Hey PE Week Wire readers. Glad to see you on the Web site. As promised, here is a reprint of last Wednesday’s Wire commentary, and the emails that followed…
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This past March, Venture Capital Journal columnist Ravi Chiruvolu (who moonlights as a general partner with Charter Venture Capital) wrote the following: “Startups funded today should be built entirely [in Asia] — from product design to product development to quality control to (in some cases) even sales and marketing. For every employee you have in the United States, you can have five in India, and you can still maintain total control over the company’s intellectual property. With a strong CEO, CFO and a fistful of frequent fliers, an entire startup’s back-end operations can exist elsewhere, while the basic roots of the company’s entrepreneurship, vision, funding and exit potential can still live within the United States.” In the latest edition of VCJ, Ravi acknowledges that this process is far harder than anticipated (he claims to have taken “the 60,000-foot view of the world beyond Silicon Valley”), but that it’s still a worthwhile goal. In fact, his firm will even launch a fund called Charter Asia that will focus on the “build in Asia” premise.
What Ravi fails to address in either column, however, is the issue of social responsibility. Specifically, do U.S.-based companies (or companies based in any country, for that matter) have an inherent obligation to create jobs in their own communities? We could push this question step further and talk about charitable work (I’m aware of one such discussion within an HBS classroom this past year, with boot-maker Timberland as the test case), but let’s stick with jobs for now. The debate often shapes up as profit margins versus warm fuzzy feelings, although there is some research that suggests (speciously, in my opinion) that outsourcing today leads to domestic job growth in the future. The problem with such a dichotomy is that it assumes you cannot have both strong profit margins and warm fuzzy feelings at the same time – almost as if one negates the other. This is little more than a rhetorical failing on the parts of both labor and management, and does little to help either side.
The solution, in my humble opinion, is for U.S.-based businesses to examine every possible avenue of hiring locally before going overseas. This doesn’t mean that India or China isn’t an option, just that it should be the last option rather than an easy out that boosts executive bonuses for the next few quarters. It should be one of the most difficult decisions of your professional career. If it isn’t, then it’s generally safe to say that you are a fairly self-centered and callous person (sorry, but I get paid to be judgmental). For those companies who do wind up with operations in Beijing or Mumbai, it is your responsibility to retrain the workers you are leaving behind and/or to help them find new jobs. Yes, you have a responsibility to your employees, as well as to your shareholders. A good example of this mantra in action is a new middle-market buyout firm being launched by a veteran investor here in Boston. His new group will take majority stakes in companies whose manufacturing activities should be (in his opinion) moved to China. As part of this fund will be a social responsibility clause, that mandates a dedication of resources to laid off workers, plus wage standards for Chinese workers. I can’t write too much about this fund, because that would steal thunder from a piece I’m writing for Buyouts, but the firm founder sees no reason why efforts such as job retraining shouldn’t be considered a basic business cost of a company that out sources jobs. Nor do I.
—Dan Primack
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While domestic job creation is important, it only helps in the immediate term. For example, when you see a colleague’s job not going away – it gives the warm and fuzzy feeling. However, it will make the country less competitive compared to Europe or Japan or even India and China.
But at what point will one stop the levels of social responsibility anyways? Is it your street, your community, your state, your country? How about the 2.8 billion people living in poverty? How come we don’t worry about providing them a way to join the market place? The fundamental premise of a business is to increase wealth and shareholder value. Globalization cannot be stopped; curbing it will only hurt the economy. We need to adapt and move on or risk being run over.
—Praveen S.
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As an FYI to your outsourcing argument, I have spoken to Microsoft’s technical support group 3 times over three days at different times of the day, from morning to night. Each time, I reached a support person in Bangalore, India. I guess Microsoft has moved their entire support group there. How can you argue? What is the differential in pay, $15,000 per year versus $80,000.
–Tony R.
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If everything gets outsourced overseas, who do any of these companies plan on selling their products to in the states? The problem is with our education system and our egos. One, we don’t produce the knowledge capital anymore… American kids can’t do math. Two, we all think we deserve more pay, even though millions of people around the world are willing to do the same exact thing we do for less money.
–Charles O.
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You raise a LOT of very important issues. This country has a great economic engine. As Henry Ford saw quite correctly, if you don’t have people who are earning wages in a local market to support your product, your market won’t exist for long. It’s true that there are two great forces in capitalism. Capital continually moves to the place of highest return given a certain risk level. The Internationalization of labor is the other great force. Even Marx saw this. However, when institutions such as JP Morgan and Dell move “back-office” operations offshore, others see this and compete by doing the same. Eventually they are going to kill the golden goose.
There’s another issue which I think needs to be addressed. That is foreign nationals making business decisions such as these for American companies. Without the sensitivity to the needs of the local community, they make decisions that run counter to the interests of the local community. I’ve seen this over and over again at JP Morgan, Citigroup and to a much lesser extent at Bank of America. Foreign nationals are making the decision to ship jobs off to place such as Mombai and the Phillippines. They are doing so unchecked. I believe this represents the source of the problem mentioned in your piece today.
–Kevin M.
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I enjoy your regular colums and comments on the state of the Private Equity world. Your piece today concerning “build in Asia” was interesting, and created a few thoughts of my own:
Is this international competition issue really any different than that faced by other industries over the last 30 years? As a banker, I have seen it happen in the 1970’s and 1980’s with automotive and steel companies, and in the 1990’s with textile companies (I noted your update on Burlington Industries). Should technology based companies be any different? Are the issues you raise any different than those made by members of the UAW and USW, both of whose members have been greatly reduced over the past few decades?
Technology has provided huge productivity gains, but at the same time technology has helped competition move from across the street to across the globe. As in all industries now, the salary paid in the U.S. will have to provide unique quality, service, or support elements to justify being here. To ignore the actual reason for the job to be here will ignore the true economics of the situation, just as others in the steel or textile have done before (and where are they now?).
It is a tough, crushing, relentless situation. It is capitalism on steroids. I have witnessed it from a slightly different viewpoint – the domestic and international consolidation and rationalization of the corporate and investment banking industry. They have taken overcapacity in the industry and squeezed it out, with a lot of people hurt in the process. However, a few years out many of these people are doing different things and are actually happier and more satisfied. It may be that the techonology and private equity / VC industry will be the same – many people enjoy being in the game, but the truth is that not all can remain at the table.
–Burt C.
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Knowledge jobs moving overseas should be a concern. However, not for reasons you have cited. It should be a concern that while the U.S is obsessed with throwing a ball in a net or in the sexual piccadilloes of celebrities, many bright people in China are burning the midnight oil learning the nuances of math and science, the pillars of any vibrant economy. That’s why I fear my children would grow up to be burger flippers because they lack the fundamental skills to create science and then technology and then innovation that run the engines of an economy. If I am Swedish or Saudi Oil money and I find companies in China making innovative software products, guess what – That’s where my money is going, not American companies.
When people here make a conscious effort to make better american products and buy american cars instead of BMWs, Lexuses and cheap chinese made goods in Wal-mart, arguments to make high tech products in the U.S does not make any sense. Can you explain to me why you can buy a shoe made in China in your local Wal-mart but not software made in China?
The real problem is our culture’s attitudes towards math and science and this will end up reducing our prosperity. Our being the world’s best may not be all true. About 50% of patents issued in this country are given to foreign-born citizens. We import the world’s best. It’s time we took this issue seriously. We need to create brilliant scientific minds right here. Lack of funds for schools, teacher salaries, equipment, facilities are all red herrings. I look at my son’s elementary school facilities and realize that it is larger and better than facilities in most higher educational institutions in many countries. It’s all in realizing the value of focussed education and making the best of opportunities given to you. We will lose if we continue to have the complacency we have now.
I grew up in India but my children were born here. Given my educational experiences and my kids’ here, I fear for their future. Just my 2 cents! Whew!
–Nari K.
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I applaud your recent editorial column about US businesses responsibilities towards its home communities when they choose to move operations elsewhere. As a current MBA student who had the unfortunate pleasure of reading every article concerning the shrinking financial services job pool to countries such as India I am amazed that more businesses have not taken a harder look at the future of their home country prior to moving jobs overseas.
While it is true that America has faced this particular job drain through out its history and has come back stronger and smarter, it needs to be asked at what point in time does the market hold responsible those companies that abandon their sales market in order to boost short-term profits? And at what point in time do we as consumers hold those companies responsible?
I am not condemning those companies that have moved some operations overseas, however I am in condemning Mr. Chiruvolu’s comments regarding a company whose entire ops are overseas and only operates a sales and marketing group (if even that) in the US. Its analogous to a man having an affair – he wants the loyalty of his wife (the US) while getting all the perks of his mistress (foreign employees).
— J. Hernandez
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Always enjoy the column and your thoughts, however…
What you are proposing here is effectively a “social tariff” on labor (e.g. the “cost” of offshore labor should be considered higher because of exogenous effects on local labor). If a producer can purchase comparable labor at lower prices, then free markets demand that advantage be capitalized upon. To do otherwise, exposes a firm to competitors that do not face such a social tariff. The evidence on the destructive nature of tariffs on markets is immutable. Tariffs protect markets from competition reducing the need (or capacity) to innovate ultimately causing obsolesce. The steel industry in the US is dead because the federal government tried to “protect” it through tariffs. The business was nevertheless captured by the Japanese and others who innovated.
The risk to labor in increasingly technical and skilled areas is absolutely clear. The wage arbitrage opportunity is compelling. But arbitrage is a brilliant equalizing force driving two factors that come into play (1) as the wage differential continues to be exploited, over time, labor prices in the US will go down, and labor prices in India and China will go up reducing the incentive to move offshore, (2) US labor will have to innovate, provide comparative advantage exclusive of price through creativity, imagination, and new skills. This labor rate pressure will demand innovation of labor and lead the US economy into the next growth phase.
The social equity question of who pays for this retooling of American Labor is a difficult one. You can rely absolutely on the fact that people will do what’s in there own best interest. Unfortunately, there is no return incentive for companies to simply retrain workers unless it is to improve returns for their shareholders. Unfortunately, the switching or training costs are often out of reach for the average computer programmer with a mortgage, two kids, and a dog. This gap is a credit constraint not unlike that faced by a high school graduate who is desirous of the income effects of acquiring a college degree. Perhaps, the a student loan program designed to fill such a gap is the answer.
Not necessarily an elegant solutions, but competitive markets are harsh In terms of individual outcomes and optimal in terms of overall result.
— Brian F.
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This is a hugely complicated issue that, I think, requires strong foresight on the part of the government that I don’t envision happening – at least not with the current administration. But here’s my two cents:
You can’t stop the outsourcing/leveraging India/China trend without hurting the long-term competitiveness of this country. The low-cost provider wins in a commodity market. That’s the way capitalism works. Period. So you have two options: 1) you can interfere with global capitalism to try and prevent the ability of companies and markets to efficiently transfer labor from the US or India, China, etc. The problem with that solution is it is, in fact, a subsidy by the members of the American population that are not subject to global economic competitive forces to those who are. The end effect is that is reduces the competitiveness of the entire American economy. Imagine the hit to the American economy if it were decreed that businesses could not invest in productivity enhancing capital equipment because on the potential effect on jobs. I think we would all agree that this would be a stupidly unwise decision. Likewise, I think it would be insane to back away from the free flow of labor becuase to do so would reduce the productivity of the economy and make everyone poorer. Which leads us to our second option: 2) you can work within global capitalism and make sure that the people displaced by competitive pressures are retrained & reemployed in fields where the competitive advantage is more favorable. At the end of the day, this is what has kept America at the economic forefront for the last one hundred years and is what is going to keep us at the head of the class for the next one hundred years.
If we agree on option 2, the next question becomes: how do we implement it. The critical question here is: who is responsible for the cost of retraining displaced American workers? You ask the question, of whether US companies have an obligation to protect American jobs & bear the cost of retraining workers. So now you have an American company dealing with a newly competitive global economy. It’s facing an onslaught of foreign competitors armed with cheaper labor. Now the proposal is that in order to move its manufacturing operations overseas it needs to retrain displaced workers in the US. Two problems: 1) the retraining imposes an extra cost on the company that its competition doesn’t have and 2) because of this extra cost the only companies that can afford to move operations are those that can recoup the investment from retraining workers via switching to lower cost production. What happens to the companies that can’t afford to retrain? Probably go out of business or lose market share…so in the end, those jobs are still lost (probably more jobs because of all the corporate staff, sales, marketing, etc. that also lose their jobs when the whole company goes down), the displaced workers did not have the opportunity to get retrained, and the company could not afford to defend itself. This is in essence the problem with forcing companies to foot the bill: every company has a different economic circumstance & will maximize its own self interest. In the end, it does not seem fair that the displaced worker from a company that earns a massive return from switching its labor center (say a software company that replaces a $100K engineer with a $20K one from India) gets to be retrained while the one from a company that doesn’t enjoy this economic benefit (say a textile workers making $30K per year that gets replaced with one making $10K in China) doesn’t get retrained. So, in the end, I think the only way this works fairly in a words that most Americans find ugly: government. At the end of the day, I think the government needs to implement a program (I haven’t thought enough about what this needs to look like) that smoothes the transition for its citizens in the global economy while investing in our most precious assets. In the end, all taxpayers are footing the bill for the retraining (a lot like the subsidy in option 1 in the first paragraph, except that in this case the American economy improves, not suffers) and, if the tax system is working right, the retrained workers end up paying for it themselves through the higher incomes they ultimately generate (which probably suggests that this needs to be a loan rather than grant-to improve the chances that people are actually retraining themselves for fields that will improve their productivity and income generating potential).
—Jagtar N.
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You’re dead on with your column about VC firms outsourcing to much to Asia without looking at home first! Keep the heat on this issue – it will become under the spotlight just as IRRs did a while back.
— David S.
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When LPs start accepting lower returns on their investments, then GPs can begin to worry about being “socially responsible”. Until this occurs, a GPs mandate should remain to make as much $ as possible for their LPs (and themselves). If that means moving operations out of the US, then so be it. “Neutron” Jack Welch didn’t get to be an icon of the business world by being “social responsible” or giving “warm fuzzy feelings” to shareholders…well, he got warm-n-fuzzy with that HBR editor and it ruined his reputation but I digress.
Frankly, I think moving “back-office” operations overseas to India, China, etc. is fraught with all sorts of risk that many don’t price into the equation. These “hidden costs” will eventually bite many firms in the ass after it is too late to do anything about it.
–Robert V.
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Great soapbox speech today. As a retained recruiter in the investment management sector, I have worked with some clients that have taken seriously their responsibility to treat their redundant workers fairly and with dignity. While there are companies that have decimated their domestic headcount by outsourcing mostly IT functions, there are other firms that have been slow to consolidate and leverage operating systems. What keeps these companies from upgrading their technology and running their business with 40 people instead 200 people? I believe it is because those firms try to justify keeping people on the payroll even if it hurts the company’s performance. The intentions are noble, put the result is dysfunctional. (“The road to hell is paved with good intentions.”) Those firms that worked to make their businesses competitive when economic times were better, are much better positioned for profitability now. Firms that are trying to manage two quarters ahead, at best, are forced to explore outsourcing arrangements to make the numbers.
Then there is the whole issue about firms bringing in workers from Asia (particularly India) under special work visas that permit entry to the U.S. that would otherwise be unlikely. There are allegations that this practice is being abused and there have been calls to Congress for an investigation.
Glenn B.
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The Dutch have been investing abroad for over 500 years. Maybe we should look at them? Ravi’s assumptions are flawed in that he expects that everything will remain static. The job market, taxes, government intrusion, organized labor/crime, and education will all change in the world. Our tendencies to over-generalization have us in this “outsource everything to Asia” mantra, when in fact, most things cannot be outsourced to Asia. He may also be too late. If we are talking about it, it probably is too late. Professionals in Mumbai are already complaining about being overworked and underpaid.
Asia has more than its share of problems that offset low set-up and labor costs. Piracy is a very real threat – not the digital type but the steal your products and kill your crew type. There are others, but they are not necessary to drive home the point. The Asia Ravi is looking to build in will be very different by the time he gets his companies going. Additionally, the markets they serve will change. Will he write off his investments in Bombay and Peking when Malaysia becomes the more compelling region for new companies? Or Kenya or Botswana? See the comment on the Dutch.
Added to the risks of Asia, time and distance are the enemies of good managerial planning and control. US and North American manufacturing has increased it competitiveness by reducing its supply chains. A fistful of frequent flier miles are not enough to make most CEO’s effective from afar. I do not know Ravi’s experience, but being a road warrior analyst is very different than being a road warrior executive. A CEO not in touch with both her markets and her supply source is not a CEO for long. Add the demands of travel and divergent cultures, and you have a recipe for trouble. The demands of major customers are a balance of time, quality and costs. The cost factor is the one getting the most attention right now. But experience shows (some of) us, that time to market and quality carry their own premiums. There are truly few people who can manage this. Ravi’s companies may be suppliers to major retailers or distributors, but the companies he is trying to create, if they are successful, will be little more than interchangeable cogs in greater machines.
That leads me to the fuzzy aspects. Any company must be a good corporate citizen. Philanthropy aside, it goes back to common sense. Treat people decently. The pendulum may well quickly swing back. People aren’t going to buy your product if you’ve screwed them or they are unemployable. The reduction of enterprises to mathematical models and strategic dictums is attractive, but only effective in a discussion. People make products. People make decisions. People execute processes. People use systems. People also get tired. People get angry. People look at folks like Ravi and want to know what was he thinking. Treat people poorly, in time you have no markets, no products, no nothing.
Big can of worms, Dan. — Patrick F.
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It is “callous and self-centered” to move jobs overseas? Have you traveled recently to these countries and seen the overwhelming poverty? Provided that you are willing to enact socially responsible business practices in your new locations, the only egocentrism I see is those nationalistic isolationists who don’t recognize our universal humanity: foreign people are no less “worthy” of decent jobs than Americans are.
Jed W.
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Social responsibility vs. a new 7 bedroom home in Aspen… truly a difficult decision in today’s corporate environment.
I appreciate your commentary, and I absolutely agree with your views. Although I am a staunch advocate of capitalism, I am often disappointed by the greed and self-motivated short-term focuses of many of our so-called “corporate leaders”. It is frustrating to know that such crucial decisions that yield a lasting macro and micro impact on the economy are often made in haste to fix a short-term problem, or are made in sheer self-interest for personal gain.
It will be interesting to watch this shift over a longer period of time. I have already seen various articles starting to appear about Chinese workers that are beginning to question their labor laws, and that are slowly pushing for labor law reform. I have also seen various articles about potential overcapacity issues in China’s manufacturing regions that might result do to the glut of new manufacturing facilities that have been constructed in recent years. Although, I believe it might be a very slow process, it wouldn’t surprise me to see these trends (sending U.S. manufacturing overseas for cheaper labor) begin to reverse themselves (to some extent) some time in the distant future.
-Kevin W.
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This is a huge topic and obviously quite timely. As a recruiter whose clients and candidates are senior IT execs as well as a host of BPO firms, almost all who leverage some sort of offshore model, I live this daily. It’s a genuine dilemma that combines a host of issues ranging from the fundamentals of capitalism to social responsibility. There are no easy answers but I have come across a number of hypotheses. One being that everything is cyclical, it will work out in the natural order of things and in a generation w/the boomers retiring, this will be a moot point b/c there won’t be enough qualified labor in the US and as we all know, its better to have these ppl doing this work from their countries than sitting in ours…. And b/f I forget, what’s your opinion on farm subsidies?
— Shawn B.
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I’ve read your pieces with interest, however, today’s piece hits a personal note with me and I must respond. I completely disagree with your point that “If it(going overseas) isn’t (a hard decision to make), then it’s generally safe to say that you are a fairly self-centered and callous person”. How about the jobs being created overseas – don’t those count? The US is pretty much the most prosperous country in the world and even though we complain that unemployment levels are high, they are one of the lowest levels globally. We learn in Economics that countries should engage in what they do best and that seems to have served the US very well for many years, but now that companies are moving operations to countries where labor is a comparative advantage – complaints abound.
If we say we are part of a global economy we can’t expect to just get all the benefits with none of the disadvantages. I’m a dual citizen (American and Nigerian). America benefits from the fact that it can import many of its products to Nigeria since Nigerians do not have the technology to produce these products. But Nigerians (and other agricultural economies) do not experience the same benefits in terms of importing some of its produce to the US because American farmers are subsidized and thus price imports out of the market. Is that fair?
Many of the workers who lose their jobs when basic operations move overseas can get retraining on their own or by the company that laid them off – for example, most employment agencies offer free basic computer training if you sign up with them. We are so lucky in this country but we just don’t realize it. Even in the worst-case scenarios where people end up jobless there are welfare benefits which are non-existent in most of the countries where the jobs move to.
I understand that you are trying to make the point that the executives who are moving operations are doing so for purely financial reasons, however, I think there is a broader point here and it is that we should care about those that are less fortunate than us and not just our fellow Americans. There are so many impoverished people the world over that are benefiting from these overseas moves. The overseas moves benefit the people it creates jobs for more than it hurts those who lose their jobs in the US.
—Feyi B.
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I never thought I’d say this but nice job!
—Eric T.
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I agree with your thoughts on rethinking outsourcing to foreign work forces. The result is a service industry nation that we have today. Good writing!
—Don N.
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Mr. Chiruvolu and his “exploit the workers” VC pals would do well to reflect on the prmise that the free maket, capitalist system in which they pusue their greed is a function of government. Foreign governments are going to be only slightly more sympatheic to US capitalists than domestic politicians who will have no sympathy for some company with all of its employees, save the money mongering CEO, somewhere else. People in India don’t vote for US politicians.
Ron S.
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Interesting comments. For info, it was quite difficult but we’ve done that with a startup we bought in the US, when revenues dropped we moved all software devt in Mumbay. It made it possible to build a great product (one of the most promising i have seen this year) and now they are recruiting again in the US. obviously these are not the same people. i am now working on a model where we don’t have to make anyone redundant by proposing them jobs as consultants.
Herve H.
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You talk a lot about social responsibility. But is there a social contract whereby government officials in the U.S., California specifically, should make companies located here not only *feel* welcome, but actually *be* welcomed via low taxes, effective workers’ comp systems, and non-intrusive, non-onerous regulations? Or is it just a one-way street of the goose laying the golden eggs until dead?
—George A.
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I live in India and your wires are forwarded to me by a good friend. I must say I enjoy your insights and candour, I think there are too many journalists out there who have forgotten the tenets of journalism and the thrill of being able to speak your mind to a literate (hopefully) audience! As for the outsourcing debate though Dan, I agree with you completely about companies’ responsibility to reinstate displaced workers and for them not to be so callous about profit taking with such irresponsible glee. You must remember that almost everything that’s available in the US these days comes with a “made in China” tag on it, which makes me wonder if India is being singled out in some way. India is a poor country with a billion people.
George Bernard Shaw said once, “there is no greater sin that poverty” and when you see that India’s teeming millions may have a chance to ‘catch up’ (well, in another thirty years) in terms of standard of living, etc. the outsourcing story will not sound entirely evil.
Poverty begets many things Dan, and as we’ve learnt so painfully, Sept 11 was a result of some people’s poverty that some greedy but cowardly thugs sitting in mountains managed to exploit. For a more equitable world, the ironing out process will have to come with pain for many, I read about the unrests and about “Pinky” the elephant mascot that people are using in the UK and my heart goes out to them for their obvious pain and indignance. If corporations can somehow be more humane about the outsourcing story, identify opportunities that they say are available in the US and UK for displaced workers, enable job training, reconcile themselves to slower profit ramp up, I guess we can still live in a world where we don’t need to start new hatreds.
From my one trip to the US a few years ago, I was touched and moved by the acceptance in the hearts and minds of Americans, from loving Indian food to clothes, to the people, I would hate for all that to be reversed due to the onset of globalization that is unstoppable but something that definitely (I am in complete agreement with you here) can be handled with more finesse and class.
Parvati P.
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My two cents are that A) yes, there is a VC and PE business to be made in outsourcing for many of the reasons stated already and B) those that spend their time worrying about what was and may be going away aren’t spending their time looking for the next thing coming, and deploying their time and capital accordingly.
For example, there are several races to create critical mass in various evolving industries, notably nanotech and clean energy/technologies. While the US has a tentative lead, other countries are competing vigorously to achieve scope and scale in these areas as well. But, as the outsourcing issues shows, R&D is increasingly global with technology moving more and more efficiently across borders. We may have to question how long traditional clustering theory of comparative advantage will last. Innovation may no longer be limited to the borders of a single country. I believe the VCs and PE firms that can leverage cross border firm management will have a value-add that is currently limited to only a subset of the major multinational corporations. We all tend to think that business opportunities begin locally. But increasingly, opportunities for new product ideas and early markets are not where the product idea was originated. What’s more fascinating is when scale is achieved in some remote market and that scale enables new products that then come back “home” to where they were originated. An example to help explain that convoluted statement: in the solar cell industry sales are increasing quickly in “poor” markets outside of the developed countries – but this scale and the strategies developed to penetrate these markets are making the technology viable for application back at home.
—George W.
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I’ve followed your outsourcing discussion with great interest. As a Canadian entrepreneur I too see US-based VCs taking advantage of the Canadian dollar, good engineering, and stupendous R&D credits, to set up ‘near shore’ investments in Canada. One perspective, however, seems to have alluded your readers. Do you expect the trend to continue unabated given your country’s national security concerns? I believe some of the countries that are benefiting most from outsourcing today are also domiciles for burgeoning terrorism.
–Josef Z.
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The following is from the 11/19 PE Week Wire email:
Some disturbing – yet not unexpected — employment news this morning courtesy of the American Electronics Association, one of the nation’s largest high-tech trade groups. It is reporting that the U.S. high-tech industry lost 500,000 jobs in 2002, dropping from 6.5 million workers to 6 million workers. Nearly half of those losses were in electronics manufacturing, and the software sector recorded a loss for the first time since AEA began tracking such things seven years ago. The only increase was in R&D and testing labs, which gained 7,000 jobs. On the more local level, California suffered more high-tech job losses than did any other state, followed by Texas, Massachusetts, New Jersey and New York. The only states to increase their high-tech employment roles were Wyoming, Montana and the District of Columbia (which isn’t really a state, but is nonetheless being characterized as such by the AEA). No 2003 data was included in the AEA tallies, but it’s fairly safe to assume that things have not yet improved in 2003 (in terms of net gain/loss, not just last month’s employment figures). What AEA also doesn’t include – perhaps because it’s too difficult to calculate – is the percentage of jobs lost to actual downsizing, and the percentage lost to other countries (yes, that chestnut again). I also can’t exactly answer the question, although Gartner Inc. research — which came to me by way of an op-ed by former Labor Secretary Robert Reich in the Washington Post — claims that 10% of all IT jobs at U.S.-based IT companies and 5% of IT jobs at U.S.-based non-IT companies will move offshore by the end of next year. Reich’s piece suggests that this is an increase over current levels, which is not at all surprising.
A quick note to end this rambling: I have been accused by some readers of not being sensitive to poverty in places like India, or that I don’t care if people outside of the U.S. are employed (see www.pewnews.com
— Dan Primack
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Thanks for covering the outsourcing of IT jobs. Those advocating outsourcing the work should consider the possibility they too may be outsourced one day – perhaps soon. Let’s face it – there’s nothing special about executive management skills that would require those positions stay in the US.
As founder of a company – I wonder how soon India and Singapore will be able to provide my firm a CEO. Heck, why not outsource the entire executive management team – especially if the CEO I was going to hire would advocate the majority of the staff be overseas. Imagine how much money I would save!
–Alice R.
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I agree with your corporate citizenship argument and believe it’s part of the domestic social responsibility of companies to provide for full employment domestically first then internationally. Not too sacrifice jobs and livelihood to skimp on profit margin by shifting manufacturing to Mexico, Thailand, and China. The responsibility to solve unemployment in places such as India does not lie with U.S. corporations. If an Indian entrepreneur founding a company in this country and has an interest in exporting jobs to his homeland then that’s reasonable. Don’t ask a 100 year old U.S. company exchange thousands of local jobs and do the same.
–Shon M.
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Dan, (LOUD applause!! A few whistles, cheers, etc.)
I read your column on a regular basis and want to compliment you on all you say, be it out-sourcing, Iraq, or other VC issues. You are the ONLY person I read 100% of the time, and as a very busy VC type (though mostly engaged in other financial management), my time is extremely short, and to me, valuable. Keep it up – maybe we were twins back sometime, but on 99% of what you write I agree or find myself changing my opinion to come to yours (or come to dealing with some of the sticky issues I had avoided to which there is no simple solution).
— Peter K.
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It is a debate between economics and politics.
As a VC, the economic rationale for outsourcing/job loss makes perfect sense. If capital flows to opportunities with highest returns; jobs will flow to locations with the lowest costs & highest quality; or labor will migrate to locations with highest wages. America will have to give up free-market capitalism at a global level and resort to protectionism to prevent such arbitrage opportunities from taking place.
The political issue you have raised is valid, but needs to be addressed in a political forum and not an economic forum such as a private equity newsletter.
–Matthew V.
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Your arguments re: tech jobs going overseas are appropriately sentimental, but ignore the economic underpinnings and benefits. I certainly empathize for the workers who lose their jobs when the position is shifted overseas (my last company went under, so I understand the hardships of unemployment very well). However, the fact is, that many more people benefit (albeit, not that workers who lost their jobs) from this shift. Consumers will be able to purchase better and/or lower cost goods (they can choose which they wish to purchase), higher profitability at companies will translate into investment in other areas (other R&D, capital investment), more workers will be hired for work that cannot be transferred overseas, net wealth of the U.S. increases. Comparative advantage is a complex but very real force in international economics. Unfortunately, the issues have so many variables and are difficult to summarize in a newsletter or on a 30-minute news segment, that the actual benefits and the drivers of these benefits are not addressed – the reduction of jobs is seen as a short term and long term economic loss, when in fact, it is generally a real benefit.
Also, except for very low skilled workers, higher skilled workers can often benefit in the short run from these job changes as this can often be a reason to assess skills, retrain, etc… this is basic supply and demand and a reality of the workplace.
–Richard I.
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You have a knack for inviting debate. This is a good thing as long as it is kept in perspective.
One thing to contemplate is why third world countries can compete so easily with US based firms. We spend more money on education per student than any country in the world, but India, China, Romania and myriad other less developed countries beat us not just on price but on quality. I work with a telesales outsourcing company with a call center in India. These people speak better English than most university educated people in the US and with virtually no detectable accent. Furthermore, they appear more motivated.
Does anyone think that working in a call center is a good job? For all our advances in technology and education shouldn’t all or most US citizens be capable of far more? These jobs require no more than a 3rd grade education and training in how to use a computer. We already speak English. Tell the Kennedy’s to stop pretending they have a Boston accent.
Where can our people provide value? How can the US leverage our intellectual property development capacity? This is both a business issue and a societal issue, and we are at a cross road. Do we believe in free trade? How can we saddle businesses with job retraining costs? Can we expect them to pay more for a commodity than the rest of the world?
–Caleb W.
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This issue of outsourcing has become so politicized, even in your great column, that I couldn’t resist tossing in my commentary.
How about this more historical take on “employment outsourcing”. When the economy was turning in the mid and late 90’s and everyone wanted to be on the vanguard of this brave “new, global economic village” we proudly told everyone we were “creating” with our ubiquitous technological advances, it was chic (and unfortunately self serving for the leading US businesses and politicians and media) to claim to be the driving force behind this dramatic and historic transformation. One in which “our” capitalistic and democratic greatness would shine a new light on the rest of the impoverished worlds people and bring them along to a new level of personal freedom and nationalized economic stability that would be good for us, for them, and for the world as a whole
So, here we are on what many within the US could describe as the backside, or downside of this wonderful “revolution” which we all so proudly “led”. Yet, on the reality laced backside in which jobs and wages have left the US for other locales in our new “global village”, instead of claiming that same level of responsibility for creating the conditions the world now operates under, we shirk them, and look for a myriad of excuses and rationalizations to explain why “other countries” are stealing our jobs, and why our corporations should be more responsible in serving their communities and why our politicians should do something to change it etc.
I am a capitalist, entrepreneur and believer in all that is democratic and free about our nation and the world, but I am also a pragmatist and when it comes to the historical trends and changes the world we live in under goes, we should all take a dose of “reality TV!”
My point Dan, is that on the upside, during good times of a fundamental shift in global economic development we can’t claim to have all the answers, and in fact be leading it, to then only on the downside, (when it doesn’t play our way all the time across all lines) claim we’re being hoodwinked by the rest of the world and that somehow the only way we can prevent it is to throw it back in the lap of the politicians ( to legislate controls against change) and the Corporate CEO’s, asking them to be better community citizens in their hiring choices.
I think it would be great if the economic trends and maturation of our entire world over the past 100 years had left the US as the dominant manufacturing and industrial power, but it DIDN’T. I would be more than happy if, in response to that fundamental historic shift, our national leaders and our business leaders had made us the dominant, defensible leaders in innovation, service provision and low cost labor pools, but history didn’t have that in the cards for us. Instead, slowly, as history in the last century and early in this new century is proving, we, as a world of nations, not simply the US, are CHANGING. We’re adapting, maturing, evolving one might say, which is what any sound, well-grounded economy should do. In fact, this current shift and evolution may well leave the US as nothing more than the pre-eminent source of Executive leadership, sales, business development, product development and strategic leadership. We may indeed simply become the worlds “HQ corner office”, leaving the manufacturing, production, service, support and technical work to be done by the nations in this world ( nations which learned or were taught their skills by our example, case in point Japan post WW2) who have developed to serve as our back end “departments” to our nations status as the “front office”. Think of this evolving global village as the various “departments” of a large corporation.
I am as equally disheartened by the softness in job recovery we’re experiencing, and felt it myself at one point over the past few years, but the reality is that the “Information Revolution” or “development toward a true global village” actually DID occur. It wasn’t a myth ( like company stock valuations in the markets were). The bubble and it’s burst didn’t change the fundamental global progress, which we led, and it won’t suddenly shift back toward a time when the world was a different place. What I really wish we would do as a nation of leaders is, do as we have done through the Industrial Revolution and history and will have to do again in the future and apply our leadership talents, uniquely American passions for creative capitalism and energies and find our new place in this world, adapt to it, then master it and maximize it again, prior to the next fundamental shift occurring again sometime in the next 50-75 years of historical evolution. We’d be so much better served to do this than waste our time trying to legislate means to prevent change or playing the global/political blame game for change.
To me this approach is akin to the “it’s the economy stupid” approach to politics. Any entrepreneurial, capitalistic, democratic American knows for a fact through the cycle of history that the President of the US has little to no impact on economic up-down cycles. Yet, each political season we use the “economy” as either a point of justification or vilification for our election decisions. Be honest people— Jimmy Carter was tossed out of office in 1979 (among many reasons) because of an economy whose weakness and problems had been embedded in a troubling decade of the 70’s long before he was anything but governor of Georgia. Bill Clinton has spared no words laying ownership to great economic leadership in “creating the boom” of the 90’s…. yet, he and all his cohorts take no blame for the unraveling of that same boom which largely began to occur in great speed under his same watch as well. And now in our present debate, all the Democrats line up and rip the President for his poor handling of the economy, but then the minute the economic signs improve this past few months (which is likely to happen regardless considering historically evidence shows that up cycles run in 7-9 year spans and recessionary periods run in 2-3 year intervals etc) all the critics say, well it might be improving, but not enough?? It’s a perfect mirror for how we are handling this shift in jobs… instead of addressing reality and acknowledging historical power, ( or in the case of the economy acknowledging the real power of people like Alan Greenspan and other global trends and not individual presidents or political leaders) we dwell on how this change is hurting us and then complain about it. 6 years ago business and political leaders in this nation were painting themselves and having the media paint them as “genius” and ” great leaders” for leading a wave of economic improvement and stabilization in a friendly nation of ours, India. Now, from all accounts, Indian companies and government economic officials would have to storm the offices of those “leaders” in order to get a meeting. Now they have to hire lobbying firms and play politics to preserve something that they were the beneficiaries of, but less than half a decade ago, we were tripping over ourselves claiming creation of, their economic empowerment and evolution to the table of growing nations.
Come on…quit playing politics with reality, and with historical evolution. Companies are putting jobs where they can be done most efficiently so as to maximize their operating cost structures and produce profits. It’s happened for decades within the US as companies first moved manufacturing jobs from high cost, labor union intensive states in the East and Midwest, out west and to the South, then it happened again as companies moved high cost “service & support” sector jobs from big, high wage cities in the East and West coast to towns in places like Arizona, Nevada and New Mexico…but now that those same trend lines are again moving “portions of industry” to other countries for those “same” fundamental reasons we are all beginning to cry foul. Companies here or anywhere else on earth are in business to “make money”!! That’s their purpose, public or private. It’s their obligation to do THAT in the most cost effective manner possible, and that has ALWAYS been the case… it’s just sad that it’s only when downturns hit and we seem to be feeling the consequences of our great, revolutionary leadership does anyone want to stand up and cry. I would have much more respect for those arguing if they had been standing proudly in defiance of all that this outsourcing trend is now producing, if they had done so during the height of the boom of the 90s, years in advance of the downturn and it’s potentially having a personal impact on them.
I enjoy your columns and input, but personally, on this point of outsourcing, you’ve gotten too “political” which hasn’t made reading your normally insightful, concise morning reports much different than reading the editorial pages of the WSJ or LA Times. One man’s opinion.
–Rob R.
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Dan, I’m enjoying this discussion and have a couple of points to make that aren’t addressed here. First, about your second qualifying condition for outsourcing. You wrote: “Decent wages are paid to the new overseas employees… the extent to which many companies cut wages overseas does more than border on exploitative.”
I live in India and have many friends that work in IT firms, some of which are US based. I can tell you that this is more of a problem of perception with the US. There’s little truth in it. There are no “software sweatshops” in India, so to speak. All employees in MNCs are very well paid, better than what firms based in India pay them. In fact some US firms, like Texas Instruments for one, pay their employees exceedingly well.
Secondly, I’d just like to add to what Parvati said. I too wouldn’t want this to lead to animosity between the two countries. India did not invent free trade. In fact we were one of the last countries in Asia to open up our economy. What we are going through right now is a curve in the global economic cycle. Anyone who has been studying the two economies closely could have predicted this five years ago. Besides, it’s us who were the exploited ones not so long ago when we talked about the unjust exploitative trade practices that the WTO has been imposing al along on developing countries.
George Monbiot, a renowned “campaigning” journalist in UK wrote about the implications of the outsourcing phenomenon and what it means for global economic justice in the Guardian recently. I found the essay very illuminating and since I’m biased [aren’t all of us?], even enjoyable.
He begins the article with a fair warning: “If you live in a rich nation in the English-speaking world, and most of your work involves a computer or a telephone, don’t expect to have a job in five years’ time.”
And ends it with an undeniable truth: “For centuries, we [the west] have permitted ourselves to ignore the extent to which our welfare is dependant on the denial of other people’s. We begin to understand the implications of the system we have created only when it turns against ourselves.”
— Manu S.
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