“The biggest weakness I think we have in America is we have forgotten the long term”, says Larry Fink the founder and CEO of BlackRock, Inc., the world’s largest asset management company. A similar sentiment can be heard from Warren Buffett, the quintessential investor. What does this have to do with offshoring? Offshoring is, I believe, a perfectly acceptable method for cost management – usually. I say usually, because in our current situation, offshoring’s short-term gains could have undesirable long-term consequences.
Technology broke the bonds of co-location previously required for many jobs. Now co-workers, or even employee and customer could be across the room, across the country, or across the globe. This distance independence allows the substitution of cheaper labor from other countries providing an effective way of reducing costs. The offshoring market is estimated at around $100 billion a year and growing at around 20 percent annually. For the most part, workers are not being hurt by offshoring, at least at the macro-level, if the economy can create new jobs of equal or greater value, that exceed or at least match, the level of offshoring. And it more or less has – until now.
Companies considering offshoring face a short term verses long term conundrum, whether they know it or not. While offshoring might be a good short-term decision, its long-term benefits are questionable. Why? The US consumer, that’s why.
We live in a consumer driven economy. Some countries, like China, are export driven, deriving the majority of their income from selling their wares outside their borders. Not us. We rely on the US middle-class consumer to buy our goods and services. Three significant factors are now converging to upset our middle-class driven economic applecart. First, while consumption has risen over the last four decades, real wages have not, resulting in the US consumer going into debt – significant debt – to keep the corporate lights on. In 2009, US consumer debt was nearly $2.5 trillion dollars or almost $8,100 for every man, woman and child in the country.
Second, if that’s not bad enough, increasingly the goods and services the US consumer is buying are made in foreign countries by foreign workers. For four decades now our net imports have eclipsed our net exports. The trade deficit for the month of August 2010 was $46 billion. Neither our consumer debt nor our four decades old trade deficits are sustainable.
What does this have to do with offshoring? Well, offshoring is the third leg of our poverty troika. By taking jobs from middle-class consumers we are eating our seed corn. We currently have 15 million Americans out of work by government count, and up to 50 percent more according to other sources. Workers we rely on to buy our refrigerators, purchase our cars, and eat our Big Macs.
And things could go from bad to worse. According to a 2007 Princeton study, and backed up by one done at the Harvard Business School the following year, somewhere between 25 and 42 percent of all American jobs – a potential 57 million US jobs – are “offshorable”. Unemployment even close to that level would place significant pressure on the wages of those who have jobs, lowering middle-class purchasing power even more. The result would be a customer base effectively cut in half.
In short, the system is broke. This reality seems to fly in the face of our visceral belief in free trade which, after all, brings cheaper goods to the US. The flood of products from lower cost producing nations means US consumers pay less for the bobbles that adorn their heavily mortgaged homes. But since consumers are making less in real dollars than they did a few decades ago, or not making anything at all if unemployed, they are slowly going broke saving money on these imports.
In general, free trade and open competition are the right courses of action for an industrialized nation. They are the activities, if not the life blood, of a healthy economy. The operative word here is healthy. While some activities are good and proper for a healthy human, those same activities could be deleterious when the person in sick. We have an ailing economy and what was appropriate for it when it was healthy might turn out to be injurious now that it is sick. For business this means that, while corporate goals may remain unchanged, the times dictate a strategy correction if we are to realize those goals.
Let’s institute a temporary suspension of offshoring until the middle class can get back on its consuming feet. How long? Don’t know. Maybe two years, maybe five years. Certainly until the economy can, once again, create more jobs of equal or greater value than it loses.
The one thing that economists agree on (and maybe the only thing) is that economies like stability. We need a stable work force, a stable credit market, a stable set of government regulations, a stable consumer base, and a stable almost anything else you think of, for a good business environment. But right now things are out of wack and all Americans, from your grocer to your CEO, are going to suffer unless we get back on track. We need a prosperous customer base that is willing to shell out hard earned dollars for the goods and services our companies peddle. What can we do to restore that stability?
Well one thing we can do is institute a temporary suspension of offshoring until the middle class can get back on its consuming feet. How long? Don’t know. Maybe two years, maybe five years. Certainly until the economy can, once again, create more jobs of equal or greater value than it loses.
How much impact will a suspension of offshoring have on joblessness? Well, probably less than one would hope. It took us forty years and many hands for us to get into this mess. No one remedy is going to solve it. Reducing or temporarily eliminating offshoring will help. And saving just one job is a big thing, especially if that job is yours.
Is this some flag waving appeal to patriotism? Not at all, it is just good long-term business sense.
George Tillmann is a former CIO, management consultant, and the author of The Business-Oriented CIO (John Wiley & Sons, 2008). He can be reached at [email protected].