Saturday, March 19, 2011

Regional Economic Disparities and Rural Outsourcing

One has to take advantage of good news wherever one finds it. The Economist ran a short article pointing out that even within a given country large variations in wealth can exist. Using OECD data for Europe, and state-by-state data available for the U.S., they produced the following chart.

It is reasonably safe to associate GDP per person with wealth. It seems that the English speaking countries are particularly adept at generating economies capable of ignoring large chunks of the citizenry. The British are the clear champions with the U.S. not far behind.

This chart indicates that in the spirit of friendly competition the U.S. is determined to catch up.

So where might be the “good news” hinted at above? It turns out that the U.S. has regions within its borders that are poor enough to compete with second and third world countries for some of the low-skilled jobs that are normally shipped overseas.

Businessweek ran an article a few months ago highlighting an outfit called Cayuse Technologies which is owned by the Confederated Tribes of the Umatilla Indian Reservation in northeast Oregon. They reported that Cayuse
“....saw $7.7 million in sales last year, seven times what they had been in 2007, its first full year of operation. With revenues from corporate clients such as Accenture expected to exceed $11 million next year, Cayuse aims to hire an additional 75 workers, says Marc Benoist, the company's general manager. "We still have capacity here at our facility, so we have plenty of room for growth," he says.”

“Cayuse is one of a handful of fast-growing information technology companies in remote areas of the U.S. that are positioning themselves as alternatives to offshore outsourcing. On an hourly basis, these "rural outsourcers" cost anywhere from 10 percent to 150 percent more to use than rivals overseas. After factoring in additional costs such as oversight and quality control of the offshore work, however, rates are comparable, says Mary Lacity, a professor at the University of Missouri in St. Louis who studies outsourcing. And the rates of the rural outsourcers are better than their domestic counterparts in big cities because the towns and small cities where they operate have lower living costs. ‘Their value proposition is,”'We cost less than the East and West Coast, and we're easier to deal with than India,”’ says Lacity.”

“There are about 20 such companies now, up from two 12 years ago, estimate industry executives. ‘A lot of it is being driven by dissatisfaction with India and challenges with visas,’ says John Beesley, director of business development at 100-employee CrossUSA. Other companies, including Saturn Systems, Rural Sourcing, and Onshore Technology Services, are reporting double- and triple-digit revenue growth in the past few years. Last year, IT research firm Gartner said in a report that while the companies make up a sliver of the market, they are an "attractive alter native" to offshore outsourcers because of language and other cultural benefits. It's also easier for them to comply with U.S. data privacy regulations, the report said.”
The total outsourcing activity is huge compared to these efforts. One might think that this is an opportunity to be encouraged and nurtured, but business analysts are pessimistic about the growth potential for these domestic companies. Given the lack of jobs and the long-term unemployment, and the historical tenacity of poverty in many regions the reason why is a bit surprising.
“The challenge is training enough workers, says Shane Mayes, founder of 70-employee consulting firm Onshore Technology Services, which estimates it will have $10 million in revenues this year. ‘We take underemployed and dislocated workers who've lost manufacturing jobs and put them through a bootcamp-style training program,’ he says. "We make software developers out of them." With clients paying from the low $20s to $50 an hour, he says the firm has doubled its growth in recent years. Mayes has centers in Lebanon, Macon, and Joplin, Mo., and plans to hire 70 more employees in 2011.”

“Critics contend rural outsourcing will remain a niche because it won't be able to scale to a significant size for lack of workers. In a Strategic Outsourcing journal article, Lacity points out that more than 61 million people—a quarter of the U.S. population—is rural. Randy Willis, an Accenture senior executive who conceived of and hatched Cayuse Technologies, agrees the biggest challenge is creating and maintaining a large enough skilled workforce. ‘To meet the cost structure, you pretty much have to build the skills from scratch,’ he says. ‘The good news is we can supplement with lower-skilled work while we're growing the deeper skills’."
This appears to be a perfect example of a situation in which focused job training could make a big difference.

Is anyone paying attention out there?

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