JUNE 13, 2003

By Christopher Kenton

Mr. Kenton Goes to Washington

My columns on overseas outsourcing brought an invitation to testify on Capitol Hill. Here's the gist what I plan to say

I thought I was through with the overseas-outsourcing issue, but I've caught hold of something that won't let go. The latest escalation came this week, with an invitation to testify before a congressional hearing on outsourcing hosted by the House Committee on Small Business. The hearing was called to examine the issues of globalization and the potential threat to the American economy through loss of jobs and wages. (For earlier columns on the offshore IT debate, see BW Online, "The Woman Behind the Code", "Grasping, Greedy, Unpatriotic? Not Me", and the reader reactions those articles inspired.)

My preparation for the hearing has been challenging, since I don't have a clear constituency. I'm neither a voice for corporate interests, since I advocate reforms to the H1B and L1 visas, nor a voice for labor, since I advocate against trade barriers to protect jobs. But I accepted the invitation in order to clarify the issues that I believe should be considered to attenuate the problems.

To do that, I'm breaking the issue down into four pieces.

Understanding Root Causes. Why do businesses outsource overseas? Obviously, the primary drive is to find cheap labor and improve profits. But there has to be sufficient motive and opportunity to justify the risks in moving away from an existing supply chain that already works.

In the motive category we're experiencing two very effective forces today: competition and recession. In the technology industry especially, rapidly improving organizational efficiencies have lowered the barrier of entry into many business sectors, increasing competition, and reducing margins. Businesses are compelled to squeeze every ounce of cost out of the system in order to compete effectively for market share and investment dollars. In the context of a recession this trend is only magnified.

The opportunity, ironically, comes from the very sector that is now suffering the most. During the boom time of the 90s, telecommunications and computer-equipment providers sold a wondrous dream of global real-time communication. Remember those glossy ads showing a businessman in New York sending instant messages to a monk in Tibet? The dream-as-necessity was so effective that we created massive overcapacity, loading businesses up to the gills with servers and high-speed pipelines.

All that helped entrench the recession when businesses quickly discovered they just didn't need any more equipment. And as sales plummeted throughout the industry, business focused on slashing costs -- which is when those servers and high-speed pipelines really came in handy. If businesses could communicate globally in real-time, they could chase cheap intellectual labor around the world in real time as well. This is and example of what I call the Rake Effect: You don't realize when you step on the rake that the handle is accelerating toward your head.

Defining Effective Regulation. Once we have a good grasp on the root causes of a problem, it makes sense to think about regulation. Few would argue about the necessity of regulations in general, but regulations are forged from a political process rather than common sense, which leads us far too often into the realm of unhealthy compromises and unintended consequences.

In the case of overseas outsourcing, the goal of regulation would be to end the migration of jobs overseas. That could be accomplished in a number of ways, but the most likely solution would be to raise trade tariffs on overseas labor. By making the cost of overseas production more level with domestic production, you would reduce the incentive for going offshore, and more jobs would be retained at home, or so the thinking goes.

From the moment we get into a discussion of trade barriers, however, we start watching the political process wend its way down the path of special interests and lobbying -- which means the debate won't really be about American jobs, it'll be about the advantages an influential industry can gain by manipulating market forces. And that's exactly where I'm afraid small businesses like mine will get lost in the legislative shuffle.

THE UNINTENDED CONSEQUENCES. While the current trend in overseas outsourcing among large companies -- and the attendant loss of jobs -- has been covered substantially in the press, the benefits and opportunities of overseas outsourcing among small businesses are much harder to see.

In my business, for example, I had completed layoffs long before exploring overseas labor. The jobs I outsource are small contracts that have allowed me the opportunity to create products I simply can't afford at home. A recent job for which I received local bids of around $5,000 I've since had done overseas for under $200. These contracts don't replace American jobs, since I simply couldn't do the work at domestic prices. But it provides me the benefit of creating a product I can market and sell, sustaining my company so I can create more jobs.

While we're so focused on the activities of large businesses that are on the front pages of our newspapers every day, it's often the small businesses like mine that develop new ideas, that help the economy grow, and that challenge larger businesses to innovate. When we start creating reactionary regulations to moderate the behavior of large businesses, we risk stifling the businesses that provide much of the energy for our economy. Personally, I believe in the competitive vitality of small businesses far more than I believe in the potential fruits of protectionism, which always seem to sap innovation and energy as the price for propping up employment.

ACTING ACCORDING TO OUR VALUES. The bottom line to this entire discussion is that no amount of regulation will stop us from our chronic pursuit of short-term self-interest. Laws, after all, are no substitute for conscience. Just as we have businesses that cynically undermine their own workforce to improve profits, we have consumers that will ignore the impact of shopping for knock-offs to save a few bucks. It's no accident that one the largest single forces in our economy is Walmart, or that the most successful e-commerce sites are eBay and Amazon. We want as much as we can get with our limited supply of dollars, damn the consequences.

I find myself asking then about the real values that lie behind our desire for regulation. Every discussion of outsourcing at some point brings up the impending loss of our standard of living. At the end of the day, I think what we really want is for regulations to help us keep what we have, and if we can, to get more. From that perspective, we're always looking at regulation from a foot off the ground, rather than from a more objective vantage point.

WHAT'S IT ALL ABOUT? At what point do we look at international trade regulations from the perspective of what we want to achieve in the world? More to the point, what exactly do we want to achieve in a world where technology erases time and distance? Are we intending to lead the world in innovation and improved standards of living? Or are we intending to hoard and protect our stash?

If you have any thoughts on these issues, or on issues that I've missed, I'd welcome them before next Wednesday's hearing. I need all the insight I can get.