Would you have time to take a look at several vanities I have written here on FR about the subject (note the dates) and give me feedback, as you say you have been *in* the boardroom when the decisions were made?
Thanks!
(Vanity) Another Look at Outsourcing (8-14-2005)
(Vanity) Whither the Economy? (02-08-2006)
(Vanity) A Falling Tide Grounds All Boats (03-05-2006)
(Vanity) Peak Labor (03-06-2006)
Cheers!
I read your posts.
With respect to companies responding to demographics (i.e. outsourcing because of declining growth of the US population as well as looking for new consumers) I haven’t seen it. My experience in the executive suite is the focus is very short term. Most detailed planning is one year out. Long range plans are usually 3 years out and in some cases 5. Even 3-5 years is too short a time horizon for an individual company to have to cope with labor force or market size changes resulting from demographics.
The reality is most investors in US companies are institutional investors with a short term time horizon. The mutual funds and pension plans owning US stocks churn them frequently. These are not long term investors. These owner’s are looking one quarter ahead. They could care less what impact demographics will have in 10-15 years because they won’t own the company if its earnings decline. CEO’s are hired to be responsive to owners. Since the owners are frequently changing, and have very short investment horizons, CEO’s are managing for the short term. Hence compensation plans that reward EPS in the current year. For this CEO outsourcing is of interest if she/he can impact the current year earnings by reducing payroll expenses and invested capital.
You are correct that long term cost competitiveness is not the rationale. However, you give too much credit to CEO’s and institutional shareholders to be developing strategies to deal with long term demographic trends. With most institutional investors owning shares of a company less than one year and the average CEO serving 3 years or less, executives have little regard for the long term implications of their decisions. If they did, we’d see free cash invested in the business (productive assets and people) instead of one time stock buybacks. Businesses would also value domestic intellectual capital and institutional knowledge seeking to leverage it rather than outsourcing people.
I believe outsourcing is a short term strategy used by mature company CEO’s to grow EPS when their strategies are not resulting in topline growth. Plus outsourcing offers financial institutions a wide variety of fee and commission generating transactions so Wall Street loves outsourcing.