Offshoring Jobs

The press always talks critically about “outsourcing”. But the term “outsourcing” gets a bum rap. It is often confused with “offshoring” and I think politicians use the lack of clarity to exploit their cause and journalists perpetuate it by not doing their homework. Outsourcing is switching a mindset from feeling the need to hire people internally to do a task; to recognizing that there can be specialists in a field outside of your company that can do something more efficiently. Janitorial services is a great example. It used to be that everyone had janitors on staff. Now we “outsource” this task to cleaning companies. I think this is a good thing as it allows small entrepreneurial companies to create scale and efficiency, mastering a particular business function. This works both for a small manufacturer that has no interest in worrying about janitorial functions as well as the janitorial service provider who cleans the shop floor. In most cases, the service consumer recognizes that there is a cost saving (at the macro level) for outsourcing non-core work.

When this same idea is employed except that the service providing company is outside the US, then that is “offshoring”…same principle, just different geography. In many cases, an offshoring effort is tangential to the business function (accounting and finance could be offshored at a large law firm). In other cases, wholesale components of the core business are offshored in the interest of saving money: car assembly in Canada/South America or technology development in India or toy manufacturing to China. Obviously you can’t offshore janitorial services. I think it is important to recognize the difference between the scenarios. In my opinion, outsourcing is good for the US economy, while offshoring has different consequences. In some industries like national defense, we play closer attention to offshoring because critical technology cannot be lost from a strategic perspective. In others, like high-tech, there is recognition that there is a labor shortage in the US. While this may or may not be true, I would argue it is only because we have trained people with the wrong skills. Inevitably that leads to structural unemployment which is a drag on the economy. Somewhere in there is balance between my belief in a free market and going where cost is cheapest.  I like to think of it more from this public policy perspective, that decisions have consequences and we should fully load the cost of a decision.  Manufacturing is a great example of this. We offshore manufacturing to China because it is cheap, but that produces unemployment here, but since those workers (who lost their jobs) aren’t trained as programmers we also need to hire programmers offshore. That just all seems to be ridiculously myopic.

From a consumer perspective, I think it is important to know where something comes from or is made. It’s why I try to look at labels for everything I buy (makes Megan crazy). I paid $7 instead of $5 for a tape measure made in the US rather than China (thank you Stanley). I do this because I believe that small difference in cost and usually poorer quality from the Chinese good, isn’t worth it. I do it for clothes too. I think the press does a pretty good job of making working conditions in offshore companies clear (like Foxxcon and the iPad in China) and that is a good thing. Raising awareness for the consumer at the very least gives them the ability to make an educated choice.  Sometimes you make a choice based on your ability to fully load the cost of your decision.

I do think there needs to be more awareness at a governmental level and the WTO when we open our markets to these nations. China and Japan are notorious for creating red-tape on importing foreign goods after trade deals are negotiated to open our markets to their products freely. Our free market system is based on reducing overhead and complexity (ie cost) while Chinese civil servants make a living off of skimming off the top when US companies come in to try to sell something.  Would you buy something if you knew that some US executive had to pay 5% of the cost to bribe some local regulatory official?  Even if that good cost 25% less than US made?  Can we have growth and scruples at the same time?

No one remembers this, but modern China was built by Bill Clinton. Prior to 1993 China was not on the permanent Most Favored Nation trading list. Every year Congress would have a big debate about renewing China’s  MFN status (for 1 year). The congressional speeches railing against human rights abuses were legendary. Because of the uncertainty, no company would go there and risk capital when they couldn’t know if MFN would be granted the following year. Once China was granted permanent MFN status, there was much less uncertainty, manufacturers flooded in looking for cheap labor and political (even if there is no political freedom) stability which was guaranteed by the Chinese government and military (see Tiananmen Square). Stability is something companies can’t get in Africa or the Middle East or even South America.

In the manufacturing sector, offshoring is largely a net plus as domestic companies can now focus on creativity, design and technology (upper income positions) and have a low cost producer in China. Unfortunately, this perpetuates an income gap as we create fewer high paying domestic jobs, and eliminate the lower paying ones. This is a structural change in the US economy and needs to be recognized and addressed. Some of these jobs may come back as a higher skilled labor force might be needed for quality, but that can be engineered out of the mix. The only manufacturing jobs that will come back are ones in which we can either compete on cost (higher efficiency makes up for higher labor costs) or where proximity to the design teams makes a difference.  There aren’t many of these situations, so get realistic about expectations.

I think it has been wrong of service companies to flock to India and China looking for well educated workers, trying to replicate in services what was done for manufacturing. It is a different dynamic and the idea of team unity is now gone. This happens with IT as developers are viewed as a commodity skill that can be executed where labor is cheapest. I would argue that the lack of integration in product execution and lost efficiency from proximity and latency (time changes) offsets all of the cost savings. Large companies fall victim to this dynamic all the time. You compartmentalize product from marketing from finance from developers and pretty soon no one knows how to solve problems. I see this on a daily basis, where we build apps for a customer we have never met.  When there are issues we have no idea who to contact to resolve problems. You spend 30% of your time figuring out who is the relevant SME, what a waste. And quality becomes a huge issue, no amount of agile interaction over a 10,000 mile wire can replace sitting in the same room with a whiteboard.

In summary, there is good and bad in offshoring. And while the “it depends” answer sounds cliche, that’s because it actually is true. But the real problem lies in out-of-touch managers who have forgotten how team dynamics produce efficiency (real cost savings) because they become too focused on one aspect of the business, their P&L, cost saving targets (and bonus impact), or some other focus area that clouds their ability to see the big picture.  This prevents them from having an incentive to work cooperatively with a peer because when you report up the same vertical, every win or loss MUST be a zero sum game.  You might be able to hit the same cost targets by thinking creatively about the whole process, rather than each area grabbing 15% efficiency by offshoring or cuttting heads or eliminating services.
The solution here is not in government. But public figures can use their pulpit to champion economic heroes; people that create or save private sector  jobs. Not by passing bills or spending tax money on construction projects, but by making a decision to hire a worker to perform a meaningful job right here in the USA.   Find it and celebrate them.

The component of a solution that government can actually help with is in not making stovepipe decisions the way myopic companies do.  Commerce, Education, Labor, and HHS cannot operate with their own single-minded focus.  If Commerce recognizes the need to have more high skill technology jobs in the US to continue our growth and desire for increased standard of living, then Education needs to reform to train those workers adapting quickly so that community colleges actually train workers rather than bulding liberal arts programs, Labor needs to stop tree-hugging to the dream of the past and buy into the reality of the future of dynamic work requirements requiring constant retraining and little to no job security to promote innovation and lastly HHS has to develop policies and standards to breed this new worker, one that is healthier, spiritually balanced, and able to handle longer work hours that are woven into home life.  It has to be a coordinated effort.  And it will take someone with a much broader perspective than a community organizer, private equity executive, blue collar senator or big mouth historian to make that happen any time soon.

About Josh Rutstein

I am an aspiring entrepreneur and hopeful political candidate. Father of 2 very special girls, husband to an amazing woman, and passionate American. I snowboard whenever possible and follow a 20x mentality for exercise. I also play golf and ultimate frisbee and am a die hard New England Patriots fan and season ticket holder. Everyday I wake up wanting to make this country a better place, someday I hope to actually succeed.
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