Every few years, a new tome becomes the bible of business. Back in the 80s, it was Tom Peters’ “In Search of Excellence.” In the IT field, NY Times columnist Tom Friedman’s tome “The World Is Flat” has become the latest conventional wisdom.

Friedman contends that, in a world awash with bandwidth, barriers to entry have virtually disappeared. Witnessing the explosion of the IT sector in places like India or China, it’s hard to argue. Last year alone, India graduated ten times the number of computer scientists as the U.S.

Yet, viewing this as a zero sum game ignores some basic realities. For instance, when you outsource offshore, you must increase management overhead because you are running a remote project that is hampered by lack of accessibility, 12 hours of time zone difference, and culture gaps. Conversely, when you “insource” a project, you may also have to bulk up on management to compensate for poor communications that have long existed between IT and the business.

Yet, at Sand Hill Group’s Software 2006 conference, we were intrigued by an idea cited by University of Michigan business professor Dr. C K Prahalad that offshoring provides a multiplier effect. Applying principles resembling Metcalfe’s Law (which stipulated the value of the network growing exponentially with the number of nodes), Prahalad said that when you have more software brains, you gain more chance of getting innovation. And innovation, of course, creates value and new opportunity.

Arguably, nobody looks at the growth of SAP, Mercury, or Fuego (recently acquired by BEA) as threats to domestic IT employment. Yet each of those companies capitalized on development conducted in Germany, Israel, and Argentina, respectively.

Prahalad made another interesting point: regardless of how fast India is growing, it remains highly interdependent on western talent that not only has state of the art expertise, but intimate knowledge of the customer and market. If you look at how manufacturing globalized, you might get an idea of what’s in store for IT (we’ll also credit Erik Keller and Brian Turchin, who have come to similar conclusions). A generation ago, Japan applied American doctrines of total quality management to produce cars faster, cheaper, better.

Yet, in the interim, American manufacturing didn't disappear. Instead, it reconfigured its role in two pivotal points of the value chain: ideation and final configuration and service for the end customer. Nonetheless, you can’t ignore the fact that IT employment in the western world is nothing compared to the dot com peak. For instance, according to Federal Reserve Bank figures, “non agricultural” (the bucket under which they put IT) employment in the Bay Area dropped 9.5% between 2000 – 2003. But we contend that the dot com bubble was an historic aberration. Taking the Fed’s own figures, if you factor out the step gains of 1995 – 2000, what remains is a more sustainable 10 – 15% overall growth in jobs from 1995 – 2003. Consequently, if you look at IT as a more ”normal” business, job trends don't look that bad, the emergence of offshore notwithstanding.

Instead, the real issue for the software industry remains finding a viable business model. You’d think that after 30 – 40 years of existence, that we’d finally get it right. Yet, according to numbers cited by Kleiner Perkins principal Ray Lane, three quarters of all profitability is accounted for by Microsoft, SAP, and Oracle. Now that’s something to get worried about.

About the Author

Tony Baer is a well-published IT analyst with over 15 years background in enterprise systems and manufacturing. A frequent speaker at IT conferences, Baer focuses on strategic technology utilization for the enterprise. Baer studies implementation issues in distributed data management, application development, data warehousing, and leading enterprise application areas including ERP, supply chain planning, and customer relationship management. As co-author of several books covering J2EE and .NET technologies, Baer is an authority on emerging platforms. Previously chief analyst for Computerwire’s Computer Finance, Baer is a leading authority on IT economics and cost of ownership issues.

About onStrategies

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