Offshore Contracting for Photogrammetric Mapping

Is it a sustainable business model?

by Nick Dudley

Over the past decade or so, the issue of offshore labor being used to execute photogrammetric mapping projects has risen to the forefront and been the subject of much debate. At issue is the impact that the practice has had on the industry in general and whether it threatens the viability of North American-based firms.

One look at the offshore business model from the perspective of the local mapping firm suggests a total destruction of the work value. Bid results might show a whopping discount of 70 percent of the standard domestic rate; the mapping firm that employs solely local technical staff cannot compete at this level. The proprietor is forced either to find non-public bids to shore up his workload, adopt an offshore model himself, or shut the doors. From an industry standpoint this may be dangerous, as a net outflow of technical talent leaves North America vulnerable to loss of industry. As we have seen in the current economic downturn, jobs are a key component to economic sustainability.

From the perspective of the local government, offshore contracting has vastly reduced the cost of geospatial data to the taxpayer. But is this saving viewed in its full context? Let's look at an example.

Let us suppose a small town contracts an annual orthophoto update. Prior to the inception of the offshore model, a local (within the state) mapping firm would likely be a shoo-in for the contract. Assume for the moment a nominal contract value of $100k per year for the orthophoto work. That sum would support local employment, which indirectly provides tax dollars to the contracting authority and supports local retail business for consumer goods and further tax revenue. This is the type of economic activity that maintains sustainable local growth.

Conversely, the offshore model prices the project at $30k annually. Say the cost of production is roughly $10k, leaving $20k as profit for the data broker (we won't classify them as mapping firms as they create nothing). The $10k of production cost leaves the local area (even the country) and never returns. The $20k likely leaves the local economy also, as the small local firm is no longer a player. That means a net drain of $30k from the local economy. In addition to the local economic drain, the support for local employment vanishes also (we don't need so many technical staff anymore), further weakening the economic model.

What happened to the $70k difference? Doesn't the "saved" revenue stay in the hands of the taxpayer and filter into the economy anyway? Perhaps some of it does, but keep in mind that it no longer directly supports local employment of several individuals. Sustainable growth depends upon the flow of revenues through an ever-increasing number of hands to stimulate economic activity. 

To whose benefit does the offshore model contribute? If you place yourself in the position of local government officials, you can imagine that apparent cost savings of 70 percent can generate endearment from the voting public, whose prime directive is tax relief. However, placed into context (the larger, long-term view) the endearment may indeed be misplaced as local economies deteriorate over time, weakening the tax base and forcing a shift of tax burden from business to residential sources.

Those who speak in support of the offshore production model often justify their position with the concept of innovation at home. The idea is that the mundane technical tasks are taken over by low-cost labor, leaving the thinkers and innovators time to develop new processes and generally advance the science. This is all fine and good in principle.

But how many innovators do we need? Is all domestically employed technical staff suited to development and innovation? Are we likely to see a net migration away from the industry as a whole? All these questions need to be answered.

Another position taken by the proponents of the offshore model is "what make of car do you drive?" - the implied premise being that if you purchase a non-domestic vehicle you are as guilty of weakening the domestic economy. This is easily refuted as most international auto makers have set up production facilities in North America to bypass high import duties. So, the purchase of an import brand can still support domestic employment and local economies. Add to this the fact that you don't exactly pay less for an import vehicle, and you can see that there are few parallels to the points under discussion here.

An additional parameter that seems to be left without discussion is the aspect of growing economies overseas. We employ offshore workers at a low rate today as their economies are still developing. As developing countries experience high growth rates, the cost of labor increases, gradually moving the savings to smaller margins. No problem: we start to send the work to smaller economies to find the least-expensive option. Ultimately though, this is a short-term solution. The whole point is that emerging economies grow and eventually aim toward the standard of living (and labor costs) that we currently enjoy.

We transfer our labor and skills overseas, allowing industry (and employment) to shrivel. The overseas economies boom and the cost savings disappear. In the meantime we have destroyed our industry at home and no longer generate the technical staff to allow production to resume domestically. We are now held hostage and must pay as we are charged. On the surface it would appear that the offshore model is, at best, a short term gain. Does this make any sense?

So what is the solution? It should be noted that the most devastating aspect of the offshore model is the devaluation of the production work. If a firm chooses to offshore the production process but charges full domestic rate for the work, much less damage is done to the industry as a whole. The firm realizes a much higher profit margin, the offshore economy still grows, but most importantly there is still good support for the mapping firm that chooses to support domestic employment. This model allows for "globalization" of the technology, innovation, and a strong industry at home.

I fully understand that a law forbidding a company from using offshore labor or forcing employment of domestic workers would not survive the scrutiny of legal challenge, not to mention compliance with existing trade agreements. However, one might hope that those engaged in the practice of low-cost offshore subcontracting would look a little farther down the road, adjust their business model to one of sustainable practice, and quite possibly save an industry and technical expertise from extinction in North America.

Nick Dudley is the president of Dudley Thompson Mapping Corporation, in British Columbia, Canada.

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