Search This Blog

Monday, April 16, 2007

Off shore sourcing

As we move more and more jobs off-shore, the US is repeating the "tragedy of the commons.' What is rational and sensible for a single firm in order to reduce costs, is a mistake for the Country as a whole. In macro-economic terms, if too many people in the US lose (or are afraid of losing) their jobs, who will be available to purchase the (cheaper) products of the companies?

It is also important to realize, that the full expected benefits of off-shore sourcing are rarely realized. That is because the managerial costs increase. Managing an off-shore operation is more difficult than managing a domestic operation so that additional (expensive) managerial resources have to be allocated to the task of coordinating offshore and domestic activities.

There are some alternatives to reducing costs other than off-shore sourcing:

1. Share the cuts across the organization. Rather than transferirrg 10% of the jobs overseas, all members of the organization (including top manages) can take a 10% cut in both hours of work and pay. This keeps the jobs on-shore but they are less well paid.

2. Develop a new compensation system: a base salary coupled with a bonus based upon profitability and exceeding performance standards. If the bonus in the most profitable year is about 20% to 25% of base salary, then in years that the firm is not profitable, a major cost saving can be achieved without layoff. This tactic requires a proactive stance by the organization. The new compensation scheme has the best chance of adoption when the firm is fairly profitable, not when cost reductions are imminent. This scheme may also reduce the large gap between top management and employee compensation.

Following on from this, with top management income at about 350 times that of the average employee, an awful lot of people could be hired with no loss profitability if that gap was reduced to the standards of the 1960's.

Sent to On Point, WBUR

No comments: