Thursday, August 12, 2004

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Outsourcing The Boss

Christopher Hayes, citing NYT tax reporter David Cay Johnston, has a modest proposal of his own: outsource executives. He argues that corporations could save a whole lot more money—and dampen public anger at outsourcing—if they outsourced some of their most expensive employees, their senior management. I suppose this hasn’t caught fire because executives are the ones who make outsourcing decisions, and they wouldn’t be keen to put themselves out of a job. You can’t out source “the man”—can you? More seriously, as Dan explains in his FA piece, only certain specific, standardized business functions are conducive to outsourcing, not complex, interactive tasks requiring geographic proximity, like management. Which, incidentally, is why most business functions will not be outsourced. I think emphasizing that fact would be the best way to address public fears about outsourcing. As for whether executives are being paid too much, that's a separate issue...

Nevertheless, Hayes’ post brings to mind a classic Kinsley column on editors being replaced by technology. The money quote:

We must distinguish, however, between special pleading and legitimate alarm about deeply troubling developments. It is one thing to sacrifice textile workers and auto workers on the altar of progress. It is quite another to start throwing journalists into the flames. And the difference is? Well, it's very different. Completely different. Couldn't be more different, quite frankly, my good madam, because … because … well, it occurs to me that I'm a journalist. This puts the whole situation in a new perspective

Surely, this brought a tear to the eye of this blog’s now silenced editor, wherever he may be.

posted by on 08.12.04 at 10:21 PM


only certain specific, standardized business functions are conducive to outsourcing, not complex, interactive tasks.... I think emphasizing that fact would be the best way to address public fears about outsourcing.

You're kidding, right?

Telling blue collar workers that their work is simple-minded and non-interactive, while reassuring them that their managers will keep thier jobs since, we're saying, their managers have more sophisticated skills? Sounds like a political winner to me.

The only way to sell outsourcing is to have a social security network, including unemployment benefits, job re-training, and health care, one that says to those whose jobs might be outsourced - "We are doing something that is for the greater good. It might cost some of you your jobs though. Don't worry. We will look after you, because we value you as people."

posted by: Andrew Edwards on 08.12.04 at 10:21 PM [permalink]

"certain specific, standardized business functions are conducive to outsourcing, not complex, interactive tasks requiring geographic proximity, like management."

If upper management can function during 18 holes of mid-day golf, or at the country club, or lunching at the Four Seasons, or on the corporate jet en route to Palm Springs, I'm sure someone in India could function just as well.

At that level, it's all about delegation anyway. Steve Jobs is CEO of *two* companies at the same time, and they're not especially close to each other.

And, finally, top-level executives at US companies have no problem managing their overseas operations, so it's pretty clear that executives don't need to be present to function.

Now, in the case of department-level managers, it probably does help to be present. But in that case, there's always cheap H1B and L1 foreign workers.

posted by: Jon H on 08.12.04 at 10:21 PM [permalink]

More blather about a phony problem. Let's go back to basics.

Outsourcing and offshoring are not the same thing. Most of the outsourcing is provided by US-based firms (for ex, Gevity for HR, BMC's Remedy unit for IT help desk).

Outsourcing is nothing more than the externalization of internal, back-office, non-core business processes that have nothing to do with a company's particular expertise or competitive advantage. There is absolutely no reason that most back-office, cost-center processes-- such as claims processing for insurance companies or collections and A/P for any company-- cannot be more efficiently and effectively done by an external service provider.

When companies move internal cost centers outside of the company, they can reassign or retrain and reassign talented employees into activities that actually increase the company's revenues and its competitive advantage. Not true with HR but certainly true with many finance-related functions in which a talented analyst can move into, say, a product research, or competitive research or other role for a front-office business unit.

When such reassignment occurs--which I suspect is the majority of individual non-HR outsourcing cases-- individuals move from cost centers to profit centers. Can you say, "productivity increase"?

When jobs are moved outside the company, the individuals involved can often find jobs quickly with the outsourcing service provider. An HR expert for example can easily find work today with any number of specialty vendors; that field is booming.

The one white-collar functional area where employees are indeed vulnerable is IT, which, in contrast to HR or many sensitive financial functions, can easily be sent offshore. This inevitable trend is unfortunate, but one should not confuse the loss of coding jobs-- a tiny subset of jobs within most corporations-- with the much larger outsourcing job trend, which is generally win-win for back-office pros and for corporations.

In future, few companies will do more than a handful of HR functions internally and many other F&A jobs will be externalized, or outsourced, as well. The jobs that will remain are those where there is tremendous expertise, often local expertise: tax and payroll-related laws in various US states, for ex. In other words, the senior people are the least likely to be outsourced, and the junior people are best advised to either join the external service providers and consultants or else develop specializations that contribute to revenue.

In short, develop a real competitive advantage and help a company refine its competitive advantages. This is how you create real economic value. Isn't this what we want our people to strive to do?

posted by: lex on 08.12.04 at 10:21 PM [permalink]

The journalism example raises the question faced by all profit-seeking firms: where's the source of value in the company's product offering? How do the company's front-line employees contribute to differentiating, and making superior, that product in the market?

Kinsley's journalistic offering is highly differentiated and in a variety of ways superior to that of the competition. No way you could externalize his contribution. Same is true for distinctive opinion columnists across the spectrum.

On the reporting side, journalists need to ask themselves how exactly they provide value that's superior to what I can access for free from any number of online sources: wire services, bloggers, foreign news outlets.

Are mainstream media reporters' sources better? Sometimes yes; increasingly no.

Do they have better news instincts than bloggers? Usually yes-- Bergergate was way overhyped by the blogosphere, as are Kerry's Cambodia follies, but Trent Lott's statements were not.

Where mainstream reporters have undeniable superiority is in local coverage: great sources, access, excellent feel for what's news and what matters to the local audience.

Where mainstream reporters IMHO particularly suck is in overseas coverage. Rarely do the journalists who parachute into Moscow or Cairo or Beijing for a couple of years even speak the language. Almost never do these clowns--even the ones who've been on the scene for years-- have good sources in the one area that really matters in non-western, non-transparent societies: the government.

For example, the Russia coverage of the NYTimes is a complete joke: their revolving door of journalists provides no access to sources within the institutions that run that country, ie the security services, the Kremlin, the bandit-industrial groups. Neither do these clueless sojourners have a good idea of what's newsworthy in that country. No attention is paid to the truly big stories of Russia, such as the complete collapse of Russian agriculture, the incompetence of the military and its vulnerability to theft of NBC weapons, the country's impending breakup into European and (China-dminated) Asian regional fiefdoms, etc.

Why not? Again, no sources in these areas, plus a reluctance of Moscow-based correspondents to get on rickety planes and travel to the shithole destinations where 90% of the population lives.
Without question, overseas coverage should be "outsourced" to on-the-scene native reporters.

Based on the above, one can expect the newsmedia to be increasingly local in nature, a constellation of local sources aggregated and filtered by a variety of editors, some of then inside the news organization (Bill Keller and peers), some of them outside the organization (Glenn Reynolds, Kevin Drum, A. Sullivan, Dan D,, etc).

posted by: lex on 08.12.04 at 10:21 PM [permalink]

Agree, Jon H. and Andrew Edwards.
lex is in outsourcing business and continually demonstrates his outright disdain for Americans
and America.

posted by: Alex on 08.12.04 at 10:21 PM [permalink]

I find my local newsprint media to be non-local. Mostly it's a Knight-Ridder rehash of the NYT and wire-services, complete with inbuilt biases and distortions - the heasdline news is more like the NYT coverage of Russia that is mentioned. Many of the by-line folks are from *way* out-of-town, who as far as I can tell cherry-picked a plum location assignment. There are few born-and-bred local newspersons with a common, historical awareness of our region - the "feel" mentioned. I don't believe any of them ever rode their bicycles through the now-vanished apricot orchards as a kid, and I wouldn't hesitate to outsource any of 'em.

posted by: -keith in mtn. view on 08.12.04 at 10:21 PM [permalink]


At some point clever news media folks will recognize that non-local coverage is largely borrowed (and that, largely junk) and that local news, buzz, useful info is increasingly provided via online communities like They will then co-opt the local sources, beef up their local coverage substantially, and give up on overseas bureaus and paying wire services for foreign coverage.

Otherwise, I think the traditional newspaper will slowly disappear. Their bogus circulation numbers cannot hide the rot within.

posted by: lex on 08.12.04 at 10:21 PM [permalink]


When blue collar jobs started being replaced with robots on assembly lines and computer programmed lathes in manufacturing plants the writing was on the wall. It is the same cost saving exercise just in a different form. Businesses do it on their scale, you do it on yours…

Jon H

Yours are obviously the comments of someone that has never conducted business in any of the venues that you mentioned and therefore are not able to comprehend the value to a business of those ‘tools’ of businesses of any size. It betrays a certain lack of knowledge about business practices in ‘the real world’. Even an academic can tell you that there are unique opportunities that present themselves and can be capitalized on while having ‘dinner with the Dean’ that don’t exist during ‘posted office hours’.

posted by: Phocion on 08.12.04 at 10:21 PM [permalink]

If large companies sole focus is the bottom line, and the whole world becomes their oyster, who or what will fill the void at the local level. I mean things like company big wigs participating in local chambers of commerce, local fundraisers, pushing for better local services and schools that help the company attract and keep skilled workers, sponsoring softball leagues? These may seem like trite issues, but for years the big local employers were a real force, often for the good, in many areas of the country. Yes, there were plenty that also polluted local water sources, held local and state govts hostage by insisting on tax breaks, rezonings, etc., but don't underestimate the value of the companies that had been around for 50 years and expected to remain around for the forseable future. There must be affects that no one is talking about. Think about the long examined behavior of gas stations located next to the highway, where they have no ties to their customer base, often will never see them again, and the gas station on the corner of the town square, where all the locals are repeat customers. You expect to get ripped off byt he highway people and you have more influence over the local station, which has an incentive to be competitive and honest.

posted by: alex on 08.12.04 at 10:21 PM [permalink]


What you point out is nothing more than standard growth and expansion. It can be traced all the way back to Germany and the development of 'cottage industries'. Businesses will always want to grow. They often need to in order to survive.

I think that in many of these cases we, the public, have no one to blame but ourselves when it comes to business striving to be mega-sized and, in turn, caring only about the bottom line. When, in recent years, the investor class grew larger and larger they demanded a greater and greater return on their investment. If stocks don't preform like gang busters they get traded away. A single bad quarter causes shareholders to sell. How many people hold a stock for years on end like they did way back when? Public businesses have no choice but to answer to the markets, in the NYSE sense, at the cost of the local public.

It would be nice to return to those idealic days but it just isn't going to happen...unless you find that remote control from "Pleasantville".

I think that your highway gas station is a good example of the trend. When you, or anyone else, travel long distances via the interstates do you get off the highway and drive a few miles into the town to but your gas? Probably pay the marked up price and don't think twice about it. What is an extra dollar or so for that fill up to you anyway? But now multiply that by the multitude of dollars per fill up that station takes in. Acme Gas takes all that profit and puts up a station in that little town that you skipped and competes with the local station. That Acme gas staion doesn't need to be responsive because it has a larger market than just what that town provides since its profits are pooled with the station by the highway that you patronized as well as hundreds of others. Plus, if it so chooses, it can under cut the local guy because he has more profits to draw from and before too long the old local guy goes under leaving only the Acme(s) from which to buy.

But if you really want to look into who is responsible for that you should probably look pass the highway station patron and look at the townspeople. Chances are they didn't want the highway to go through the town because it would change the character of the place. But in the end it does so anyway.

Change of that sort can only be put off for so long. 'Progess' is inevitable.

posted by: Phocion on 08.12.04 at 10:21 PM [permalink]

Phocian -
This is 4:59 Alex again. Ill sign alexp. Just realized there is another Alex posting.

I wasn't looking to place "blame" or analyze the why so much as to point out the is. An historical source of advocacy, employment, stability and income for many towns and cities is drying up. And to wonder what is going to fill those voids.

I would like to bring up a couple of issues with your post, however. I think there are millions of investers who would be happy to own shares in stable firms that pay out reasonable, but consistent dividends year after year. Not everyone is foaming at the mouth to buy and sell constantly in search of the big, short term payoff. Public businesses do have options. I think certain risk averse or risk neutral investors and fund managers (especially municipalities, school districts, etc) would flock to a public company that took the so-called old fashioned approach. Reasonable, consistent profits shared with stockholders in the form of reasonable, consistent dividends. A company where the CEO and other upper echelon employees are making reasonable salaries, and have reasonable retirement packages. A company where salary is based on balance sheet not stock performance. A company whose board did not consist of overpaid corporate celebrities and the politically connected who are not advocating for the shareholders.

You state: "When, in recent years, the investor class grew larger and larger they demanded a greater and greater return on their investment. If stocks don't preform like gang busters they get traded away. A single bad quarter causes shareholders to sell." Most of the huge growth spurt of the investor class is due to people investing in retirement accounts and the loosening up of investment parameters for local govts, school districts, authorities and the like. And most of IRA and 401k type accounts are in mutual funds where the investor can buy into or get out of a particular fund but cannot say 'sell GE immediately!"

I think the CEOs and big fund managers are driving the quarterly earning/stock price frenzy, not a large portion of the new investor class. It is the top management and hot shot mutual fund managers that need to milk the quarterly stock price quickly, not my local school district, or the 39 yr old risk neutral person saving for retirement. These types of investors would prefer a smaller but consistent gain to a riskier potentially bigger short term gain.

posted by: alexp on 08.12.04 at 10:21 PM [permalink]

Phocion writes: "Even an academic can tell you that there are unique opportunities that present themselves and can be capitalized on while having ‘dinner with the Dean’ that don’t exist during ‘posted office hours’."

You don't think an offshored CEO, in India, would have such opportunities in India?

And better yet, the connections formed that way would come already set up with cheap Indian labor. Bonus!

And as more and more US companies offshored their top management to India, the better it would get. The offshored CEO of HP and the offshored CEO of Boise Cascade Paper could shmooze it up on the golf course - in Bangalore.

posted by: Jon H on 08.12.04 at 10:21 PM [permalink]

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