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Outsourced Jobs Are No Longer Cheap, So They're Being Automated

Yahoo's massive round of layoffs is a signal that "cheap labor" is getting pretty expensive.

Remember when a majority of new tech jobs were going to India and China? Well, increasingly, those jobs are going away altogether. Outsourcing, it turns out, is in the early stages of being automated.

This morning, news broke that Yahoo would be laying off at least 400 workers in its Indian office, and back in February, IBM cut roughly 2,000 jobs thereCisco has been considering cuts in India as well.


Labor in India and China is still cheaper than it is in the United States, but it's not the obvious economic move that it was just a few years ago: Wages in India have increased about 10 percent annually over the last five years, according to Cliff Justice, an analyst who studies outsourcing.

companies are seeing that automated replacements are getting to be 'good enough'

"The traditional low cost arbitrage markets have been India, China and other parts of Asia," Justice wrote in a paper he called "The Death of Outsourcing." "However, the success of outsourcing and global manufacturing has spawned a rapidly growing middle class in these regions, which is both increasing the cost of labor and broadening the potential customer base for many companies."

late 2012 report by IT analysts HFS Research suggested that "robotic automation has the potential to wreak some dramatic, painful changes on the Indian outsourcers who are the current bulwark of the industry," and analyzed several instances in which an automated IT program has already started doing important work for several (unnamed) companies.

That discussion of automation is becoming much more common in the tech industry, with tech jobs in Asia having at least the potential to be on the chopping block, said Mark Muro, an economist at Brookings.

Automation is going to create some disruptions not only here, but also in the emerging world, where the whole appeal is that labor is cheaper


"The labor costs are becoming significant enough in China and India that there are very real discussions about automating jobs there now," Muro said. "The next generation of robots, the next generation of computer learning, is going to be much better than they were at handling things like customer service."

"I think it's going to create some disruptions not only here, but also in the emerging world, where the whole appeal is that labor is cheaper," he added.

Unsurprisingly, robots are and will be cheaper. Meanwhile, Yahoo and other major tech firms are trying to consolidate their human operations to larger offices centered in urban centers—most often in the United States.

Muro suggested that there's been some "buyer's remorse for massive decentralization of the workforce," and you're beginning to see that with Marissa Mayer's vision for Yahoo. Mayer has famously suggested that working from home isn't nearly as effective as having face-to-face communication in the office, and Muro says he's seen that in other firms as well.

"There's a broad trend to reexamine the idea that anybody can work anywhere in their underwear at any time and it works," he said. "I think there's a new appreciation for working in tight ecosystems—that could be part of Yahoo's layoffs here."

It's not just Muro who has noticed that trend: In late 2012, the Congressional Research Service noted that American IT firms are increasingly returning customer service centers and other workers to the United States, because it's simply not all that expensive to do so, once you consider logistics such as transportation and energy costs.

What we're seeing, then, is a slow move away from outsourcing, powered first by the idea that it's not really all that much cheaper than having workers here in the United States, and, secondly, by the broad automation trend we're seeing elsewhere.

What does it mean for the economies of these up-and-coming world powers? Well, probably the same thing that it means for everyone else: The automators will continue to get very, very rich, while the automated will have to find something else to do.

"Technology is another platform putting another pressure on developing countries," Muro said. "Cheap labor isn't as cheap as it was, and companies are seeing that automated replacements are getting to be 'good enough.'"