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The backlash: the only thing that will make the furor over offshoring worse is hiding from it

CFO, Magazine for Senior Financial Executives - June 1, 2004

Not since the North American Free Trade Agreement debate, when Ross Perot evoked the "giant sucking sound" of U.S. jobs pouring into Mexico, has offshoring attracted so much angry attention. Today, the debate over the decision to outsource jobs to other nations has taken on the tenor of a crusade, pitting corporate "Benedict Arnolds" against the American worker.

Companies claim to be impervious to the uproar, which they chalk up to election-year political rhetoric. In an exclusive CFO magazine survey, the majority of CFOs who are currently offshoring say that the backlash against sending U.S. jobs overseas has had no effect on their plans. In fact, they say, negative publicity is at the bottom of their list of offshoring risks.

But the public outcry may be scaring them a bit more than they care to admit. Some companies have delayed signing offshoring contracts. Many more refuse to discuss their offshoring efforts, and have asked their offshoring providers to do the same.

This reticence may fade in time. But whether it evaporates as the economy improves (as 49 percent of our survey respondents expect), ends with the election (as 17 percent say it will), or reflects along-term change in public attitude (15 percent), the current "duck and cover" response is only making matters worse. And since they clearly have no plans to stop offshoring, CFOs need to do a far better job of making their ease.

Companies have been offshoring--loosely defined as relocating U.S. jobs to lower-cost overseas locations--for decades, if not since the beginning of the Industrial Age. This time, however, the jobs they are sending overseas are high-paying, white-collar ones formerly held by people who expected their college degrees to protect them. In fact, 47 percent of survey respondents said the majority of the jobs they moved overseas paid $50,000 or more before they were offshored, and 19 percent of respondents said 100 percent of the jobs they offshored paid $50,000 or more.

Proponents argue that the United States, as an innovation powerhouse, will yet again invent its way to new levels of prosperity and employment, and that jobs will be created in industries that haven't even been dreamed of yet. However, as companies increasingly begin to offshore more-creative, judgment-based tasks--like analysis or research and development--critics of this theory (including some of the CFOs we surveyed) worry that this time, U.S. industry may be offshoring the Golden Goose.

All these factors--angry white-collar workers, concern that the United States may lose its creative edge, a seemingly jobless recovery, and a pending Presidential election--have converged to add fuel to the argument most people ignored in the 1990s. Democratic Presidential candidate John Kerry has proposed altering the corporate tax laws to encourage companies to keep jobs in the States, and President George Bush has indicated he may be open to expanding to service workers the benefits of the Trade Adjustment Assistance program, a federal program created to help manufacturing workers who lose their jobs to offshoring or import competition.

STACKS OF BILLS

Not content to wait for the outcome of the probable Bush-Kerry contest, legislators across the country have responded to the offshoring outcry by rushing to do something--anything.

According to the National Foundation for American Policy, legislators in at least 35 states have proposed more than 100 anti-outsourcing bills, with more than a dozen bills circulating at the federal level. To date, the states have not passed major anti-outsourcing restrictions, although efforts continue.

In March, the U.S. Senate approved an amendment by Sen. Chris Dodd (D-Conn.) that prohibits federal contracts from being performed overseas unless the President deems a contract to be in the interest of national security. That legislation awaits further action in both the Senate and the House of Representatives, even though observers say that measures giving U.S. companies preferential treatment violate World Trade Organization commitments made by the United States.

Likewise, proposed state laws may inadvertently violate the commerce clause of the U.S. Constitution if language intended to prevent jobs from going overseas also keeps them from going to other states, concluded a legal analysis by the National Foundation for American Policy. If passed, these laws will also impose higher costs on any company or state or federal agency currently using offshore services. That argument has already been used to kill at least two pieces of state-level anti-offshoring legislation.

Even some shareholders--a class that more typically rewards cost-saving measures like offshoring--are balking at offshoring initiatives, albeit without much success. The pension fund of the Communications Workers of America placed anti-offshoring shareholder proposals on the proxies of at least three major companies: General Electric, Sprint, and IBM. The GE and Sprint proposals sought a study on the reputational effects of offshoring, and the IBM proposal sought a study to determine if compensation programs at the company promote short-term, cost-based decisions, like offshoring. All three failed to gain shareholder approval.

STUCK IN THE MIDDLE

It is the cost savings, of course, that often make the CFO a company's chief proponent of offshoring. In fact, 42 percent of the CFOs in our survey whose companies outsource offshore reported net savings of more than 20 percent on offshored expense areas (see "Offshoring by the Numbers," page 51).

While they report that they aren't concerned about negative publicity from offshoring, they are far less willing to promote those savings or even talk about the topic than they were 12 months ago.

Now, in fact, some companies are actually putting offshoring plans on hold. "We've had a couple of clients say that because of the current political situation, they want to defer signing their contracts," says K. Srinivasan, senior vice president and national sales director for Polaris Software Lab Ltd., an offshoring company based in India. Although the companies he works with are "very supportive" of offshoring, he says, "they want to make sure they don't rub people the wrong way."

And consider this: a year ago, Clarence Schmitz, chairman and CEO of Outsource Partners International, a New York-based finance and accounting offshoring firm, was interviewed for what he describes as "a bit of a puff piece" on the "CBS Evening News." Companies that were using offshoring were even portrayed in a slightly positive light. "It was like a 'Gee, we didn't know that companies did this,' kind of stor3," he says. "We even got a couple of new clients from it." Today, Schmitz says clients don't even want press releases issued when they sign a contract with OPI. "It's amazing how much things have changed in one year," he says.

Indeed, a year ago, offshoring companies announced dozens of new deals each week, and their clients were usually happy to discuss the anticipated cost savings in public. Today; few if any companies will agree to be interviewed on the topic. Among the companies contacted for this story--all of which are known as leaders in offshoring strategy--the vast majority declined requests to interview their CFOs. Even offshore service providers were hard-pressed to come up with any clients that were willing to speak on the record.

This silence is endemic across the U.S. corporate landscape, says Virginia Garcia, a senior analyst at TowerGroup, a Needham, Massachusetts-based research and advisory firm. "A lot of my clients say, 'This is what we're doing, but you can't talk about it, because we can't talk about it, because there's a directive that everything has to go through the marketing department'--and they're being very tight-lipped."

Perhaps the conundrum was best expressed by the communications director of one Fortune 50 company, who told CFO, "If you were the communications director of a multi-billion-dollar, multinational compan3, would you want to be out in front on this subject?"

More often than not, the answer to that question has been a resounding no. And that, say some experts, is the worst possible approach that companies can take if they want to bring the backlash to a speedy end. The deafening silence not only leaves an information black hole, but it also lends credence to the growing popular perception that there is something fundamentally unsavory about offshoring. If there weren't, why would CFOs and other executives be so reticent to talk about it?

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