Another Perspective

“Outsourcing” — For Real

The development of real outsourcing makes up one of the major threads in the story of business from the 1980s onward.

By 4.8.04

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To call "outsourcing" a political football insults football. Football makes sense. The press and the politicos haven't even gotten the term right. As a long-time advertising writer and consultant, I've benefited from outsourcing, the real kind. That takes place when companies decide they can hire vendors job by job instead of regular full-time employees. And the development of such outsourcing -- real outsourcing -- makes up one of the major threads in the story of business from the 1980s onward.

Did you know, for example, that "working your way up from the mailroom" mostly isn't possible anymore? Many large companies outsource their mailroom and similar functions, like copying and binding, to another company that comes in and sets up shop on the first company's premises. That second company takes responsibility for the payroll and benefits (and liabilities) of the mailroom employees.

And what do you think an advertising agency is? Or an accounting firm or law firm? Or business consultants, or sensitivity trainers, or 401(k) plan providers? They are vendors, recipients of outsourced jobs.

But no, never mind what outsourcing really is. If you paid attention to that, you might find out that the "jobless recovery" isn't so jobless after all, as more and more of us turn into vendors, rather than employees.

Nowadays, "outsourcing" means "hiring foreign employees." Or, if you want to attack the practice, "outsourcing American jobs." How do the sides line up? On Investor's Business Daily's front page news roundup for April 1 appeared the telegraphic head: "Treasury Sec'y: Outsourcing Good." The Bennington (Vt.) Banner, in a March 20 story headlined "Outsourcing Toll Mounts," described three bills introduced by a rogue's gallery of the most egregious meddlers in Congress: "There is the Defending American Jobs Act, authored by Rep. Bernard Sanders, a Burlington independent. Another is the Jobs for America Act, backed by Vermont Sen. Patrick Leahy. They are joined by Rep. Marty Meehan, a Massachusetts Democrat pushing the USA Jobs Protection Act."

And John Kerry accuses CEOs of companies that "outsource" of being "Benedict Arnolds" - i.e., traitors.

TO FIND OUT what foreign hiring is really all about, I asked somebody who does it. In July of 2000, my old friend from New Jersey, Tom Loop, started a company with his friend and colleague from Prudential Securities, Rak Chugh. The company, Manhattan-based Byte Consulting, does for financial firms what Tom and Rak used to do for Pru:

"We work in the structured finance area," Tom says, "structuring financial transactions like derivatives and other instruments." The underlying securities are mainly aggregated fixed income streams, "some kind of collateral, like mortgages, credit card receivables, or equipment leases."

Complicated stuff, making Tom and Rak, in finance speak, "quant geeks." Computer programming plays a major role in the business.

"Oh, very much so, a huge role," Tom explains. "You deal with hundreds, if not thousands" of payment streams, which have to be quantified in order to present the investment to potential buyers, to describe its return, to position it among other asset classes.

In mid-2000, when Byte Consulting started, "Tech jobs were in huge demand here. The demand just could not be satisfied. I tried to hire a lot of people for Pru. Good people were really hard to find." That, in turn, drove up the price of U.S. talent.

"We figured we could marry our financial expertise with the technical expertise that was available in India and satisfy some of the huge demand of the financial sector." Before the days of the Internet and voiceover ISPs, natch, the setup wouldn't have been possible at all.

How much did it save, hiring Indian programmers?

"At that time, labor there was available at about one-fifth the price in the U.S."

Byte Consulting employs about 50 programmers in India and a staff of a dozen or so in the U.S.

There are drawbacks. "We're dealing with technicians (in India) who don't even know what a bond is," Tom says. Byte has to work harder training the programmers.

When I asked Tom whether the incentives to hire abroad were mainly positive (i.e., subsidies or tax breaks) or negative (high U.S. costs and regulatory burdens), he had to think about it.

"The regulatory hurdles we face are visa quotas," Tom says. "We could bring over more people under other visa options. The only (tax) benefit might be that we don't have to pay matching FICA (Social Security) contributions for those people (in India)."

Without the economic advantage of hiring Indian programmers, Byte Consulting might not have created its dozen U.S. jobs at all. Prudential fired the entire structured investment department in 2000 three months after Tom left. And, as Byte develops a track record and attracts more business, the company expects to hire more U.S. employees, mainly in client service.

Benedict Arnold? Yeah, right.

Lawrence Henry writes every week from North Andover, Massachusetts.

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Lawrence Henry writes every week from North Andover, Massachusetts.