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Outsourcing: A Personal Window on the Rise of Grifting

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Outsourcing: A Personal Window on the Rise of Grifting

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Yves here. As readers know, I’m skeptical of outsourcing, since its main purpose appears to be to transfer income from lower level workers to managers and executives without increasing the risk-adjusted profits of the enterprise. I’ve had colleagues at public companies say that their economic case for outsourcing was weak but management went ahead because Wall Street approved.

Robert Cringley made a more forceful critique back in 2015, and I doubt much has changed:

Now let’s look at what this has meant for the U.S. computer industry.

First is the lemming effect where several businesses in an industry all follow the same bad management plan and collectively kill themselves…

The IT services lemming effect has companies promising things that can not be done and still make a profit. It is more important to book business at any price than it is to deliver what they promise. In their rush to sign more business the industry is collectively jumping off a cliff.

This mad rush to send more work offshore (to get costs better aligned) is an act of desperation. Everyone knows it isn’t working well. Everyone knows doing it is just going to make the service quality a lot worse. If you annoy your customer enough they will decide to leave.

The second issue is you can’t fix a problem by throwing more bodies at it. USA IT workers make about 10 times the pay and benefits that their counterparts make in India. I won’t suggest USA workers are 10 times better than anyone, they aren’t. However they are generally much more experienced and can often do important work much better and faster (and in the same time zone). The most effective organizations have a diverse workforce with a mix of people, skills, experience, etc. By working side by side these people learn from each other. They develop team building skills. In time the less experienced workers become highly effective experienced workers. The more layoffs, the more jobs sent off shore, the more these companies erode the effectiveness of their service. An IT services business is worthless if it does not have the skills and experience to do the job.

The third problem is how you treat people does matter. In high performing firms the work force is vested in the success of the business. They are prepared to put in the extra effort and extra hours needed to help the business — and they are compensated for the results. They produce value for the business. When you treat and pay people poorly you lose their ambition and desire to excel, you lose the performance of your work force. It can now be argued many workers in IT services are no longer providing any value to the business. This is not because they are bad workers. It is because they are being treated poorly. Firms like IBM and HP are treating both their customers and employees poorly. Their management decisions have consequences and are destroying their businesses.

Today’s post provides some additional color by giving examples of other forces that promoted outsourcing, sometimes invisible to the companies themselves. Perhaps readers can add their own experiences in comments.

By Kevin Melvin. Originally published at Angry Bear

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 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.

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