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Weekly Column

Our Own Damned Fault: When It Comes to Understanding Why Government Doesn't Understand High-Tech and Why Financial Markets Seem to be Working Against Our Own Interests, Well, We Did It to Ourselves

Status: [CLOSED]
By Robert X. Cringely

An "elevator pitch" is what they call a 30-second description of a new high-tech business -- the sort you might give to some titan of industry who you happen to recognize standing next to you in the elevator. In Hollywood, they've refined the concept even further to what is called "high concept" -- a single sentence fragment that defines a movie idea in terms of other movies: "Rollerball meets High Noon." Since last week's column on IT outsourcing as a very, very, very bad idea, I've been trying to come up with a tighter version that might even be understandable by politicians. So far I've failed, but even in failure I think you'll find the ideas interesting.

First let's deal with the critics. These well intentioned people had a number of consistent arguments in favor of IT outsourcing:

1) "It is inevitable so stop complaining." I spent two columns last year explaining that IT outsourcing -- whether inevitable or not -- is simply not good for anyone except the CEO and a few institutional investors. It hurts our economy and doesn't result in better service for customers. That's what it's all about, you see — customer service. Find me three companies who have outsourced their IT functions to India and have tangible proof that their customers feel better served, and I'll shut up. But it can't be done. At best, companies talk about how outsourcing saves money and doesn't hurt customer service very much. Why should customers have to hurt at all? And why should customers put up with poorer service? Well, they shouldn't, and that's why this whole mess isn't inevitable. Entropy in the business world works in reverse, with the better organized operations (the ones that better serve their customers) growing in strength, not declining.

2) "What do you have against those poor Indians, Bob, you racist?" I have nothing against those poor Indians, but neither do I feel that they have an innate right to take over functions that they don't do better than those who they replace. And what makes them poor Indians, anyway? Even Bono would look at the numbers and conclude that India takes in far more dollars from the U.S. than it pays out to buy U.S. goods. I checked back as far as 1986, and found only consistent trade surpluses on India's side of the ledger. The U.S. provides foreign aid to India, not the other way around. The net flow of investment capital has always been from the U.S. and into India. And don't forget the tens of thousands of U.S. workers who are either Indian citizens or of Indian descent who send money back to the old country every month. India has nothing to complain about concerning its financial relationship with the United States.

3) "This is all hogwash, the Wall Street Journal and the New Republic say outsourcing is good for everyone." Read the New Republic article on this topic by Clay Risen (you can find it among this week's links). His point is that fears of outsourcing are anecdotal, that what few numbers can be produced reflect not the negative impact of outsourcing but the simple slowing of the entire economy in the recession, and the overall economic effect of outsourcing is positive, not negative. "According to the McKinsey Global Institute," Risen writes, "for every dollar a U.S. company spends on offshoring to India, the U.S. economy gains $1.14, thanks to a number of factors: savings from the increased operational efficiency, equipment sales to Indian outsourcers, the value of American labor re-employed to higher-wage jobs, and repatriated earnings by U.S. companies that own Indian outsourcing firms." Maybe it is true that there is some benefit to doing a poorer and cheaper job of serving customers, but to say that it helps the U.S. economy says nothing of the smaller, more dynamic economies that catalyze so much of our economic engine. It doesn't feel good in San Jose these days, I can assure you. Not much re-employing to higher wage jobs going on there. And is 14 cents worth the possible loss of an entire industry? It doesn't look like a good bet to me.

4) This is just a natural evolution and we'll invent a new industry to replace this one. And what industry would that be? Pretty much everyone sees biotech and nanotech as the new growth industries, but neither industry is very good at job creation. Find me a biotech company that's a comparable employer to Hewlett Packard or Sun Microsystems. Find me a nanotech company that has more than 100 engineers, total. Maybe these are the future, but what if they aren't? Why allow our current bread and butter to slip away if the benefits are doubtful at best and customer service suffers?

Let's understand something here: I am NOT advocating protectionism, I am advocating customer service, rational self-interest, and competitive advantage. If a resource doesn't give you a competitive advantage, you can outsource it without any damage. But if it is a key differentiator, NEVER outsource it.

What boggles is that this isn't obvious. A look under the hood, though, reveals both the push and pull driving this problem. It comes down to a lack of government understanding or even interest in the underlying issues and to an investment community out of touch with the interests of its owners, who are ultimately you and me.

First, the part about government. To better understand how out of touch with reality U.S. government is, let's hear from someone who has worked in Federal government IT for more than two decades:

"As an executive branch employee for the last 24 years, I can assure you that there is no such thing as ‘the government.’ The phrase suggests a monolithic entity with a single purpose. In fact there are three branches that were deliberately designed to be at odds with each other. Even limiting the discussion to the executive branch - the one that comes under the ‘Executive Office of the President’ - there are a multitude of departments and agencies pulling in many different directions. If you are speaking of the current administration, I can't tell that it matters to them. As long as large corporations and wealthy individuals continue to contribute as much as they can, any way they can, the administration will continue to reward them. In theory Congress, especially the House, should be more concerned about the effects on their constituents. If you ask any one of them about it, s/he will say the right thing. But as can be seen from their inability to pass a budget on time (once in the past 10 years, I believe), the only thing they are effective at is delivering pork to the folks at home. Again, as long as the contributions keep rolling in, the bills and votes will favor the contributor. Money buys access - period!"

So government doesn't care. They either don't understand, or their own value structures are so divorced from those of the people being governed that no governing is actually going on.

But my guess is that it goes even deeper than that. Think of the term "political capital," which is generally accepted to be the grease that keeps the wheels of government turning. Now do a Google search of "political capital" and see what verbs are associated with this noun. There is only one -- "spend." We don't invest political capital, we don't redeem it, we don't save it, we don't borrow it, we only spend it. This means that progress in government is made possible by giving things up, with those things being ideals, constituents, even logic itself.

No help there.

And there is no help from the financial markets, either. After all, these are the folks who tell us that short-term earnings are more important than long term prosperity. Why is that? It is because we've managed over the last 40 years to give up control of our own money, placing it in the custody of those who do not share our values and who are ultimately held unaccountable. They impose their values on us and we -- for no rational reason -- accept this. I'm talking about mutual funds, pension plans, and other forms of institutional investing.

Here's word from another reader:

"Few ever discuss the role of diluted shareholder responsibility through mutual fund ownership. 401(k)s and the like are a beautiful stealth model; they bring us ordinary citizens into the stock market, but deflect our own ability to be participating shareholders, voting our meager shares with or against directors and executives and mergers and, to your point, international outsourcing practices. So via our own jobs' benefits programs we buy into mutual funds that trade in shares of the very companies we work for and whose products and services we buy. But when those companies choose to eliminate our jobs or move them overseas, and the stock market responds favorably, we see our portfolios increase, an oasis of comfort in a sea of imminent unemployment. Two insane examples of this are state of California bus drivers who bought into CALPERS investments, which included stakes in the company the state outsourced bus contracts to when the state eliminated its own positions; and schoolteachers in Florida, who now own through the state pension program the majority shareholder of Edison Schools (a for-profit operator of public schools). It will be interesting to see how Edison does in Florida�.That this is important is evidenced by the attention paid to the recent market timing scandals, and the fights for greater investor access to fund manager voting records. Still, though, ask your neighborly mutual fund shareholder if they understand those issues, let alone the outsourcing issue. I'm afraid that no amount of campaign rhetoric could make up for the degree to which unwitting employees/citizens are indirectly allowing themselves to be screwed. Not that that's not true on many other dimensions in our society, and elsewhere, and in the past."

He's right. The very pressure behind this IT outsourcing comes from self-interested CEOs and institutional investors. And the money those institutional investors are using to sway corporate policy is OURS. It goes beyond our 401(k) and pension plans to insurance companies and banks and even to our stock brokers who enable the shorting of the very companies that we have bought because we believed them to be good long-term investments. These people simply don't care. And why should they? By the time the damage is irreparable they'll no longer even be involved.

We have given away our power and are getting not much at all in return.

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