Outsourcing, jobs and innovation

Chief Executive, The, August-Sept, 2003

A vital debate is taking shape, and it has a direct bearing on the ability of CEOs to manage their businesses in the most cost-efficient way. This debate--about where American jobs are going--could emerge just as CEOs are trying to recover public trust.

It's surprising, but true, that 1 million U.S. jobs have disappeared in the past 18 months--a period of economic recovery. The completely hollow debate in Washington is whether tax cuts help or hurt job creation. The reality is that tax policy can't possibly have any impact on hiring decisions in the short term. The other canard being floated is that if the economy could grow at 4 percent, rather than 2.5 percent, that might trigger a surge of hiring. Again, that's not necessarily true.

What's happening is a structural shift in the economy, not merely a cyclical one. Just as manufacturing jobs have been moving offshore for decades, now the outsourcing movement is hitting service sector and high tech jobs, thanks in part to the power of the Internet. As we at Chief Excutive heard anew at our Accenture Round-table (page 50), CEOs are scrutinizing their organizations and examining every process. Any function that isn't deemed essential to keep within the corporate womb is getting shipped out to India or elsewhere.

This process is just beginning. Companies are outsourcing bill collecting, code writing, software testing, customer servicing and dozens of other functions. Gartner, the research firm, says that one out of every 10 jobs in the U.S. computer services and software industry could shift to lower-cost locations by the end of 2004. That translates into 500,000 high-paying jobs. That's a stunning number.

We can already see glimmerings of backlash in Washington. There are calls for hearings and the occasional speech. The anti-outsourcing movement hasn't coalesced yet, but it could as the economy continues to lose jobs.

There are several reasons CEOs need to take this debate seriously. Aside from wanting to head off any foolish attempt to dictate which jobs should be located where, it's in CEOs' best interest to have a stable, prosperous home economy. Much as Henry Ford realized his workers needed to earn enough to buy his cars, so too do smart CEOs realize that sustained demand for their products isn't going to develop until the Great American Job Machine gets re-energized.

In framing the debate, it's key not to lose sight of the guiding philosophy of globalization--lower-value-added jobs should be allowed to move offshore while the U.S. drives up the technology and skill ladder. Problem is, there seems to be a gap in that process at the moment--jobs are moving out and it's difficult to see where new ones will come from. Historically, that gap has always been filled. It's just a question of timing. It could be that the biotech or wireless sectors will suddenly catch fire. Or technologies spun off from the surge in defense spending could create new industries.

CEOs ought to be shaping the debate by explaining that outsourcing is inevitable and, indeed, healthy in many ways. It creates profits, shareholder gains and lower-cost products, for example.

At the same time, new jobs should be created through innovation. Historically, large companies are not net hirers of people. Small and medium-sized businesses and startups are usually the ones to exploit new technologies and expand their work forces. Government can invest in broad technology sectors--federal spending did spur the creation of the Internet and biotechnology industries--but Washington can't decide where jobs are created and how many.

The keys are capital formation and business creation. Right now, the deck is stacked against entrepreneurs taking risks and raising capital in the public markets. Our new CEO of the Year, Hank Greenberg of AIG, warned at our dinner in his honor (page 44) that Sarbanes-Oxley and other new requirements are having a "chilling effect" on the economy.

So there's a lot at stake now that another political silly season looms. If the debate becomes "Why do Evil CEOs Move Our Jobs Offshore?" that's a lose-lose for everyone. The much better debate would be, "How Can We Unleash Innovation and New Business Formation?"