INDUSTRY ANALYSIS

Congress and Protectionism: Outsourcing Your Job

One way or another, anti-outsourcing legislation seems likely to pass both houses of the U.S. Congress relatively soon. Whether this comes about through the House initiative led by Bernard Sanders or through other routes isn’t important. What is important is that most of the proposals being discussed have bipartisan support and outlaw the use of government dollars to support foreign jobs at the expense of American workers.

From the long-run economic and military perspectives, this kind of reflex protectionism is counterproductive. In the long run, free trade produces balanced budgets and better jobs while ensuring that authoritarian regimes like Communist China’s come to an end. The problem right now, however, is that the process is out of balance, with the negative consequences arriving a lot faster than the benefits.

What knocked the process off kilter is well known, too: Clinton made two deals with North Korea, one in 1994 and the other in 1999. In both cases, those arrangements were mediated by Communist China, which got provisional most favored nation (MFN) status for its help in the first round and permanent MFN status — as well as WTO membership — in the second.

Foreign-Sourced Services

With the controls attendant on conditional MFN lifted in 1999, Communist China made increased exports to the United States a national economic objective while continuing to block imports from the United States. In an environment where the government owns the country, that support for contract manufacturing quickly led to a disproportionate movement of manufacturing jobs from the United States to China, and consequently set off a frenzy of competitive bidding for American manufacturing jobs by other Asian governments trying to hold market share.

As a result, a lot of good people in both Canada and the United States are now either unemployed or underemployed. And politicians in both houses of Congress are reading polls telling them it’s time to do something. No one yet knows in detail what that something will be, but it’s a pretty good bet that the eventual compromise will attempt to slow the imbalance while providing political cover for those involved.

Thus, two elements seem almost certain to emerge as parts of the eventual consensus legislation. First, the new law likely will prevent the export of personal information for offshore processing. Second, it almost certainly will prohibit the expenditure of taxpayer dollars on foreign-sourced IT services — if those services could be provided by Americans.

Both of these restrictions are vitally important to the IT industry. The prohibition against sending personal information out of the country for processing will stop the export of jobs — and therefore the IT support for those jobs — in areas such as personal financial planning and healthcare claims processing. That will kill the profitability of the financial management outsourcing services offered by companies like IBM and thus stop the targeting of those jobs and their IT support for offshore consolidation.

The Prepaid Infrastructure

More immediately, the requirement that federal dollars not be spent on foreign services where American equivalents are available will make foreign-sourced software support and development a thing of the past.

Federal dollars don’t make up a big percentage of outsourced IT services dollars, but this tail will wag the much bigger dog of state and private-sector outsourced IT support because of the short-term impossibility of untangling the financial impact of different classes of outsourcing contracts.

For example, when a company like HP offers Windows support as part of the purchase price of a PC, the service is internally priced on the basis of marginal cost plus a small contribution to overhead — meaning that pricing assumes shared use of an existing infrastructure.

Thus the cost of adding support for another thousand PC users for a company that already supports a million or more is close to zero, because the only variable cost analysts need be concerned with is the pennies per hour paid to a foreign support worker.

Spreading Infrastructure Costs

Take away that prepaid infrastructure, however, and the picture changes. Now the cost of adding support for the next thousand users is about the same as adding it for the first thousand users, and companies like EDS, HP or IBM will have a much smaller cost advantage over the in-house IT department.

The legislation — as currently proposed in both houses of Congress — has provisions that will create this situation because the prohibition against spending federal dollars offshore makes commingling (spreading infrastructure costs across multiple clients) virtually impossible. Sorting out commingled costs on a pro rata or proportionate basis has a long history in military procurement, particularly for national offset programs, but would fly directly in the face of clear legislative intent and is therefore likely to be unacceptable.

As a result, a supplier like HP or IBM will need to prove that none of the cost associated with something like a leased PC reflects commingled services — and doing so will require an internal “Chinese wall” that will take at least a year to set up.

It should be obvious that the biggest potential IT industry losers, at least in the short term, are Accenture — which could be virtually wiped out in the United States — EDS, IBM, HP and Oracle. Companies like Sun and PeopleSoft essentially will be unaffected. Dell, interestingly, has been putting its defenses in place for some time, with the probable ability now or very soon to sell a PC whose warranty support costs flow only from an investment in American workers.

Supporting Action

The other companies, of course, aren’t sitting still either, but they appear to be focusing their efforts on lobbying for exceptions and special clauses to let them continue commingled support products — and that’s where you get your chance to play.

It doesn’t matter which side of the political aisle you’re on or whether you believe, as I do, that this legislation is fundamentally uninformed. A “fair trade act” requiring the United States to apply Communist China’s own rules on imports from the United States to imports from Communist China would be fairer and more effective.

You should get to work and make sure your representatives in both houses know you support action on both kinds of restrictions.

In doing this, don’t be discouraged by the fact that the lobbyists on the other side have more money and access than you do. Remember, elected representatives usually want the lobbyists’ money only so they can use it to buy your vote — which you can give or withhold directly.


Paul Murphy, a LinuxInsider columnist, wrote and published The Unix Guide to Defenestration. Murphy is a 20-year veteran of the IT consulting industry, specializing in Unix and Unix-related management issues.


5 Comments

  • I think this trend is here to stay in a free economy. I experienced the pain when I was let go in 2002 from a large multinational and my job was outsourced to Germany. I had to train my German counterpart on how to do what I AM doing. However things were not that bad I started a small industrial equipment company and have been pretty sucessful. I have seen my income jump by 150% in last year and a half. Had I not been laid off I would still be living in a protected environment of a large corporation with biweekly bag of peanuts.

    • Hi Cahroch,
      I find your story very intruiging. I AM managing editor for a technology trade magazine. I would like to put more of a human face to the dilemma of outsourcing. Would you be willing to discuss this issue further with me outside of this forum?

  • You’re logic seems flawed to me basically because you assume that somewhere in the future, something will certainly come to replace the jobs that have been exported.
    .
    You go tell that to the guy who just came out of college with a computer engeneering degree and 50000$ in debt.
    .
    "sorry kid. 3 years too late. You’ll have to wait for the next trend and go back to school, in the meantime you can work at starBucks…"
    .
    You tell that to the guy in the suburbs with a wife, 2 kids and a new home.
    .
    "Sorry sir, maybe you could go sell carpet untill you figure out what you want to do next…"
    .
    There is a time when corporate greed has to be stopped for the good of all. The time is right now. You call it protectionism, I call it putting your money back into the hands of the people who gave it to you in the first place. I’m sorry but I cant bare to see lives and families ruined here so that company execs can keep getting their Xmas bonuses and so that investors can make a quick buck.
    .
    The money vacuum has to be stopped because this country is going nowhere very fast.

    • Oops! I think my title confused you. This article is supposed to incite you to phone every elected representative you can find – including those just running for election- and tell them to support immediate action.
      Please understand, there are difficult issues here. In the long run protectionism isn’t effective; but right now – in the short term- it’s the only answer because the Chinese communists aren’t playing by the rules.
      Personally I think a trade mirroring act, something that enabled the US to treat imports from countries like China they way they treat imports from the US would be both more fair and more effective – but congress is unlikely to pass something like that. A short term ban on sending taxpayer dollars offshore may be less fair and less effective, but its do-able. So please, don’t misunderstand – and get out there to help get it done!

      • Hello-
        Both my husband and I were laid off from IBM after being outsourced from AT&T. When we were targetted for outsourcing, we could not look elsewhere in AT&T for other opportunities, we were stuck. Once we moved to IBM in 1999, I was laid off in 2002 and my husband was laid off in 2003!!!! We cannot find suitable work because our jobs were offshored to another country, my husbands 26 weeks of unemployment has just run out. From making a decent living we are close to financial ruin. We will probably lose our home since we had purchased it based on our income. We do not have health insurance because we cannot AFFORD it.We do not qualify yet for the Trade Act Assistance because although our positions are no longer in this Country, what we did is considered "Not Tangible"?????? What’s wrong with this picture??
        My husband has a BA in Computer Science. He was a programmer, I a Business Analyst. I worked for AT&T for 21 years and my husband for 10 years. How can anyone that has a half a brain in their head say that these IT folks need to be retrained for other careers?? With the financial positions that most of us are in, where do they expect us to get the money to pay for retraining?? We can barely pay our mortgage!! IBM has stated that they are allocating monies to retrain certain employees whose jobs were outsourced, what about the thousands that IBM has already laid off??? What are they doing about them? Did IBM even consider that they were letting both a husband and a wife go in matter of 1 year??? Oh yes, not to mention, we also have a 6 year old son. I never in my life thought that this country is allowing this to continue. I also cannot understand how can outsourcing be beneficial for the economy in this country? Who will keep the economy going if no one has a job?? What I would propose is that if a company wishes to outsource then they must PAY for retraining of each American that lost their job. They must be accountable and responsible for once. I always thought that "Money is the root of all evil" the real meaning is "The love of money is the root of all evil". SHAME on all the companies and our government who left and are continuing to leave Americans out in the cold to DIE. They will all have to live with their conscience. My husband and I may be in dire strats right now, but at least we can put our heads on the pillow at night and go to sleep.
        WAKE UP AMERICA!!!!Before it’s too late tell your senators and congress that you wont stand for it anymore. Enough is Enough!

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