Tag Archives: outsourcing

Dissecting the Skills Gap — The Sequel

Pop quiz.

Q.  What is the job of Management?

A.  To manage!

And yet, in the area of human resource development, managements of big and small companies alike have failed to manage what they profess to consider a strategic threat to their sustainability.  They are not without options in addressing this problem; primarily they are without vision. And to a large degree, they have created their own problem.

Sometime in the ’90s (you remember, that prior century. How quickly they seem to pass these days), I became aware of the growing meme that the labor force of the future would have eight to twelve careers in the course of their working lives. This is the kind of nonsense that routinely flows from hip thought fountains like Fast Company and similar self-styled orifices of cutting edge management wisdom.

One must then ask what constitutes a ‘career’ by that definition.  Take a 40 year work life and divide by 8 (to keep the algorithm conservative and simple) and you’ve got 5 years plus or minus for a ‘career’.  Except for the exceptional, most people are only reaching their competence and optimum productivity in the first five years, and ready to move on to the next level of ‘Career 1’.  So the meme suggests one of two pathways:  1) we’re talking about truncated expertise and productivity among ‘career’ moves; or 2) we’re really talking about job moves for the most part.

I am an accountant.  I’ve morphed into many forms with multiple companies over my career, but I remain fundamentally an accountant by career definition and SKILL SET, which has also morphed over time.

If we’re talking about job changes, we’re talking about tactical changes in our preparation and decisions as CEOs of our personal careers.  But if we’re talking about planning for a future of major ‘career changes’, we’re talking about strategic decisions of much greater import.

Back in the good old days of the Last Century, major corporations would hire a careerist by some definition, and mold him/her through various means of career planning, investment in education, job rotation, etc. to meet their long-term needs.  Corporations invested in advanced degrees and credentials, and acquired individuals who expected advanced compensation and who in too many cases were expert at ‘doing the drill’, but often susceptible of ‘missing the point’. Hence many organizations, bloated with expertise, notoriously missed opportunities/risks presented to them in the tumultuous  events of the ’90s.

But in our current management environment where management regards people as plug-and-play commodities, to be available exactly when needed with exactly the needed skill-sets, we’re running into a problem.  Not surprisingly except to the executive corp, supply is not meeting the demand. Embedded in the corporate mentality is the convenient, if utterly unrealistic, assumption that ‘the workforce’ will self-manage itself to management’s needs. It will intuitively divine the constantly shifting, A-D-D driven expectations of the E Suite and reprogram itself to need.  It’s not working.

This was reinforced this week when I attended the 18th International Festival of Arts and Ideas in Yale, Connecticut (also known as New Haven).  On the particular day of my attendance, the theme of ideas was innovation, at various levels of the entrepreneurial food chain.  I attended a panel discussion in which representatives of four innovative organizations spoke of how their organizations endeavored to promote innovation and economic growth.

During the Q&A, I did what I so often do at these events and threw them a curve ball.  Acknowledging the obvious benefits of their various contributions to innovation, I asked if their organizations ever consider what is often the intended consequences of innovation: the displacement of people from their positions.  The answer was not surprising, and telling.  The collective response was the recognition of the reality of my question, but the belief that many of the people who are displaced in one instance will transfer their skills to other promising opportunities.  In essence, they were speaking to a small segment of highly creative, highly skilled, highly motivated individuals who are on the cutting edge of innovation, but not the vast majority of the workforce, many whom have been or stand to be displaced by future innovations.  The panelists were unknowingly trapped in their own philosophical bubble.

My question was somewhat unfair, because it is not necessarily the role of any given corporation to plan for the collateral labor consequences of its strategies, particularly beyond the boundaries of its corporate mission.  But if not business, who should be concerned? The implied answer is the labor force.  It should pack its own parachute.  It should be ready to bail at a moment’s notice into the unknown and recover instantly without need for unemployment compensation, government sponsored re-training or damage to their credit ratings and impairment of their ability to sustain consumption.  Neat trick if you can do it.  Statistics suggest it’s not working.

Over the years and with the ever-increasing demands for maximum growth,  US business in general has relied on growth by acquisition over internal, organic growth. The results have generally not been good for a variety of reasons, suggesting an overall lack of executive competence in effectively managing this strategy, and resulting in investor cynicism when presented with this proposition.

Similarly, corporations have revealed equal challenge in effectively managing R&D reliably to support organic internal growth with some predictability.  Thus, they have again turned to external acquisition, looking to small start-ups who can furnish what the biggies cannot conceive.  It is an option to be sure, but an opportunistic one; not a strategic one, and filled with risk for all involved.  Imagine if we tried to go to the Moon with such a strategy.

*   *   *

In 2005, I was researching the issue of technological displacement which I had concluded trumped outsourcing and off-shoring as threats to economic stability in the US.  In the course of that research, I came across an article that reported a decline in the number of US students considering a career in computer science.  Eschewing the rising paradigm?  How foolish! Do they not see the future? Quite possibly at the time, the future was obscured by the fog of the present.  Seeing on the one hand what was happening to their parents in their respective fields, and hearing the propaganda in the background about 8 to 12 careers in a life time, they may well have wondered what was the point in investing intensively in a demanding career that would likely render them obsolete by forces they could not anticipate before that career made them secure.  Good question.

*   *   *

Two weeks ago I attended a conference on transit oriented development. An intern joined our table. When I asked her background, she indicated that she was currently studying at an Ivy League university.  I asked her career interests. She replied that she was pre-med, but also considering career options in community engagement.  It struck me as a somewhat strange combination, and she seemed of equal mind on both.

Last week at the Arts and Ideas Festival, I made a stop at a small business incubator. On one of our stops through the facility in a recently re-purposed commercial building of some vintage, a young lady described her services with the incubator in facilitating programs to inspire and nurture would-be entrepreneurs.  At the encouragement of our program guide, she also offered that through her primary efforts, she was developing her own small business to sell cupcakes, samples of which she offered to us.  I wrestled with concurrent feelings of cynicism and sympathy.

My feelings of cynicism sprung from a sense of the triviality of what I was observing, and the high probability of failure.  It was tempered only by the realization that, for all I know, her cupcakes could be the next Mrs. Fields success and go viral.  But the sympathy came from a sense that these were acts of semi-desperation in an economy that offers her and her  cohorts little more of substance at this moment, and perhaps for many moments to come.  I respected the dignity of her effort, even if I questioned its probable success.

In both cases, these young people seem to have arrived at the atrium of adulthood without clear direction leading to a sustainable future.  They are joining older cohorts who previously had a sense of clear direction, only to be derailed by circumstances they did not anticipate, and in many cases could not have foreseen.

*  *   *

US society has learned to recycle waste.  It is gradually learning to recycle the electronic refuse of our digital era.  But we are doing a genuinely lousy job of recycling people to beneficial purpose, and that is the ultimate waste.  In that human ‘waste’ is the future sustainability of our obsessive consumer economy, and all the marvelous innovation that presumes to support it.  It also holds the fate of our democracy.

Onward

20130624

Advertisements

Employee Benefits – The Illusion and Betrayal – Part 1

Economists have acknowledged in various ways that employee compensation has been flat or in effective decline in real terms over the past thirty years.  In the asymmetric warfare between employers and employees, employers have had, and exercised, the upper hand to the detriment of their employees.  ERISA, the Employee Retirement Income Security Act of 1974, has had limited long-term benefit. And now, here we are at the edge of the demographic cliff, waiting to witness the splat below as a generation of the trusting and indifferent slowly goes over the cliff over the next twenty years.

In this post, I will address retirement plans; in the next, health care.  My comments come from my vantage point on the periphery of the issue, beginning in the mid seventies when I worked for a multi-line insurer which was a major force in group life, health and pension benefits.

The mid seventies were an inflection point in the evolution of big business, its relationship with its employees, and the fate of employee benefits. I came to realize this quite by accident.  But hindsight solidified the understanding and as years passed, I connected the dots and a clear trajectory evolved.

My understanding  began quite unexpectedly in the corporate library of a major insurer.  I was an internal auditor at the time. I had just completed a survey of the Group Pension Department; a reconnaissance, if you will, to understand the business terrain and scope out future audits.  During that endeavor, I became aware of the shift in pension plans from defined benefit to defined contribution basis.  In defined benefit, the employer assures a future benefit of some measure, and is on the hook for funding over time to generate it based on the demographic profile of its retired workforce.  If the asset base modulates in value , or life expectancy extends appreciably beyond actuarial expectations, the employer faces future cost increases of a current commitment.  By contrast, a defined contribution plan insulates the employer from future variables, and transfers that risk to the beneficiary who may not fully comprehend this dynamic quite as well.

By chance, I came across an article in an arcane actuarial journal. Regrettably, I did not copy the article or remember the name of the journal.  But the article’s point was quite direct.  The authors opined that if the nation’s Fortune 500 companies retained their current retiree health plans, they would all be bankrupt by 2000.   Now, the life actuaries I have known are for the most part a humorless bunch, and not given to hyperbole. Indeed, by comparison, they make us accountants look gregarious.  So the assertion of the article struck me as being rather sober, if beyond easy comprehension, and worth filing away in core memory for future reference.  And the journal was not one to catch the attention of the mainstream public, mainstream media or mainstream business press.  To my knowledge, it didn’t. So the authors were not intent on seeking attention of the masses.

Within two years strange things began to happen on the way to the millennium.  Corporate ‘restructurings’ became a fad. More financial restructurings than organizational or functional restructurings. I never fully grasped what this apparently cosmetic process was all about, but it seemed to have the feel of shuffling the deck chairs on the Titanic.

Next, I noticed that the term ‘associate’ began to supplant the term ’employee’ in many companies’ reference to employee related issues.  It struck me as a bit odd.  ‘Associate’ connotes a relationship somewhat more detached and ’empowered’ than ’employee’; as if the associate is more equal, though we all know better. I might not have noticed this subtle change, had it not seemed to blossom in multiple corporate venues almost simultaneously.

Next, we begin to see ‘downsizing’ and ‘right-sizing’ throughout the early eighties, in which companies seek to shed ‘overheads’ and strip down to their ‘core competencies’.  In some instances, the corporations attempt to do this humanely for some of their middle managers and professionals by granting them ‘consultant’ relationships in place of their current employment relationships.  This temporarily reduces headcount on paper, but not necessarily cost.  It does, however, cut the benefits bond. And within a year or three, it cuts the consultancy bond. In other cases, there was merely churning of staff in order to get rid of ‘dead wood’, but really to drive down the unit cost of labor.

Another stratagem of this time was to cut loose an internal function and its related staff to an outsourced service bureau on the pretense that the function is now more closely aligned with the core competencies of the outsourcing firm than with the client firm, and that economies and efficiencies will evolve.  IT and facilities maintenance functions were prime opportunities for this. The chief economy achieved in the mid eighties was that the salaries and benefits of the outsourcing firm were not as generous as the prior client firm relationship.  Over time, competencies and economies of scale did evolve for these service oriented entities as advances in information technology supported true specialization. But the primary initial motivations appeared to be reduction of headcount and associated benefit costs.

By the mid ’90s an age of business irrational exuberance topped Francis Fukuyama’s ‘End of History and the Last Man Standing’ with the notion that the business cycle had also been vanquished along with Communism. Corporate boards across the business spectrum gathered around the punch bowl to celebrate the growth of stocks, and with that, the growth of pension fund surpluses that could now be ‘redeployed’ back into the enterprise, on the assumption that the good times would continue to roll unabated,  Was this corporate herd mentality or a conspiracy of the elite? The question is largely irrelevant, though there is ample precedent to support corporate herd mentality. The end result is the same: the looting of many pension plans of critical value on an unsustainable pretext.

And then  came the ’00s.  Who could have ever imagined in their wildest nightmares that the good times wouldn’t role on forever, and the dreaded Business Cycle would swing back with a vengeance.  Downsizing proceeded with new vigor through outsourcing, off-shoring and technological displacement wherever possible. Defined benefit programs were frozen, and in some cases defaulted into insolvency and the tender hands of the Pension Benefit Guarantee Corp, in the case of the private sector plans.  In the course of this turbulent period, we discover the utter sham that is the financial services sector, fleecing not only the little guys, but the supposedly smart set that populate corporate C suites and boards of major entities outside the investment community.

And then comes the Great Repression of 2008, and its multiple aftershocks and tsunamis, most significant of which was the stripping of all pretense of viability of public pension plans. Since then, much has been made by corporations and the Republican party of the excess of unions in negotiating unsustainable pension benefits.  It doesn’t wash.  There were two parties at the negotiating table. Managements, both public and private, were in the position to know the truth about their pension obligations. Union leaderships, of varying degrees of competence, should nonetheless have been equally competent in understanding the evolving economics and trend lines of benefits. But over the thirty years, all vigorously sustained fictions bordering on fraud that were no longer sustainable.

And here we are now in the ‘teens, waiting for the Boomer retirement shoes to drop as if from the feet of a centipede over the next twenty years.  As we begin the run-up to this transition, it is fitting that the phase ends as it began.  Just as the phase began in the seventies with financial ‘restructurings’ of dubious benefit, we are now in QE3 (Quantitative Easing).  I have not understood the mechanics of this stratagem any better than restructuring.  Critics worry that it is creating a market bubble that will eventually burst.  Could be. But that doesn’t speak to why it was created.  I suspect that one reason, perhaps the main reason, is to prevent private and public pension plans from falling into technical default and triggering major shock waves, particularly in the public sector.  It serves the same function for pensions that the bail-outs did for the banks in 2008; to engineer if possible a smooth transition at best and a softer crash landing at worst.

I have no favorites in this tale.  Managements kicked the can down the road, rather than bargaining smartly with their employees through their unions.  Unions slit their own throats by piling on demands that were winnable in the moment, but not sustainable in the long run. Advisers to both remained mute as to the realities of the gradually evolving trends. But not all advisers.

Employees remained oblivious or indifferent to warnings in the press regarding the inadequacy of social security alone as a retirement income source.  They appear to have remained equally oblivious to what was happening around them in the corporate jungle as the rain forest of retirement benefits was steadily being mowed down, laying bare the land to the scorching heat of an evolving and predatory economy.

No, there are no favorites, and no innocents.  Just plenty of victims.

And the question – which way forward, and to what destination?

Next stop: health care.

Onward.

20130120

Arbitraging the Economy

The following is the classic definition of arbitrage, per Investopedia:

“The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.”
That’s the classic definition as applied to its typically limited application in financial markets.  But Corporate America has transcended that small-minded application in the past fifteen years. It has applied it to the whole blessed economy, with the corporate flagship of Walmart being the best known practitioner. Through the application of outsourcing and off-shoring, corporations have succeeded in reducing their expenses but continuing to sell to the American public at the same prices, and take the difference straight to the bottom line.
That’s the theory, of course, at the firm level.  It operates on what I often refer to as the ‘greater fool than I’ theory; a stratagem of self-deception that assumes the operator is the only one brilliant enough to conceive and deploy the stratagem to sole advantage.  Of course, when this exercise in self-deception is applied collectively by the corporate herd, the end result is what we have observed: the gradual collapse of the aggregate well-being of corporate profits and general economic vitality.
The reason is obvious; so obvious in fact that only a cocooned corporate executive could miss it.  Every employee is inevitably some corporations’ customer, at least for today. Cut or eliminate his/her salary and the operator saves its expense, but also cuts the purchasing power for the goods and services of  some other executive member of the country club. Do this often enough and to scale and we have a circular firing squad.  Congratulations.
This cumulative effect has been slow to manifest itself.  Business has contended that off-shoring is a small element of the total economic picture.  Who knows for sure?
Further, since the Great Repression of 2008, ‘gains in productivity have been further achieved with reductions in wages and benefits below the E-Suites, and translating full time workers into part-time-without-benefits workers (although I have yet to understand how this contributes to productivity except perhaps for the Walmarts and McDonalds  of the world.
So the cash has piled up on the balance sheets, but fear has begun to infest Corporate heaven.  It hasn’t shown up in stock prices yet, probably thanks in part to QE 2, 3, etc., but it apparently has in last quarter’s earnings.  I believe that will continue, regardless of whether we veer away from the Fiscal Cliff, because the stratagem of arbitraging the economy is one that big corporations will follow over their own cliff.
Corporations have argued that they are sitting on mounds of cash because of uncertainty about regulation, the future course of the economy, the existence or not of a China bubble, the fate of Greece, the meaning of life and the winner of the next super bowl.  But the truth is that the very stratagems that have led to their concentration of wealth and power are the same ones that will destroy the basis of that wealth and power.
Economic growth requires job growth. If Corporate America is to live up to its mythology and earn its pay, it must begin to take risks and resume being the job creating engine it claims to be. Of course, to jump-start that process in a period of diminished consumer vitality, Big Business will need to partner with Big Government to get the economic engine chugging again in areas where real productivity can be achieved, ….like $3 billion in deferred infrastructure investment.
Unfortunately, unless wisdom soon manifests where it is rarely observed, the rest of us will at best observe a Pyrric victory in Corporate America’s eventual demise, notwithstanding the US Chamber of Commerce’s likely assertion that ‘it was all Obama’s fault’.
Onward.
20121201

Capitalist Papers 8: Capitalistic Cannibalism: Self-Destruction by Self-Consumption

Capitalism is a self-destructive paradigm.  I'm not speaking of private enterprise, or a
competitive business environment.  I'm speaking of the mutant form of
these two economic dimensions that we refer to with unquestioning
reverie as 'Capitalism'.

It is self-destructive because it has become addicted to a form of
cannibalism that, having devoured its competition, turns on itself in a
self-consuming act of gluttony, with the drug of profit stimulating the endorphins for its own destruction.

Three phases of
Capitalistic Cannibalism appear to exist: competitive cannibalism; customer
cannibalism (what I call "stage 1 death by metrics"); and corporal cannibalism (no, not 'corporate'; corporal —
the consumption of one's own body in a final desperate act of survival(aka: stage 2 or 'terminal' death by metrics)).

Continue reading

Outsourcing our future

2007/10/27

David Brooks’ column in today’s New York Times,The Outsourced Brain, touches on an interesting dichotomy. The advantages of our technology that expand our capabilities on the one hand, also have a curious way of rendering us more vulnerable.  While Mr. Brooks addresses this issue on a personal level, it has some profound relevance on social, civic and organizational levels.

The theory of outsourcing as it has evolved in business over the past twenty five years is to focus on your ‘core competencies’, and leave everything other than those core competencies to others who possess greater efficiencies or economies of scale or competence to execute them.  In the beginning, this was little more than a ruse employed by some corporations to downsize internally to create a lean and mean image for investors and to shed costly internal staff for less expensive ‘external staff’ (who, coincidentally, were often the same people they previously employed). 

Continue reading