Outsourcing and the reasonable re-Distribution of Wealth

 

One of the most interesting dilemmas faced by business leaders in the world, is whether or not to outsource. They have a responsibility to stakeholders to use invested money wisely, to remain competive, to generate a profit and accordingly to make wise decisions. Companies like GM use local resources and find themselves uncompetitive, at least in part, due to high labour costs. At the same time, CEOs are criticized when they outsource services to other countries in order to reduce costs and consumers are criticized for purchasing foreign products.

To be fair, even on a very small scale, many company owners outsource services. By using a bidding process on sites such as e-lance, individuals from any country bid on the work. If you want a web-site developed or some specialized software, it’s generally much less expensive to have the job done by a developer in India than one in North America. If we choose not to outsource, we soon find ourselves uncompetitive and out of business, thereby loosing any opportunity we may have had to employ people locally.

Sustainability implies two concepts which at first may appear contradictory.

The first is the encouragement to use local resources as much as possible. While this is partly concerned with limiting the transportation of goods, it also encourages hiring of local skills and supporting local communities. The obvious question is, why would we do this when someone else is willing to do the job for less and can make the company more competitive?

A second concept in Sustainability is to encourage equity, education and a reasonable standard of living for people everywhere. This implies that people everywhere need to be employed and, from this perspective, outsourcing may be considered is a good thing.

Outsourcing has short term, mid-term and long term consequences.

The short term is that the wealthy nations benefit from having high salaries combined with a low cost of goods and services. As such they enjoy a very high standard of living. Poorer nations benefit as well because as we are paying for these goods and services with dollars that are unavailable from their local economies and their economies, as a result, become more affluent. As they say, a rising tide lifts all boats (hopefully). Outsourcing helps to build the overall wealth of less affluent nations.

The mid-term consequence is great for the less affluent nations and not so rosy for the more affluent nations. As jobs are outsourced, the skills, expertise and manufacturing capability move to the less affluent nations. While the costs remain low for goods and services, the number of low value jobs disappears and people are less able to afford these goods and services. Trade unions representing low value jobs have traditionally looked to set their standards of living based on comparing salaries with other higher value jobs. However, realistically they need to begin taking their queue from lower cost countries who are able to provide the same services if they wish to have any long term viability for their workers. This will undoubtedly be a very painful adjustment for workers that have grown accustom to high salaries, benefits and pensions. But in a world economy, it is not reasonable to expect assembly line workers in one country to live in comfort while in another country to barely scrape by. The only reasonable long term outcome is that equal value workers must have an equivalent standard of living. Similarly higher value jobs are also coming under attack. Outsourcing of software was a start. As we move forward, Business Process Management (BPM) and Law Services are beginning to face similar challenges. And, while this mid-term adjustment begins to takes place, the long term prospects, are not quite so bleak.

In India, for example, one of the unintended consequence of outsourcing is high turnover of employees. Companies scrambling to improve their services and gain market share from the west, need qualified and experience employees. There is tremendous competition for highly qualified employees between companies which often has employees jumping from job to job in order to benefit from higher and higher salary offers. While their salaries are still relatively low compared to North American standards, they are at least within the same order of magnitude. And as the salaries continue to increase, their competitiveness will decrease. This trend is ultimately the great equalizer.

As the economies become more affluent, they are also more able to be self-sustaining. In other words, they rely more on their own purchasing power and sell to their own local economy.

The only reasonable expectation in the long term, is that the standard of living for equivalent jobs around the world should begin to equalize.

This is still perhaps a long way off and, in the short term, a very scary outlook for factory workers in North America, knowing that the standard of living of their counterparts in other countries is far less than desirable. On the other hand, it provides an incentive for each of us to become more educated, more productive and to provide a higher value of service, rather than being satisfied with providing the lowest possible service while feeling entitled to high benefits. We have become lax in our expectations of ourselves.

Outsourcing organizations will continue to displace our local high paid employees with lower cost employees as long as we provide equivalent value at higher costs.

It is true that some of the value we provide is higher simply due the fact that we are local which generally makes for a better service. However, the sooner we accept the reality that many services can be displaced, the sooner we will begin to strive to become truly competitive again. And we need to be vigilant because other countries are only becoming stronger and will continue to threaten our ability to compete. The outsourcing of Software to India, as an example, sees a nation of highly intelligent people, which is growing at the rate of 25 million per year, some percentage of which are being specifically trained in highly specialized universities which teach students about topics such as software development and customer service.

While this appears to be a bad thing short and mid-term for those of us who have become accustomed to our relatively comfortable life, I believe that it will lead to a more equitable world, one where we depend more on each other, where we see each other as equals rather than haves and have nots, and this is, undoubtedly, a good thing in the long term.

Our call to action is to strive to become more innovative, more creative and to constantly strive to improve ourselves on a personal and corporate level.

In the process of making adjustments to the world economy, there will be more economic challenges and, undoubtedly, more short-term financial pain. Thankfully, we have been blessed with Governments which are “relatively” aware of the need for subsidizing essentials such as health care and education.

Equity also implies a fairness of distribution of wealth.

The elimination of the extremes of wealth and poverty is another task for CEO’s and business leaders, world wide, to keep in mind while they make decisions around employee and executive compensation. While it important to have a distinction between high and low value jobs, (i.e. a CEO is certainly not equivalent to a factory worker in their value to the company), and this difference must be reflected in salary, which encourages striving for higher education and higher value positions. On the other hand, wise CEOs and executives also know that the true wealth in life is knowing that they have made a positive impact on their employees and on the world. They know that compensation must always be reasonable and generally have some way to share profitability with their employees.

Responsible Governments everywhere need to support these equity initiatives by imposing progressive and reasonable taxation on excessively high incomes.

Let’s continue to vote for those representatives who demonstrate their concern for equity and for environmental sustainability through word and actions.

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