'Offshoring' Has Its Trade-Offs
By Steven Pearlstein
Wednesday, February 11, 2004; Page E01
washingtonpost.com
Greg Mankiw, the president's top economic adviser, has now weighed in on the hot topic of "offshoring" of service jobs, using the traditional economist's argument that trade is good and more trade is even better.
In the next couple of columns, I want to suggest ways in which this might not always be true. That's not to say that there aren't real gains to be had from the specialization, scale economies and access to cheap labor that offshoring provides. But what most of these rosy analyses routinely neglect are the business and economic downsides from trade, either because they are not measurable or because they lie outside the economist's frame of reference.
Let's start by looking at this from a different angle and a different starting point -- namely, that a strong U.S. economy needs to be built on a foundation of strong, competitive companies. Obviously, companies can achieve competitive advantage in lots of ways, including lowering costs through offshoring. What's less clear is that this is the best route to competitive advantage.
One reason for skepticism is the obvious motive behind much of the recent offshoring -- namely, the need to meet earnings targets promised to Wall Street. You would think that, after all they've been through since the Enron scandal broke, corporate executives would have discarded their fixation on quarterly earnings per share. Dream on. Company conference calls with analysts are once again full of the old promises of double-digit earnings increases. And the only way to deliver on these promises is either through big increases in sales, which are difficult in the current economy, or one-time cost-cutting exercises like outsourcing.
In defending outsourcing, whether domestic or foreign, companies always say they are shedding "non-core functions" or "commodity inputs." But what's truly amazing is how quickly this "non-core" category has expanded -- from letting someone else run the cafeteria and front security desk to handing over large chunks of human relations, marketing, information technology, product design and customer relations.
The first thing to be said is that this often winds up being a fool's game. If I can lower costs simply by contracting with a Sri Lankan firm to do claims processing, so can you -- and in the end, neither of us achieves a competitive advantage.
But perhaps more significantly, this rush to outsource betrays a woeful misunderstanding of how sustainable competitive advantage is achieved.
We know from a long line of management gurus and academic research that great companies are those built around an enduring vision that focuses everyone, from the CEO to the janitor, on building and sustaining the enterprise over the long term.
We know that successful companies are relentlessly "interdisciplinary" in doing their work rather than organizing themselves around traditional functions or "silos."
We know competitive advantage comes from constantly listening to customers and disseminating that intelligence throughout the firm.
We know it comes from empowering employees, giving them incentives and tapping into their creativity through self-directed teams.
We know it comes from leveraging technology to operate smarter, better, faster.
We know that success has more to do with effective execution throughout a firm than dramatic shifts in corporate strategy announced at the top.
Now let me ask you: How does all of that square with contracting with people halfway around the globe to write your software, deal with your customers, run your data networks and manage your human resource functions? In most cases, I suspect, it doesn't square very well at all.
In the long run, the success of the American economy will come down to how good U.S. companies are at coming up with new products and services, along with better ways of producing them. Sometimes offshoring can foster that process of innovation and value creation, but contrary to what you hear from Dr. Mankiw and other economists, sometimes it will discourage them.
Steven Pearlstein can be reached at pearlsteins@washpost.com.
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