Who’s looking out for the US business these days?

Phoenix_ashes I was having a little joke yesterday, where the premise was: "So what do we do once all the jobs have been offshored?"  My initial solution was:  "That's easy -  we create great low-cost skills here, and we bring them all back".  The other partaker in the mirth added:  "Wrong – we will still be offshoring, as all our business headquarters are moving out too.  In effect, we'll be offshoring jobs to America". 

As we rolled around on the floor in uncontrollable laughter (OK, it wasn't that funny), it did hit home how unattractive the US is becoming for businesses. 

  • US corporate taxes are among the highest in the world.

  • The cost of living and wages in business centers such as New York, Philadelphia and Chicago is off-the-scale.

  • The cost of healthcare is a killer – and, despite the excellent intentions of this new proposed healthcare reform, the tax burden on the US business is going to get even worse.  For the cost of one years' benefits package in the States, you can hire a full-time ABAP programmer in your offshore captive for that entire year, or pay for half of one (for the entire year) with a service provider.

  • Other Western countries are far more corporate-friendly.  I was helping a friend with a business plan the other day, and the cost of hiring qualified graduates in London (yes, London) is half that of New York (and getting even cheaper in this market).  Why even consider setting up a global business in the US these days in this virtual environment?

As much as I admire all the efforts of President Obama to drive reform and economic stimulus into the US economy, I just don't see the environment for the US business to thrive and create new jobs being created.  I'd like to see stimulus money being allocated to helping businesses create new knowledge-jobs that are competitive with those on offer from India, Europe, China etc.  The way things currently stand, the US business environment has never been so ripe for outsourcing – not just for accessing lower-cost skills, but also for our businesses themselves.

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21 Comments

  1. James McIntyre
    Posted July 24, 2009 at 10:38 am | Permalink

    We need to focus on helping our businesses like we have our banks. Well said Phil!

    James.

  2. Michael Koontz
    Posted July 24, 2009 at 11:03 am | Permalink

    The US is a great place and a world leader but over the years we have become complacent, tied to our own success. The offshoring activities will force Americans to step us and look for ways to compete with the offshore countries.

    As we move into more of a global economy it is going to become more critical to be able to compete on more then just cost. It will really come to value and because of this the US market is not out of the race, just need to reposition the services and look for the value to the services. Companies will always pay more for better value, well at least the good ones. Competition is healthy and will in the end be advantageous to the end consumer.

    It is time to step up the game and take it to the next level.

    Michael Koontz

  3. Posted July 24, 2009 at 11:10 am | Permalink

    You’re right Phil, it’s not that funny but I did laugh… just a nervous reaction I think because your points are all valid and… scary. It’s a good thing that offshoring is not the only option for outsourcing. There’s “nearshoring” of course but even better is onshoring which now includes Canada and times like these are prime opportunities for the US and Canada to show the rest of the world the value of true partnership between two entities… Canada helps the US when needed, and while Canada is enjoying more stability, and then the US helps Canada when needed, when the US environment has improved. It’s a lot easier/cheaper to bring jobs back from Canada than from India, Europe, China, etc.

  4. Posted July 24, 2009 at 12:17 pm | Permalink

    The great news is that we are starting to see the outsourcing jobs move back to the US .. It is with technology breakthroughs and innovation. One great example is our call center agent @ home model. We are seeing 1000′s of jobs coming back into the US due to the costs and quality this solution can provide. Just one example of a company we work with everyday that is making a difference.

    Craig Tobin

  5. Jerry Durant
    Posted July 24, 2009 at 12:27 pm | Permalink

    There are so many factors in play; trade policy, economic, level of sourcing transference… A key to regaining control (or should I say establishing an equitable level) is to have businesses that understand the cost/economics of sourcing, and to balance this with innovation. Why did it take American business so long to even establish stranded operations (and then try and make them like American businesses), why was sourcing looked at as a supply chain matter and not as a service sector, and how come we are still seeing laments about sourcing and not using it as a catalyst for the next order of world business? I have my thoughts but for now I will reserve further public controversy.

    Jerry Durant

  6. Steve Lander
    Posted July 24, 2009 at 12:36 pm | Permalink

    I’d like to pick up on Jerry’s first point : trade policy. The reason that a business can be successfully established in the US is because of the elephant in the room : The imperative for rising protectionism. The US will not be able to afford to keep its economic borders open given the plight of its finances. Leveling the playing field for taxes is, in my view, the first salvo in turning industry back to the US, and have it cater for its own demand.

    The US has ample, willing and well-trained labor together with enormous internal demand (albeit in negative growth). The well-commented-on trends (healthcare costs, labor costs) are worthy of focus, but more so are absolute levels of demand & the new political/social/economic imperative.

    Steve Lander

  7. Posted July 24, 2009 at 3:21 pm | Permalink

    A couple of the comments hinted toward at least a partial answer to this seemingly dire situation which is domestic sourcing or on-shoring. We have the ability to utilize the labor arbitrage tactic right here in our own non-metro towns and cities across the US. You mentioned how expensive it can be to hire talent in the major metro areas of the US. However, not all the talent chooses to join the urban sprawl way of life. There is a growing number of experienced and talented IT workers who are choosing to live or move back to these low cost, high quality of life locations. AND willing to accept lower wages for that option to live in places like Jonesboro, AR or Greenville, NC. While on the surface it may not seem that the hourly costs for an ABAP programmer in Jonesboro can compare with one in Bangalore. However, as sophisticated companies begin to look at the fully-burdened costs under both scenarios the on-shore option is very competitive and compelling. Not to mention that the taxes generated by this US based job may help pay for some of these expensive programs.

  8. Posted July 25, 2009 at 6:23 am | Permalink

    Phil,

    US has been and will remain, for decades to come, the epitome of innovation and enterprise. The job loss that we have seen in this country has been primarily due to reduced focus on innovation and enterprise and more focus on Q-on-Q earnings growth. Off-shoring will continue and should continue but not just for cost arbitrage. Other factors like expertise, efficiency, standardization and service excellence must be considered with equal importance as cost. Many companies jumped on the off-shoring bandwagon without much thought and due diligence.

    On the other hand with protectionist approach, government subsidies, trade barriers and other measures to prevent free trade, the dollar will most likely start depreciating – which will make off-shoring less attractive but may lead to other consequences in the international markets – Companies/Countries pulling out their investment from US and taking countermeasures to US actions. In the long run such measures will prove to be counterproductive.

    I tend to agree with you on where to spend the stimulus money. I’d go on to add that certain fundamental lifestyle changes are needed in the American society (like over dependence on Credit, tort/liability laws and Insurance – they add to the cost of living and hence cost of doing business).

  9. Posted July 25, 2009 at 9:17 am | Permalink

    Hi Vikas,

    100% agree on the innovation and entrepreneurial spirit statement. However, it’s the tax and cost burdens of running a business in the states that make it unattractive. Not to mention the fact that, while the top talent still resides in the US for most areas, the other countries catching up (dare I say BRIC?).

    I do believe that the global war for talent will start to level out in time (and currency fluctuations will play some role in the short-term), and we will start to see a great equalizer across top nations.

    However, we should closely watch where the next generation of innovative companies are headquartered… entrepreneurs can set up shop in many alternative locations these days. They will go where they can access talent at reasonable wages, and the cost of running the corporation isn’t prohibitive.

    And we can’t rely on past glories, which I fear corporate America is currently doing. It’s about future glories… times have changes and we need to get with it.

    PF

  10. Raghu
    Posted July 25, 2009 at 6:18 pm | Permalink

    Refreshing and real point of view, Phil! It sure has been a matter of choice. Reasons attributed by most others commenting on this question have credibility. However, one has to view this from recent economic history to understand the rationale for outsourcing phenomenon. Some points to be considered are as follows:
    - Is it the tax structure the sole reason for this rotten mess?
    - What may have been those reasons for the US to stay-put when the rest of the world has changed dramatically if one has to consider the tax regime amongst OECD between 1980s – 2009?
    - Are we faced with a fundamentally structural problem as such that has led the US to fire-fight to stay afloat even if it meant risking an unfriendly posture as a land of opportunities?

    While outsourcing / off-shoring have their own pros and cons, it is important to realize that the US may be going through a overhaul of sorts which is set to bring about a whole lot of behavioral changes as well. Besides, the ongoing economic crisis that led to one another over the last couple of years has surely made a statement in this direction.

    Lastly, the US administration is itself going to make some choices which will determine the direction of its policy. Staying ahead of others also may going forward mean quality of life as also the perception on the possibility of achieving it in the US.

  11. Posted July 25, 2009 at 10:03 pm | Permalink

    Phil,

    When you say that it is the “tax and cost burdens” that makes US unattractive for businesses, you reinforce the point the point that I highlighted. Tax is nothing but cost of living in a civic society. Be it individual or an enterprise, the cost of living in a society is born by one and all. So far, for the businesses, the top line has grown at a decent enough pace that the cost of running business in the US has not outweighed the benefits of innovation and enterprise. To have US continue on the leadership path we shouldn’t look at the Government to cut taxes but take it upon us, as a society, to understand why it costs so much to live in America and what can we do to bring those costs down. It is really as simple as it sounds – look at all the elements of cost of living in a society and eliminate what is unnecessary (like tort and liability insurance) and reduce what can be reduced (debt and healthcare burdens).

    America’s strength is individualism and so is its weakness – especially when it comes to the legal system and all the systems that have been built to protect the individual at the cost of society.

    Yes, the talent and growing shift towards innovation and enterprise in a flat world poses serious challenges to US businesses. Protectionism and trade-barriers are not the solutions to deal with this challenge. I think we need to turn away from the glorified greed (as portrayed by Michael Douglas in “Wall Street”) and go back to the values and Americanism of Theodore Roosevelt.

  12. Posted July 26, 2009 at 9:55 am | Permalink

    It really depends on how you look at taxes. Do you look at hard numbers, or do you look at marginal effects?

    While the United States corporate taxes are the second highest in the world, the marginal tax rates for corporations in America are in line with the rest of the world.

    Read: http://www.treas.gov/press/releases/reports/hp749_approachesstudy.pdf

    From the Executive Summary of this paper:
    “As barriers to cross-border movement of capital and goods have been reduced, differences in nations’ tax systems have become a greater factor in the success of global companies. Recognizing this, many nations have changed their business tax systems. During the past two decades, many of our major trading partners have lowered their corporate tax rates, some dramatically. The United States, which had a low corporate tax rate in the late 1980s as compared to other countries in the Organisation for Economic Co-operation and Development (OECD), now has the second highest statutory corporate tax rate among OECD countries. Moreover, other OECD countries continue to reduce their corporate income tax rates leaving the United States further behind.”

    And what does this mean? Well it means that while we are in line with the rest of the world in regards to marginal tax rates, our base taxes are still increasing, which in turn causes marginal taxes to increase.

    My personal problem with this type of tax structure is that it inherently wastes money. Corporations have to hire accountants, attorneys and tax specialists just to maximize their tax deductions to minimize their marginal tax. It also means that companies rely on loans, buying and reselling equipment, etc. to meet guidelines for these tax deductions. While it helps to drive the economy, it is at its core, wasteful, and drives out businesses that cannot or will not fight with the system.

    Dan Rutland

  13. Debashish Sinha
    Posted July 27, 2009 at 8:41 pm | Permalink

    The US businesses will be fine. We don’t need to wait till ALL jobs are offshore. The opportunity to build globally competitive service businesses is here, today. We already have the right mix of ability and incentive. Just needs a few people with the right experience to galvanize it.

  14. Manish Mehta
    Posted July 28, 2009 at 2:22 pm | Permalink

    Hi Phil,

    I will focus on the “Talent/Jobs” part of this question (not Tax/cost of doing biz).

    I am reading this book-”A Whole New Mind -Why Right Brainers will Rule the Future”,& while the concepts are work in progress,it is an interesting read…Can you outsource jobs that require creativity & conceptual& interactive skills?

    I am not saying that this is the answer or will be helpful for everybody….and seems like these days everything that requires quantitative skills can be offshored,

    Cheers,
    Manish

  15. Esteban Herrera
    Posted July 29, 2009 at 11:44 am | Permalink

    Wow–a most succinct summary of the structural issues that impact competitiveness of this country. Fix your four items above (ok the 2nd one is tough because it is driven more by supply and demand than anything else) and we have a shot at continuing to be an entrepreneurial powerhouse that generates great jobs.

  16. Mark
    Posted August 14, 2009 at 4:58 pm | Permalink

    So do we need to have everyone in this country forced out of their homes in order for the home prices to come in line with the salaries that will be available? Does anyone believe the people in other countries are able to buy products from American companies based on their salary levels? Do we need to remove the polution and safety regulations we’ve implemented over the years to be in line with the cost of living in other countries that have no regulations?

  17. Sinaril
    Posted August 19, 2009 at 4:13 pm | Permalink

    For the first time in international economics, the moral authority of US albeit much vaunted soft power appear shaky. The twin tower of Madoff and Lehman collapse has shaken the world perhaps impacting economic scenario more than the original twin tower collapse did. The moral authority of the global auditing firms, not to mention of now oblivious investment bankers is seriously in doubt. The entire edifice of investment banking has collapsed dragging the conventional banking along with it and raising serious questions on American financial wisdom. But sorry I am not ready to join the chorus of blaming US neither would dub the crisis as “Made in America, Exported to the World”. Perhaps, I am little biased towards America as I have always been. But even without it, I would doubt the way the Old world was funding this calamity in making and they should share the blame in equitable proportions. The reckless spending habits of Americans could not have been possible without complicity of equally reckless money lenders of Asia. But as it is always easy to blame, I would take a pause in this blame game and contemplate on what economists are doing. Mostly, it is dubbed as credit crisis and policy of coordinated quantitative easing is followed. In essence, central bankers worldwide are cutting interest rates and printing notes tandem so that relative currency stability is maintained. Overall, when the crisis abates, it will create inflationary trend and fiat currencies will seriously be devalued as money can never be made out of thin air in real terms. But today, no body is daring to think beyond present day revivial of economy. Since, I am capitalist at core, I hate this policy as technically it will defer the crisis rather than allievating it. Instead, I would prefer restructuring of global economy where stronger elements will survive taking down the weaker. However, for that to happen, enormous social pains need to be taken and obviously no politician is prepared to take the risk. While, I am ever supportive of human greed which will pull up from this economic shit it has dragged us into, I am less confident of a workable economic solution out of this economic mess unless some serious restructuring takes place. One thing is true, we are only deferring this risk and we shall eventually run out of options to carry forward this broken economy with those weaker elements. No body is willing to put it out that we are getting to place of total collapse, only few clever men are amassing as much as wealth as they can before the crisis of monumental proportion hit us. From the ashes of phoenix, strong players will emerge accompanied by conservative fiscal management before again we come full cycle to de-regulation and greed in possibly next generations’ time. During rest of our life, we are perhaps going to see restrained global economic model. Perhaps, that’s why life comes full cycle. I have hinged on probability rather than predictability as politics is always intertwined with economics. The great depression was largely over due to World War II. I am not in favor of war as instrument of economic policy which is essential political solution rather than pure economic one. In Asian war scenario, US and Europe will have a field day, but will Asia take the bite? May be the South Asian brothers would take it, if we go by recent indications
    People good at Maths,look into below:
    —————–
    High Cost Low Cost
    Raw Material 30 30 Constant assumed to be sourced from neutral source
    Transportation 2 10 Local vs Global transportation
    Labor Cost 60 15 High Cost vs Low Cost
    Profit 10 20 Arbitrary
    Total Labelled Price 102 75

    Savings passed to Consumer 0 27 Consumer benefited short term(102-75)
    Income Generated within consumer segment(-producer profit) 60 0 Purchasing power of consumer erodes on long term; in this case net erosion is(60-27)
    Profit by producer 10 20 Profit is more for producer;
    Total benefit to economy 70 47

  18. Ratnesh Mathur
    Posted August 21, 2009 at 2:58 pm | Permalink

    Nations dont have moral authority, nor do corporations – at best, one can have a point of view on the morality of some individuals in national/corporate governance. To talk of US moral authority, is as flawed as talking of North Korea & Iran, as rogue-states.

    Obama has set high standards on morality & ethics, for himself & his team, & made them public. Now, take a look at the balance-sheet he manages – http://bit.ly/6ZigY . To do the morally right thing, he doesn’t really have a choice but to take some decisions in long-term national interest, which will have short-term (decade mebbe) negative impact on US corporations.

    In an increasingly interconnected world, the conventional assumption on loyalty of the individual to both corporate & national boundaries, requires revision. We still talk of nations as capitalist, socialist & communist, when we know that these lines have been blurring everyday since at least, 1989. Today, the term ESOP (Employee Stock Ownership Plan) is cited as a great form of socialism inside capitalism but the great American post-war economist, Louis Kelso, who coined the term ESOP in the 1950s, wouldnt agree with this. Louis Kelso (in a book titled – Capitalist Manifesto !) designed the term ESOP, as a way of sharing company stock with 100% of the employees, not just the management cadres/high-performers, as is the norm now. Most of the stock was meant to be traded inside the corporation, amongst employees.

    As the ESOP point highlights, the dominant focus of corporations which are private-enterprises, is just that – private – filling the coffers of the largest stake-holders (top 5% of the employee/board), of the corporation. Just like ESOPs, the new mantra of work being done under – CSR – label, is mostly window-dressing to project socialism, for better public relations. The economic corelation between the growth of the multinational corporation & the country, where its headquarters are incorporated, has always been an approximation. A lack of standardization in international finance now makes this impossible to measure for finance-ministers of any country, which has a fully-convertible currency. If Obama’s government is pressed by any section of the US private sector on fiscal policies, its understandable that they will first seek higher transparency on the real cash position(including wage & private swiss bank account information of the management team) from that sector, as a start-point.

    Some fundamentals of what makes a multinational corporation, are being questioned, for the first time since 1950s. Individuals (not their national governments ) have to lead this innovation. New skills/geographies in the supply-chain, in the form of outsourcing partners, are just first steps towards that innovation. So many US headquartered organizations & US citizens have lead the first phase of outsourcing. This has locked in millions of Indians, Chinese & other developing countries, into the US economy. They see a direct corelation between their monthly salary & the success of the US corporations & the US currency. This is a form of goodwill, which will pay rich dividends, even if no further jobs migrate from the US, to these countries.

    Sinaril is right in highlighting the role of WWII in ending the great depression. This is history. I’m a lot more optimistic about the US economic future. I believe huge peace initiatives (such as the ones Obama favors) can as easily end depressions, by creating new markets & arbitrage. US corporations are known for their risk-taking ability ( sometimes negatively – eg. – banking) & will have an opportunity again. Besides, most Indian & Chinese businesses ( apart from a few BPO salemen), have vested interest in the US currency & defacto interest in the well-being of the US industry. Information about money ( read – US Dollar) has become as important, as money itself – this statement from Walter Wriston ( a great American banker, who created the world’s first global bank), takes a new meaning. Wriston’s other 2 famous quotes are also noteworthy – (a) Capital goes where its welcome , & stays where its well treated (b) Countries don’t go bust..

    Phil, apologies on yet another rambling long note. Feel free to edit, if you post. Some folks I’m doing some consulting work with, have suddenly taken ill – am spending a lot of spare time on the internet. Cleared my backlog of reading on your blog – as ever, full of great insights !

  19. Posted August 28, 2009 at 6:24 pm | Permalink

    There is definitely a need for a Public-Private partnership to create and channel an initiative that looks at areas to create more jobs in United States. There is a lot of talk about knowledge-competitiveness leading to more jobs staying in the country. However, US needs to also focus on certain mainstream service/industry areas where it can be a quality leader in a cost competitive way. If our only focus is on retaining the top of the pyramid in every industry, pretty soon that top will move offshore too.

  20. Posted September 2, 2009 at 12:02 pm | Permalink

    Agreed – we need to step up to make the it more advantageous to keep business in the USA, however we all must understand we are in a global economy and it is here to stay. Take advantage of the economies of scale where we can. I wrote this simplistic article for the everyday worker who needs to shift their mindset. Thanks.

    http://finance-accounting-outsourcing.com/38/outsource-proof-your-job/

  21. henrylow
    Posted January 23, 2010 at 2:36 am | Permalink

    Often we forget the little guy, the SMB, in our discussions of the comings and goings of the Internet marketing industry. Sure there are times like this when a report surfaces talking about their issues and concerns but, for the most part, we like to talk about big brands and how they do the Internet marketing thing well or not so well.

    http://www.onlineuniversalwork.com

One Trackback

  1. [...] When is comes to “bringing US jobs back onshore”, we repeatedly seem to get all sorts of legislation that, quite simply, is focused on restricting our busineses’ competitiveness, when we should be looking at helping them invest in new talent and entrepreneurship, rather than penalizing them for trying to be competitive in today’s global environment. (Read our excellent discussion from last year: Who’s looking out for the US business these days?) [...]

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