Editor’s note: This is the first of a four-part series on the history, current state and moral implications of outsourcing for tech companies.
- Teddy lives in Nigeria, and his 75-person company is entirely remote; the founder-CEO lives in Philadelphia.
- Sarah got a job during the pandemic while living in Brazil, but she’s planning to move back home to Pittsburgh so she can make semi-regular trips into her company’s New York headquarters.
- Jessica was promoted at a company where she lives in Silicon Valley, but she’s planning to spend the next year working remotely in months-long chunks at places around the world, many of them lower-cost emerging tech markets.
Let’s assume they all have similar titles, experience and skill levels. How much should they be paid? Equal pay for equal work? Or is compensation better understood as a means for quality of life that varies widely by geography?
All three of them are composite sketches of real people, the combination of real-world examples to demonstrate what this story aims to accomplish: Surging remote work presents increasingly complex logistical, cultural and moral compensation questions, but there are answers to help you navigate these thorny issues. They have implications across rich-country economies, but American tech firms are confronting them most urgently, so we’ll focus on that perspective.
“Tech moves fast, but a lot of these decisions can only be made slowly,” Brian Berkey, a business ethics professor at the Wharton School of the University of Pennsylvania, told me.
Over the last several months, I spoke to 10 CEOs who have hired internationally, two more that have considered doing so, a few analysts and ethicists, and a handful of professionals who have been employed abroad. Together, this paints a picture backed by data: International hiring is entering a new stage that requires a deeper understanding of how to do this well, especially for smaller and startup tech firms who are joining a trend that has been rocked by the pandemic.
What must tech companies consider when hiring abroad, either directly or through outsourced IT firms?
The question has implications for startup founders who are confronting international hiring at increasingly earlier business stages, tech workers who are entering a golden age of digital nomadism, and policymakers who face the consequences of the great untethering of professionals from where they live.
What is the history of outsourcing?
The invention of corporations in the 17th century was an effort to unite resources from around the world. Though the explorations of the East India Company and its successors set a foundation, international hiring got started after the Second World War.
In the last half of the 20th century, outside of the largest organizations, the only practical way most firms worked with employees in a country outside their own was by contracting with another company. Using an “outside resource” came to be known as outsourcing — influenced by British economist Ronald Coase’s influential 1937 essay “The Nature of the Firm.”
For a simple definition, outsourcing is a business practice of hiring a different company to provide goods and services that could be provided internally. In common usage, outsourcing often (but not always) implies sourcing from a different country, especially when a company from a richer country is working with a company with lower costs.
“The negative connotation many people hold of ‘outsourcing’ didn’t come from call centers or tech jobs,” said Mike Dershowitz, the CEO and founder of Fair Trade Outsourcing. “It came from manufacturing, especially the idea of ‘good jobs’ in [automobile manufacturing] going overseas.”
Dershowitz says it helps to consider three waves of outsourcing that brought us to where are today:
- Outsourced manufacturing — Starting in the 1960s, the modern global supply chain was developed through a complex network of specialized facilities to produce physical goods. Think consumer electronics.
- Business process outsourcing (BPO) — Growing rapidly in the 1970s, routine and/or non-core business functions were next positioned abroad. Think call centers.
- IT outsourcing (ITO) — In the 1990s, increasingly highly skilled functions were fulfilled by workforces built in lower-cost emerging markets. Think IT staffing firms.
In most of these cases, firms specialized in one of these functions and sold their resources to other companies — for example, Foxconn in manufacturing, call center giant Concentrix for BPO and EPAM Systems for ITO.
Outsourcing is overrun with acronyms and increasingly specialized categories because the trend has been clear. Over the last 70 years, business leaders have followed legendary management consultant Peter Drucker’s overly cheery recitation: “Do what you do best and outsource the rest.”
The trend went from heavy industry into knowledge work — fitting that Drucker, who died in 2005, is credited with coining the term “knowledge worker.”
In today’s startup circles, “outsourcing” carries little of the polarizing connotation of the auto-worker battles that came to define the term. That’s because of at least two reasons: Tech outsourcing is newer and it affects a far more privileged class.
Quietly then, outsourcing has become a more routine debate inside tech firms of every size. If software is eating the world, does that mean that to succeed, every company must do technology best, leaving a smaller portion of “the rest” to outsource? That might be one reason why more tech companies supplement third-party outsourcing companies by hiring internationally themselves.