January 01, 2004

Outsourcing

Kim du Toit has a post in which he discusses the movement of jobs offshore, and suggests learning a trade as a counter to this tendency. A tradesman, in most cases, cannot be relocated overseas. While I don't take issue with his recommendation, it seems to me that Kim misses another possible way of surviving this transition.

I suspect that a lot of this outsourcing wave we're seeing right now is a part of an ongoing change that started in the 1980's, and that Kim hinted at in his post:

Let's be frank, here: the Corporation Man died in the 1980s, when layoffs and restructuring became common during corporate mergers and acquisitions. Now, in addition to all that, we are seeing functions exported.

You don't owe your company anything: not loyalty, not fealty, not anything. And you were not the one who broke this compact: they did it.


The starting point of the change was that the dominant work model was the "Company Man", and the end will be with the dominant work model being the "Free Agent".

When the large corporations broke the implied work contract of the post-war (WWII) years - do a good job and you're here until you retire, whereupon we'll take care of you until you die - they did not want the break to go both ways. That is, they wanted to be able to get rid of employees at will, while employees were expected to remain loyal and give up any amount of potential job improvement elsewhere until the company wanted them gone. This hybrid model actually held sway during the late-80's/early-90's, mostly as a result of inertia in the workforce, among those who hadn't been laid off.

But as the economy boomed in the mid-1990's, workers in knowledge industries and highly-trained work (such as computer systems administrators and paralegals) realized that they could advance much faster by job hopping. At the height of the tech boom, it was rare to retain a good admin for more than 18 months: companies would raise their pay fast enough to hold them. Once the company no longer owes you anything - and will replace you with a just-out-of-college tech at 1/2 the pay rate as soon as they can - why would you stay at a place for maybe 5-10% raises over a year or two, when you could go to the company across the street for a 25% immediate raise, and move to a third company a year later for another 25% raise?

The recession inhibited this activity, because it hit the tech industry particularly hard. However, there is a lot of pent up capital spending which is just starting to come out of companies, and it will likely be a banner year to be a good, experienced system admin or other high-end technical specialist. However, this is a problem for companies, because it means that their labor costs are going to start increasing again at a fast clip, probably in about 2 years from now.

It is largely for this reason that large companies are shipping as many jobs as they can overseas: why pay $60/hour plus benefits for a developer, when you can do it in India for $15/hour with much lower benefits? The $20/hour or so of frustration costs (co-ordination and management travel and the like) don't bring the cost back up to that of a skilled local worker.

Let's take a hypothetical software company. If all of the programmers are overseas and not employees of the company, a large chunk of management goes away. All that is left is sales and on-site service and support, and the financial and HR and management overhead for that. Well, the financial services and HR work can also be largely outsourced, and that leaves only the services portion and a small management cadre. The company has gotten smaller, and yet its sales and profits don't change. This cycle will continue until the company is optimized.

So what do the high-performing employees do with this situation? Increasingly, they become self-employed. Can't find a job at Microsoft? Compete with them, by starting a small software company. Can't find a job at Lockheed? Compete with them, by founding a small aerospace company. Too busy blogging to start a company? Learn to sell your writing to publications and for-pay websites. Or you can take a partnership approach: you pay me corp-to-corp to develop software for you, and your costs are lower. In the meantime, I can work at home, from anywhere, which lowers my cost of living to where I can compete with the cost of someone in India (once overhead is figured in), and I'm not exclusive to you so I can have several clients, and thus maintain my level of income. There is no reason that manufacturing cannot come back in this country: it just takes people to start small manufacturing companies and find a way to sell to the retailers.

What do the lower-performing employees do with this situation? Learn a trade, or go work for the government (it's a growth industry).

In any case, the end result will be that more and more people will be self-employed, and the economy will go on growing, and there will be changes in the job market, but not a huge increase in unemployment. Michael Moore can be counted on to spin it as a horrible thing, though (particularly because it will be the death-knell of unions).

Posted by Jeff at January 1, 2004 11:59 PM | Link Cosmos
Comments

Bravo, Jeff. Substantive and sensible. By the way, "Dilbert" cartoonist Scott Adams -- have you ever wondered which one of them draws the other? -- has called this "diversifying your employer."

This transition will, of course, not be without aches and pains, and every one of them will be used to justify some sort of government intervention. Given our current set-up, probably the most significant source of opposition to this wave of change will come from older employees -- 50s and 60s -- whose health, energy and mental flexibility have begun to fail, and who are the largest source of both current and looming costs to their employers. On the one hand, they'll be massively disinclined to accept the rigors and risks of self-employment. On the other, their high salaries and other accumulated perquisites will make them the logical targets for corporate belt tightening measures.

(I'm 52, by the way.)

Posted by: Francis W. Porretto on January 2, 2004 06:36 AM
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