Outsourcing
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 than 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.
Reading the names, shouldn’t the last sentence be “this is how Repubiican politics works”?
The outsourcing of functions involving violence is extremely dangerous. As a result of such outsourcing, prisoners are subject to unaccountable abuse, and Eric Prince has what amounts to a private army.
Private outsourcing is also destructive to society. Labor market frictions have been the primary barrier to impoverishment of the working class by the iron law of wages. Computer-aided uberization is destroying that barrier, even for highly skilled labor. When I was young, job-shoppers earned twice my hourly wage, but I didn’t begrudge them because they had no benefits or security. Today, job shoppers actually earn significantly less than salaried engineers, as corporate outsourcers learn to exploit monopsomy power via uberization.
“…saw people with no qualifications whatsoever, other their political connections, take over high level administrative positions…”
[Patronage is one of the cornerstones of Jacksonian democracy. It is the key to offering universal suffrage to the wage class. Quasi-democratic electoral politics pose no risks as long as political and economic elites and their connected brethren collect the rewards and select the eligible nominees via their own dollar democracy.]
Nyeh … Used to be an engineer, and the government’s been trying to eliminate independent contractors and small consulting firms ever since the 1980s, whether Democrats or Republicans are in power, Sure, in principle, the government wants to encourage small business and entrepeneurs, but in practice the bureaucrats find it too much of a hassle. It’s a lot easier to send out a solicitation for some work to five or six established businesses with a few thousand employees than to deal with 10,000 different one-man firms they’ve never heard of, who don’t know how to operate with OSHA and taxation and all the paperwork associated with umpteen million regulations.
Can’t say I blame them entirely. I suspect a Libertarian administration would behave just the same.
mike:
Saw your comment in trash. For some reason the system is trashing people. Restored your comment.
There’s also honest corruption and dishonest corruption. That was a big distinction back in the at least as corrupt late 19th century. There was plenty of corruption, for example, in the 1960s, but the pharma companies were cranking out “wonder drugs”, many of which are still in use. The interstate highway system was like that, rife with bribes and patronage, but it provided union wage jobs as well as jobs for high end consultants and payoffs for the big buys. We still use the interstate highways, so not all that money went to waste.
Now, we pay the telecom companies to wire up an internet and almost all of the money goes to share buyouts, dividends and executive salaries. Outside the most profitable areas, our telecom infrastructure barely improves from decade to decade. This lends credence to Turchin’s theory of elite competition. The ancient pattern revolved around agricultural production and popualtion. The modern pattern revolves around the government expanding the pie as it did during the Civil War, the Great War and World War II. These debt fueled expansions create new opportunities and improve living standards, but eventually a new group of elites expands and the elite competition lowers living standards for everyone save a handful at the top.
According to Turchin’s theory, this means a long period of alternating bad and awful elite rule with an eventual destructive crisis when the competition gets out of control. In the good old days, this meant a revolution or crushing war or plague. In modern times, we’ll get something more like the New Deal to displace the old elite and offer openings for a new one.
Ken:
Sixty – eight I was gone for a few years. Came back and picked up my BS/BA in 3 years at a no-messing around Catholic University. It is amazing what one can do to catchup. I went to work in healthcare supplies, then to electronics, and finally over to machine tool making parts for hydraulic and air cylinders. I had 3 years in seniority when Reagan struck the Controllers Union and proved there was no corporate contract with Labor anymore. Then a recession hit and the layoffs began with me having to layoff my people one-at-a-time. Nothing but two weeks of severance, a promise of a good recommendation from me or a letter, and being told a week ahead of time this was their last week and to please hand their work over to so and so person. It did not matter whether they were good people. Personnel was angry at me for being honest.
Than they came for me and told me my job would end the week before Christmas. The personnel manager made it known to me I was being laid-off 1 year shy of a retirement plan kicking in for me. I was told two months beforehand. I asked to hang around to collect Christmas pay and was told “no.” It did not matter that I installed there MRPII system and a pseudo – distribution system to plan shipments to the 7 plants we planned parts for over the last two years. It did not matter that I reduced inventory by a large amount and simultaneously improved delivery. It did not matter that I kept the company at breakeven during the loss of business, made a couple of months profitable, and reduced the losses during two months over 14 months. As the PP&IC Manager, I was expendable and they wanted a sales guy in there to learn the business. He just about peed his pants one time when he was alone with me in a room.
All your experience and mine matters little when it comes to corporate or political influence. Your expertise and mine mean nothing. Oh, you will be remembered alright for a short time and then forgotten. That is why they hand out medals for the dead, shake hands with those who are departing, and move on to the next group of cannon-fodder. You are expendable. What really helped me was I kept reinventing myself. It lasted since then and I never cracked the one-hundred $thousand a year ceiling till I started to work for the Germans and 10 years out from retirement at 70.
It did pay off in SS for my wife and I who rode it out also. Just a steam of income.
It could have been better if they allowed it to be.
The point I so wanted to make, but obviously didn’t, was that this how it works when an administration comes in. When George Schultz said of Reagan, and again of Bush II, “We can work with this guy.”, this is what he meant, We can get what we want through this guy. Schultz was working a list of wants, that included the ‘Powell Memo’, and a few other things. When someone donates one or more $million to a campaign, they expect something in return. The two I listed were examples.
ken:
Sometimes being blunt helps (with me especially as I am trying to over-think the topic).
Run75441 —
Much grass! I’d wondered a bit about its non-appearance but finally considered the comment was just too mundane to interest you highbrow intellectual economist types. Which still might be the case, of course ….
Probably switch to 24601 rather than 75441
Outsourcing has happened to a lot of people. On June 15, 2015 Northrop Grumman laid off the last 52 state employees that they had assumed management of from Virginia Information Technologies Agency on July 1, 2006. Out of 850 state employees under the outsourcing agreement 560 had taken Northrop Grumman’s employment offer and gotten a 6% salary boost along with eligibility for promotion within NG. The other 290 affected state employees remained state employees with all associated employee benefits. Either way only one year of employment was guaranteed for any former VITA employee under the scope of the agreement.
I was extremely fortunate to last until the bitter end of the “partnership’s” managed employee provision. I had turned 66 years old just two months before VITA and NG terminated the last 52 managed state employees. NG offered about half of the final layoff staff 75% part-time employment through a third party at 80% of former hourly wage. Essentially that is the same job at 60% of former pay and no benefits. I declined, but most accepted probably because they were not 66 years old with 35 years of state service. Then NG offered me full time employment directly with NG. I declined again. The state severance benefit that NG had to pay the state for was convertible to six extra years of service for the defined benefit retirement calculation. In turn I converted that extra service into a 25% survivor benefit for my wife.
Retirement is the best job that I have ever had. I liked my old work just fine, but now I work outside at my own pace for someone that is not an idiot for a change. Outsourcing and layoffs are usually devastating because employees lack income protection. It is not losing a job that destroys lives. It is losing that pay check.
@Ken,
Talking about oneself is the most intimate opportunity that we can get to talk about something that we actually know for certain.
Outsourcing is a great way to go
when robots are just too damn
expensive. Must do this to avoid
hiring unionized workers. Does
NOT necessarily mean ‘off-shoring’,
unless that can’t be carried out either.
Fred:
What is the percentage of direct labor cost in a product?
(BTW, if the above is true, at least
of the US economic system, then
our system is fundamentally unfair &
inequitable, and needs to be re-imagined.)
Because, after all,
We Take Care of Our Own
Bruce Springsteen – (Official Video) via @YouTube
Here are the songs Joe Biden and Kamala Harris played at their Delaware event
via @BostonGlobe – November 8
“What is the percentage of direct labor cost in a product?”
That is likely a bogus concern.
The ‘ideal’ product these days is one loaded up
with ‘highly integrated’ semiconductor chips
produced by machines, automatically.
Does it matter what the ‘labor content’ is
in such products, while the profits
flow directly to the shareholders
(and executives)?
We need a new paradigm.
We barely provide starvation insurance, yet we call it unemployment insurance.
@Fred,
“What is the percentage of direct labor cost in a product?”
That is likely a bogus concern.
The ‘ideal’ product these days is one loaded up
with ‘highly integrated’ semiconductor chips
produced by machines, automatically.
Does it matter what the ‘labor content’ is
in such products, while the profits
flow directly to the shareholders
(and executives)?
We need a new paradigm.
*
[One of these days I will take time to write that article on the importance of correct semantics in the communication of complex concept, but not today. Let’s just leave it for now sufficient to not that “direct labor cost of a product” is often only a small share of the ‘total labor content’ of a product’s production costs. The producing firm’s indirect labor costs are generally desired to be low, but that is not always how things work out. Usually of much greater significance in complicated supply chains is that much of both direct and indirect labor costs are buried in the price of inputs from the accounting perspective of the end product producing firm.
Also, when considering economic impacts of supply chains and labor content, then it is useful to place these considerations in perspective according to household spending. At my house food, housing, and utilities are the big ticket items. Computers make great jobs, but not much of them are in our annual consumption budget. We spend more on gas for the cars than all tech combined except for our monthly Fios bill, which is an exorbitant rentier gambit on Verizon’s part.]
Hmmmm:
“direct labor cost of a product” is often only a small share of the ‘total labor content’ of a product’s production costs.
What is Overhead?
Three items to this and I named two of them.
Run,
All indirect labor costs are overhead, but not all overhead is indirect labor costs. In any case, to dissect price then the labor content is spread over then entire supply chain rather than just the final producer which only sees agglomerated materials cost. Then if we take the environmentalist POV, then the largest share of costs is externalized, absent from market price to be paid later by everyone. One might even consider that all realized costs are labor and price is just profits plus labor costs, with much of profits being taken as economic rents.
However, I believe that your context was referring to why firms choose to offshore production or employ robots given that in any individual firm making such choice that their own direct labor costs are often a fairly small share of their products price. There are many answers to that question which vary according to a firm’s product and market competition. The most obvious reason is that ‘often” is not nearly always. All firms are not created equal. NC furniture manufacturers went offshore chasing cheap labor because pollution is not a big obstacle for furniture production and NC has always been a “right to work” state. Labor is a big share of the price for that coffee table. A lot of partnership deals with US firms that invested in offshore production was greater access to rapidly growing markets in SE Asia. The finance big hats always like a fast growing market at the other end of major capital investment. There is more to regulation than just pollution. We got OSHA, restrictions on imported hardwoods, health insurance, and PTO just off of the top of my head. But labor does matter for a lot of firms. Link and excerpt below on NC furniture.
https://businessnc.com/moving-furniturecategory/
Moving furniture
Bruce Cochrane resurrected his family business because he believes manufacturing will come back from China.
By Vikki Broughton Hodges
“”Bruce Cochrane sits in his father’s former office, surrounded by photos documenting his family’s history. His great-great-grandfather turned wood into church pews. His great-grandfather opened a factory in Lincolnton that made fireplace mantels before focusing on oak and pine dining-room sets. By the late 1930s, it employed 50. When his father, Theo, became president around 1960, he introduced pieces crafted from cherry and the popular Threshers collection. In 1982, when the new factory opened, Cochrane Furniture Co.’s workforce topped 1,000. “It is not just about making fine furniture,” his dad would say. “It is about the good people that make the fine furniture.”
The family sold the business in 1996 to West Lafayette, Ind.-based Chromcraft Revington Inc., which over the next decade cut back the Lincolnton workforce as it moved jobs to China, joining droves of furniture makers chasing cheap labor. Between 2001 and 2005, the U.S. industry lost 230 plants and 55,800 jobs, according to The Furniture Wars: How America Lost a Fifty Billion Dollar Industry by Michael K. Dugan, a business professor at Lenoir-Rhyne University in Hickory and former president of High Point-based Henredon Furniture Industries Inc. Lincolnton became a victim of that exodus. Twelve years after it bought Cochrane Furniture — the same year Theo Cochrane died — Chromcraft Revington laid off the remaining workforce, shuttered the plant and sold off the machinery.
Bruce Cochrane, the company’s president when it was sold, became a consultant, helping manufacturers source products in China and Vietnam. “It was almost like a drug. Everybody wanted to be a part of it. It was a crazy time in the furniture business. We lost a $50 billion industry in a short period of time.” But by December 2010, he saw the landscape start to reverse. As China’s economy expanded, the demand for workers increased. So did wages, from 30-to-50 cents an hour to almost $3.60 an hour. Months-long delivery times and rising shipping rates chipped away at shrinking margins. The focus on cheap labor overlooked the cost of inventory, quality and service. These changes have led companies to question the benefits of offshoring and explore what’s called “reshoring.” The Boston Consulting Group projects seven industries, including furniture, will start bringing jobs back from China by 2015. U.S. companies are looking at ways to replace 20% of their overseas manufacturing workforce between 2012 and 2014, according to The Hackett Group, a Miami-based consultancy…
Of course the best example of high direct labor cost is the call center service. With cheap global telephony then low labor cost call centers offer exceptional price advantages to firms, all the better if customers give up out of frustration trying to explain their needs to someone half a world away that speaks with an accent so thick that most spoken words by our foreign “help” sound garbled.
In steel and autos we just got our asses beat by foreign competition. We failed to invest in new technology for production and with autos we failed in consumer-purposed design. US firm CEOs took a beating from the free market. These failures probably fed into other firms’ offshoring decisions, but the one thing should have had nothing to do with the other. American exceptionalism met meritocracy at the corner of arrogance and over-confidence.
I love accounting almost as much as Covid-19. In the extreme cases then either every business unit is a profit center or every business unit is a cost center, the latter being Peter (all profits are external) Drucker’s meme-child.