Traveling Minds - - Table Of Contents -

While Don­ald Trump was still the Pres­i­dent-elect, he an­nounced a ma­jor deal with United Tech­nolo­gies for its Car­rier sub­sidiary to hold on to 1,000 jobs that were orig­i­nally sched­uled to go to Mex­ico. In the process, his in­ept han­dling of that deal demon­strated much of what is wrong about Trump’s – and the U.S. gov­ern­ment’s – fight against out­sourc­ing.

In this case, then can­di­date Trump had gone on record as say­ing that he was go­ing to force United Tech­nolo­gies to keep a to­tal of 2,100 jobs orig­i­nally planned for trans­fer to a Mex­i­can plant. Car­rier ended up keep­ing only 1,000 of those jobs and only af­ter re­ceiv­ing spe­cial tax breaks in re­turn for keep­ing that much-smaller num­ber of jobs here. For Trump, it was an op­por­tu­nity to check that off as a win for the man­u­fac­tur­ing peo­ple, which it was not – ex­cept for that ~1,000-per­son pool who will keep their jobs. For United Tech­nolo­gies and Car­rier it was def­i­nitely a win as they were given the op­por­tu­nity to ship the ma­jor­ity of the jobs from that plant to Mex­ico any­way. And they also re­ceived a nice tax break bonus from Un­cle Sam.

The tough part about this is that even though jobs were saved, this was all about pol­i­tics and leav­ing a “win-win” on the ta­ble for both par­ties rather than ad­dress­ing the real is­sues un­der­ly­ing why out­sourc­ing hap­pens at all.

In the Car­rier case, though some will cer­tainly ar­gue oth­er­wise, it looks very much like Trump just wanted to make it ap­pear that he could be tough on a com­pany and it would cave in to his demands. What is needed in­stead is a bet­ter un­der­stand­ing of why com­pa­nies out­source and how gov­ern­ment can or should in­ter­vene in the process.

Why Com­pa­nies Out­source

Com­pa­nies out­source for many dif­fer­ent rea­sons. And de­spite what Trump and oth­ers may want the pub­lic to hear, although many rea­sons do have to do with money, far fewer have to do with go­ing af­ter cheaper la­bor than most might imag­ine.

Con­sider th­ese of­ten-cited top rea­sons for hir­ing


out­side a com­pany to get work done, re­gard­less of where the jobs are specif­i­cally ac­quired.

Ac­cess to skills or tal­ent not avail­able lo­cally

In the past, com­pa­nies would re­cruit from a dis­tance and re­lo­cate in­di­vid­u­als to work in an area, but that is be­com­ing more ex­pen­sive for all par­ties in­volved and is also not nec­es­sar­ily the right way to go. In­stead it is of­ten far more ef­fi­cient to hire from a dis­tance.

Ac­cess to world-class tal­ent and/or fa­cil­i­ties that would be too pro­hib­i­tive to de­velop or set up “at home”

This is a vari­ant of the first rea­son but em­pha­sizes more the kinds of work that are pos­si­ble for teams al­ready trained else­where and with ac­cess to the right skills and fa­cil­i­ties.

Ex­am­ples of this kind of out­sourc­ing cer­tainly do in­clude hir­ing com­pa­nies like Fox­conn (a highly-skilled elec­tron­ics man­u­fac­tur­ing com­pany with head­quar­ters in Taipei and ma­jor fa­cil­i­ties in China and through­out the world) or some of the Mex­i­can fac­to­ries Car­rier has set up across that side of the bor­der. But there are many other out­sourc­ing ex­am­ples where the idea of “hir­ing an ex­pert” who is al­ready set up with peo­ple, soft­ware, in­fra­struc­ture, method­olo­gies and more is just the best way to go. Some of the more com­mon of th­ese in­clude:

Ac­count­ing ser­vices: Even in large com­pa­nies it is be­com­ing more com­mon to hire out­siders

to man­age the daily, monthly, quar­terly and an­nual drudgery of keep­ing the books straight.

Pay­roll ser­vices: Ex­cept for the small­est com­pa­nies, it is the norm now to out­source this es­sen­tial ser­vice, which is more than just writ­ing checks and in­cludes au­to­matic trans­mit­tal of pay­ments and de­duc­tions ev­ery pay pe­riod.

IT ser­vices: This in­cludes man­age­ment of all things con­nected with com­put­ers of any kind in a com­pany. It can in­clude man­ag­ing net­works, en­sur­ing easy tran­si­tion when soft­ware up­grades are prop­a­gated, buy­ing mo­bile de­vices (lap­tops and smart­phones) in bulk, set­ting up web­sites, han­dling spe­cific bug fix­ing for re­leased soft­ware (more com­mon than most re­al­ize), pro­tect­ing com­pa­nies from mal­ware in­tru­sions and more. This is an area where In­dia’s In­fosys made much of its ear­li­est in­roads into Amer­i­can busi­ness.

Ac­counts re­ceiv­able and col­lec­tions: More and more, th­ese ser­vices that no com­pany wishes they even had to bother with are now be­ing han­dled from over­seas. The growth of BPOS (busi­ness process out­sourc­ing hubs, or “call cen­ters”) and the avail­abil­ity of low-cost in­ter­na­tional VOIP ser­vices have made this pos­si­ble.

Help desk and cus­tomer sup­port: This is the other ma­jor part of what BPOS do right now.

The above types of out­sourc­ing ex­ploded dur­ing the pe­riod when com­pa­nies be­gan look­ing hard at what they uniquely do best. Those ca­pa­bil­i­ties, which in­cluded things like in­dus­trial de­sign (Ap­ple), pro­pri­etary semi­con­duc­tor and mi­cro­pro­ces­sor de­sign (In­tel) and bat­tery tech­nol­ogy (Tesla), set those com­pa­nies apart as well as the need to be kept “close.” Rou­tine IT ser­vices, pro­vided there were safe­guards to pro­tect the com­pany’s most pri­vate data, could be eas­ily out­sourced, even to a com­pany as far away as In­fosys in In­dia, pro­vided there were some lo­cal re­sources avail­able.

Part­ner­ing with oth­ers to co-de­velop a skill or tech­nol­ogy

This is be­hind many out­sourc­ing op­er­a­tions, which for­eign gov­ern­ments will of­ten even sub­si­dize at con­sid­er­able per­cent­ages to at­tract th­ese kinds of busi­nesses.

Build­ing over­seas to avoid many costs and taxes for prod­ucts that will never be sold or con­sumed within U.S. bor­ders

For com­pa­nies with a ma­jor global pres­ence (such as Ap­ple again, just as one ex­am­ple), build­ing prod­ucts out­side the United States that are then shipped solely to for­eign cus­tomers can save con­sid­er­able money in mul­ti­ple ways. One of those ways that dis­turbs many but is part of why com­pa­nies do what they do – legally – is that they can avoid U.S. taxes on in­come not earned within the bor­ders of the United States.

Un­will­ing­ness of avail­able work­ers to work for the wages of­fered in each area

In some cases, where a com­pany may have its cen­tral hub just may hap­pen to be in a place where the pre­vail­ing wages are so high, even for less-skill-in­tense jobs, that it is just not fi­nan­cially sound to hire lo­cally. No amount of bul­ly­ing or in­cen­tiviz­ing by gov­ern­ment can usu­ally do much to change that.

Gov­ern­ment poli­cies, in­clud­ing tax poli­cies, or for­mal trade agree­ments that en­cour­age out­sourc­ing

It is hard to ar­gue with the logic of this one from the side of com­pany man­age­ment. Af­ter all, if the laws ac­tu­ally fa­vor out­sourc­ing over keep­ing things at home, some­times it is just im­pos­si­ble to do any­thing else.

This is the one that Trump beats on the most. But trade agree­ments and tax poli­cies are com­pli­cated beasts. Mak­ing one change to en­cour­age cer­tain in­dus­tries to stay at home might cause an­other part of an agree­ment to fall apart. There has been talk, for ex­am­ple, from lib­eral rep­re­sen­ta­tives about im­pos­ing a tax on com­pa­nies equal to what they save when they out­source. That might seem like good pol­icy, but be­sides that it is pos­si­ble this may vi­o­late the treaties that al­lowed for the sav­ings, it also would likely cre­ate counter-re­sponses that would cre­ate a ma­jor trade war be­tween coun­tries with far more dam­age likely to hap­pen.

The Need for a Sys­temic Ap­proach

The re­al­ity is that it is a com­bi­na­tion of do­ing “what’s right for a busi­ness” any­way and in­ter­na­tional gov­ern­ment poli­cies (in­clud­ing the U.S. gov­ern­ment) that are the rea­sons com­pa­nies out­source. This com­bi­na­tion is also why the lo­cal pub­lic, es­pe­cially in the United States, goes crazy when they hear about a Gen­eral Elec­tric or an Ap­ple with hordes of cash stored out­side the coun­try from prof­its that were earned 100% out­side the coun­try (and there­fore are not touch­able within the bor­ders, at least up to a point).

To change things so more jobs are re­tained and cre­ated at home in the United States, mul­ti­ple things need to hap­pen:

Cre­ate a clear vi­sion of what spe­cific changes are de­sired: what in­dus­tries, what jobs and what lo­ca­tions are to be pre­served.

De­fine the poli­cies the U.S. gov­ern­ment – per­haps in tan­dem with state gov­ern­ments – can cre­ate on its own to en­cour­age those changes to take place. This is about far more than tax cred­its. It is about train­ing, sub­si­diza­tion of tar­geted skills and/or in­dus­tries, and tran­si­tion­ing of out-of-date skills to the new pri­or­i­ties.

De­fine changes to trade pol­icy and/or ex­ist­ing trade agree­ments that will sup­port th­ese poli­cies. De­ter­mine leg­isla­tive changes that will sup­port th­ese poli­cies, and get them drafted. Ex­ec­u­tive or­ders are not enough be­cause they are too eas­ily changed.

An­a­lyze the im­pacts to ev­ery­thing and fine-tune the re­sults.

Ne­go­ti­ate with all par­ties, in­clud­ing in­ter­na­tional part­ners.

Ap­prove treaties, pass and sign off on leg­is­la­tion and pro­ceed.

What one can­not do is try to make big changes like this by just wing­ing the “vi­sion” part of the process by bul­ly­ing (one of the more com­mon ap­proaches now in use), get­ting a group of com­pany CEOS in a room to­gether to agree on it (be­cause it’s far more com­pli­cated than a sin­gle meet­ing could cover) or han­dling the is­sue one com­pany at a time.

This will take time to carry out but has a much higher prob­a­bil­ity of long-term suc­cess than work­ing to ne­go­ti­ate in ways such as the cur­rent sit­u­a­tion with Car­rier was han­dled.

It is un­for­tu­nate for the cur­rent ad­min­is­tra­tion too, but to man­age this process re­quires a much more ex­pe­ri­enced eco­nomic mod­el­ing ca­pa­bil­ity, un­der­stand­ing of in­ter­na­tional trade is­sues and high­level leg­isla­tive man­age­ment skills than the cur­rent Pres­i­dent has ei­ther in him­self or in his sur­round­ing staff.

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