Another Look at Outsourcing (Vanity)

grey_whiskers | 8-14-2005 | grey_whiskers

[grey_whiskers]

Many articles have been written about the phenomenon of “outsourcing”—the practice of sending work needed within a company to be performed outside of the company. More recently, the word has become synonymous with “offshoring”—the practice of sending the work to be done by lower-paid workers overseas, often in third-world or emerging countries such as Mexico, China, and India.

These phenomena have been going on for some time—one of the first industries to be moved outside of the United States has been textiles. Indeed, while garment manufacturing was first sent to low-cost locales, there was some outcry over the growth of sweatshops—as Kathie Lee Gifford found out. Those who supported the process were quick to point out the dual benefit, of cheaper costs (passed on as lower prices to the consumer) together with greater opportunity for the impoverished in third-world countries. Although, to be honest, I haven't seen the price of $150 Nike sneakers dropping anytime recently.

Following the widespread offshoring of garment manufacturing, the trend continued. The (thankfully!) former head of Lucent and then of Hewlett-Packard, Carly Fiorina, was quoted as stating that no American had a right to a job just because they were American. And companies have put their money where their mouth is, as well. For example, 54% Dell computer’s employees are offshore. One widely-quoted statistic from consultancy McKinsey & Co. states that 3.3 million US jobs will be lost to offshoring by 2015. (*)

So clearly, there has been a great rush to send all kinds of work overseas. But WHY? The usual answer is “To be cost competitive. We could not survive as a company if we continued to pay exorbitant American salaries.” Is this really true? Consider Microsoft. One of its managers, Brian Valentine, was quoted in a trade magazine as saying “Think India! Two for the price of one!” But before its big dividend payout, Microsoft was sitting on some $50 billion (with a “B”, folks)--in Cash. And essentially no debt. Are you telling me Microsoft has to pinch pennies on salaries, because they can’t afford to compete otherwise? Let’s do the math. MBA types like to talk about comparing expected return on investment to the “risk-free” rate of return, US Treasuries. If Microsoft had just invested that money into US Treasuries, even when interest rates bottomed out at about 2%, they would have had $1 billion /year, CASH, with which to pay American programmers. And this would have been without touching the principal and without affecting cash flow from continuing operations.

I think that in fact, the non-answers above, while not true, still point to the truth: “Follow the Money”. The argument seems to go like this: if you, as a worker, want to make $80,000 a year or more, you are greedy. We should outsource your position to India to save money, so we can afford to pay our executives tens of millions a year. (Does anyone recall the retirement packages of Dick Grasso, Carly Fiorina, or Jack “Neutron” Welch?) And this is because executives are “indispensable”. Right. About as indispensable as a vampire bat is to a hemophiliac.

But on the other hand, there is one more way you can follow the money. Companies (and their stock) are looking towards future earnings. Remember, the US consumer isn’t getting any younger. And as workers get older, it costs more to retain them—from salaries, to health care costs, to risks of age-discrimination lawsuits. So companies want younger, cheaper workers. And what happens when the US workforce starts retiring en masse and can no longer afford the goods produced by US companies? Remember the two biggest destinations for outsourcing: China and India. What do these companies have in common? Cheap labor, and a large pool of relatively young buyers for American products. What else do they have in common? They are both primarily third world countries; on the whole, they cannot afford American products. So what’s an enterprising CEO to do? The answer is obvious: start a stampede of companies to relocate to China and India. This will do two things. First, it will directly lower all sorts of costs (no Social Security tax, no EPA, fewer lawyers…). Second, it will send all kinds of money overseas, to stimulate the economy of other countries, so that they can start buying goods when the US consumption tapers off.

(*)McKinsey’s motives in this, however, may not be as pure as the wind-driven snow, or even the silt-ridden Ganges. According to an article from The Times of India, McKinsey is being paid to generate jobs in India: “The Karnataka government would like to see more jobs created in these areas and has mandated consultancy firm McKinsey to formulate a strategy to generate one million jobs by 2008.” QED.

[grey_whiskers]

Huzzah!

[Lokibob]

You have simplified a complicated problem.

Lets take wigit corp, that is going gangbusters.

Wigit need to double their customer service prople. They advertise for new hires. All they can find are IT people laid off from $20.00/hour jobs. That is what they pay their IT people already, but not their customer service folk.

If they hire these IT's at $20.00 an hour (say a 25% increase for the position), they need to increase the presently employed IT's 25% also, just to keep it fair. After all, you don't hire a new person at the salary you pay someone that has been in the company 5 years.

OOPS, IT's are getting $25/hr, now the programmers need a 25% pay raise, and they are getting $35/hr. That boosts them up to $42.00/hr. And the middle level managers now are up to $50.00/hr.

Now wigits are not selling for the kind of price that can sustain the salarys they are paying.

I know of 3 small businesses that are in just this delemma. And the irony of it all, it is caused by full employment (5%). People can pick and chose the jobs they accept.

[grey_whiskers]

You have simplified a complicated problem.

Why, thank you! :-)

You are conflating two things:

1) the greed of multinationals awash with cash, unilaterally refusing to hire qualified people, just to make more money for the few at the top, in a time of slowing revenues.

2) the problems of small companies trying to compete with large multinationals, when business is booming.

I was addressing the former, your counterexample is the latter.

Full Disclosure: There are other factors which may come in, including the use of third-world labor sources to compete (see also manufacturing sector), the movement of menial labor to 3rd world workers, where the US wages had been artificially propped up by unions, the short term use (a few years) of 3rd world labor to cut costs while companies cut their balance sheets, PC run amok, to name a few. But including all of them at this point would have cluttered up the article.

And certainly some of the lines bandied about concerning "not enough qualified Americans" are bald-faced lies considering all the stories about Americans being required to train in their H-1B or L-1 replacements. The problem there sounds like not enough qualified third worlders, if they needed training.

Cheers!