Monday, September 20, 2004

Outsourcing -- Today's profit maker

We speak in respectful tones about that primordial soup from which profits flow, the marketplace. Great numbers of people worship at that altar...probably more than worship in old-fashioned religious venues. When the numbers are good, the news announcer reading the results often has happy background music playing, something like "We're In the Money". If the numbers are down, the music might be "Stormy Weather". It's as much a part of our culture as sports and popular foods to rejoice when the "Market" is good, and gloomy if the report is "down". At some level everyone, even those who will never see a stock certificate, some of whom will never guess that there is a cap on social security taxes every year for people earning over a certain amount...everyone feels connected.

It's not fashionable to ask where profits come from, however. It's like asking if someone has had cosmetic surgery or was fortunate enough to come into a lot of money following the recent death of a loved one. We want the dealership from which we get our car to be profitable enough to keep up with the warranty service, but we don't want any profit to that dealer from our purchase, and we sure as hell don't want to pay dealer prices for service. Profit is what happens when a company makes a good deal with someone else. When I have to make the same deal, however, they are taking advantage of me.

Not everyone thinks like this, of course. There are lots of people who cheerfully pay a dear price to be the first or latest in their peer group to see a movie or own a certain fashion or travel to some wonderful destination. Big tips, ostentatiously bigger than the norm, are sometimes found by delighted service people who don't care that they say more about the ego needs of patrons than the quality of their service. And I think there are a few people who take a balanced view of profits and don't get disturbed about their contributions to someone else's pofit.

In the face of all this resistance on the part of customers, clients and patrons to cut them out of reasonable profits businesses are forced to be imaginative about being able to report ever higher profits. The word "bubble" comes to mind first, because that is the easiest track to profits in the short term. We have seen it many times, from the famous tulip bulbs to the California Gold Rush to the explosion of dotcoms. In the end the bubble bursts (hence the term) but there are what I would call "serial bubbles" (see "serial monogamy") in real estate, fashions, entertainment and advertising. I heard a couple of weeks ago that insurance stock prices go up when a hurricane hits because historically that is when premiums go up, not only to cover "losses" due to weather, but improved profits as well. Why do insurance companies jack up the prices at just the time that their policy holders can least afford to pay more? Because they can.

A few years ago, and to some extent continuing today, the phenomenon of "mergers and acquisitions" yielded breathtaking "profits". When two companies in the same line of work merge it is a win-win situation (except for the people whose jobs are sacrificed for the deal) because the new, stronger company has one less competitor in the marketplace (whew!) as well as a more efficient operation, because the payroll departments, accountants, ad agencies and other support operations can be performed by one department instead of two. All this improved efficiency translates into profits.

Speaking of accounting, now there is the toolbox from which a lot of profits can be made to flow. When they get the cooperation they need from operations there is practically no end to the profits that can result. Just ask the people at Enron how easy it can be.

Have you noticed that so far that nothing has been mentioned about productivity? That is my point. The only real source of profits haas to be that something has been produced. Moving the furniture around does not produce anything, unless you are paid to be an interior decorator. Mergers might squeeze a few cents from the economy of scale, but they real improvements, if you can call them that, is that there is more to report for profits because fewer people are being paid.

This brings us to the notion of outsourcing, the ultimate job eraser. Outsourcing has had it's bony finger in nearly every business enterprise in the marketplace. I would like to advance the notion that corporate reliance on outsourcing is tantamount to an admission of failure. It is easiest to see in something like janitorial work, the bottom of the economic ladder by most standards. Very few organizations today directly employ the people who literally clean up behind them. The reasons are easy to grasp. Nobody wants to take out the trash, clean the restrooms and refill the soap dispensers, so it is eaasier to pay an outside company to do that job than go to the trouble to hire and train someone and hold them accountable. And don't even mention the benefits that the would expect. After a few years they could get to wanting a vacation like everyone else. Next thing you know, they might even want to be getting ahead in life and someone would have to be trained to replace them. Imagine that.

I'm trying not to sound cynical, but I'm not trying very hard. I have watched for years as the idea of people skills and management accountability have become less and less a part of business life. Few supervisors are trained to spell out their expectations in language that is clear but not judgemental. Even fewer are trained to be the patient coaches they have to be if they are to develop their subordinates into more than robots. For the past few days I have been thinking that outsourcing is the contemporary successor to mergers as a generator of false profits, because in most cases the end result neither improves the service nor generates any new value to the owner/stockholder.

And the social consequences of jobs being lost....don't get me started.

1 comment:

Hoots said...

This post was about ten days ago. Today is September 30. And already I run across a link about the "internet bubble" and its consequences.

The writer begins by arguing that by going public before earnings are possible a new company is really just raising venture capical (VC) from the market rather than from the customary private sources. In time, he says, the marketplace may do better at assessing new business ventures than the private sector.
* * * * *

>>After the excesses of the Bubble, it's now considered dubious to take companies public before they have earnings. But there is nothing intrinsically wrong with that idea. Taking a company public at an early stage is simply retail VC: instead of going to venture capital firms for the last round of funding, you go to the public markets.

>>By the end of the Bubble, companies going public with no earnings were being derided as "concept stocks," as if it were inherently stupid to invest in them. But investing in concepts isn't stupid; it's what VCs do, and the best of them are far from stupid.

>>The stock of a company that doesn't yet have earnings is worth something. It may take a while for the market to learn how to value such companies, just as it had to learn to value common stocks in the early 20th century. But markets are good at solving that kind of problem. I wouldn't be surprised if the market ultimately did a better job than VCs do now.

>>Going public early will not be the right plan for every company. And it can of course be disruptive-- by distracting the management, or by making the early employees suddenly rich. But just as the market will learn how to value startups, startups will learn how to minimize the damage of going public.

* * * * *
The link is worth following. I cannot post a forward link from the comments, but I will post a backward link to my original post when blogging today.