Isn’t fearing outsourcing and offshoring, the hot topic du jour, just about fearing change? Peter Cochrane details an alternative approach to the subject.

From all the ballyhoo in the media – and the US Congress – you could be forgiven for thinking outsourcing is about to become the ruination of the Western world, with all the jobs heading to India and China. The reality is we have been outsourcing almost everything and anything for a very long time. Even before the industrial revolution, back to biblical times, countries had unique capabilities in the production of silks, spices, foods and artefacts.

It is called free trade. Ultimately it leads to globalisation – free trade + outsourcing = globalisation – which in turn leads to greater spread of wealth, political stability and better living standards.

Outsourcing is really about peoples doing what they do best, becoming specialised, hyper-productive and achieving an improved standard of living. Hence the modern company maxim – do what you do best and outsource the rest. And if this works for individual companies then, the logic says, it should apply at a country level too.

Despite the losses in steel production, automotive and white and brown goods manufacturing in the UK and US both nations have grown wealthier by migrating to areas where they are more skilled and productive. In the UK, for example, the focus has been on design, software, services and specialised high-earning high-tech products. The big deal with outsourcing this time around seems to be the migration of software jobs abroad. While it was OK to lose a few thousand call centre jobs, our coveted software writers appear to be another matter altogether.

Why is it happening to software? There is a shortage of good software folks in the UK and US – demand seems to have outstripped supply. At a more fundamental level, software is both immature and tough, and the sector has been limping under pitiful productivity gains for decades.

While hardware productivity at around 80 per cent growth per annum has been sustained for decades, software only sees less than 5 per cent. A net result has been a reduction in the number of hardware jobs as improved design techniques and automation have moved in, while software has bloated to the point where the balloon has burst and a lack of skilled people has been compounded by rapidly rising costs.

At this point there is some good news and some bad news. The economic advantage gained from outsourcing call centre jobs is very transient as eventually all competitors do the same and the market equalises to return to comparative competitive stasis. But these jobs will ultimately go anyway as we can increasingly expect to talk directly to machines and their location is of no economic importance.

Also, new generations of software are being created by machines with no human intervention and may ultimately aspire to the same productivity gains enjoyed by hardware. In the meantime we have no choice: if we want to be competitive and survive we have to join this global outsourcing circus.

What is at threat next? The financial services industry is probably next in line with $350bn of business at risk of being outsourced in the next four to five years.

Is this all a really big deal? Yes and no. On the one hand, to take a popular location only 3 per cent of India