A pet issue is that the claim that outsourcing and offshoring lower costs is greatly exaggerated. Offshoring and outsourcing (we’ll just say “outsourcing” for the purposes of this post) do lower direct factor and lower-level worker costs. But they do so at the increase of greater coordination costs of much more highly-paid managers. And they also increase shipping and financings costs, and downside risk. Having people work at a distance, whether managerially or by virtue of being in an outside organization where the relationship is governed by contract, increases rigidity (harder to respond to changes in market demand) and the odds of screw-ups due to communication lapses. And outsourcing also reduces an organization’s skills. Those lower-level people have a lot of product know-how that you lose when you transfer activities to an outside operation. It’s nice to think that you can hollow out your organization and just do all the sexy design and marketing stuff and dump the grunt work on other players. But over time you are breeding future competitors.
Thus offshoring is best understood as a device for transferring income from the rank and file to middle level and senior executives.
Yesterday in commments, reader Clive explained how outsouring over time starts to create its own bureaucracy bloat. It’s the modern corporate version of one of the observations of C. Northcote Parkinson: “Officials make work for each other.” As Clive describes, the first response to the problems resulting from outsourcing is to try to bury them, since outsourcing is a corporate religion and thus cannot be reversed even when the evidence comes in against it. And then when those costs start becoming more visible, the response is to try to manage them, which means more work (more managerial cost!) and/or hiring more outside specialists (another transfer to highly-paid individuals).
I have to laugh (actually, it’s more of a groan; if I didn’t I’d cry) at what has happened quietly and almost imperceptibly at where I “work”. So unobtrusively did it sneak in, it is now impossible to remove its tentacles.
With the fashionable fad for outsourcing and offshoring, labour has become ridiculously cheap (obviously in the offshore locations more so, but real incomes have also fallen onshore so the same effect is present, albeit to a lesser degree).
As someone put it, management can find people to do the same job cheaper. They can’t do it as well, but they can do the job. The snag has been in what precisely constitutes the “not as well”. Put simply, it needs more people to do the same job and the spans of control are narrower. The people are cheaper, so the overall cost seems lower. But hidden, unbidden, in this change to labour sourcing and organisation, is a new cost, the cost of co-ordination.
Management information “proves” that the cost of delivering X- or Y- task is lower. But the overhead costs aren’t the same as the costs allocated to delivering whatever task is supposed to be being delivered so didn’t initially show up (or not quite so blatantly or seemingly risk becoming such a pernicious long term problem).
These overhead costs are now sufficiently large enough to start attracting attention. There’s two basic types: people and systems. People are needed to keep an eye out for the resources who are doing the actual delivery of the task. Often the resources need very detailed explanations of what they are supposed to be doing. Sometimes they get conflicting requests and it is not within their span of control to resolve the conflict themselves. A few have realised that they can do as little work as they want by trying to hide behind the “Permit Raj” which has been created and so overseers are needed to stop that happening (as far as it is possible to stop it happening).
Speaking of the Permit Raj this is of course the other cost. A cottage industry had to be started off by management to try and move the things along the myriad of steps needed to complete a work package that had to be salami sliced into ever thinner tasks. The more outsourcing and offshoring, the more need emerged for that cottage industry to be industrialised as it didn’t take long for everyone to realise they could game the system by blaming the system. But economies of scale are hard to come by in irregular, beskpoke one off deliverables (each piece of work is different so how it gets broken down and allocated is different every time). So the workflow sausage machine has more and more complexity built in, in an attempt to cope with the underlying complexity.
The solution is of course obvious, but impossible to implement under current management orthodoxy: What is needed are fewer but more flexible / skilled / knowledgeable / “good” i.e. expensive people. The kind of people who, once you have them, you know you have them and you don’t really want them to leave if you can help it. The kind of people who you need to treat in a not completely shabby way. So that’s never going to happen.
Okay, eventually something will have to give and the bureaucracy will become unmanageable. But just because something will have to end sometime does not, of course, mean it is going to end soon. Conversely, the pressure to lower wages still further (on the now vastly increased headcount) increases.
Absolutely. I’m not against outsourcing outright. I’m not against global trade outright. But the reality is much more complicated than looking at production costs on a sheet and assuming X vs Y is more efficient without understanding all of the costs, risks, and downsides of BOTH sides of the equation. Obviously when managers are looking at sheets and they see a few things, they become interested. Those things are lower wages, lower production costs, lower regulatory costs, and sometimes lower taxes. What they don’t look at carefully enough is supply chain management costs, know how costs, what kinds of methods and materials are being used to manufacture the products and what kinds of risks are there to compliance and regulation costs. Also, how easy is it to trust some countries, governments, and management cultures to do things the way you want them to be done? I read articles all of the time on intellectual property theft and how some countries have companies that not only take over the know how of said production, but figure out how to undercut the very companies that set up shop in said territory in the first place. So now you have products coming over that if it’s found to be in violation of regulation and compliance ordinances, now you have new legal costs, public relations costs, and production redevelopment costs. Also if you have companies that basically let you set up shop, take all of your valuable information, and figure out how to undercut you through currency design and new ways of creating their own industrial capacity off of your proprietary information, now you have to figure out how to go back to the drawing board if/when possible to gain back your competitiveness. In short, while you should encourage trade and borderless industrial capacity when possible and opportunistic, you need to realize the sheets that give you X vs Y costs comparisons, usually aren’t even remotely accurate so even if you’re an amoral capitalist, sometimes you really need to think through the risks before undertaking the endeavor.
But they do so at the increase of greater coordination costs of much more highly-paid managers.
As the old saying goes: It’s a feature, not a bug!
Exactly. Businesses only worry about “efficiency” when someone else is outcompeting them. When all your competitors are on the same page, or there are no competitors, then the former bug becomes a feature. Clearly the problem here is “economic orthodoxy.”
Also one shouldn’t ignore the degree to which zeal for unskilled workers comes from management hatred of unions. There’s more sociology going on here than economics.
I second your opinion: “There’s more sociology going on here than economics.”
Another downside of outsourcing is the mirror image of one of its purported advantages: so called “flexibility.”
The ability to employ people when needed, disemploy them when not needed, and pay no benefits or penalties for this jerking about, must seem deliciously tempting to anyone juggling the cost of a workforce.
But the reverse of this is the ability of the workforce to abandon your task in favour of a slightly easier or better paid job, to leave on a whim, or to dissolve their company and leave your supply chain stranded, like a train that’s run out of track. Two examples:
I worked in a city that had cut costs considerably by laying off city workers outsourcing almost all it’s snow plowing to many independent contractors, individuals and small companies. This seems like a grand idea, because snowfall is so variable that the cost of employing people full time when one winter might be nearly snowless must have grated on the budget committees.
Fast forward a couple of years to a huge, unprecedented snowfall. It landed like a damned mattress on the city, practically overnight. Did the small contractors gleefully leap into action? Yes! They fired up their rigs and plowed out commercial parking lots, shopping centres, and other high paying customers. Those were done practically overnight. City streets were not cleared for almost ten days.
In that same town, neighbours of mine had hired a company to re-shingle their restaurant’s roof. It had no workers of its own, but subcontracted to a smaller company. These people leaped into action, stripped the shingles off into my side yard, and then after a couple of days disappeared, never to be seen again. It took the rest of the summer for the original contractor to muster up more workers ( still subcontractors,) get the roof done, and belatedly clear my yard of shingles, wood strapping, and ten thousand nails.
Found out later that the original subcontractors had taken the job while waiting to hear if another more lucrative contract would be awarded. When it came through, they were gone like the wind.
No, efficiency isn’t the true goal in outsourcing, though it might be the reason it is initially tried. Rather, it is the shedding of responsibility. The city could point at their subcontractors as being the problem, the roofer could point to his sub trades, and the subtrades can point to their need to get the best dollar for their efforts, because hey! they’re small businessmen just struggling to get by, with no benefits or pension to look forward to.
Those are two spot on examples.
Though I must say my experience with home renovation sounds similar to the roofing ordeal. I have a simple job for a basic carpenter. Three of them have come to my house to spec out the job, estimate time, and when it can be completed. All three have disappeared when the time comes to execute the job. I can only assume that my small job is not worth their time once something better comes along or falls into place.
The above anecdote seems to be on the right track from where I stand. “Shedding of responsibility” seems to be a big driver, I wonder if shedding legal liability is in there, too. Fewer employees, fewer people who can sue you.
I’ve seen clients who outsource, while the remaining employees admit the data quality is probably worse now, it goes on…I wonder if the plan to handle lawsuits is “don’t blame us, our contractors gave us bad data!”
Shedding liability/responsibility may seem more important to high level managers than doing a good job because you only have to be as good as your competition, right? And they’re doing the same thing!
efficiency OR resilience (with it’s necessary redundancy)? Pick one.
Subcontracting could be seen as a technology, in the Archdruid’s terms: a device and practice by which potential and actual costs are externalized.
Theoretically management could be outsourced too. You could probably get some smart managers very cheap in Bangladesh. Doesn’t seem to happen much, though. I wonder why?
thats a feature,. labor cost control is not for management, which is why they never seem to out source them, or cut expensive executive pay, until it becomes obvious the company is failing (like they are in bankruptcy!) and management will only work for a dollar. sort of
Also, managers (and staff also) have been taught over the past generation that no matter how well and faithfully and forward-looking they perform on behalf of their company, said company can be counted on to restructure, be bought out, downsize or otherwise change all the rules and unilaterally, arbitrarily lay off their staff, close successful departments and otherwise kick over the traces.
Now, though staff learned this pretty quickly, managers must have learned it even faster, because they were generally the ones deputized to coordinate the destruction and mass renegations of promises made to employees. This has led to a generation of managers and workers whose timeline has no room for the long view. They aren’t building institutions, they are at best camping overnight on ice floes, traveling light and ready to leap to the next berg if the currents change.
Only a fool would plan for a company’s future when fragmented futures are melting all around them and under their feet.
That is where the real savings would come from. Labour cost in manufacturing are not as high as most people believe. 17 hours of labour to assemble a car. 1 hour for an iPhone.
1 hour for a pair of pants. If Apple made the iPhone in the US it may cost $15 more.
Indeed. One is reminded of the Boeing’s development of the highly outsourced “Dreamliner”, and how much of a disaster that was – it took a $35 billion dollar de-facto government bailout through the rigged air force tanker deal to save the company, IMHO. (And once again – why should the big boys care if outsourcing can result in problems if they are too big to fail? They get the profits up front – the public treasury covers the downside).
I do think there is another angle that is often overlooked. When productive labor is greatly reduced in value, you naturally set in motion forces that create a parasitic administrative class. People don’t like to starve do death in the mud doing grunt labor, so if honest productive work doesn’t pay, they will fight like scalded cats to find some protected administrative position. I’m seeing in this is basic science – the pressure on real scientists is becoming insane, but move up to the administration and you have a much more relaxed and higher-paying career. This doesn’t just cause people to increasingly want administrative over research jobs, I think it also creates forces that tend to expand the number of these administrative jobs.
Boeing specifically is an interesting case because it wasn’t just bailed out by one tanker project. They are a prime government contractor, a fixture of the permanent increase in the size and scope of government, the permanent transfer of public wealth to private individuals.
They are a great example of a private company that wouldn’t exist in their current state without public policy. Why should Boeing engineers designing bombs to kill people make more money than workers cooking meals for school children? Why should Boeing contracts involve markups and profits and negotiation fees, when grants to small nonprofits don’t include any of those things? There is no market-based justification for these kinds of things.
My mother worked at a Boeing subcontractor responsible for making sections of the 787 Dreamliner. They were directly instructed by Boeing to offshore the work that was outsourced to them. In this case, to China.
She had many stories on the complete disaster the project became as blueprints and work orders routinely went ‘missing’ and work was incorrectly done. Dozens of engineers spent years in China in order to assist the Chinese subcontractors.
Thankfully there was zero tolerance for substandard parts.
I have no doubt that China will soon use this knowledge to launch a competitor to Boeing in the near future.
The stupidity of arming your future competitors amazes me.
Black and Decker outsourced production to china, then
tool design and suddenly found itself with neither design or production
It’s easy enough to hire an ad company and turn shanghai manufacturing into
a US Brand.
I dunno, arming other people has long been a good business move. The long-term costs can be fobbed off onto the future, and even then, are usually born by the general public, not management…
Works better with war than in a domestic markets. Help Germany build Panzers. Then help America build Shermans. Make money on both ends. Good for business.
But setting up a foreign competitor to compete in your domestic market seems colossally short-sighted. Except for American firms where short-sighted means less than a quarter or two. Cash-out and retire next quarter or end of year — only idealistic fools worry about further out than that.
That is exactly what happened to Dell!
Christensen retells the story of how Dell [DELL] progressively lopped off low-value segments of its PC operation to the Taiwan-based firm ASUSTek [LSE: ASKD]—the motherboard, the assembly of the computer, the management of the supply chain and finally the design of the computer. In each case Dell accepted the proposal because in each case its profitability improved: its costs declined and its revenues stayed the same. At the end of the process, however, Dell was little more than a brand, while ASUSTeK can—and does—now offer a cheaper, better computer to Best Buy at lower cost.
Maybe better to go the IBM route and straight off sell your consumer computer manufacturing to China’s Lenovo.
And (eventually) your server business as well.
Your comment in conjunction with your posting at the link referenced seems conflicted. “Abstract scholarly forms of labor” contrasted with “practical labor” from your link encounters “basic science – the pressure on real scientists is becoming insane.” Basic science is what it is — it may be or become practical and useful or it could fall into your category of “abstract scholarly labor” when little or nothing of practical application results.
The neoliberal acquisition of creative science pushing it toward marketable results killed this golden goose for all of us. Basic science is a blue-skies quest. Without blue-skies science can do little more than slowly gather clouds and rain on the parade of “progress.” That’s the heart of the crisis of innovation our corporations cry crocodile tears over — as if they truly desired innovations. Innovations disrupt profits from their current investments. Their lack is twofold beneficial for excusing the lack of growth thereby excusing the lack of raises and for protecting what is from disruptions.
The Dreamliner is a great example, and the problems were pointed out in 2001 by L.J. Hart-Smith in his article “Out-Sourced Profits: The Cornerstone of Successful Sub-Contracting.” He said the ultimate end of the process of out-sourcing based on maximizing return on net assets of each division would be that the fully out-sourced airliner would taxi up when it was built and Boeing would just put their sticker on it.
(story includes link to PDF of Hart-Smith’s article)
Boeing is a great story and an archetype of why financial engineering means the death of once great companies. For IBM, their focus on earnings per share means going into debt to buy back shares rather than investing in the company to increase earnings. For Boeing, a focus on “capital efficiency” has meant cutting capital (by outsourcing capital-intensive manufacturing) rather than improve the efficiency of the capital invested by improved manufacturing and operations management.
Not sure I’d ever want to fly a 787 over an ocean. A plastic plane with a dodgy electrical system built in a union-busting plant; what could go wrong?
Costs for whom? And what type of costs?
The following linked article argues that the success of electronics outsourcing in Shenzhen is dependent upon a fundamentally different approach to business and that approach’s network effects.
Considering that Shenzhen manufacture’s pricing advantages allows them access to the emerging economies of the 3rd world it is worth a glance. Presently it is hard to see anywhere else where markets are growing, and harder yet to imagine how Western business models could be competitive in those regions in anything except extractive industries.
From Gongkai to Open Source
Once the article drifts away from Chinese quid-pro-quo business ethics it is probably not too interesting for this blog’s readers, except to reinforce that the technology discussed is state of the art, and that the region has the capital structures in place to participate at that level of manufacturing and design.
So apparently they are doing something to retain their highly skilled workforce.
The structural problems for US American rank and file labor is practically to grim to consider. US Capital needs a rethink about offshoring without a one-way flow of value or its structural problems are just as grim.
I do love the ridiculously obvious scams tag.
That is the essence of the challenge. The issue isn’t outsourcing per se; specialization of labor is a fundamental element of civilization. It can be used for good or ill, just like any other tool of organizing resources at scale.
Rather, the issue is inequality. High-wage earners have this notion of entitlement to justify their outsized privileges. The trouble is, they’re not backed by any reality-based, objective assessment of skill or value creation or fairness or whatever. They are creatures of public policy, from computer programmers to doctors to professors to lawyers to bankers to engineers. This is the management class; these are the people making decisions in hospitals and higher ed and finance and IT and so forth.
The problem is the nature of work itself. Public policy has created a system where incumbents dominate the formal employment landscape while also enforcing formal employment as possessing a monopoly on income. There is no alternative to the hierarchical workplace, because self-employment is virtually impossible, and there is no alternative to not working at all, because there is no alternative form of income.
The natural – indeed, the only – possible outcome of such a system of incentives is ever greater concentration of wages (and thus wealth) amongst the educated technocrats and gatekeepers of the system. Until some catalyst causes a massive paradigm change, either through voluntary recognition of the need for change or some involuntary end to unsustainability.
“There is no alternative to the hierarchical workplace because self-employment is virtually impossible.”
This remark is certainly a powerful sentiment among the commetariat at NC but is it accurate?
Are the shifting class alliances, that have evolved since the early 1970s, making it quite likely that the real conflict (financial/economic/political/cultural) will be between largely self-governing Bankers, networks of government bureaucrats, Big Capital corporate CEOs, media and academic supplicants as well as the Tech/NSA oligarchs vs. struggling grass-roots small business owners, the rapidly expanding lower classes and the increasingly de-skilled blue-collar sectors?
Will part of such a conflict also involve a battle between economic growth advocates and advocates of sustainability?
In which factions are most intellectuals likely to align?
I’ll address only the first portion of your comment.
Yes, there are few if any options to working for a living. Aside from its other negatives, corporate consolidation decimated Main Street and makes new venture of any kind exceedingly risky. This theft of opportunities is described in great detail in Barry C. Lynn’s books, “End of the Line” and “Cornered.”
Yeah, I agree that’s exactly where a lot of the conflict ends up being. Or perhaps it’s not really conflict. It’s more like a paradigm shift, like the Berlin wall. Perhaps growth will continue to prevail formally until there’s nobody left to speak for it.
I’m a bit further than some on the time horizon (a little more radical, in other words). I’d say not only is it accurate, we had already passed the turning point sometime by the late 1990s or possibly as late as early 2000s. The framework that makes the most sense to me of what has happened over the past couple decades in public policy is to observe that the ad-hoc post-Bretton Woods international arrangement to deal with the collapse of the London Gold Pool and ending of foreign dollar/gold convertibility itself broke down in the 90s. Active domestic government support is now required simply to keep things disintegrating at a manageable rate, from major market-moving events like housing bailouts and bank bailouts and media consolidation and intellectual property to the smaller items that tell the tale of the soft corruption of careerism, like how many economists are influenced by the Fed and other government actors at some point in their careers. The trend of lower highs on the Fed Funds rate is unbroken for over three decades now. And then of course there is the more secretive geopolitical maneuverings of the national security state; what we do know is that in aggregate, there has been a lot of growth, shall we say.
You can see the difficulty in avoiding the incumbent employers even among those areas that self select for the most motivated and ambitious and determined personalities, like law and medicine. Hospital chains and law firms (and the universities that staff them) dominate the landscape. Our society is awash in overeducated/underemployed medical and legal workers specifically, and all sorts of formally educated disciplines more generally. And of course lower down the food chain, the concept of a breadwinner has been completely eliminated. All adults are expected to provide income for a household in order to maintain that increasingly ephemeral middle class standard of living.
And then there are the non-monetary parts of the long-term economic changes, in particular, attitudes about cars and auto-centric development, declining marriage rates, declining birth rates, and declining respect for authority and institutions (think the widespread view among younger Americans that the drug war is a joke and the almost complete abandonment of organized religion as anything beyond a matter of heritage/background). Quite simply, people are choosing to get married later, have kids later, have fewer kids once they get around to it, and decide for themselves which state and moral laws to follow rather than following laws simply because they are told to. It is a shift from a common, shared experience to diversity and pluralism.
No amount of corporate welfare or deficit spending or outsourcing scams or whatever can overwhelm the fact that for some time now (pre-dating the GFC) younger Americans have been withdrawing from the growth paradigm, imperceptibly at first, with increasing force more recently. Keynes didn’t predict everybody would spend their waking lives working. He predicted the workweek could be much shorter, that we would have better things to do than work all the time.
Anyway, this is getting long for a comment, but I thought fleshing out my perspective more thoroughly than just saying yep, I think it’s accurate would be valuable. Your last question strikes me as the big wildcard. I think we are at a point where a lot of leftist intellectual energy is ready to accept that abandoning GDP/growth as a goal is a mainstream, perfectly legitimate option. But the power of institutionalized rewards is a rather formidable countervailing force.
Those are some good questions.
Right — a big reason for low wages is to keep the working class industrious (in service to their betters) and keep them from accumulating capital for their own use (not in service to their betters). I don’t agree, however, that such a system can’t find a steady state, if emotional well-being ($4/30 days) can be made more “important” than physical well-being (feeding the animals real food!?! What spendthrift audacity! May as well burn it), and if the drive for “more” can be continually fed with intellectual stimulation just novel enough to not have come full circle within the memory of any viewer.
You impute far too much power to the “computer programmers to doctors to professors to lawyers to bankers to engineers.” The wages for all these former “professions” are under attack. I don’t question your assertion we’ve been paid proportionally far more than we might reasonably assert as our true value — but you need to look a little higher up the food chain to see where all the money goes. The “computer programmers to doctors to professors to lawyers to bankers to engineers” had it good for a while, but now they too are under attack.
Look at how income is distributed. The best most “computer programmers to doctors to professors to lawyers to bankers to engineers” can claim is a position in the lower 1-5%. Their wages are disproportionately high compared with those below them — but look further to the right on the charts to see where the wealth resides and where an obscenely disproportionate share of the income accrues. Your class animosity had best focus higher up. [While that’s inadequate apology for the arrogance shown by the “computer programmers to doctors to professors to lawyers to bankers to engineers”, you should channel your anger toward the source of all our problems.]
Except the class allegiances of those people, whenever push comes to shove, are with the upper class on whom they are dependent for their oversized salaries.
I hear what you’re saying.
But, the most famous rich man in the world is a computer guy. The Oracle of Omaha is in banking. The Leader of the Free World is a trained lawyer. The ASCE and AHA and AMA and so forth have never met a problem that wasn’t solved by throwing more public dollars at projects that pay its members’ salaries. Directors at Enron now have roles in academia, finance, defense, energy, and so on. University trained prosecutors and judges run the largest prison system on the planet.
There is no separate class of evil villain overlords. They are simply the top ranks of the professional class. Outsourcing what can be outsourced is simply a natural byproduct of the incentives of our system.
yes, but all those examples are not workers–they are owners, very wealthy people.
I’d say that’s a distinction without a difference. I’m curious where you are going with that thought?
P.S., thought you might like this timely link. Yves has a great post about NYU management. Is Sexton part of your ownership class?
A fun case study for B-school might be West Marine Corp. (NASDAQ WMAR), for which I worked as a low-level sales grunt and assistant manager for over 10 years, through a couple of transitions from small and pretty good to self-belief by new senior managers that the brand and chain were “category killers,” to over-priced product fraud and permanent mediocrity.
One favorite bit, in the “outsourcing” general category, was when some Really Smart Callifornia New Genius Retail Mavens in HQ decided that the bottom line would really grow if they just moved one of the two national, distribution centers maybe 30 miles, from one side of the North/South Carolina border to the other, since wage rates were $2 less on the south side.
Build a sexy expensive new building with really cool material-handling stuff and computerized inventory and all that, sort of fundamentally incompatible with the company’s existing old-mainframe systems. Bring a few “key employees” to the South Center, and hire “new blood” to unload, stock, pull and distribute some 15,000 products, from little bags of stainless steel washers and sailboat pulleys to high-end radars and navigation devices. Discover that poorly paid, condescendingly treated workers, most of whom could not tell a bolt from a boat and certainly had none of the institutional wisdom and product savvy of the “dispossessed outplacees,” hired and “managed” by “managers” of the quality that US business produces, those newbies will “adjust their wages upwards” by just backing their ol’ pickup trucks up to the loading docks and helping themselves, and gee, they even discovered how quickly, in the Management of Change, one can easily destroy the evidence that stuff that disappears was ever in the building to begin with (like Hillary’s e-mails?). There being a ready “marine” market for all that stuff the company routinely marks up 5 or 600%, a lot of which is remans from the defective returns of various suppliers anyway, because the Wizards of Watsonville get a price break on each item with its incipient failures and “customer dissatisfaction” built in. And that part about it taking 2 or 3 people, using the New, Improved Systems and Stuff to do one person’s prior level of effort, with another 2 or 3 managers to wrestle the Hydra of Change? Check.
It only took about 6 years to iron out most of the “teething problems,” and in the meantime, an idiocy of a Wall Street valuation of “fill rates” and game-able other metrics as indicia of Corporate Value,let one cohort of the serial new management teams to reward itself with some really valuable
fraudulently“intelligently” up-valued options cashable at a very high, all-time-high, bubble-blowing price. As they fled the ship they helped scuttle…
Multiply times a squillion, and is there any wonder that there’s nothing to see, horizon to horizon, but Crapification and its excreta? And one has to ask, given the incentives and desires and delusions that feed it all, is there any fix short of what you might call a “biological bankruptcy,” almost everyone of us dies and maybe a few (or maybe the rats and roaches) start over with A Clean Sheet Of Paper?
I read of your account of labor bargaining power, and the only thing that comes to mind is, “[deity] helps those who help themselves.”
As it happens, I recently read this on what appears to be the Armed Forces’ equivalent of manager-bloat, the proliferation of generals and admirals relative to lower-ranking officers and enlisted men.
Here’s a nice example of one of the other aspects of Bloat and Impunity, actually out of date by a couple of years — “Generals Live Like Kings,” http://www.outsidethebeltway.com/generals-live-like-kings/ and http://www.salon.com/2012/12/12/7_absurd_ways_the_military_wastes_taxpayer_dollars/.
As a low-level GI I got to see how bad it was way back in the three years between 1966 and 1969. A buddy was the crew chief for the commanding general of Ft. Eustis, who used “his” Beechcraft King Air (U-21 Ute, military designation) to follow the golf pros and NASCAR circuits and run down to Hitherandyon on a whim. Nice aircraft, all fitted out for comfort. Nowhere near as swank as what the military “C-suite-ers” have these days, of course. I got detailed to the driving range there, to stand out in the grass and sun with one of those little ball-picker-uppers, while officers tried to hit me with their shots. Small stuff, there’s a million little stories like that. It all adds up to why soldiers occasionally frag their officers or refuse to obey idiotic or horrific orders.
In case readers here haven’t noticed, NOTHING IS WHAT IT IS PURPORTED TO BE, NOTHING IS WHAT IT SEEMS, and THE MYTHS HAVE NOTHING TO DO WITH REALITY. Here we sit, the vast majority of us, facing avidly into the Cave, reacting to the shadows flitting across the far walls, cheering…
Since you bring up the Vietnam era, one of the many interesting points made by Andrew Cockburn’s Kill Chain (link is to a nice review by Chuck Spinney) is that improved telecommunications, etc., have led to a newer version of those Vietnam horror stories about layers of battalion+ commanders hovering in helicopters trying to micro-manage single company engagements.
Worse still … for a long time, the slogan at US Army CECOM, was “from foxhole to Whitehouse,” thereby supporting micro-management from a full set of battalion+ commanders.
That’s the entire ethos and notion of the current paradigm, the Global Interoperable Network-Centric Battlespace. Which posits putting warheads on foreheads across all of Earth and near space, under real time positive control by Battlespace Managers illuminated by a geometrically growing fllod of real time intel, helmet cams to drones to satellites to NSA feeds to who knows? Also posited is the ” interoperability, ” under Imperial command of course, of eventually every national armed body and police force, and “moderate extremist org trained and armed by ( Coalition.) All leads ap to Rome…
One comprehensive planning doc for anyone interested, the MICC is happy to leave these lying around in plain sight, I guess out of arrogance and vast unconcern and to reinforce the futility of resistance:
There is another problem. Since the efficiency of outsourcing is considered a self-evident truth, companies, organizations, even industries build in incentives for outsourcing into contracts, accounting practices, etc. What that means is that for the managers making these decisions outsourcing is, in fact, a more efficient way for them to hit their numbers (capex vs opex, etc) and thus meet their bonus targets. So the argument ends up being nicely circular.
Here’s a particularly loathsome example I’ve come across personally. The Medical Loss Ratio Provision in the ACA (yep, Obamacare) requires that insurance companies spend at least 80% of premium dollars on actual health care – you know, treating people. For large group plans that number is 85%. But if they outsource their IT spending for managing claims they can move that expense out of the 20% (or 15%) overhead bucket and claim it as part of the cost of providing health care. Disgusting? Sure. But it’s a huge incentive for insurance companies to outsource that particular function, regardless of any other impacts on the business.
Also not factored into the cost model is the ongoing training cost caused by increased turnover of staff in off-shored facilities. One very large US computer consultancy company as turnover rates in the 30% range in it’s Indian off shore facilities. Apparently the locals needed a spell, albeit a short one, with a US company to complete their resumes. So while they were firing their stable US workers they had management work teams urgently working on “Talent” retention approaches for their volatile offshore ones. One strategy not considered was reversing the process and retaining staff in the US.
Outsourcing to far away places combined with just-in-time inventories of parts and products throughout the supply chain results in long fragile supply chains. Add the trend to concentrate suppliers to remote single sources and we end up with a very unstable system of production and distribution.
I remember an old Fortune article where a Toyota executive let slip the general breakdown of car manufacturing costs:
‘ “60 percent of the cost of the car is the investment into the plant. 20 percent is the parts that go in the car,” says Toyota’s photogenic Executive Vice President Atsushi Niimi. He does not say what the remaining 20 percent are, presumably labor, something he does not want to mention in front of local leaders who want jobs, jobs, jobs.’
Maybe the true cost benefit manufacturing corporations look for with outsourcing is to get someone overseas to build/fund/tax abate a factory for them?
That would leave plenty of room to pad administrative costs as discussed in the post.
You left out the best parts.
The relative lack of robots is the most striking item for someone who learned the trade back in the 80s around Volkswagen’s dimly lit and fully automated Halle 54: Sure, there is a gang of stout welding robots that weld heavy pieces together. Otherwise: Less automation than in some Chinese factories. Since the turn of the millennium, Toyota has been slowly backing away from heavy automation. The labor saved by robots was wasted by fixing and most of all by reprogramming robots. Ohira is the current culmination of this trend.
Hmmm, that was different!
. . . Why less automation? More flexibility, lower investments. The cars no longer dangle from the ceiling while parts are attached from below. They roll on a simple raised platform. This reduces the ceiling height of the factory. Advantage: 50 percent of the investment saved, says Toyota. A side effect of the non-dangling is that people can work on a stationary object, instead on one that dangles.
All the numbers add up perfectly, except these: It’s a small plant. Pocket sized as car plants go. 900 employees. Only 250 units a day, we hear during the plant tour. But once everything is ramped up, 1,900 people will be able to make 120,000 units here. A compact car factory in the true sense of the words.
Suddenly, it all makes sense.* This plant is the perfect export item to emerging markets. Low cost. Can be built anywhere, even into an existing building if necessary. No pits, no overhead rigging. Special equipment (such as the paint booth) can be brought in as modules from Japan. No heavy investment into automation. If people are cheaper than robots in Ohira, guess how much cheaper they are in China, India, Indonesia. Can expand and contract. Doesn’t grow roots. Can be uprooted if necessary and taken elsewhere. 250 units a day, ideal size for a start in some other backwoods. If Toyota can develop a car for developing markets,why not make a factory to go with it?
Taxes are supposed to be for managing inflation, and have nothing with funding government spending.
But it seems with these governments abating taxes for corporations, taxation a tool to aid looting.
And may I expand a little, from my own nook providing ancillary services to academics, on the following from Clive’s post?
The proliferation of managers is often accompanied by a kind of brahmin-like distaste of being in any way involved in the actual labor involved in producing the good or service in question, of being a “resource,” as Clive put it. That is for the unskilled, the uncredentialed, the 40-hour-part-timers, the off-shored, the riff-raff, canaille, etc..
Managers (“supervisors”, where I’m at) are therefore very often designing elaborate systems (simple systems might call into question the need for a manager, so you don’t get a lot of those) while at the same time refusing on point of principle actually to do the work these systems are meant to organize. This is an additional guarantee that breakdowns will occur, requiring the hiring of more managers. And, the more of these there are (in one of my departments, the hierarchy is actually become funnel-shaped), the higher the likelihood that each one’s elaborate system (basically their only promotion metric) will conflict with another’s, requiring more managers to “coordinate”. . . and so on.
Great post–I suspect you’ll be getting more sympathy-and-let-me-add-another-example comments in this thread.
Great comment. I see exactly this happening now at my University. Without going into specifics I can say that, for example, a simple campus admin or purchasing process that once took maybe 30 minutes may now take 1 or 2 days. A process that once took a day can take a week now. Too many up-lines have to approve even simple requests and tasks… that they do not understand, and the people who do understand the processes are being “re-organized” out of responsibilities that require judgement and institutional knowledge. Everything takes much, much longer to accomplish.
That’s so you’ll give up and stop asking for stuff.
Then the joke is on them because the univ. administration has overseen my university’s ranking drop the past few years – from a top 25 to something well south of that.
this is a phenoemon that transcends social systems. In the one-party planned economies, management also tended to grow quicker than labor. I don’t know why there, but in the U.S. it seems to be managers under constant pressure to outperform every quarter and tons of nonsense meetings. Their ideas can never fail, so the B.S. disruption continues. It’s akin the fetishization of Steve Jobs or Bill Gates–the uber manager that single-handedly created the company.
Also, the more phony management jobs created, the more resume B.S. they can claim. Because there are no market restraints on academia, this trend is the most pronounced.
I too provided ancillary services to academics, for ten years, until the new brahmins last year decided my nagging questions and often critical analyses were surplus to their requirements. So my role (leading a process central to the mission of any educational enterprise) was made ‘redundant’ – really, renamed and partially remodelled – and then given, with a payrise, to a more amenable type (someone I trained, and have a lot of time for, to be fair).
The distaste for real work, I encountered that too, but I detected under it a fear of that work, or of having to try and wrap their pretty little heads around it all. Much easier and far more relaxing to keep scheduling and preparing for and attending meetings. As for ‘very often designing elaborate systems’, in my experience they were more likely to hire consultants to do that, and then have lots of meetings with the consultants, after which they would excitedly come back to ‘let us know of progress’ and ‘keep us up to date’. It was amusing though dispiriting how often we had to gently point out some aspect or other they’d either forgotten or more likely never knew, not having done the work, and only having been there for a short time anyway. You had to be careful at times like these, they were apt to get cross and infer that you were being obstructionist, ‘resistant to change’ being the epithet of choice.
The restructuring of bureaucracy in our state has been at fever pitch for several years under the conservative government, with gutting numbers of public servants an ever popular election sale item, enthusiastically hawked by the radio shock jocks and the more sober-sided press columnists, most of them working for Rupert Murdoch. The thing is, since I have been looking for work I have been floored by the sheer numbers of short term contract govt jobs, in the hundreds this last year alone, in education, health, housing, community services – most of them thru agencies and cagey about the actual work, but reading between the lines they seem to be plugging gaps left by the gutting mentioned above. This way, the govt can crow about cutting FT job numbers and even the permanent salary bill, while quietly overseeing a massive expansion in consultancy costs, which if questioned can be painted as a one-off requirement in the process of change.
The post and comments refer generally to private firms, and I would argue that they have an inbuilt prophylactic against this sort of process going on forever – if it doesn’t work for the business either it goes or the business fails. In the bureaucracy however, this sort of thing can run and run…
I saw many examples of the sort of thing Flora mentions below – in particular outsourcing things like printing and the provision of facilities management. Some dollars are saved on wages but in the end the privatised costs outrun the previous model and the institutional know-how and commitment is gone.
Flora, norm de plume:
Reading your posts made me realize that there’s an additional factor behind the institutional bloat we all seem to have experienced. One source for the brahmin attitude is that, over any period of time, there’s a real degradation or even destruction of whatever skills the managers came in with. If you think about it, manager/supervisors spend so much time doing stuff like
that end up in the position of not actually knowing how to *do* anything.
This is simultaneously demoralizing (I’m thinking here of the heartfelt, confessional reader reactions David Graber got from his “On Bullshit Jobs” piece) and terrifying in terms of ever landing a job outside the organization or others like them.
While corrosive to efficiency and morale, it is also the source for a perversely strong kind of class awareness, so strong as to make them into an actual “caste.”
Horizontally, manager/supervisors exist in a kind of balance-of-terror: everyone’s aware that hard questions about the efficiency or effectiveness of any one of them could ignite counter-accusations and revelations that would bring the whole edifice crashing down if it ever become public enough, for example, to embarrass deans or infuriate tuition-paying parents.
Additionally, the pretense that most of them do anything much beyond drawing pay can only be kept up by an elaborate gift-economy whose currency consists of the pointless individual “projects” they all agree to take seriously and hold meetings about in order to justify their yearly raises and promotions.
Vertically, however, stagnating or shrinking budgets mean that, to use a very vulgar Argentine expression, “someone’s *ssh*l* will have to bleed.” So there’s quite a ruthless kind of social war against their contingent inferiors, exploiting any skills or eagerness they might bring with vague promises about being promoted into their caste, while simultaneously finding ways of getting them to “do more with less,” meaning do multiples of their colleagues’ work (this allows the colleagues to be fired) or, the master-stroke, do any actual non-project/meeting work the supervisor/manager might still be burdened with.
Regarding this last move, a department I’ve always taken care to keep away from has gone as far as to create the position of “part-time supervisor.” I’ve seen a succession of naive new hires suckered into this preposterous position, laboring on until they realize that, absent extraordinary circumstances, supervisors/managers *hate* any promotion that would involve paying someone more for doing a job they’re already doing.
And this might be in part because it would bring into the caste someone with dangerously concrete working knowledge of the organization and how it might be improved, which, in balance-of-terror terms, is like a country that hasn’t been socialized into MAD acquiring nuclear weapons. So such full-time positions become available will usually go to safely-useless outside hires, usually someone’s cousin’s husband, who’s been looking for a job since being retirement-packaged out of some job like doing payroll for an insurance company downsized out of existence.
Eine betrübliche Feststellung, aber was soll man machen?, as Jonathan Littell has his SS narrator say in that book.
Yes, the administrators are now a self-protecting and propagating caste without useful expertise, but with plenty of transferable ‘skills’ – such as how to build a resume that will attract the right sort of attention, and how to signal subtly that they are ‘one of us’, adept with the managerial, ‘client-focused’ Newspeak that accompanies the Leninist corporatisation they will be a part of.. and if they can muster some genuine glee, some palpable enjoyment from the chaos they sew, so much the better.
But though they seem like brahmins from our perspective, to the real brahmins above them (there are now finance industry appointees on every public enterprise board or senate or council that I’ve checked on) they are just the cattle-herders, who are paid just handsomely enough to do what they’re told.
‘someone with dangerously concrete working knowledge of the organization’
Ha, reminds me of one of my last conversations with my manager, who chipped me for not having trained members of my staff to do all of the things I do, in case of emergency. I pled guilty but cited the mitigating factors – I was flat out the whole time, the newish staff were very busy with their own stuff (which I oversaw), we had absolutely hopeless and work-expanding new systems being implanted around us…
and, I wondered aloud, if that principle was good enough for us geese, what about the ganders? i.e, why haven’t you trained me and your other sub-managers to do what you do (whatever that is, sotto voce!)
Papers were shuffled, the watch was consulted and I was told that ‘this conversation is over’
Great anecdote. The “telling detail” is that apparent complete lack of self-awareness that stems from the fact that, while the brahmins know they’re a different class, they have to pretend otherwise, and often can’t work out in advance how, purely rhetorically, this could be turned against them.
Have you read Thomas Frank’s Academy Fight Song? It’s from a few years back and general gist of it what we all know, but the bit I can’t get out of my mind is his how the people you accurately describe as “the real brahmins above them…financial industry apointees” talk, among themselves, in the same gibberish they direct downwards.
Marx wouldn’t have made this mistake, but I grew up with a vulgar Marxist idea that, behind closed doors, the bosses are perfectly clear about what they’re doing and why. No, not really:
Great anecdote yourself, via Mr Frank.
‘The particular pedagogy that motivates this class of university creatures is . . . management theory. They talk endlessly about “process management” and “excellence.”
Ah yes, prime Newspeak idiom. Where I was we heard a lot about ‘change management’. Our big restructure was called the ‘XX XXX Change Management Plan’ and was itself just a cog in a wider ‘Student Administration Review’ (my colleagues at other Unis reported the same thing happening at their places, albeit with different mnemonic (FAR, Faculty Admin Review, etc) A tinhatted cynic could be forgiven for thinking that these geographically discrete but almost identical phenomena had a common provenance.
Our CMP arrived out of a clear blue sky, presented to us by our our managers with great ceremony and pride, and when several of us averred that perhaps it might have been a good idea to at least consult us, if not include us in the decision making process, feet were shuffled and pregnant glances exchanged, and the next day a communique arrived to tell us that we had a week to comment and that our thoughts would be considered seriously before any final decisions were made. We brainstormed, had meetings, came up with not just credible criticisms but some clearly superior alternatives, which we laboriously crafted into a document we all signed, sealed and delivered. Two days later we received an email – thanks, but no thanks, basically.
The Plan promised all sorts of things in the drive to a ‘more customer-focused service’ (where we wondered was the evidence that customers were DISsatisfied?) These included long overdue reclassifications of key back room positions, along, almost as an afterthought, with ‘consideration of an improved management structure’. You can fill in the rest yourself – a new level of completely new management positions, paid twice the level below, all external appointees with no institutional experience, and not one red cent for anyone below that line.
The bold promises in the end were quietly forgotten, and my dogged, rather chippy insistence on producing the original 2008 document which detailed them was considered bad form, living in the past, not being a ‘team player’.
I am still looking for work and quite often I see jobs like this one:
A hundred grand to assist with the ‘strategic’ implementation of ‘excellence’, by getting rid of people and ensuring those that remain know that they could be next.
My wife, an arts professional in a cultural institution, has seen people made redundant around her, has been given their duties, had her job description altered to vague generalities so that she can be given anything management wants, received no pay increase after a review, and seen a new manager appointed from without, on almost twice as much, who seems aggrieved that her rah-rah, yay team approach hasn’t translated into acceptance or respect.
It’s an epidemic – check out pieces by Marina Warner or Stefan Collini at the London Review of Books, Terry Eagleton too, for an idea of how bad it is in Britain. Friends confirm Canada and New Zealand are copping it too. It is a more or less co-ordinated imposition of control, capital colonising one of the last frontiers, one crucial in throwing up a bulwark against any resurrection of the power of labour. That is the ‘deeper motive’ –
‘Reading these preposterous declarations at the time, I was convinced there had to be some deeper motive, that no one really talked this way’
It is so deep that its cudgel-carriers are not really aware of it, and they rationalise and characterise it, like most human explanations of injustice, in emollient terms such as ‘strategic dynamism’. It is the same disease that has reversed, in an economic context, the meaning of the word ‘reform’. The Brits didn’t pillage their subjects, they civilised them! That sort of thing.
The key observation is this: ‘The point of management theory, after all, is to establish the legitimacy of a social order and a social class who are, in fact, little more than drones’ And they are drones in service to the top of that social order, ‘the real brahmins’.
‘The grotesque top-heaviness of the American corporation is an old story: we have more supervisors per worker than any other industrialized nation’
Reminds me of the old joke, which I’m sure you would know:
The author of this story is unknown.
An American Company and a Japanese Company decided to engage in a boat race. Both teams practiced hard and long to reach their peak performance levels. On the big day they felt ready. The Japanese won by a mile. The American team was discouraged by the loss. Morale sagged. Corporate management decided that the reason for the crushing defeat had to be found, so a consulting firm was hired to investigate the problem and recommend corrective action.
The consultant’s finding: The Japanese team had eight people rowing and one person steering; the American team had one person rowing and eight people steering.
After a year of study and millions spent analyzing the problem, the consultant firm concluded that too many people were steering and not enough were rowing on the American team.
So as race day neared again the following year, the American team’s management structure was completely reorganized.
The new structure: four steering managers, three area steering managers, and a new performance review system for the person rowing the boat to provide a work incentive.
The next year, the Japanese won by TWO miles!!! Humiliated, the American corporation laid off the rower for poor performance and gave the managers a bonus for discovering the problem.’
I’ll leave you alone now Gabriel, good talking with you.
One other cost that doesn’t make it into the headlines is the newly adversarial relationship your outsourcing management takes with the rank and file. This observation is admittedly anecdotal to the places I worked, but from chatting with colleagues, it’s a fairly reliable trend. Once something is outsourced, *everything* harder to fix.
In the cases I was party to, management outsourced to save money or to leverage those ever famous ‘economies of scale’ by creating a single entity all divisions / wholly-owned subsidiaries must use for their service (whatever service this is – for me it was always IT).
The promise is the same or near same service for a fraction of the price, saving the company tons of cash, and delivering bonuses for everyone (well, everyone in management).
In each case, the outsourced entity does not deliver / fails to live up to expectations / is far less capable than previously believed. Then people scream to management, just like they always would, looking for someone to fix the problem.
What happens next is the interesting part… whereas before management would reliably dig into the issue and light a few fires to see something resolved (for good or ill), once outsourced, they take on the role of minimizing the concern. In short, where before they worked to fix a problem – whether they should or not – they now work *against* the person raising the concern, and seek to trivialize the issue… whether they should or not.
The motivator – bonus, money, validating their decisions, etc – is the same in both cases, but once someone is basically a vendor manager, and said bonus relies on the vendor, they’re recast as their evangelist, not the one who holds them accountable, no matter what their title says.
It’s the short path to normalizing disfunction, with service paradoxically getting worse with experience, not better.
It’s been a wonder of mine for a few years now, how wide spread a phenomenon really is, and how much of a role it may play in the accelerated crapification of everything.
I observed the same phenomenon you describe where I last worked. The outsourcing was to a domestic companies but managers used the one-remove of outsourcing to avoid taking any responsibility for the quality of service. Suspicious as I am, I wondered how many of the companies supplying outsourcing effectively belonged to various high level managers who protected their companies from any effective criticisms.
Last year Doug Henwood interviewed Esther Kaplan on KPFA about an article she did on the closing of Phillips lighting plant in Sparta, Tennessee in 2010. It’s superb, and here’s the link to the article at Virginia Quarterly Review
One of the many great quote/cites:
Occasionally here we discuss the crappy quality of the current elites we’re afflicted with. This is part of the diagnosis. Shareholder value-driven capitalism, freed of any constraint, is an economic form of mad cow disease.
When we can offshore it all; pack up factories and sent them off too; export the very means of production and then some it is clearly time to end trade altogether. There is no reason for it.
Unfortunately the situation you describe gives us why we absolutely need to trade. Many products we used to manufacture or produce are not available domestically. Worse still, the complex of infrastructures required to produce some of these products is long gone and difficult to rebuild. If China got pissed off at the United States, something our government seems intent upon, if they shut down trade with us, we would be in a world of hurt. This “we” includes not only American consumers but a range of Industries that now must rely on Chinese sources for products, parts, and even commodities like citric acid or rare earth metals.
Is this a joke?
Even with “hidden costs” of coordination, shipping, and increased high-level management, there is no possible way any basic consumer product made in American can touch the same product made with cheaper labor abroad on price point. Do you honestly think that companies are blind to these “hidden costs” when they decided to relocate production outside of the US? On the surface this argument against outsourcing seems sounds, but with a few more seconds of thought you would come to the conclusion this if someone could make the same product for less, “hidden costs” included, they would have already done so.
The US is extremely innovative and newcommers enter the market constantly (see start-ups), even if your idea is absolute garbage, if it has a snowballs chance in hell of working people will literally line up to give you money (see venture capitalist). If someone could have set up shop locally and been competitive, they would have done it.
Easy example is TVs. I can buy a 32″ HDTV for $300, probably made in China. Please point me in the direction of any place where I can buy an American made TV for the same price (let alone have the option to buy an American made TV). If there is an American TV for sale out there (I can think of one company), it may have superior quality but you cant say this articles argument stands up when it comes to final pricing. Like I said if someone could have made it cheaper in the US they would have.
Edit: I should add, the US will continue to lead the way in cutting-edge, complex manufacturing. (cutting-edge, complex being the point at which the potential risk of allowing someone abroad to take take a stab at making something is just not worth it, see article above for potential risk).
It wasn’t relevant to the service industries which I was originally referring to in my comment but one of the main causes why you can’t get a $300 TV is that made outside of “high cost” countries like the U.S. Is because manufacturing companies are willing to completely disregard what we would define as the bare minimum for a Social Contract. The following areas have received well documented (e.g. http://www.laborrights.org/publications/wal-mart-china-high-cost-low-prices ) reportage of blatant abuses:
Workplace Healh & Safety
Harmful substances ending up in the finished product
Faked compliance with mandatory standards (such as electrical safety) in the finished product
Local labour laws (such as minimum wage, rest breaks, protection for pregnant workers)
Now, if you think that’s fine (maybe it’s easier to rationalise if it happens to funny brown people in faraway places) then by all means buy that TV and enjoy the saving. Sorry, but the compromises inherent don’t sit so well with me.
Even if you’re willing overlook all that, many commentators here have attested to the other hidden cost for consumers — crappification. If your $300 TV turns out to be a Pile of Crap, it becomes your problem to sort out the exchange / refund / warranty claim not to mention the loss of utility due to the device failing or not performing as advertised.
I believe the “advantages” accruing from the control and exploitation of labor and the ability to avoid paying for the externalities which you point out are a big part of the attraction outsourcing holds for upper management. I am sufficiently cynical to believe high level corporate managers value outsourcing, for advantages above and beyond mere advantages of cost. Done on a large enough scale, the unemployment here resulting from outsourcing promises to yield similar advantages domestically. This line of cynicism leads me to wonder whether corporate managers wouldn’t outsource even if the total cost savings were minimal or break-even, or even if total money costs were more in some cases. Outsourcing has these other occulted advantages for dealing with domestic labor — really labor anywhere in the world that gets a little too uppity. There are always some other countries where things are “better” for outsourcing.
I didn’t read into Evan’s comment any positive assessment of outsourcing. He questioned the underlying assumption of today’s post that outsourcing when priced in its totality failed to be more cost effective. He assumed outsourcing represented a rational economic choice and implied such choice would not be made were it not a rational economic choice. I don’t believe he would argue in any way that outsourcing is a good thing for our society or a good thing for truly rational world trade. [His responses and later postings may falsify this of course.]
As many other comments have pointed out, outsourcing offers advantages other than cost savings. Besides, our highly concentrated corporations can hardly claim they still have any real competition in the “marketplace.” Economic man had best remain in Econ 101 where he best belongs. He isn’t running our corporations. [If he were, the costs of management, especially upper management, are one of the first places he would make cuts — long before outsourcing.]
The fact that the American worker is so beat down that companies are insourcing/reshoring now that wages have fallen confirms your suspicions. Also stuff like IKEA locating plants in the South since we have much worse unionization/workers protections than in the EU.
The machinery the Establishment uses to keep the livestock in line is firmly in the “bads” camp, not the “goods” camp. How much wealth in non-countable economies or ecologies — social, household, natural and otherwise — is the purchase of that $300 TV destroying?
Or, rather, why compete? Collusion wins, every time. If it didn’t, the rich wouldn’t be doing it.
Your argument is circular and pretty typical of someone who isn’t getting it.
YOU: “There are no American made TV’s because Chinese made TV’s are so cheap. $300! yay! ”
ME: “Well according to the facts raised by this post, its probably not necessary to produce TV’s in China which have to shipped from China with artificially low, state subsidized transportation costs which we all pay. Its entirely likely that if the will to defy toxic corporate culture and “common wisdom” was there, a $300 dollar high quality TV could be manufactured in the USA.
YOU: But there are no TV’s made in the USA because its cheaper to make them in China.
One thing I like about american-made stuff is that it tends to last and last…. it represents a good value even if the up-front costs more. A good example would be my RCA 32″ TV. It has to be a good 20 yrs old and still going strong. I’m sure it cost a grand when it was sold new. I’m also sure your $300 unit isn’t going to last that long nor be as well made. But then, some people (IO use the term loosely) can only see the $$$ and nothing else enters into the picture.
Even American made stuff don’t last as long as before.
American made movies used to last 2 hours (more or less). Now, they are likely to be 1.5 hours.
Other examples: Made in America marriages don’t last as long either. A college degree in technology will probably last a couple of years, whereas before, it might last a decade or more.
In most instances — e.g. floor lamps– the foreign, i.e. Chinese product is so revoltingly poor in quality that people would gladly pay more for better. Get this through your head– Chinese quality sucks. Yes there may be some counter examples, like the I-phone– but my new HP-35 scientific calculator (made in China) has keys that register only sporadically. This was never a problem with my old HP-15C that finally died after 20 years of very hard usage, and many falls to the laboratory floor.
Its not as if the chinese are incapable of building good stuff. They are easily able to build world-class stuff. They even have a space program like the russians. The issue is that american style management (1%-ers) is so cheap they squeak when they shit.
First, usual Chinese quality sucks because what Western companies are ready to pay is low even by Chinese standards. I saw some cost breakdowns for items like shoes and iPhones, and the portion accruing to Chinese labour in the total cost of goods sold is actually marginal (a few percents). So if even the Chinese are badly paid, how do you expect them to be motivated to care or be able to care about quality?
The second thing specifically about electronics:
Electronic items are mass produced by poorly paid, summarily trained employees.
Do not be deceived by what you view as the good quality of the iPhone. It is subject to similar production quality problems — every single Apple gadget made by Foxconn&al. has been plagued by remarkably low production yields. It is just that Apple, given its enormous profit margins, can afford to carry out extensive checks at the end of the line, and mercilessly reject all those items that do not exhibit the required quality before they reach the retailers. Companies that do not enjoy margins comparable to those of Apple cannot afford those extensive validations, and pare down quality control processes.
Add the fact that devices are also summarily designed for cheap manufacturing and planned obsolescence, and you have general crapification.
What’s the point of $300 TV when no-one can afford it because they don’t have a job? Real wages growth takes into account the fact that TVs are now cheaper, and they didn’t grow in the last couple of decades. If the wages drop in line with prices and/or fewer people are employed, everyone (including the factory owner in the end) is worse off.
You know, the supply-side argument works only if the demand side can pay for it (which means it has some income). Both supply side and to a lesser extent demand side tend to forget that trade is not the absolute supply (or demand), but the intersection of supply and demand. And if the demand side has 0 to spend, there’s no demand side, at any price except 0.
Do you honestly think that companies are blind to these “hidden costs” when they decided to relocate production outside of the US?
Yes, because if corporations always acted perfectly rationally, with perfect information and perfect execution, there would be no bankruptcies.
Also, and more importantly, corporations are subject to severe agency issues. What’s best for the corporation isn’t always what’s best for the executives who make the decisions. If outsourcing can goose the numbers for a few quarters, enough for the execs to cash out their options and launch their golden parachute, then it will be done regardless of the long-term consequences to the company.
Finally, to address the question of why wouldn’t competitors arise to take advantage of this inefficiency, you assume that capital markets also operate perfectly rationally. If you have a business plan that involves making consumer electronics in the U.S., I assure you no bank, no Wall St. firm, nor VC investor will be willing to fund your project, no matter how economically sound it might be, thanks to the dogma of outsourcing uber alles.
Bringing up VCs actually illustrates my point: if you are a web startup in Silicon Valley trying to get funded, VCs will specifically ask you about your outsourcing strategy, and if you don’t assure them that all your web development will be done in Bangalore and your services will run on Amazon, you won’t be funded. It’s essentially a check mark on their screening process for “serious” companies. Try to tell a VC that you plan to hire people internally to develop or (god help you) run your service, and you won’t even make it to the initial meeting.
The bottomline is that corporations can be subject to dogma and groupthink just as bad as people can be (since they’re run by people), and then add on the severe agency issues and short term thinking that plague our industries, and it’s actually more a wonder that they occasionally manage to do the right thing!
School of Navigation
Critters ‘steal’ something from nature and build derivatives over time, exploiting natural resources in a positive feedback loop, creating booms and bust with increasing duration mismatches, and the bank smoothes those bumps, for itself and its controllers, with RE inflation, enforcing its rule with arbitrary credit and debt, public education and law enforcement, employing the lower classes as a shock absorber. The only difference among governments is the layers in the shock absorber, population pacification with technology. America is the best shock absorber to date.
If you want to explore the universe, you have to see gravity for what it is, the counterweight. Riding the counterweight is not life. What you don’t want is 90% of the people spending 90% of their time riding the counterweight, unless you are the bank. Whether you look at the universe mechanically, electrically, optically, acoustically, or whatever, depends upon what you seek. You have to carry the load to see it, which is why the critters never see it coming.
You want a counterweight stack with a dynamic heap for regeneration, to adjust the load the motor sees, to grow the motor. G shrinks the motor, adding arbitrary event horizons, efficiently eliminating the gears, on a one-way trip. You need to adapt today, but you must get a permit that requires a year to process, to allow for capitalization and redistribution. Capital is as dumb as a rock, but you would never know it listening to empire media make-work.
You can give your children opportunities to adapt, or you can adapt the environment. The latter leads kids to wait for their parents to die, with no real skills, all losing an artificial battle with RE inflation, as the number of empty units multiplies. Government is in the business of replacing marriage, measuring its consumption as production, with consumer confidence as feedback. In a gearless machine, your ammeter is the bridge. Adjust slip accordingly.
The majority seeks capital, voting to mortgage the future, with your children as collateral, selling itself out, and acts surprised every time, wrapping it all in pretty words, which mean nothing without work. That’s History, of capital, looking at itself in the rear-view mirror, projecting sunk cost infrastructure forward as wealth, always a mirage in a desert. Fewer show up to work as more avoid work, with ever-increasing complexity, artificial University intelligence, a black hole of compliance paper.
A laborer has many gears, to fit any situation. Capital has special middle class gears, to the end of capital, which it steals from labor. Generally, labor has children which join the middle class, chasing capital, which scales up to exploit natural resources, until, like a virus, it consumes its environment and moves to next location, to build the next middle class, an Internet bubble as the solution to an Internet bubble in this case.
The empire always has its foot on the brake, as a means of extortion. Let it wear that brake right out. Labor can come from anywhere at any time, and drop the load at will. The critters can plan all they like, to plan some more. Whether it’s a crane, an elevator or a catapult depends upon empire phase. Funny, the Clintons aren’t giving up the ‘wealth’ they stole with trade agreements, to reshuffle the deck, again, the problem always posing as the solution.
I can tell you that the outsourcing balloon has already burst years ago, perhaps around mid-2000s, at least of IT projects. There is already a large body of scholarly work on why outsourcing fails, how to make it less risky, selection of correct contract type to increase chances of success, etc. So, the tide has already turned. That is also reflected in the industry: many of my colleagues in IT start swearing when someone starts to talk about the benefits of outsourcing.
Does that account for what seems like an upsurge in H1-B workers in IT?
From what people in the field tell me, yes. One wage undercutting measure didn’t work. One (the techtopus wage suppression thing) is ongoing, a third measure was introduced to limit wages as profitability soared.
Some of this happens right up front. I’m a landscaper, so I deal with small engines a lot. The higher-end ones were made by an old American company called Tecumseh Sherman. At one point, some years ago, my mechanic told me that Tecumseh had tried to outsource its production to Brazil, but failed, causing the company to go out of business. That was very nice for Briggs and Stratton – I think most of them are still made here.
Apparently offshoring isn’t quite the paradise it’s sometimes made out to be. Which is the point of the article.
I’ve got a tecumseh from the 60’s. Still runs just fine. Losing tecumseh was a huge bummer. :( but yeah the chinese ate their lunch.
Before Henry Ford joined John Rockefeller and became a globalist (selling stuff to Hitler) he exhibited a grasp of basic macroeconomics with his policy of paying his workers enough they would be able to buy the cars they made. This was in the days before really ‘creative’ finance and the Empire of Debt so his naivete from a contemporary perspective can be forgiven.
To the point… even if outsourcing / off-shoring is ‘efficient’ (read ‘worry about lowest cost today and your customers’ ability to provide effective demand tomorrow – if ever’), some day we are going to have to deal with the issue of nation-states and whether boundaries and history mean anything.
Efficient? Come on. It’s all about the present value of a race to the bottom in everything from wages to environmental pillaging, about today’s share prices not about investing, about the future.
I wonder — Was Henry Ford concerned to have workers able to buy Fords or was he more concerned to undercut union organizers?
There was more, of course, like Harry Bennett: http://en.m.wikipedia.org/wiki/Harry_Bennett
Remember that Ford — however anti labor– is the guy who said “I have to pay my workers enough so they afford to buy one of my cars.” That simple fact has been lost sight of in this post-modern day economy of ours.
Your argument reminds me of the old saying about people who know the “price of everything and the value of nothing.” As a consumer, you’re perfectly right to look at price as the fundamental issue. I do the same thing, most of the time. But uprooting a US factory, or offshoring a bunch of jobs in any field, be they IT or manufacturing or financial analysis for an investment bank–they all carry costs that aren’t as easily quantifiable as Brand A costing $245 versus brand B costing $287. It’s not the offshoring entity that has to pay THOSE costs, either, even when the offshoring entity (a factory, say) may have already extorted a fortune in tax incentives from the community its US factory was formerly located in. (What costs am I talking about? The job losses and resulting loss of purchasing power that sustained surrounding businesses, the unemployment benefits paid, the medicaid required that formerly was not, the loss of real-estate tax base from the idled factory, the loss of jobs from all the ancillary agents that serviced the factory–mechanics who fixed the machines, vendors who supplied food, local bars and restaurants that have now lost clientele and perhaps have to close, the lost real estate revenue–taxes and the value of homes–when neighborhoods decline as a result of factory closure.) Then there are the psychological losses, of identity and usefulness and … do I need to go on? NONE of these costs is paid by the corporation that leaves, and frankly I think that sort of cost burden makes the cheaper TV very very expensive indeed.
But you’re right, as long as a factory owner is allowed (even encouraged) to move jobs overseas, and supported by our political system to regard the human damage as so much inconsequential roadkill that’s someone else’s responsibility to deal with (or no one’s)…sure, the cheaper TV wins every time.
I believe there are countries in Europe in which local governments are deemed entitled to compensation from corporations who close local factories–if they’re even allowed to get away with it at all. I think they know a little more about “value” there than our American brand of politician.
To give up my little slice of anonymity, in the clothing industry this myth is especially strong. It’s used as a device to deliver bonuses to management and to decrease the quality of product by leaps. There’s no reason logical reason not to produce most things here.
This is one of those things that really angers me. I depend on really rugged clothes every day on the job. I mean the *old* levi’s or the new carhartts more often nowdays. What boggles my mind is that Levis wants about $60 for a good button-down heavy work shirt with riveted metal buttons… and its made in pakistan or india or wherever…. they’ve managed to go offshore *and* still find some excuse to raise prices. This is why I try to avoid the “new” Levis like the plague. They’re built like crap too– the cloth isn’t as heavy as it used to be, among other things. More often nowdays to get a good shirt or pair of pants I go to the thrift stores and yard sales. I would have had *zero* problem with paying an american worker those prices back in the day.
There’s no excuse for producing low quality clothing. There is a loss of huge bodies of institutional knowledge in the process of offshoring, but the basics don’t change. It’s just a race to the bottom, cheaper thread, cheaper fasteners, cheaper textiles, younger and lower paid workers all add up to ugly fragile garments that aren’t worth half of their price.
ooops, my comment was intended as a response to Evan, but I screwed up. Sorry.
My own experience with some government outsourcing was with a sub of the famous auditing company that gave such aid and comfort to Enron. They and their employees had no experience whatsoever in what we were doing and their part of the project failed. Their line as they left, when asked to finish the project correctly was ‘So sue us’. Words no doubt often heard in the outsourcing world. Thus my view that no one can write a contract tight enough to ever force these types of companies to finish anything properly.
My personal experiences with outsourcing as an engineer have been illuminating. Without exception, they haven’t decreased costs – merely shifted them. You spend more time writing detailed requirements, holding their hands and answering questions, testing their work and (almost always) troubleshooting and fixing what they turned in, as you would have had you done the work yourself. In most cases, it has ended up taking longer and costing more. I’ve had code submitted that looks superficially great – all coding conventions obeyed to a ‘T’ – and they you analyze how it is organized on a deeper level and it’s a WTF???? moment.
Out of the dozen or so projects I have worked on where parts were outsourcing was involved, it has worked well maybe once or twice.
Just another piece of the puzzle here. So much of our workforce these days has been converted into contractors to outsource costs. I don’t know if it is ever acknowledged but another name for a contractor workforce is a mercenary workforce. What does it do to a society to have a large part of its citizenry made up of people with a mercenary outlook? It has been noted by other commentators here such as Noni Mausa the day to day effects of how that works out in practice but what effect does that have on a society as a whole?
I don’t see how you’re a mercenary just because you’re a contractor. Sure, you can threaten a contractor and get them to execute on things they’d really rather not, but you can threaten an employee too. This is the daily life of a middle manager. This includes unionized employees, because in practice, unions are often rotten and working for HR. These ensure their own continued existence by not trying too hard.
It seems to me that contractor status is mostly there so that companies can avoid shouldering the cost of the US welfare state. Honestly, if a nation wants to provide healthcare, old age pensions, and etc to all its citizens maybe it should.
Ah, but there’s the rub. We haven’t agreed to do that, have we? The mercenary condition was the 20th century status quo. Now when the tide goes out, we see what naked is and who’s been holding the whip.
Perhaps I should have clarified my terms more. The main purpose of using contractors is to outsource costs out to the Government rather than a company being responsible for the people that they employ as you pointed out. I have heard of how in the US a business would ‘lay off” workers so that the Government would support them until the business would need them again.
With full time employees in a previous era, there was always an expectation of loyalty to the employer. A contractor, on the other hand, shares with a mercenary the same primary motivation – a desire for personal financial or material gain.
This is not to disparage contractors. After all, they are only playing the hand that was served them. But for them, there is no incentive to put their employers welfare above their own personal needs. In any case, for such a quality as loyalty to work, it has to be both ways i.e. both up and down. In other words, no time soon.
We’ve come to think the word “mercenary” means only a hired soldier. This leads to an interesting sidetrack of the discussion.
Look at the difference in our minds between a “real soldier” and a mercenary, a hired gun. A real soldier, though paid of course, is also a faithful son* of his nation. He isn’t there just to make a buck, he is there to protect his home soil, his kin, his traditions and so on. He is partly hired, but mostly acting from honourable motives.
A mercenary, of course, is not expected to have such motives, and so we reflexively consider him less worthy of respect, more likely dangerous, and not someone to honour and follow as a role model.
So we have to ask, are we right to expect employees to operate by the honourable, “real soldier” model, when their employers treat them under the disposable mercenary model? Certainly, thats what right wing discourse pushes, constantly urging people to work hard, think of their company’s needs first, be “good soldiers.” And if they balk at this, they deserve to be homeless, jobless and shunned by business, the self-styled Arbiters of All Value. Of course, the requirement to deal fairly does not extend to business, only to the people it needs in order to even exist. (But let’s not talk about that, hey? Because businesses obviously exist, or they wouldn’t be able to push people around so much, right?)
*insert female pronouns and so on as needed to make yourself comfortable.
Back in the 1980s there was a popular banking software package where if you knew it you could easily get $80/hr rate anywhere with just a years worth of experience.
Now a days, with all of the M&A and the retiring folks, guess what the rate is for that same package? It’s like $80/hr if you’re lucky.
Here are some relevant Marx quotes ripped right from the web:
“And this life activity [the worker] sells to another person in order to secure the necessary means of life. … He works that he may keep alive. He does not count the labor itself as a part of his life; it is rather a sacrifice of his life. It is a commodity that he has auctioned off to another.”
“Machines were, it may be said, the weapon employed by the capitalist to quell the revolt of specialized labor.”
And the coup de grace:
“Under the freedom of trade the whole severity of the laws of political economy will be applied to the working classes. Is that to say that we are against Free Trade? No, we are for Free Trade, because by Free Trade all economical laws, with their most astounding contradictions, will act upon a larger scale, upon a greater extent of territory, upon the territory of the whole earth; and because from the uniting of all these contradictions into a single group, where they stand face to face, will result the struggle which will itself eventuate in the emancipation of the proletarians.”
The final statement is paradoxical and knee-jerk inducing, but it is worth pondering. I’m not sold yet. Maybe I’m too timid?
Apologies, last one is Engles.
a) If outsourcing was a silver bullet, we’d all be self-employed.
b) corporations (as in company with more than one employee) exist to reduce transaction costs (which are not only financial). In the same way as a managing too large a corporation creates too large a management caste (and overhead costs), managing too dispersed a corporation adds too much of a transaction cost – that is, unless the dispersed people have very strict discipline. But the cost of imposing discipline is either high in management time, or flexibility or both. You _can_ induce self-discipline (which is the best, that is unless it’s induced by pure fear), but that works only through shared values (shared work culture, vision etc… yes, corporatespeak, but that doesn’t mean stuff like that doesn’t exist and can’t be useful. the problem is that most corporates get the causality wrong way round), which is nigh impossible for outsources as most managers wish them. Again, it can be done, but requires lots of work/investment up-front (effectively making them your long-term partner, and investing time and effort in them, as say some Japanese manufacturers did with their supply chain partners), but that sort of goes against the short-term gain ideology of outsourcing.
“What is needed are fewer but more flexible / skilled / knowledgeable / “good” i.e. expensive people. The kind of people who, once you have them, you know you have them and you don’t really want them to leave if you can help it. The kind of people who you need to treat in a not completely shabby way.”
Outsourcing (finding a personnel agency to bring in temps to do the work that full time employees do) is done on a subtle level sometimes without hiring out. I have had many a-not-so-wonderful job that involved moving on a series of treadmills. Aa a beginning employee you could walk the slow treadmill and then find yourself moved under pressure to faster and yet faster and harder treadmills. Eventually most people jumped off the fast moving track (lots of pressure to produce, work long hours, take low pay and insipid benefits (or none) and put up with a crappy attitude from the employer)and found another job. Hopefully the next job was better in terms of pay and expectations. But often not and especially today where the starting pay (office clerical, customer service in my chosen profession) is around $17-21k/yr.
I now have a job that pays three to four times what I made 25 years ago and I am treated better than I ever thought I would be. However, corporate ‘deciders’ had found local college students to work a fast treadmill (move ’em in, move ’em out) at what I would call a desert call center; desert because the culture there is barren. There are few if any experienced workers who know the product they service and indeed, most are just looking past the next semester before they can move into a field with more status than customer service. I sometimes have to clean up after the calls taken at the desert call center. This gives me this perspective on ‘outsourcing’
1. Nothing is gained except the sheer numbers of hefty volumes. This is a business that can’t tolerate large numbers of abandoned calls but refuses to do anything to try to keep more seasoned reps except when forced to by the union.
2. Customer satisfaction goes up and down but there seems to not be a lot of real concern about that except to talk about it.
To make outsourcing and offshoring easier, I have written several books with experts from around the world. I think it’s a must read for anyone who read or commented on this post :)