Table Of ContentP1:000
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AN EASY OUT
Corporate America’s Addiction to
Outsourcing
Jack Buffington
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LibraryofCongressCataloging-in-PublicationData
Buffington,Jack.
Aneasyout:corporateAmerica’saddictiontooutsourcing/JackBuffington.
p. cm.
Includesbibliographicalreferencesandindex.
ISBN978–0–313–34502–9(alk.paper)
1.Contractingout—UnitedStates. I.Title.
HD2365.B84 2007
338.6(cid:1)3–dc22 2007027851
BritishLibraryCataloguinginPublicationDataisavailable.
Copyright(cid:2)c 2007byJackBuffington
Allrightsreserved.Noportionofthisbookmaybe
reproduced,byanyprocessortechnique,withoutthe
expresswrittenconsentofthepublisher.
LibraryofCongressCatalogCardNumber:2007027851
ISBN-13:978–0–313–34502–9
Firstpublishedin2007
PraegerPublishers,88PostRoadWest,Westport,CT06881
AnimprintofGreenwoodPublishingGroup,Inc.
www.praeger.com
PrintedintheUnitedStatesofAmerica
Thepaperusedinthisbookcomplieswiththe
PermanentPaperStandardissuedbytheNational
InformationStandardsOrganization(Z39.48–1984).
10 9 8 7 6 5 4 3 2 1
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Contents
Illustrations ix
1 TheNeedforProductivity 1
2 TheHistoryandMythsofOutsourcing 15
3 StrangeBedfellows—TheOpportunistsofOutsourcing 32
4 MarketMyopia,Enron,andPoliticalOverreaction 48
5 TheEconomicsofWho’sRightandWho’sWrong 59
6 ScrewIt,I’llOutsource 73
7 The“DifficultIn”overthe“EasyOut” 86
8 FearofaGlobalPlanet 103
9 TheLastoftheSpirits 117
10 Solutions,WhatIf... 129
Conclusion:GetInvolved 165
Notes 169
Bibliography 175
Index 183
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Illustrations
FIGURES
2.1 IndiaTradewithUnitedStates 20
2.2 ChinaTradewithUnitedStates 20
2.3 U.S.vs.IndianWages 25
3.1 ReasonsforTemporaryEmployment 42
9.1 GrossWorldProduct 121
10.1 SolutionstotheEasyOut 130
TABLES
7.1 EasyOutvs.DifficultIn 87
10.1 2007FederalBudgetforStatisticalAnalysis 148
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CHAPTER ONE
The Need for Productivity
DuringtheearlyninetieswhenIwasagraduatestudent,Americabecameobsessed
withfearoftheexplodingJapaneseeconomy.Japan’seconomicgrowthratesof
10%inthesixties,5%intheseventies,and4%intheeightieswereviewedasa
threattooureconomicwell-being.ManufacturingcentersinAmericabecamerust
belts, and coming from a family with roots in blue-collar labor, I paid attention
towhatwashappening.EventhoughIwastaughtinschoolthatitwasAmerica’s
destinytoevolvefromanindustrialtoaninformation-basedeconomy,Ithought
therewassomethingwrongwiththistheory.NotuntilIjoinedthecorporateranks
didIbegintounderstandhowimportanttheconceptofproductivitywastolarge
corporations, achieved or not. When I accepted my first professional position in
1990,Iwasthreemonthsawayfromhavingtosurvivemassivewavesoflayoffs
atthecompany,thefirstlayoffsinthecompany’shistory.Iwondered,sometimes
aloud,whytheleaderswhowerebeingforcedfrompowerneverthoughtthrough
theneedforproductivity,andwhethertherewasarealizationthattheresultwas
that thousands of employees would need to lose their jobs. For the next seven
years, I learned how to survive within the company that continuously laid off
people, Black Friday after Black Friday, year after year. I eventually became a
manager,andasariteofpassage, hadtolayofffourmanagers reportingtome,
eacholdenoughtobemyfather,withtwentytothirtyyearsofexperience.Was
productivitythesamethingaslayingpeopleoff,Ibegantowonder?
Having become disenchanted with the manner in which the corporate world
viewed productivity, I sought to fully understand the concept of productivity
through the application of academic research. I conducted work on a doctoral
dissertation, seeking to determine how U.S. corporations could become more
productiveandcompetitive.Armedwiththisknowledge,andnowbeingthelate
1990s,IwentinthedirectionofBigFiveconsultingasanavenueinwhichtoapply
mypassionandnewfoundknowledge.Insteadofbecomingtheproductivityguru
thatIlongedtobecome,Iwasforcedtobeanagentofthefirm,seekingprimarily
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2 AnEasyOut
to find better ways to increase revenue billing at the client site. In many cases,
clientsweren’tinterestedindifficultsolutionsthatinvolvedhardwork,butrather
ready-made, instant answers. This is not a critique on the consulting firms, but
ratherastatementregardingCorporateAmerica’sreluctancetodowhatisrequired
tofixtheirownproblems.ItbecamecleartomethatmostU.S.corporationswere
notwillingtodotheheavyliftingthatitwouldtaketobecomemoreproductive.
Shortly thereafter, I distanced myself from the cottage industry of Big Five
consultingandmovedontothenextbigthinginAmericanbusiness:thedot-com
craze. What better way to perfect the concept of productivity in the corporate
setting than to lead dot-com initiatives within a traditional company? I became
thefirstDirectorofe-Businessfora200-year-oldorganization,andthereafterfor
a125-year-oldorganization.Manyofmycolleagueslaughedatmeforseekingto
applye-businessprinciplesatold,traditionalcompaniesratherthandynamicnew-
ageones.Intheend,someofmybestproductivityachievementswereinpreventing
departmentsatthecorporationsfromwastingresourcesofe-businessventureswith
novalue.Fromtheselessons,Ilearnedthatsomeofthebestproductivitydecisions
thatacompanycanmakearetheonesthatavoidpoordecisions.
Mynextstepinthejourneyinsearchofproductivitywasbacktowhereitall
started:inamanufacturingsetting.WithdreamsofHenryFord,FrederickTaylor,
and engineered standards dancing in my head, I felt relieved to finally be back
atthelastbastionofhardworkwheremypassionforproductivityimprovements
couldbelaunched. Andyetonceagain,mydreamturnedintoamirage.Instead
ofbeingaproductivityguru,Ibecamethehenchmanofoutsourcing,seekingcost
reduction only by making problems go away. As in consulting, outsourcing has
become a cottage industry, with the promise to the customer that productivity
canbeachievedthroughsimplyhandingthekeystothecarovertoathirdparty
with supposed core competency expertise and/or lower labor cost. At this stage
of the journey, I realized that the typical American corporation would do just
aboutanythingtoavoidfacinguptoandaddressingitsproblemsandtheconcept
of outsourcing was now the best way to prevent it from ever having to do that.
It is an easy out. Today, it is difficult for the American executive to suggest
otherwise.
In just fifteen years of my career, I have seen massive waves of layoffs, hap-
peningyearoveryearoveryear.Ihaveseenthe“wizards”ofconsultingdevelop
servicesandproductsaimedatimprovingacompany’sperformance,andIhave
seen the dot-com craze take off like a rocket, and then pathetically crumple to
the ground like an injured bird. And just lately, I have seen and taken part in
the latest alternative to good old-fashioned productivity focus within a corpora-
tionintheeffortsofoutsourcingandoffshoring.Certainly,somecompanieshave
focused energy on productivity, and there are strong methodologies being used
thatsupportsuchefforts,suchasSixSigmaandKaizen,whenappliedappropri-
ately. But for sure, these efforts have not achieved the passion and rage within
American business as have layoffs, the consulting craze, dot-comism, and now
outsourcingandoffshoring.Mypremiseisthatwhileachievingtrueproductivity
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TheNeedforProductivity 3
improvementwithinalargecorporationisveryhardandoften-contentiouswork,
thesealternativesareoftentheeasyout.Inthisbook,you’lllearnhowbadlytaking
easyoutshas,andwill,hurtU.S.corporationsintheglobaleconomy.Thereare
certainlyalternativestoeasyoutsthatcorporateexecutives,workers,laborunions,
academics,consultingfirms,andpoliticiansmustconsideriftheywishtobeapart
ofwin–winsolutionsthatassistourcorporationsaswellasourworkforce.Yetfor
thistooccur,everyonemustbewillingtoreformandthinkthroughtheproblems
without the buzzwords of the current day. To use an often-overused corporate
phrase,wemustthinkoutofthebox.Ifwedon’t,wewillnotbecompetitivewith
thegrowingeconomiesofChinaandIndiainthefuture.
Estimating job losses due to outsourcing varies from source to source, and
nobodyreallyknowsthetrueimpact.In2004,TheCenterforAmericanProgress
noted a range of 300,000–995,000 of net lost jobs to date (2004), projected job
lossesinthefutureof3.3–6million,andjobsatriskof14.1million,allonabase
of 140 million American workers.1 In a longitudinal study on the use of third
partylogisticsproviders(3PLs),itwasreportedthat70–75%ofallcompaniesin
theUnitedStatesuse3PLsforsomeoralloftheirfunctions.2 Isuspectthatifall
typesofoutsourcingservicesareconsidered,almosteveryFortune500company
outsourcessomefunctionoranotherwithintheUnitedStates,andoffshoresquite
abitmore.Butwemustbeclear:thereistraditionaloutsourcing,whichessentially
istiedtothedefinitionofacorecompetencyandisprimarilydomestic,andthereis
offshoring,whichistypicallytiedtoglobalization,andlow-cost-countrysourcing.
Thedistinctionbetweenthesetwotypesofserviceswillbeimportantforthereader
tounderstandthroughoutthechaptersofthisbook.
SowhatdoesAmericaoutsource/offshore?Abetterquestionmightbe,What
doesn’t America outsource/offshore? Let’s begin with Wal-Mart, the world’s
largestretailer.It’snotonlytheworld’slargestretailer,butalsotheworld’slargest
toystore,andthelargestgroceryretailerintheUnitedStates.Itisestimatedthata
staggering93%ofallhouseholdsshopatWal-Martatleastonceayear.In1995,
Wal-Martimported6%ofitsmerchandiseversus60%in2004,andover70%in
2007!Aswell,Wal-MartitselfaccountsforoneeighthofallexportsfromChina
to the United States, and 80% of its worldwide factory suppliers are in China.3
TheWal-Martmodelistheperfectfitforoutsourcing/offshoringbecauseitsvery
raisond’etreislowerpricesonmainlysimplemanufacturedproducts.Thatbike
thatyouboughtyourdaughterforherbirthdayatsuchagoodprice?Youmayhave
bought it at Wal-Mart (No. 1 retailer of bikes), and it’s 98% likely that the bike
wasbuiltinaplacelikeChinaorMexico.4 ThereisstoryafterstoryofWal-Mart
squeezing American-based manufacturers to either lose a contract or to have to
source their production from out of China, Mexico, Vietnam, or elsewhere. We
assume that the Wal-Mart model of “lowest prices, always” must lead the labor
ofmanufacturingtocontinuallycheaperalternatives,butisthisnecessarilytrue?
CanAmericancorporationscompeteagainsttheChinaPricethroughprocessim-
provementsandgreatertechnologicalinnovation?Beforewerespondnegatively,
wemustunderstandthenewdefinitionofproductivity.
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4 AnEasyOut
Today,itisnotastretchtosuggestthatWal-Martisengagedinajointventure
with China. If Wal-Mart were a separate nation, it alone would be China’s #5
tradingpartner,aheadofBritainandGermany.5 ButareWal-MartandChinathe
villains in this story, or are U.S. corporations, their workforces, consumers, and
American society in general to blame? We owe it to ourselves to think through
this,frommorethanjustakeep-jobs-in-Americaperspective.Letmeclearlystate
mydisagreementwiththeprotectionistobjectiveofkeepingjobsinAmerica:that
modelhasnotandcannotmakesenseinaglobal,wiredeconomy.Butontheother
hand, the professed globalists appear to be mesmerized solely by the $1.00-an-
hour labor rates in Chinese factories (compared to $23.00 in the United States),
or$20anhourforeducatedsoftwareengineersinIndia(comparedto$125–$150
intheUnitedStates).Canournation’soutsourcingpolicyaffordtobesimplyyes
orno,blackorwhite?
Some economists suggest that old, traditional economic tenets are tumbling
downgiventhedualemergenceofChinaandIndia,andtechnologicalinnovations
liketheInternet.Backinthenineties,nolessthantheworld’smostfamousman-
agement theorist, the late (and definitely great) Peter Drucker advised us that it
was acceptable for us to transform ourselves into this new Information Age and
leave the manufacturing to developing nations.6 Yet today, emerging economies
like India and China are capturing sophisticated Information Age functions that
shouldbeacompetitiveadvantagetotheUnitedStates.Chinaisbecomingincreas-
inglyefficientandsophisticatedinmanufacturing,andIndiaiswinningthebattle
ofwhite-collarbusinessprocessoutsourcing(BPO).Thepatriarchofmodern-day
economics,PaulSamuelson,nowquestionswhethertheemergenceofChinaand
India will be good for the United States, which is a radical shift in thinking.
Three million gross manufacturing jobs have been lost to China during the six
yearsoftheBushadministration.PerMetaGroup,anITconsultingresearchfirm,
bigU.S.companiesareeliminating500to2,000ITemployeesatatime.Future
trendsindicatethatjoblosseswillcontinuetowardhigher-educated,white-collar
work,whichfliesinthefaceofconventionaleconomics.Wemustbegintolook
atoutsourcingmuchdifferentlythanwehaveinthepast.
Ironically,theU.S.Governmenthasrecentlyreportedournation’sstrongpro-
ductivity growth rates. The third quarter 2006 report from the Bureau of Labor
Statistics(BLS)indicatesthatproductivitykeepsincreasingintheUnitedStates,
up 5.9% for manufacturing. The Economic Report of the President, in February
2006,showedthatproductivityhadgrownatafasterpaceforany4.5-yearperiod
(2001–2005) since 1948, and a strong rate in 2006 as well.7 The paradigm has
changed: productivity success stories of the past won’t do, as the result of an
emergingChinaandIndia.Thepastisirrelevant.Weneedtounderstandthenew
definitionofproductivityinthehypercompetitiveglobaleconomy.
It has and does continue to disappoint me how freely Corporate America
is willing to outsource its problems without first understanding them. I have
always believed that if a company wants to properly outsource or offshore, it
needstohealitswoundsbeforetheresponsibilityforthisfunctionisdelegatedto
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TheNeedforProductivity 5
somethirdpartytofix.Thisismymainproblem withmuchofoutsourcing and
offshoring: not that it is not or cannot lead to strong productivity and financial
results, but rather that it too often leads to the sweeping of the dirt underneath
therug.Asacorporatemanager,ithasbeenrelativelyeasyformetogetsupport
foroutsourcing/offshoringinitiatives,butnotforpureproductivity,process-based
solutions.Nomatterwhatthecorporationoutsources,itcannotoutsourcethefixing
ofitsownmanagerial/operationalproblems.VeryfewinCorporateAmericaare
willingtoopentheirclosetsandexposetheskeletons.Weneedtofacetheseharsh
realities,andsoon.Companiescannotachievetrueproductivityfromoutsourcing
asameanstoanend.
In a Harvard Business Review (HBR) article in 1990, C. K. Prahalad and
Gary Hamel introduced the term core competency as “an area of specialized
expertise that is the result of harmonizing complex streams of technology and
work activity.”8 For example, Volvo’s core competency has been shown to be
safety, while Honda’s has been in the efficiency of its engines. With this theory
becoming popular in business circles in the late eighties, corporations began to
think about what they had expertise in, and what they did not. Almost at the
sametime(somethink1989?),outsourcingreallybegantotakeoffasabusiness
strategy.Coincidence? Maybe not.The concept ofthecore competency became
the U.S. Corporations’ next reason for avoiding what was too painful to face,
andallowedthemtofindtheeasyout.Afterall,whatiseasierthansaying,“We
make good widgets; we don’t need to focus on customer service.” As a result,
specialists companies were born: customer service companies, IT companies,
humanresourcecompanies,payrollcompanies,andeveryotherpossiblecompany.
All great concepts, but in practicality too often, easy outs. Corporate managers
should proudly proclaim, “We’re inefficient in that function because it’s not our
corecompetency.”EveryonecouldpointtotheHBRarticle,andnodaffirmatively.
Anotherexcuseforpoorcorporateproductivityisenabled.
It is definitely true that the concepts of core competency and specialization
have led to productivity enhancements for both the customer of the services
and the new specialized supplier. Classical vertical companies, such as General
Motors,didgetimprovementsthroughoutsourcing.TheCoorsBrewingCompany,
anotherclassicverticallyintegratedcompany,hasachievedproductivitythrough
outsourcing. The outsourcing of less-sophisticated manufacturing and assembly
hasalsobeenawin.ButIwagerthatthesesolidexamplespaleincomparisontothe
poordecisionsthatwillbemadewithincorporationsasaresultofafailuretoface
theirownproductivityissues,andanovereagernesstojointheherd.Furthermore,
asthesebenefactor-outsourcingcompaniesachieverevenueasaresult,theblood
is in the water, and specialization evolves into the development of a cottage
industry.Justaswhenconsultingfirmsweremakingmoneyhandoverfisttotake
overtheproblemsfromthecorporatesector,nowtheoutsourcingcompaniesare
doingitaswell.Everythingisoutsourced,andcorporationscanignoretheirown
problemsbyturningitovertoaspecialistoralow-labor-rateprovider.Theeasyout
personified.
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6 AnEasyOut
Lately, the trick of the trade has been for outsourcers to focus on labor-rate
reductioninsteadofachievingproductivitythroughprocessimprovementandin-
novation. Why is this? The answer is that it is easier to compel the customer to
achievesavingsthroughlowerlaborratesthanpromotingmoredifficultimprove-
ments that require customer involvement. Ridiculous labor-rate differences via
offshoring are the ultimate easy out. And when the customer company is either
unwillingorunabletohealitself,theoutsourcerisleftonlywithalowerlaborrate
asanopportunitytosavemoney.Obviously,thislabor-ratedifferentialisasucker’s
betfortworeasons:first,alowerlaborratedoesn’tmeanthecostwillbelower;
cheaperresourcesmaybelessproductive.Second,forthethirdpartyoutsourcerto
makeaprofit,thecompanymustfindlabor/productivitythatisatleastlowerthan
theirprofitmargininthedeal.Ifitslaboris10%lower,anditsmarginis15%,the
customer loses money on the deal. Third, there are often unexpected, or hidden
costsassociatedwithoutsourcingandoffshoringthatcompaniesfailtoconsider;
thesehiddencostswillbeaddressedlaterinthebook.Intheabsenceofapolicy
to focus on productivity first, most company and specialty outsourced relation-
shipscannot createsustainedefficiencies because theinitialeffortwasbasedon
ratesavingsreduction,andnotcostefficiencies.Reworkcostscanerodethecost
savingsassociatedwithalowerlaborrate.Intheend,outsourcingoroffshoring
solely on labor-cost reduction can never be sustainable, as labor-rate reduction
without productivity will in many cases lower rates but not improve costs. The
labor-ratesavingstacticisamirage,whetheritisthechiefreasonnotedforthird
partyoutsourcing,onshoreoroff.Unfortunately,toomanythirdpartyoutsourcers
eitherdeliberatelyornotsomakemoneyoffcorporationsthroughtheconfusion
oftheseterms.
Thiseasyoutstorycanbecomemoreaboutperceivedcostreduction,andless
aboutproductivity.Acompanyhasoutsourcedthemanagementofitstransporta-
tion,andactuallyseenitscostsincrease,whiletheratespershippinglaneappear
togodown.AnothercompanyhasoffshoredanIToperationtoIndia,andnowhas
fivetimesthenumberofprogrammersatthelowerlaborrate.Isthiscost-effective?
A Boston Logistics Group (BLG) study from 2005 suggests that companies, on
the average, achieve a 13% net savings when using a low-cost country, such
as India or China; this is much lower expected savings than conventional esti-
mates (stated typically between 40 and 50%) because of the difference between
grossandnetsavings.9 OutsourcingwithintheUnitedStateshasnotachievedits
promiseinmanyoccasions.GiventheBLGstudy,onemustwonderwhetherwe
canautomaticallyassumethattheChina/Indiamodelwillalwayswork,inevery
industry.Perhapsifwediginandfigureoutspecifics,maybewecanlearnhowto
out-produceIndiaandChinathroughourowncompetitiveness.
Many consider the differential between gross and net saving when outsourc-
ing/offshoring as a hidden cost. The outsourcers from both America and abroad
present a very persuasive yet somewhat academic response to why a company
shouldoutsourceitsoperations.Whenthebusinesscaseispresentedtothecom-
pany’sdecisionmakers,agrosssavingsestimationismade,withthecaveatofnot
