What Trump Doesn't Understand About Outsourcing

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The Trump era promises to reverse a multi-decade outsourcing megatrend in a noble quest to bring jobs back to America. The question is, is that really what’s best for the economy, our companies and our workers? I argue that it’s not.

While I do believe that regulatory, tax and trade reform – key tenets of Trumponomics – are needed to unleash economic growth and prosperity, swinging the outsourcing pendulum back the other way will likely have the opposite effect.

If that makes the hair stand up on the back of your neck, you can thank the politicians for all the public confusion on the subject. Let’s break it down.

The management strategy now known as outsourcing was the brainchild of the father of modern management, Peter Drucker. In a pivotal 1989 Wall Street Journal op-ed called “Sell the Mailroom,” Drucker described the many advantages of “unbundling” various “clerical, maintenance and support” functions.

The concept of “doing what you do best and outsourcing the rest” has become so ingrained in business culture that we take it for granted. What Drucker proposed was not some nefarious notion to boost the bottom line, but the only plausible way to improve the nation’s productivity and the upward mobility of its workforce.

As virtual monopolies, internal service functions offer minimal incentive to improve efficiency and even less potential for individual promotion. Someone who cooks or cleans for a company will never end up running the place or even becoming a manager. Outsource the same function to an independent contractor and everything changes.

That same individual can now become a manager, executive or even CEO of a food or cleaning service business that specializes in performing that function for dozens or hundreds of companies. Since they compete in a free market, vendors are incentivized to maximize efficiency to win and keep customers, which improves the bottom line of the customers they serve. That’s the definition of a win-win.

The same concept has since been extended to a broad range of fields, from IT consulting and product design to supply chain management and a host of administrative functions. And contracts with outside firms can be dialed up or down as a buffer to mitigate the impact of cyclical markets. In other words, fewer layoffs.

Not long after Drucker’s revelation, FedEx (NYSE:FDX) and UPS (NYSE:UPS) began offering supply chain management and logistics services to corporations. And many, if not most, of FedEx’s drivers are in turn independent contractors who work for agencies or themselves, just as today’s Uber and Lyft drivers do.

The internet is only partly responsible for leveling the playing field and enabling a generation of young entrepreneurs and startups to compete with big corporations. The outsourcing megatrend is the other part. By outsourcing HR, IT and finance functions to any one of dozens of consulting firms, startups can scale faster than ever before.

Startups and small businesses also outsource product fulfillment and cloud capability to Web service companies like Amazon (NASDAQ:AMZN). The ecommerce giant in turn grew from 230K employees (excluding contractors) in 2015 to 341K last year. And Snapchat parent Snap, which is planning a March IPO, outsources its entire cloud platform to Google (NASDAQ:GOOGL).

That’s as good a place as any to stop and take a deep breath. As is often the case in business and in life, you can take a good thing too far.

The Journal reports that Google parent Alphabet has about as many outside contractors as full-time employees. And Indian-based consulting giants Tata, Infosys and Wipro, as well as Cognizant and Accenture, have figured out how to game the H1-B visa program and grab a disproportionate number of limited foreign worker grants.

Clearly, we have our work cut out for us. And I do believe that President Trump’s policies will incentivize corporations to do right by American workers. But keep in mind, this is not us against them, good people against evil corporations. As Drucker proved, the right strategies can benefit both, and avoid the usual unforeseen consequences.