the pension fund's assets, and easily determine if the pension is under-, fully-, or over-funded. Pension funds that follow the ERISA rules are also ultimately guaranteed by a government agency (I'm not clear on exactly what criteria have to be met for the federal government to take over a pension fund's obligations).

Having said all that; the rise of the 401k "defined contribution" plan, has largely driven out the defined benefit pension plan. Defined benefit plan costs are built on a lot of actuarial and investment assumptions. They are typically much, much more expensive to the company than a 401k plan.

Rob VH
Friday, August 8, 2003

On a kinda related note:

Leonardo Herrera
Friday, August 8, 2003

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