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Monday, November 30, 2009

Outsourcing Costs Companies More Money, Say Nobel Laureates

According to the recipients of this year's Nobel Prize in economics, Boeing’s costly, overdue production of its 787 Dreamliner could have been predicted. It is due to outsourcing.

Research conducted over the years by Oliver Williamson and Elinor Ostrom is now accepted by economists as proof that employees can't be viewed as just a financial transaction. Seriously? Yes, this how Williamson and Ostrom earned the Nobel, by showing why outsourcing is not only bad for American jobs it is bad for American business.

So how do you make a decision to outsource work? According to one professor at UC Berkeley
“I need to be very sure I can specify what I need in advance and wouldn’t have to ask for changes later” to make outsourcing contracts cost-effective. As anyone who has ever had to manage a project of any duration or complexity knows, that's the $100,000 question for which no one can ever be sure to have an answer. And if that's the central question on whether work should be outsourced well, American business is going to be in a world of hurt. (And you've probably already experienced it if you've ever had a complex question you've tried to ask of an overseas call center.)

BTW,
it seems that Boeing's answer to the question is that it needs more control over the complex production process. So it has reversed course canceling contracts and even acquiring some of the companies that were making the jet parts.

Sunday, November 22, 2009

Brother, can you spare $17/hour?

Economy watchers use to wonder if this generation of Americans would live as comfortable a middle-class life as did our parents. Forget about this generation (the answer is no) how about the generation before us? In what has yet to be acknowledged by our leaders and the mainstream media, baby boomers (defined as being between 45 and 64 years old) have seen a spectacular erosion in their lifestyle during the past decade - and it's getting worst.

The culprit you would guess is the U.S. recession. Yes that's part of the story. But the bigger contributor, the elephant in the room, is the steady shipping of jobs out of the country every year for almost 20 years.

Take the story of Joseph Paccione, chronicled in this weekend's paper. Mr. Paccione, aged 55, spent 30 years working for 2 companies as a technology specialist. A year ago he was laid off from his job at Lockheed Martin. His job search yielded only a part-time position making $17 an hour. But he still hoped it would turn into a full-time job - no luck. Mr. Paccione supports a typical American family of 5 and no one in the family has health insurance. (Side note: the debate you may have heard of between whether America needs jobs or health care first is false - American needs both.)

Let me put this into perspective. $17 per hour is $33K per year or about $45K if you factor in benefits, increasingly rare. A full-time worker with Mr. Paccione's IT skills, say in Beijing or Bangalore, costs at least $40K (fully-loaded, as accountants say, with benefits, cost of facilities, training, and recruiting) but that worker is probably younger than 35 and has no family to support. And if you were looking for someone with Mr. Paccione's managerial skill and experience he would be equivalent to the salary Mr. Paccione made at Lockheed Martin. How can I be sure? I have had to make those painful hiring decisions in my career in Silicon Valley.

If you are an employer reading this, would you seriously not consider hiring someone like Mr. Paccione, rather than sending his job offshore? (His temporary job has ended but his manager was so impressed, she is willing to give him a stellar recommendation.)

America has lost its way following the free-market, free-trade pied-pipers. If you think business voices and political leaders (who run for office using business money) have your jobs at heart when they advocate for NAFTA or free trade with Asia, I have a mortgage portfolio to sell you from Lehman Brothers.

And I'm afraid to tell you that the situation is getting worse because not only are white collar, "knowledge-worker" jobs not coming back, the surplus of wealth the middle-class built over the past 50 years is evaporating faster than the polar icecaps due to the big ticket items: energy, health care, education and housing costs. For those of us who grew up hearing stories of the depression (a rarity these days) or of immigrant sacrifices (as I have from my parents), it's time to start paying attention, thrifty days are ahead.