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2009.08.28

The Price of Cheap Labor

The strange entries I've found over the past two weeks I've been researching a large database are innumerable. Some addresses, like Wastington, DC are simply annoying, while others, like Vancouver BC V6T 1Z4 United States, are mildly amusing. It's clear to me that the database has been populated by the massive application of a cheap labor force. This is happening all too often, and I think it is a mistake.

Many tasks, like data entry, quality control, or even medical diagnosis, can be performed by cheap labor or with the application of advanced technology. For instance, we can retype an old printed document or we can scan it and run optical character recognition on the image. With easy access to a low-paid foreign workforce many organizations are being seduced to the road of cheap labor, but this is short-sighted.

First, in the long term labor costs around the world are moving up as countries with low wages increase their standard of living. Therefore, any advantage gained through this option will not last for long. Furthermore, off-shoring companies always face the political risk of tightening local regulations or foreign upheavals. In contrast, the cost of computing power is diminishing each year, and new advances, like cloud computing, are making large computing infrastructures ever more accessible.

Worse, exploiting cheap labor can't increase the organization's competitiveness, because other organizations can easily follow the same off-shoring strategy. An unscrupulous company could gain a cost advantage by outsourcing its work to a sweat-shop in a country lacking labor protection laws, but this behavior is immoral and can easily backfire. Again, the application of computer technology is a superior option, because the organization can keep a competitive advantage through trade secrets, patents, and other proprietary technology, and also by hiring, cultivating, and retaining highly-knowledgeable employees.

In addition, the mental and physical capacity of an unskilled worker is finite. Clever management can increase a worker's efficiency by an order of magnitude but that is the limit. Contrast this with computing power, which has been roughly doubling every 18 months for the past quarter century. Improvements in algorithms and computing tools provide a further advantage here.

Finally, once a worker has finished a task, the results are difficult to correct or improve. Compare this with an IT-based solution, where improved software can repeatedly run on the same input data producing better results each time.

I could give many examples of companies whose strategy depends on cheap labor or advanced technology, but I leave this as a fun exercise to the reader.

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Unless otherwise expressly stated, all original material on this page created by Diomidis Spinellis is licensed under a Creative Commons Attribution-Share Alike 3.0 Greece License.