Yves here. As readers know, I’m skeptical of outsourcing, since its main purpose appears to be to transfer income from lower level workers to managers and executives without increasing the risk-adjusted profits of the enterprise. I’ve had colleagues at public companies say that their economic case for outsourcing was weak but management went ahead because Wall Street approved.
Robert Cringley made a more forceful critique back in 2015, and I doubt much has changed:
Now let’s look at what this has meant for the U.S. computer industry.
First is the lemming effect where several businesses in an industry all follow the same bad management plan and collectively kill themselves…
The IT services lemming effect has companies promising things that can not be done and still make a profit. It is more important to book business at any price than it is to deliver what they promise. In their rush to sign more business the industry is collectively jumping off a cliff.
This mad rush to send more work offshore (to get costs better aligned) is an act of desperation. Everyone knows it isn’t working well. Everyone knows doing it is just going to make the service quality a lot worse. If you annoy your customer enough they will decide to leave.
The second issue is you can’t fix a problem by throwing more bodies at it. USA IT workers make about 10 times the pay and benefits that their counterparts make in India. I won’t suggest USA workers are 10 times better than anyone, they aren’t. However they are generally much more experienced and can often do important work much better and faster (and in the same time zone). The most effective organizations have a diverse workforce with a mix of people, skills, experience, etc. By working side by side these people learn from each other. They develop team building skills. In time the less experienced workers become highly effective experienced workers. The more layoffs, the more jobs sent off shore, the more these companies erode the effectiveness of their service. An IT services business is worthless if it does not have the skills and experience to do the job.
The third problem is how you treat people does matter. In high performing firms the work force is vested in the success of the business. They are prepared to put in the extra effort and extra hours needed to help the business — and they are compensated for the results. They produce value for the business. When you treat and pay people poorly you lose their ambition and desire to excel, you lose the performance of your work force. It can now be argued many workers in IT services are no longer providing any value to the business. This is not because they are bad workers. It is because they are being treated poorly. Firms like IBM and HP are treating both their customers and employees poorly. Their management decisions have consequences and are destroying their businesses.
Today’s post provides some additional color by giving examples of other forces that promoted outsourcing, sometimes invisible to the companies themselves. Perhaps readers can add their own experiences in comments.
By Kevin Melvin. Originally published at Angry Bear
Warning! First person ahead. I don’t usually talk about myself, don’t even like to talk about people, but this a story that I want to tell and don’t know how to otherwise do so. So, your forbearance, please.
Those of you who have been around as long as I, have probably witnessed personnel changes that follow a change in political Administrations. I happened to be on campus when Reagan became governor in 1967 and saw people with no qualifications whatsoever, other their political connections, take over high level administrative positions. As a child, I saw rural Postmasters come and go with changes in Presidential Administrations, and thought, wow, now that’s connected. Richard Nixon handed out contracts to build ships, and a whole sundry of other things. Gerald Ford was into skiing. In the 1980s, we saw Reagan’s Candy Store, operated by Ed Meese, handout Post Offices, funds for streets and roadways, etc. Bush I handed out an International Airport. Bush II, through his loyal sidekick, Little Beaver, pretended to hand out Hurricane Katrina relief, but in reality outsourced it to Halliburton, who outsourced it to connecteds in Texas, who outsourced it to hard-ups in New Orleans, who they never paid. Trump outsourced everything, or almost everything. Didn’t want to take responsibility.
On 9/11, in 2001, I was a gun for hire, a consultant for control systems. At that time, I was working mostly for the Bio-techs such as Bayer and Genentech. In 2002, when it came time to renew my professional liability, I was told that it would be $15,000 for six months; ten times a much as before; that I might not be able to get coverage at all; that it was just the market. I had never had a claim. Made a couple calls, same answer. So, I called my fellow consultants, to ask about perhaps subbing under them. They had ran into the same numbers. The younger ones took jobs with Bayer, Genentech, … Us older guys were simply out of luck.
Someone had decided to shutdown small contractors, to ensure all those contracts at firms like Genentech, Bayer, went to larger, well connected firms; firms that hired H1Bs almost exclusively. Doubt that Genentech, Bayer, … ever knew; though they were the losers, or would have been if bio-tech wasn’t basically cost plus. It had nothing to do with competence. I had spent many an hour explaining to these guys, how systems and components worked, and why something had smoked when they turned it on.
I really truly doubt that Bush II or Cheney I knew anything about any of this. Though the agent mumbled that it did, it certainly didn’t have anything to do with 9/11. But in their Administration, there were those who were tasked with this sort of thing. Someone who had been given the list of, taken the calls from, those someones who had contributed lots of money to the campaign; tasked with responding when those contributors called in their chits. 9/11 was used as an excuse for a lot of things.
Without going into the weeds about patents, up until 2003, if one thought they had a infringement, they could make two or three phones calls and within hours they could get a lawyer to take to case on contingency. High risk for the lawyer, but these guys were willing to put up $millions of their own in return for the possibility of winning many times as much in settlement. Many fortunes had been made. By 2007, they all demurred, just couldn’t do it anymore. Cost too much, and the odds were stacked against them. Maybe Bush I and Cheney did or didn’t know about this; but someone did. Someone did it for them. Doubt that the call even has to come from the White House, but everyone involved knows what it’s about. Today, patents are only for the really big guys; infringement suits are now pissing contests amongst $Billoinaires. There must be a 9/11 in there somewhere. Let the record show, though history will not record, this is how politics work.
I’m thinking the same thing about candidates wanting to police or contest election votes. You need a big party’s backing and legions of lawyers or you’ll get nowhere.
In The Mythical Man-Month, the author points out that adding personnel to a project slows it down, at least if it is an engineering or software or other technical project, where things have to be gotten right, at least eventually. This effect would be exacerbated when the added bodies were far away on different continents or different planets. The old people must take time to insert the new people into useful roles, acculturate them, show them where the rest rooms are, etc. However, here it is said that adding lawyers improves the chances of success. I’ve observed this in copyright battles: whoever has the most lawyers is likely to win. So lawyering is different in some fundamental way from engineering. Possibly, lawyering is basically destructive, like war, so the more bodies you can throw at the front, the better. Eventually you wear the enemy down. Outsourcing might work well for a big legal firm, then, they could have hosts of scribes scribbling away in Bangalore, on the level of the call center slaves that read you the manual transcontinentally.
Outsourcing works in the legislative markets, too. Congresscritters are too busy to write their own legislation so they outsource that to K Street, think tanks, consultants, Beltway Bandits and the like.
That allows those hard-working Critters to spend time
servicing their Constituentsfundraising.
Somehow, the people in paragraph 1 and paragraph 2 overlap in
I did a little of that outsourced work at the state level. Like any task delegation, the key is retaining responsibility for final product. The insurance regulators in my experience who tasked industry technical support groups with crafting language were like your most critical boss.
I floated the idea of Modern Legal Theory once, based on the principle that legislatures are sovereign, and can draft any legislation they want, as much as they want, any time they want. They don’t have to supplicate outsiders to get draft legislation. This was and remains true; it just isn’t the way they do it in the U.S.
This same operation has started in the last few years in Massachusetts, by having patients at the entry system of the health care system their family physician office sign forms that cause the patient to unknowing give up legal safe guards.
A good example of this if interested, check Steward Medical Group forms which is operating in Massachusetts.
“ When you treat and pay people poorly you lose their ambition and desire to excel, you lose the performance of your work force.”
I would offer that this is not always the case. Cooks and chefs work in >extremely< abusive conditions by and large, literally being screamed at while they work. One chef I worked for would throw things sort of at us as we cooked, tongs and such,….and he was one of better one’s. We used to laugh at him because it was in (mostly) good humor. In general, it’s a grim, stressful, debilitating situation. And it works, cooks and chefs drive themselves into the ground all the time thanking the people who are literally breaking their bodies and minds.
But many don’t know that there is another way. They are told this is the way it is in culinary schools and then told that the worst thing you can ever do is walk out because you’re hosing your “teammates”. They think it’s perfectly normal if not preferable; they laugh about old jobs that screwed them out of paychecks or how they burned themselves but were told to finish their shift or be fired. It’s tied into their masculine identity, and that goes for the women too, everyone it supposed to be “tough” and never “whine”. Like the Roman slaves who would brag about whose master beat them harder, they take pride in being treated like dirt. People who protest are told to go find another industry if they “can’t take it”.
I’m not saying this is optimal, in fact I’ve seen it destroy kitchens. But if you can ideologically capture your workforce, you can get them to not only work against their own interests and drag others down but to like it. This probably has a lot to do with the class strata they inhabit; unless you are a high end chef who went to a good school by and large you are lower working class with an ideological disposition to endure mistreatment.
My response to your comment is simply too long to type, more like a conversation. Let me try to condense it down to highlights…
Went to cooking school at the community college, in my thirties, more as someone auditing the course. In the interview I asked the first year instructor if the atmosphere in the kitchen would be hostile. He looked offended at the suggestion and assured me it was not. He lied and waited to the end of the quarter during test week to ‘be himself’.
I went to see the Dean, who turned out to be an old instructor of mine from back when I was pursuing an associate’s degree 15 years earlier. She remembered me, we got along. I told her what I’d seen and heard over three months, including using the students to cater night time functions for the college president for no pay and no opting out. He made it part of our final grade. None of that was included in the interview. The Dean took notes, we ended the meeting pleasantly; I went home and decided not to register for the next quarter.
The instructor was denied tenure. Because of my story to the Dean? Hardly. I got the impression she didn’t much care for the president and was gathering evidence to deny tenure to one of his on-campus allies.
In this house, between the two of us, we have quite a collection of skills and a few college degrees, for what that’s worth. We’re the oldest children of teachers. We believe to our core in knowing things… and drinking… but mostly knowing things, and when we lived on the west coast, knowing things was socially valued, a visible part of the culture. But here in the middle of the country, over the last 20 years?
Here the social emphasis is on who you know, not what. There was guy down the block who was a regional director for the CDC, or he was as long as there was a Republican in the WH. He took early retirement for health reasons but continued to work on contracts. Obama was the last guy he wanted to gain office; the ‘whoyouknow’ contracts would dry up. Obama won and they moved to Wyoming. Our neighbor would happily tell you that what makes the world go ’round is who you know, not what. He was a lifelong Republican and he had worked his whole career for the Feds. Who he knew and who liked him had promoted him up the chain of command. Did he know how to do anything outside of work? No and seemed to have a prideful disdain for those with ‘other interests’.
I’ve seen alot of that attitude here: no books, no hobbies, no travel, no interests. There’s work/money, family, school, church, and the bragging right of eating out every night and saying they can’t boil water.
I was down at the cooking supply store yesterday picking up an Emile Henry 8×11. It was quiet in the store and I was worried this portended a future closure. I asked how they were faring business-wise. She said it was quiet right now, but come the weekend, the foot traffic pouring through the doors was insane. I believed her. Since spring large numbers of locals suddenly realized they could not live by boiled water alone and no chef would coming along to bail them out. They were going to have to learn to cook and ‘know things’.
‘I’ve seen a lot of that attitude here: no books, no hobbies, no travel, no interests. There’s work/money, family, school, church, and the bragging right of eating out every night and saying they can’t boil water.’
That’s a pretty devastating summary that. Not really a group that could adapt much to changing circumstances. Reminds me of that quote from “Blazing Saddles”-
‘These are people of the land. The common clay of the new West. You know… morons.’
I asked Google is there’s a word for ‘lacking curiosity. It offered a different question — ‘what is the opposite of curiosity?’ The answer was ‘indifference’, ‘disinterest’, ‘normality’. Normality? I found both the substitute question and the answer… curious. They’re not morons; they just seem to lack curiosity about the wider world and the people in it. They aren’t Makers, unless you’re counting their children.
Was parenting meant to be a full-time, lifelong hobby?
I’ve lived in Somewhereville and Nowheresville with areas in between. I’ve been extremely lucky in that I have never lived in an area like the one you described.
Nowheresville: The library here is extremely important to the community. Very very busy (or it was) with an outstanding regional inter-library loan system. People do travel here. Snowbirds down to Florida, Texas, Arizona. The local school takes a class for international travel. Yes, the class does fundraising for a few years. People go camping. As long as one has a vehicle one can go somewhere. Otherwise pretty much trapped. The buses don’t come through here anymore.
There are people who have extra money and others who are simply flat out poor. The latter keep their heads down. There’s no money for books or travel. But they do have interests.
People here are interested in all kinds of things if you can get them talking. But it is very cliquey. Also some are leery of outsiders because they can be aggressive about “changing things” because that’s how it was done in the city. Or looking down on them for how they talk or their appearance.
Everyone knows everyone. Who they dated, married, divorced. How all the branches of families intersect. Every possible scandal. Generally if one wants an in, one goes to church to meet people.
And people here do things like fix cars, fix farm equipment, re-roof their houses, put up sheds, fell trees, cut firewood, farm, shovel manure, raise livestock, fix computers, answer the call from neighbors for help, active church programs / social events, etc., etc., etc.
Of course the knowledge base isn’t what it once was as the population declines. Nor are the hobbies. Softball and bowling leagues died as the smaller regional mills & manufacture closed. A few dart and horseshoe leagues still around. Lots of fishing and hunting. Bars & restaurants closed long before COVID came along. But the school kids have all kinds of competitive “club” programs which I guess would take the place (time, money & travel) that used to go for adult entertainment.
And if you can ideologically capture voters, you need do nothing else but continue the circus.
And mistreatment, in many cases, is preferable to missing the rent payment. Factor in a precarious immigration status and an exploitative landlord and there is no end to the abuses that people will endure to keep their jobs. It’s almost like it’s set up that way.
Not going to go against your experience – is it possible though that the type of people you knew were either
a) short termers expecting to have a career in something else and just paying bills — it’s easy to continue to perform decently when you know it will come to an end
b) people who have aspirations (aka your culinary school classmates) to be on the other side of the screaming and throwing. There is a surprisingly close similarity, I think, between the military -especially the navy – and the culinary profession.
They work together in cramped quarters, there is a very definite chain of command, etc. Oh, and they seem to all wear white (sometimes Navy blue, I guess). Mostly you smile up and kick down.
Yes to both of those points: turnover can be insanely high ( I knew a place that lost a chef a week.) and I’ve worked with great guys who eagerly transmogrified into Stalin the second they made lead line cook. But there is a definite culture, maybe ideology is too strong, that inculcates the mindset I described.
Part of it too may be the remnants of the apprentice system that still linger in cooking; it’s one of the few jobs I know of where school training will get you turned down for a job because school trained cooks notoriously “know it all”. It’s a real thing; a lot of chefs prefer to train you themselves because they want it done their way. I think the restaurant PMC’s play a role here when power over the kitchen and hiring has devolved from being the strict domain of the chef to someone with a “hospitality management” degree who knows nothing of cooking.
The deal was, is in some niches, you work your butt of for the chefs and they train you in return. The almost familial yelling and carrying on had a payoff: an education. And a home: you used to eat for free in return for aching hours and some drunk hollering from the walk-in. That was the situation above with the tong tosser, I learned more in that kitchen about cooking than in the 15 years prior. That has been going away with the rise of rip off culinary degrees for 50G$ that garner a 13$ an hour job and charging workers for the “family meal”. What remains is the abuse and the headset.
The military analogy is apt. Prep time = prepare for battle. Battle = lunch rush, dinner rush. Coordination, everyone has to know their roles, everyone has to deliver – no time for slacking off. Orders come in – execute.
The culture of dehumanisation and hazing / camaraderie and pressure-testing is not limited to the armed forces and kitchens. Junior doctors get it in spades. Senior consultants today still decry the UK medical training changes that have ended 120 hour weeks. They claim the lower workload makes less trained doctors but they are also just bitter that the new generation has not had to pay the same dues they did….
Yes, I think the standard kitchen hierarchy (formalized in France) was explicitly modeled on the military for those reasons. ‘Chef’ is actually a French military address.
I’ve known plenty of people who worked in the industry. Jr’s description does not apply to all workplaces (although it probably does for the majority of them) but even the more collegial ones face the same pressure to perform, and blunt on-the-spot feedback is a feature of almost all of them. Even (especially) at the best of them, the pressure to execute flawlessly and consistently is very strong, and the industry has no time for those that can’t or won’t do that. Making the same mistake twice is often a firing-level offense.
Hmm. Extremely interesting topic; I’ve floated in and out of sourcing much of my career, including government and the GMP biopharma patch. In general, functional outsourcing as practiced since well before 9/11 is a disaster both for workers (both the old and new) and for the organization that has abandoned control over what is often very important work. It’s a metastasis of the ‘core competency’ and ‘intellectual capital’ MBA wanks of the mid 90s: anything ‘noncore’ is deemed fungible, to be delivered as cheaply as possible. 0 to 60, or rather the reverse….
But I found Melvin’s commentary here a little disjointed. Sole practitioner 1099s, as opposed to big firm peons, can do quite well when they have a steady clientele (patronage), and that hasn’t changed since 9.11.
They couldn’t out-source in the construction industry, but in the 80’s-until about 2008, both parties turned a blind eye to illegal immigration, so labor costs in construction could be halved. In addition, all labor employment was turned into contract work. Now many residential construction companies are little more than an owner who doesn’t do much, a couple of salesman and an office manager.
There is a myth that Latino’s/Hispanic’s work harder and do better work. In my experience in the industry, they do work very hard, much harder in many cases than the typical American citizen in the industry. Their work is not any better necessarily than work Americans did a generation ago, and sometimes it is simply not that impressive. The only one’s really making good money in all of this are the owners and salesman in the bigger firms.
In addition, in regulation, it used to be, once a guy got too old to swing a hammer every day, he might get a job working as an inspector. During the housing bubble, the regulatory infrastructure expanded considerably, and most of these new inspectors learned the codes in school, have never worked in and may not even have any aptitude in the trade they are regulating. This has an effect, over time, of assisting in the domination of the market by a few firms, a generalized easing of regulation, while the small business is regulated into oblivion. As a contractor working on my own, getting permission from regulators, waiting for regulators to show up to inspect things, dealing with their by-the-book intransigence in many cases, inflates costs 25% or more and makes jobs last much longer. That is not an issue for the big builders so much.
In addition, the codes in residential construction are, as books stacked up, three feet high. No one understands it anymore, and yet regulators spend years concocting new rules to apply, and the stack grows ever taller. Now every job, the work gets extended because what used to be self-evidently good enough is no longer acceptable, a danger to public welfare etc, and this and this and that have to be done. All of this is hard to bill for when you are just one guy trying to scratch out a living.
So the system is working….
“…both parties turned a blind eye to illegal immigration, so labor costs in construction could be halved.”
“…the codes in residential construction are, as books stacked up, three feet high… All of this is hard to bill for when you are just one guy trying to scratch out a living.”
God forbid the little guy or average working joe makes a living. Can’t have that when there are yachts and ski villas that need to be cleaned and maintained.
but in the 80’s-until about 2008
Until the 80’s, if I remember, management and C-suites were paid handsome salaries and yearly bonuses. Sometime during the 80’s management and C-suites started being paid in stock options, as deferred compensation, for publicly listed companies. Suddenly pushing up the stock price became more important than real profits and happy customers. Of course, the top companies’ management ethos filtered down to smaller publicly traded companies. A lot of once good companies were destroyed by stock options compensated management. Remember Sunbeam and Chainsaw Al Dunlap, the “Rambo in Pin Stripes.”? For a time, he was a near hero to the young MBA crowd. (The 2008 financial crisis took some of the wind out of the stock options heros sails, but has since recovered.) Or, look at Boeing now. My 2 cents.
adding: the stock option deferred compensation scheme has filtered down to new, young, white collar workers in a lot of new businesses hoping to go public with an IPO.
My family and my husband’s family both came from beef and butchering beginnings. His were German/Danish immigrants c. 1825 who had all the skills from the old countries; mine were English/Danish who had those same skills. Both families took advantage of almost free land in the west. When my grandfather married my grandmother her family were established cattle ranchers – a small operation – and he turned it into a big one. Right place, right time – a population boom in a country that was exploding with capitalist enterprise and a world war to boot. My father-in-law’s father had been a butcher for his family’s business in South Dakota, then he moved to Nebraska and became a train “engineer” so he followed the growth of Swift and Company and their huge refrigerated beef enterprise with interest and so his son, after returning from the war, got a job at Swift and Company in Chicago. It was all so quaint back then. In the 75 intervening years my grandfather’s operation was bought up by a friend in Texas and my father-in-law’s employer (Swift & Co) went through decades of contortions to remain “efficient” – during which my father-in-law was forced into early retirement by new managers with fresh-from-Harvard business degrees who managed to kill the company quicker. Like death is the ultimate efficiency. Raising and packing beef is still a big business. Now an “essential” one. Usually hiring immigrants on the cheap, and with good technology to make a profit. I always thought that Swift almost disintegrated when it had to compete with Australian beef because that coincided with it’s failing old business practices. Maybe. But now on Wiki I see that Swift morphed several times since the 60s and is still one of the biggest meat packers in the country. My point? The only obvious conclusion (imo) to make is that labor meant nothing – it was cheap and when it got too expensive to maintain profits it was trimmed away like steak fat. Which ties in well with the post, if employees (or small independent contractors) are that meaningless they have no clout and no incentive – why should they? And if profits can’t be made employers have no reason to be in business. My seminal point? – We need good regulations to protect both sides of this equation. In every industry. We need good government that “treats both labor and capital fairly” – as Eisenhower once admonished LBJ. But grifting took over and has left us in this visionless, financialized mess, which no one will take responsibility for. Least of all Joe Biden. Which is one reason I fear we will be going off to war before we can dust off the “election”. Speed will be essential, if it’s anything like 1965.
You need to squeeze out the rent seeking (grifting) behavior! Spot on. (note, this is basic socialist ideology – not that that’s bad; despite what the propaganda says)
Infringement lawsuits have dropped because of changes to patent law. One, the USPTO adopted first-to-file as the status. In the past infringement lawsuits would be messy affairs arguing over papers, signed lab notebooks, conference minutes and the like. Now, it’s whoever got to the USPTO first, with a digital timestamp.
Alongside that they also established a policy of inter partes review with specialized courts to settle claims and patent matters. These are still costly procedures, but not nearly as expensive as litigation.
There’s a lot to dislike about how we handle intellectual property, especially around biotech/pharma, but a decline in lawsuits seems like a false complaint.
Do most infringement lawsuits revolve around the process of filing the patent? I thought at least a few involve copying a technology after it had been patented and reduced to practice. The new policies of inter partes review with specialized courts to settle claims and patent matters might still be costly but I don’t understand how that explains the questions the last paragraph of this post raises. What happened in patent law or legal practice between 2003 and 2007 to make infringement litigation cost too much, stack the odds against small money patent holders, and so completely undermine the value of a patent?
Nothing really. Especially as the author is talking about biotech. The valuable patents are few and far between, but ask the MIT/Broad institute if it was worth litigating the CRISPR patent fight. For one, most patents are worthless because the USPTO is overworked and many grants would not stand up to scrutiny. First to file and IP rights inflation has accelerated patent filings globally year over year. Big companies file things just to confuse the competition.
That said, truly valuable patents will be litigated endlessly and likely settled for royalties. I did business with the Boston University office of technology transfer. Their director said they mostly try to license their IP quickly so they don’t have to pay fees to patent offices to keep things going and to defer legal costs. They literally only maintained full rights over one patent that essentially dealt with blue light LEDs. You can read about it here:
The myth of the individual inventor is long gone. Inventing in high tech takes resources. Even for the university prof. you sign over IP rights for access to buildings, students, and all the resources that can provide. Top inventors at companies often receive rewards for filing valuable patents, but they don’t reap the rewards.
Thank you for your confirmation there was nothing really. I couldn’t think of anything — but I don’t have an adequate knowledge in this area. Your assessment of the patent system saddens me. The patent system has devalued patents as a way to develop and share knowledge of new useful art and I suspect drives more useful art toward hiding away as trade secrets.
The link you provided contained couple of disheartening comments by students commenting on Boston University’s actions to protect their patent rights in technology for producing blue light-emitting diodes:
“Although I’m glad he was compensated, I’m worried as to how this will affect our chances of landing a job at these companies?”
This link and comment were from January 2014. Another comment was also troubling:
“… how much of this compensation will go into University funding? Does this mean our tuition spike won’t be another absurd $3K.”
Most liability insurance rates skyrocketed after 9/11. Many carriers pulled out of markets or dropped types of coverage altogether. My recollection is that the reinsurance firms were underfunded at the time of 9/11 due to the post dot.com market weakness.
Reminds me of the public discussion about introducing whole-body x-ray scanners in US airports. As I recall it was pretty much a privacy vs. terrorism argument. Cost-effectiveness of the project relative to other ways to enhance public safety wasn’t discussed.
Like those sold by Chertoff and associates?
“”personnel changes that follow a change in political Administrations.””
Two words for the writer == Adriana Gianturco
This post suggests something about 9/11 in 2001 lead to someone’s decision to shutdown small contractors by raising professional liability insurance rates by ten times. What happened? I was out of the business by 2001. The bottom dropped out of road job-shopping for me working on DoD Government contracts by the early 1990s. By that time I’d gone direct with a freeway-job contracting-consulting firm. The 2001 10x jump in professional liability insurance rates reported by this post smells a little fishy — a lot like other mysterious squeezes on small contracting firms, 1099s, and on contractor rates.
I remember a squeeze on small contracting firms and 1099s that took place in mid-1980s. I believe that squeeze was initiated by changes to IRS practices. Supposedly, too many small contracting firms and 1099s were not paying their taxes and the IRS was going after the firms they had contracted with to collect. The IRS was also intent on reducing the write-offs small contracting firms and 1099s could claim as business entities. As I recall — that was also around the time the Chapter S Corporate form was created although I have no idea what part if any that had in the squeeze on small players. Near that time the largest firm hiring contract help in the area I had moved to for contract work very deliberately stopped doing business with all but the five largest contracting firms on their books. The story told to us contractors was that the purchasing department wanted to simplify their accounting.
Don’t forget about the Microsoft lawsuit over contractor v. employee and whether or not Microsoft owed those individuals things like stock. A lot of the big companies started limiting 1099ers as well as agency workers to 11 month contracts after that before outsourcing the entire group to one company.
I wonder how that lawsuit would play out in today’s legal world or whether or not Prop 22 would have ever made it to the ballot back then.
Although it wobbles around a little, I think the main thrust of this post is that out-sourcing does not serve the long term interests of business? A simple case in point is the ongoing difficulty/near-impossibility of updating and maintaining old COBOL programs. Documents were skimped on or simply skipped and the staff who coded the programs were regarded as redundant. Contracting came in later, but the mentality that lead to outsourcing and the growth in contracting labor was already in play.
I didn’t notice any mention of the peculiar accounting practices in many firms and Government entities that made bringing in a contractor — even at a higher labor rate than a direct — less expensive on the books than hiring a direct. I believe it had something to do with the burden rate the firms and Government entities applied to direct employees versus those that applied to contract work. I don’t know the origins of these accounting practices or what part, if any, the tax codes played.
I also recall it was not so easy to just lay off direct employees in the 1970s and 1980s. By claiming directs lacked the skills required for a new contract or business initiative and bringing in contractors who had the skills — at least on paper — the firms could set about trimming their direct workforce. Of course older employees a decade or less from retirement were first to go. Managers seemed impressed that they had the power to let contractors go with an hours notice — time to pack your stuff into a box under the watch of security who escorted you out the door and pulled your badge. [Actually I heard stories of directs treated with similar alacrity by the large Aerospace firms. The difference being that they were first escorted to personnel to receive a severance check if they went quietly and signed a release, or to receive threats and no severance if they refused to sign the release.]
If businesses bothered to listen to their own bullshit about employees as ‘capital’ they might rethink the value of out-sourcing and contract labor — and other capital for that matter. That out-sourcing does not serve the long term interests of business seems obvious to me but then it also seems obvious the longest term US business management appears able to conceive of is about three-months.
Simply put, the executives long-term interest became in no way aligned with the business’ long-term interest. Why shareholder never noticed was and is still beyond me.
Your average ladder-climber parasite has an 18month window. If he/she is somewhere short of the executive suite by that time, they move laterally most often into another company. At that place, they are given “new guy” treatment and usually get at least one promotion (in the interview, they make it clear that it is expected). They can try for another promotion, or leverage this back to their old company going two rungs up the ladder instead of one.
Useless for getting anything done, let alone long-term.
The other interesting side effect of outsourcing is that managers have lost touch with the technical aspects of the work. I was just awarded a patent. Not one of the many managers I had while I was designing and implementing the system understood in the least what we were doing. One of the key team members had just been warned he was going to be let go by the company (we complained and he was kept and is now a technical fellow at the company).
This is is considerable contrast to how the company was run twenty to ten years prior. The managers were all generally highly skilled engineers themselves who had performed the work that they managed. Now, all the managers seem to have MBAs and manage by Excel and cost cutting. Their primary skill set seems to be no brainer cost cutting designed to maximize their performance bonus, and their golden parachute for when they finally manage to run the company into the ground.
I have spent forty years working in automation, designing, building and programming equipment for manufacturing complex products. The decline in the industry as a whole in America has been hard to watch. CEOs and managers have made decision that have quite literally wrecked our country. It was easy to see coming, but I felt like a lone voice in the wilderness complaining about this twenty years ago – heck even ten years ago. But I’m hoping now people are aware of what’s been done to our country, all because of greed.
All because of greed? Maybe, but there is a bunch of stupid, too.
My example of MBA madness, then. A telecommunications company I worked for years ago (think dialup modems and fractional t1, which should tell you how long ago this was) had a $5 million order assembled, boxed, on the pallet, sitting on the loading dock, truck en route, when the new director, freshly installed by corporate, canceled the order, told the salesman to notify the customer, “Sorry, we’re going in a different direction.” We poor schmucks in engineering were speechless, as was manufacturing.
You wrote: “I have spent forty years working in automation, designing, building and programming equipment for manufacturing complex products. The decline in the industry as a whole in America has been hard to watch.”
I can confirm this. I believe that part of the problem, particularly in the computer, electronics, and robotics industry is the “complexity barrier.” This means that the technology is now so complicated that managers cannot possibly understand in any meaningful way the systems/products their engineers are designing/building. The further up the chain you go, the less these managers understand, so that once you reach the c-suite, they know nothing, except to use buzzwords and bullshit.
At the same time, these managers pretend/tell themselves that they DO understand, and they use this (mis)understanding to tell their reports what to do, thereby further FUBARing everything.
You wrote: “One of the key team members had just been warned he was going to be let go by the company (we complained and he was kept and is now a technical fellow at the company).”
I thought IBM
Where do I begin…. I have been in IT for 40 years and have seen a lot in that time.
When I started in this business (I was trained by my employer) I had come to like it and thought I’d be good to go for the next 35 40 years, until 2 years later. That is when everybody in IT over the age of 50 was given the option of an early retirement or getting laid off within the next 6 months. All of a sudden my career was shortened by 10 years. As time went on I knew I had to work on my own as a contractor/consultant and when the opportunity rose I jumped. The first 5 years were wonderful then the outsourcing and H1-B visa hit. I had started seeing signs of it a couple of years earlier but thought it might take 10 – 15 years to take hold. Boy was I wrong. By 2002 it came with a vengence and being 50 years old at the time my options were were not good. I have been working essentially part time since then. Evidently, I had been part of the gig economy before I even knew there was a gig economy.
And yes it sucks.
I would have ended up as you did or not so well if I hadn’t been lucky enough to get a clearance to do DoD Government work [I made it employed to age 63]. That clearance was the only thing between me and being replaced by an H1-B worker. Even so, I faced layoff at least yearly as the contracts shifted around. Only a whole lot of luck and a little quick footwork saved me — emphasis on the luck. When it came time to suggest things for my children to look into as career choices the only advice I could offer was “Stay away from IT”.
Great post. Creeping consolidation, if not outright monopolization everywhere: A little change in the tax code here, a little change in anti-trust enforcement there, a little change in govt contracting rules, and financialization everywhere.
Thanks for this post.
About 10 years ago I was at a political fundraiser at the Fairmont, chatting with the then-police chief of San José, who said to me:
My job necessitated that I look at census demographic data. By the end of the Obama administration the 1.9 million population of the county comprising Silicon Valley had been overlaid by 250,000 H1-B workers from India alone — driving down wages while causing housing costs and traffic to skyrocket. All while half of U.S. STEM grads had not found employment in their field of study after 3 years.
These outsourcing decisions allow labor costs to be slashed by upwards of 90 percent, eroding customer service without rebating fees, while transferring the savings into the pockets of executives. None of this could have happened without pliant politicians — everybody knows this. It is at the core of the widespread hatred for Washington elites that is responsible for Trumpism.
H1-B workers set a price ceiling on labor, at least in the minds of execs. Any pressure to pay Americans what they used to earn is now referred to as a labor shortage.
Okay, so where are the sentences about Carter, Clinton & Obama in the author’s world?
The 90s and the Clinton years (e.g. the Year 2000 bug but there are so so many examples) were particularly important in this IT services narrative but they seem to be MIA. What happened in IT was a fully bipartisan policy decision. To imply anything else is frankly ludicrous.
One of the saddest things I ever saw was Honda’s robot, ASIMO, waving its arms around in front of a live orchestra. The musicians were professionals, and they could play, but I couldn’t escape a sense of humiliation. For all their expertise, that was the best gig they could get that night.
It looks like there are three themes in the post. The first is outsourcing, the second is political appointments and the third around patents.Looking at the roots of the issues with each you may come to something a little more fundamental that underlies all.
I have seen a lot of outsourcing particularly in IT and whilst mostly it is an abject failure there are a few successes. Those successes tend to be when the communication protocol is tightly defined and the outsourcing is of narrow scope to a company that heavily invests in the specialization and retention of the employees (Excellence rather than cost). Sometimes outsourcing is the result of slick salesman tricks, but I think mostly it is driven by a need for executives to make important decisions and being able to flex the size of the work force (Throwing bodies at things never works though). Large business has its own class system that involves remuneration for big and often decision making. The counter balance to bad decision making is often intelligent technical people within a organization who often become a target of decision makers. Disperse, divide, dumb down the business, don’t trust employees, find the worker who will accept the worst life/work balance and the decision maker is more likely to have their ambitions fulfilled.
In a similar way political appointments seem to be about suppressing challenges and queries from intelligent technical teams.
Patents could be looked at as a means to have income to invest badly in the business through poor decisions and get away with it.
What I think pulls things together is people with egos who have to make decisions being fearful of being reviled or caught out not really knowing what they are doing. What we think of as leaders are maybe no more than evangelists who need to entertain and keep people interested whether it is wall street or the general public. Fear of change, job loss, restriction of freedoms, persecution, different cultures seems to be driving a lot of choices. Listening, learning, delving into detail, respecting and thoughtful people don’t make entertaining super stars whilst peddling your own brand of fear does.
@David in Santa Cruz, November 5, 2020 at 4:57 pm
Thanks for the validation of what I witnessed in Silicon Valley during Oboma’s reign. No surprise that Biden plans to AMP up the Visas on Steroids, while the increasingly homeless citizens increasingly give up on life (e.g. Homeless people in L.A. increasingly are taking their lives by hanging https://www.latimes.com/california/story/2020-08-06/l-a-homeless-people-increasingly-are-taking-their-lives-by-hanging). July 2, 2020, Joe Biden says he will rescind Trump’s H-1B visa ban:
Welp, I guess none of the homeless, once productive and able to afford a roof over their heads, citizens of the US, built the country™.
I don’t like Trump, haven’t since I first was aware of him decades ago, and did not vote for him (I did not, and will likely never again vote for any Democrats either), but I despise Biden, Kamala, and the handlers (Obama, et al) far, far more for their total and deadly betrayal of the populace.