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Global Outsourcing: Same Perils . . . New Implications

There is plenty of uncertainty around how a Trump presidency will unfold in many policy areas, but one thing is perfectly clear: our new president will focus intensively on creating and keeping jobs inside the U.S.

Global Outsourcing, Same Perils, New Implications - updated.jpg

On multiple occasions during his campaign, Trump has scorned the official U.S. unemployment figure, calling it “such a phony number” and suggesting that unemployment is, in fact, much higher — in double-digits.

During his Thank You Tour in early December, he told a Fayetteville, NC crowd that the U.S. should view trade “almost as a war,” and promised — as in many other instances throughout his campaign and transition — to get tough on trade: “We have to look at it almost as a war, because that’s what has happened to us…that’s what has happened to our workers.”

And it’s not just traditional manufacturing in Trump’s cross hairs. News reports surrounding the December 13 meeting between Trump and U.S. technology titans such as Amazon, Facebook, Apple, Microsoft, Alphabet, SpaceX, and Tesla say the meeting strongly emphasized Trump’s vision of keeping and creating jobs inside the U.S.

A CNN Tech reports Trump as saying: “My administration is going to work together with the private sector to improve the business climate and make it attractive for firms to create new jobs across the United States from Silicon Valley to the heartland."

Already, U.S. companies appear to be responding to Trump’s direction on jobs. Ford recently killed plans to build a $1.6 billion auto manufacturing plant in Mexico. Sprint announced plans to add 5,000 jobs in the U.S. (backed by a planned $50 billion U.S. investment by SoftBank Group founder Masayoshi Son). Amazon said it will create 100,000 jobs in the U.S. by 2018. And Apple has reportedly been talking with two Asian contract manufacturers (Foxconn and Pegatron) to move work into the U.S.

The president’s clear position favoring U.S. job creation will certainly accelerate a slow swing of the pendulum from global offshore toward U.S. domestic outsourcing, which, we believe, has been underway since 2013 and first wrote about three years ago. Reasons for the big swing are many, but sort into four key areas:

Innovation. The extraordinary pace of technology innovation and digitalization over the past decade has U.S. companies now looking to cultivate and secure pipelines of future technology and business management and leadership talent.

Development/Delivery. Approaches to developing and delivering new digital products, services, and capabilities have changed dramatically (think: Agile, bimodal). These methods, which emphasize rapid iteration and constant collaboration are simply less easily executed across great distances, multiple time zones, language, legal, political, trust/transparency, and other cultural boundaries.

Economic. Labor market conditions have evolved and changed in many traditional outsourcing markets for U.S. technology and other jobs, with strong economic growth exerting upward pressure on wages, increasing delivery risks associated with tightening talent markets, and rising turnover rates.

Cost/Risk. U.S. companies have learned that managing large, complex engagements offshore often come with hidden and unanticipated costs and risks — such as added costs associated with rework, travel and expensive resources needed to manage, supervise, and to quality-check work being performed offshore.

In a recent interview with USA Today, Genesis10’s own CEO Harley Lippman noted that companies often cut jobs in Technology because they think they can do the work cheaper offshore. “It’s purely a cost issue, but it’s not always true,” Lippman said, noting that sourcing IT work offshore often requires hiring project managers, business analysts, programming analysts, and so forth just to manage it all. “You have to hire people here to manage people offshore. That's an extra cost. No one realizes there are direct and indirect costs.”

Expect Acceleration

If the pendulum was already swinging from offshore to domestic outsourcing, there are plenty of reasons to expect the trend to accelerate now that Trump has been sworn into office.

First, there are the president’s provocations around trade, including threats to impose 35-45% tariffs on imports and to crack down on currency manipulations and intellectual property theft. Add to this the president’s apparent willingness to upset delicate political balancing.

Second, is the president’s public stance on H-1B visas could present additional difficulties on wages and access to technical resources. A new Wall Street Journal article reports that a draft executive order now under consideration by the president calls for the government to scrutinize a range of visa programs, including the H1-B program, to ensure they protect “the jobs, wages and well-being of United States workers.” The WSJ article notes that three Indian outsourcing firms alone brought in some 12,000 technology workers on H-B1 visas in 2014 compared to around 2,000 by Microsoft, Google, and Apple combined.

Stay tuned for our next post with more commentary as the president’s position continues to evolve on these and other issues relating to technology talent in the U.S.

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