Outsourcing: The Stuff People Forget

Now that Edwards and Kerry have joined Pat Buchanan and the rest of the isolationists in opposing international trade, under the guise of “saving jobs” (this means that the unions have ordered them to try to kill NAFTA), and fresh from the demagogic opportunity to trash Dr. Mankiw for his gall in speaking the truth, it is time to take a more rational look at the whole mess.

The root of the terror that is supposed to be engendered in our collective breast as we contemplate the idea of every job fleeing to India is the mythical idea that the statistical trend of outsourced “white-collar” jobs is a linear relationship. If the trend line is up at a 25% slope, and 20,000 jobs fled last month, golly, it won’t be long till every US job is over there! The idea on its face is nonsense, and only “populist” presidential candidates and your average reporter would fall for it, which explains the fascination the networks seem to have for the story.

This is not only bad economics- the net jobs impact of outsourcing is positive- but it ignores the reality of logistics. If we had applied this “logic” to the auto imports in 1975, all US production would be in Japan today. Just as with tax rates, the phenomenon is self-limiting. Today, the so-called “foreign” cars are assembled in Alabama, North and South Carolina, and Tennessee. The UAW may not be happy, but the local employees love it.

Here is a more recent example. Dell, well-known previously for its good customer service support for its laptop computers, formerly had the call centers in places like Texas. You have a problem, you call the 800 number, talk to a rep, answer some questions, try some things, maybe fix it, perhaps send the machine in if it turns out to be a hardware issue.

Now, reading into Dell’s process, based on my personal experience, this is the likely turn of events. The “customer service” boss decided that it would be a good thing to “reduce costs”, based on the early trial with the Indian outsourcing firm, an entrepreneurial, growth-oriented, service firm. The test doubtless utilized the outsource support company’s brightest, least-accented people, and no one could tell the difference. As soon as the ink was dry on the contract, it was time for the Indian company to staff up to meet the volume demand, at the same time as the company put the star staff onto the next marketing test to go for the next new contract, heavily sold based on “Dell liked our results so much, they signed on, so you should consider it too!”

I never heard a thing about this anywhere- I experienced it for myself. I called Dell to resolve a problem under my extended warranty. Oops. I am hard of hearing enough that I have a lot of trouble understanding accents. I endured a long and painful conversation with a young lady who was doubtless a wonderful person, but whose words were almost unintelligible, reading a canned script of “what to try to avoid having to fix the machine” that was written for people who couldn’t spell “computer”. I, knowing what was wrong and that it was absolutely a hardware issue (I had an LCD screen that was intermittently going in and out, a second time this had happened), I finally said sternly that I did not want to waste any more time on this, just give me the return authorization NOW. She did, I sent it in, they fixed the bad inverter, and things were fine. And Dell heard from more than just me, announcing about two weeks later that they were re-opening their domestic call center for business customer support.

Why? Because the Indian firm made the classic error of confusing growth in booked orders with satisfactory execution., and paid the price. They could not find enough help that had thoroughly passed through accent-elimination training, or had the basic knowledge required to be useful to a customer with a problem. Dell got an earful from many formerly satisfied customers, and the outsourcing trend reverted for the time being.

There is always a tradeoff, a cost-benefit equation for these decisions. Sometimes companies make bad decisions because they segment the departments too much- saving money on customer service is a lousy idea if your formerly satisfied customer goes elsewhere; save a buck, lose a hundred plus suffering all the inevitable bad word-of-mouth.

There is always an inflection point for the equation, and the benefits plateau (that means “level off”, you four justices in the Massachusetts Court majority), the point that the Congressional Budget Office always had trouble understanding about marginal tax rates- “You can raise the marginal rate to 100%, but Mr. Trump simply WON’T give you all of his money; he is rich enough and smart enough to hire William Gates Senior to set up his tax shelter!” The Japanese found that, MITI notwithstanding, there came a point where transportation costs, real time flexibility, increasing Japanese labor costs, and after-market support argued for assembly closer to the customers. In a Southern, right-to-work state where the work rules enabled quality production, of course.

The key: the US needs to avoid doing dumb things to its own cost basis that push the plateau point farther out.

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