Posted on 01/17/2005 9:14:11 PM PST by jb6
Fouroboros | Outsourcing: Corporate Anorexia in a Land of Plenty
11-12-2004 UPDATE: More Links to outsourcing-related posts at bottom
There are a pair of terms we've come to use in our company, terms my partners and I arrived at after seeing management and employee, company and consumer get at ridiculous cross-purposes to each other: Insulated Deciders. Isolated Deliverers.
Salon: [get the day-pass, it's free.]
"The biggest fear people have isn't terrorists," says Don Pellow, a full-bearded, burly former president of the main United Auto Workers union local at the Electrolux plant. "The terror is that they won't have medical care, not getting blown up in a taxi by an Iraqi."(emphasis mine)It's not just their own fates at stake, either. If there are no jobs or only Wal-Mart jobs, says union president Carl Hoag, "there won't be any money to run the government .... How you gonna fix the state deficit if people aren't working?" And the impact will ripple further into the community. A local doctor, for example, will soon be forced to move by his health-plan employer. In all, local estimates say, the Electrolux shutdown will cost the economy here 8,000 jobs.
But the reaction of 74-year-old Mayor Walker to his failed effort to save the plant is a little more surprising. "It's a tough time for me," he said, reflecting on his experience in the cozy parlor of his home. "I've been a lifelong Republican. I have never voted for a Democratic president or a Democratic governor, but I think I'm going to change this year. I think NAFTA -- and I supported that -- is just killing the industrial strength of this country. Michigan is being hit especially hard."
With the exception of extremely deep-pocketed organizations, we are seeing in the people who come to us for suggestions on how to get out of the ditch, an unusual, and deeply dispirited, alignment of those insulated deciders and isolated deliverers--management and employee.
While many influentials have focused on "anger" as the emotion du jour, the press, as per usual obsesses on the wrapping paper and not the present inside: Fear. 9-11 brought fear, but time eased the tension, despite overseas adventures and transatlanic distemper. This fear is different. It reminds me of an odd parallel.
Six or so years ago, in the course of interviewing cancer patients and survivors for a major NCI treatment center named after a famous fotball coach, one of the things I learned was the deep seated, layered anxiety and isolation these patients felt: One woman said it felt as if the bricks were knocked out from the foundation of everything she counted on. Her health, the openness of her family, her future and that of her kids. Answers and reassurance were in short supply from doctors and friends. Nobody knew how to act or what to say because nobody knew what the future would bring. So nobody said anything, or rather, anything meaningful. I guess the best way to characterize the phase I'm talking about is a complete failure of hope, even though most had plenty of options, and time was on their side.
It's not a stretch to say that this same feeling permeates some conversations I've participated in recently. We deal with mostly mid-cap and smaller companies, and many of these anxious talks have been with middle to lower-end employees. But more and more, they are occurring higher-up the food chain, ages Gen X to Gen WWII. These "deciders" are less outwardly fearful, but they're just as strapped for answers. And they know the clock is ticking.
The Internet-90s blew through corporate america leaving behind it good and bad, success and failure, but mostly, it left positives. One thing it also prompted were warnings that things are only going to get faster and more disorienting. You know what? I think many heard that but didn't believe it. I think many saw the Tech bubble, and the characteristic, final-year last gasp over-revving of optimism and silliness as a bad trip, but one they survived--as in "Phew, that was close." That last gasp implication is an important one.
There's another latent bubble, echoing the first and invisible to many because it's part of the natural prime directive, the DNA of businesses: EBITDA.
In 2003, corporate earnings were up 46%. Hourly wages climbed $ .03. Job growth is flat. Yes, we're slowly adding jobs but remember, kids grow up, so we're also adding new job seekers. The productivity gains from the tech boom have flattened out but companies, their shareholders, and their lenders, still need to see compound annual growth rates appreciate.
To put it bluntly: if you've committed to staying lean and mean and the diet's reached the point of dimishing returns; if you can't work out any faster but you're still on the hook to get leaner, you start cutting off body parts. Call it "corporate anorexia."
Some business bosses unfortunately have blinders on and feel that drastic cost-cutting alone is the answer when times are tough. They develop corporate anorexia. Those companies have become so skinny they'll be the last to get healthy again. -- Al Neuharth, "What will be top 10 headlines in 2002?" USA Today, January 4, 2002The examples abound. Everybody from IBM down is doing it. The Electrolux worker above sees it. The conservative mayor of a town of 8,000 knows it.
The community's package would save Electrolux $74 million a year, without the risks and costs of moving and losing a skilled, highly productive workforce, close to the $81 million a year that managers said they could save by moving to Mexico. And union leaders, using data from the company, estimate that it will cost $250 million to build the new factory.The mayor was willing to virtually mortgage his city's future local revenue stream--that's trash pickup, schools and safe streets to you and me--for the sake of jobs.
And Electrolux said "No." After 127 years in the community, for the diffence of $7 million over savings of $74 million, they said adios.
Was it really the money?
No. Electrolux has had some issues over the last several years. (Who hasn't?) But they're in good shape. ELUX is the worlds largest maker of homecare appliances, with market leader positions in most countries. New management as of 2002 began restructuring debt and operations to position themselves for global expansion opportunities and financial flexibility. 2003 saw them execute a stock buyback and cancellation valued at $90,498,876, resulting in a share price increase of about 11.1%. (That's the currency for future acquisitions, etc.)
Electrolux' Eurpopean growth is weak. Asia has become a much more competitive market than anticipated. The newly incorporated Eastern European countries are challenging. Energy efficient, higher margin, next generation manufacturing has given management fits. (The kind of process being shited from Greenville, Michigan to Mexico. Make your own education-level comparison here.)
But... North American growth is strong. And that¹s the paradox the union worker pointed out above: We'd like to keep buying your stuff--you need us to keep buying your stuff, but we can't if we shift from a producer/purchaser nation to a purchaser only.
Electrolux' EPS looks fine and their growth is healthy, new products and new markets are coming along. They are merely doing what they feel they must: Move, because every body else is. The dialogue goes: We must stay competitive and competition demands that we offshore or "out-border" our manufacturing. Translation: Everyone's doing it.
So, again, is it about the money? No. It's about a policy vacuum, reactive thinking based on surface measurement, and a herd mentality. This is finance as fashion, not fiduciary good sense. In some cases, one might even say it's self-congratulatory cleverness elbowing out character: "Our 'brains' have invested a lot of time and effort into plans and contingencies, the sails are set and the wind of "progress" is at our backs." Besides, everybody's doing it.
Columbus' men feared they would fall off the edge of the Earth. Cortez torched his ships when he reached the new world to better motivate his men. So much for the modern age: A lot of companies seem to think the horizon goes on forever. They've torched their ships. And they're not even out of port.
The history is apropos, because, like most things, all things really, we've been here before. About 13 years ago, during a different Bush administration, manufacturing was under a similar assault and job flight was convulsing middle america. Two consistently excellent reporters from the Philadelphia Inquirer, Bartlett and Steele, wrote a book that laid bare many of the prevalent fashions in business at the time: Outbordered labor was a necessity, corporate profits were being squeezed by overseas competitors, corporate-honcho salaries were pegged to performance, everybody was working smart. The book was called "America: What went wrong."
A sturdy title, it turns out.
Proximate to Bartlett and Steele's book was Michael Moore's "Roger & Me," about a town, oddly enough, in a similar depression and in the same state as Mayor Walker's Greenville -- Flint, Michigan. But there were other books, too. Ones that looked on the bright, far horizon. Books by Tom Peters and others were trumpeting a new age of dynamic globalism. McKinsey's Kenichi Ohmae had written "The Borderless World," a paean to international trade. In it, he rightly said
Most people in big companies have forgotten how to invent. they know how to buy and sell businesses and produce me-too products... They're too worried about competition and market share and profitability figures."His gist was that business-people needed to jilt their spreadsheets and have a meaningful relationship with original, forward thinking before they had their pink sheets handed to them. Well, they took his advice, but in a spindled and mutilated form. They invented plenty: New financial vehicles. Enron. Options. Chasing our tails across the globe in search of "efficiencies".
Then the internet came along and changed the game, and the mission. Ohmae's implorings had a new interpretation. Many thought, this is what he was talking about--instant communication, instant global reach. Far-flung operations and capital sloshing across borders. And off we went. Certainly, new products ensued. Computers burst into homes. DVDs, PDAs and Playstations flowered. Software became a real, hard cash business. Some smart guy revisited the Beetle.Chrysler, now Daimler-Chrysler, uncharacteristically unleashed the social psychologists and car nuts and birthed the PT Cruiser. Interest rates headed south, second, third and foruth mortgages abounded.With a click and a credit card, Dilbert could be delivered at your door in 24 hours cheaper than going to a "real" store. Virtual was "it."
All these would be forgivable, if one hemisphere of the corporate brain was inventing new structural models while the other was busy slashing cost of goods sold. But if you look closely, virtually all those products were either completely manufactured offshore or outbordered, and almost all owed their birth to a concentration of talent, sweat and cash located squarely on the fat end of the wealth curve. Upper and middle management was pleased. EBITDA, that narrow-cast measure of corporate health, was looking good. Lower and Middle America was still asking: What went wrong? More accurately, they were (and are) asking: Where'd the jobs go? In the interim, big boxes like Home Depot, Staples, Walmart and Galyans ballooned to answer some of that question. And in many white and pink collar sectors, free-agent nation was born. Needless to say, sales of Maalox and Prozac have done very well indeed.
The odd thing is, companies like Electrolux or the countless German, British or Asian companies guys like Tom Peters or Drucker were using in the late eighties, early nineties as exmples of visionary corporate virtue and savvy were all headqaurtered in highly regulated countries and economies, where the social costs of doing business are accepted as much as the Sun coming up. America is the place where they do their selling (50% of ELUX's business is American.) and where they get to function frontier-style. Not free-trade. Not fair trade. ANY trade.
So, you see, we haven't really moved much business-wise since 1990 , since Bartlett and Steele, and Drucker and others applied the cattle prod to our thinking. To make matters worse, once the first distracting bubble burst, 9-11 was upon us, with all the rightful distraction it brought. Followed by the oddest economic stimulus package ever conceived: Tax cuts and warnings of impending nuclear doom, in 45-minutes or less, followed by an occupation. The 90s were a diversion from a fundamental question left unanswered, and, thanks to world events, a question forestalled even further..
What to do? Or, rather, what's next?
Certainly not more of the same. It's pretty obvious that India, Malaysia, China, Europe, Latin America and everyone in between has figured out they'd better get with the program--the one we perfected--if they want to have some of what we've got. And they are: One of the most exacting standards of software quality is the Software Engineering Institute's (SEI) and Carnegie Mellon's 5-step Capability Maturity Model (CMM). CMM is equivalent to a Doctorate in quality where, say, ISO 9000 is an Associates Degree.
From ITWorld:
Of the 42 organizations worldwide that have reached Level 5 on the CMM scale, 25 are based in India, according to the SEI.Who would you go see, even if you weren't trying to save money?Relatively few software shops in the U.S. seem prepared to invest the considerable time and effort needed to reach those lofty levels...
Perhaps the most surprising, and conventional wisdom-busting, is they are doing this while living conditions are still terrible. The water is still sketchy, air pollution is atrocious, living conditions would offend your average American Slumlord. Indians, and others, are doing first world work in third world conditions--Now. If they copy us, and well, and the copying keeps climbing higher and higher up the the value chain where's our point of differentiation? Our national and strategic competitive advantage? How do we keep the lights on in a mansion like America, if we're forced to earn a global minimum wage?
You don't have to be an Indian software genius to see how "low cost provider"--the mantra of 90% of American executives--leads straight to the basement of that mansion.
Remember Electrolux? They wil soon be saying adios to Mexico as they chase the dragon of lower costs to Asia. The CEO of Electrolux, Hans Strøberg, commented in a recent Wall Street analyst conference call that when he met with Vincente Fox, Mexico's president, on a visit to Sweden, the CEO got an earfull about how the maquilladoras (border manufacturing areas) were now upping sticks and exporting those valuable Pharma, Telecom and assembly jobs to Asia. The conversation led to the Greenville swap, inevitably. Fast new friends, Fox and Electrolux will soon part ways also, just watch.
So what is next? A mission to mars wont do it. There are only so many Rocket Scientists for that kind of make-work program. And if we're all working at Lowes or Office Max, who can afford to build new florida rooms or invest in a new start up? Patience and blind faith in the invisible hand may sound fine in the abstract, but hopeless, pissed and poor workers--and voters--with torches and pitchforks at your mansion gates are hardly abstractions. EBITDA, the corporate answer and rhetorical armour up to this point, isn't much protection in this scenario. Paper shields are funny that way.
Time for a new model. And quick.
[2-11-04 edited fromthe original posting for 1. clarity (yeah, I know, not near enough) and for 2. disappeared text thanks to bad html.]
Jack Trout: "Outsourcing needs better Spin" + nifty global economic history graphs
America and Outsourcing: Eagle? Cuckoo? Ostrich?
If Pride matters more than Money, why does Outsourcing trump Thinking?
Outsourcing: Corporate Anorexia in a Land of Plenty?
Is The Jobless Recovery Due to Small Business Outsourcing?
C-Level executives and industry are in danger of losing some vital artillery
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Original content © 2004 Fouroboros, except where otherwise noted.
Call it Gloom-and-Doom Incorporated.
Extended unemployment will do that to you. I particularly enjoy getting up in the morning and sending out resumes instead of getting in my car and heading to a job. And the joy of collecting unemployment is immeasurable, vs earning my money.
Nice screed.
Long on problems, short on solutions.
ping for later reading
This is pure economic ignorance. I suggest you read "Free to Choose" by Milton Friedman.
The reason jobs are being outsourced is because we have minimum wage laws and don't allow cheap labor to come in to our country. This distorts the supply and demand for labor and forces employers to go overseas where they can find cheaper labor and no minimum wage.
Yes, they go to nations that have slave labor, primarly China, where labor has absolutely no power to negotiate, as going on strike will have you arrested and sent to a prison factory.
This simple fact distorts labor and the market.
First of all, becasue they are illegal thos mexicans are not hired for jobs that would keep our industrial capacity here. Secondly, you are right about the risiding on the taxpayers bill, which is why we need to stop giving welfare to these people. The ones we want come here to work, not to collect a check.
The Chinese workers power to negotiate exists in their freedom to not take these jobs. Please read Friedman, you will understand what's going on around you far better. The "It's not fair" school of economic thought never got anybody anywhere.
When you're starving in the country side, living on dirt floors, that's not much of a choice and when you're in a prison then you really don't get a choice. Even the military is in on it. Soldiers spend half a year working for free at the generals' factories.
You are on the right track now. You are making the case that Chinese workers are not free to choose where and at what wages they will accept work. However you're simply incorrect, most people doing the manufacturing are not prison laborers, you're using that example as a red herring.
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