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Government Aid and Offshoring: Should Strings Be Attached?

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With all of the money going toward "stimulus" and bailouts of big corporations, and the financial markets still in a disarray that some experts say shows no real signs of abating (despite the bump in stock prices over the past week or so), it's safe to say that many U.S. taxpayers are mad. But where do we direct our anger?

 

In bad economic times, outsourcing has always been a convenient scapegoat. That hasn't changed. Just last week, IT Business Edge blogger Loraine Lawson wrote about her ire that JP Morgan Chase, the recipient of some $25 billion in bailout money, was planning to increase the amount of IT work it sends offshore to India in an effort to save money for its shareholders. And it's not the only one. As I wrote last week, banks are unlikely to give up stakes in their captive operations in India and will probably even increase them, thanks in part to all of the costly and complicated integration work resulting from quickie mergers like that of Bank of America and Merrill Lynch.

 

So, should strings be attached when companies take U.S. taxpayer money? When companies accept money from state or local governments as an incentive to locate their facilities in a certain geography, they typically agree to provide a specified number of jobs within a specified time frame, much as IBM did when accepting $53 million in incentives from the state of Iowa in exchange for opening a technology serivces hub in Dubuque.

 

The no-strings-attached approach that has prevailed with federal aid thus far has resulted in outrages such as insurer AIG Group using $165 million of its $170 billion in government aid money to pay retention bonuses to some of the same folks responsible for practically running the company into the ground by making what Federal Reserve Chairman Ben Bernanke called "unconscionable bets." AIG insists it has to honor bonus clauses in employment contracts signed before the bailout. (Oh, really? Why? And I, for one, would like to see the dates on those contracts. And I think the federal government should demand to do so, if it hasn't already.) Let's not forget, AIG also spent some $400,000 of aid money on corporate retreats that were no doubt necessary to soothe the frayed nerves of its executives.

 

"According to a survey by CareerBuilder.com and the University of Pennsylvania's Wharton School published last spring, offshoring at least some IT operations results in annual savings of $20,000 per head for most companies..."


Ann All

To add insult to injury, AIG used more than $90 billion of the aid to pay off some of the banks to cover their questionable investments in financial instruments that even those of us who aren't MBAs could have predicted were going to collapse. (Though no one seems to have foreseen the spectacular scale of the ensuing financial damage.) And guess what, many of the banks had already accepted government aid of the own. Here I'll resuscitate a phrase from my last gig, during which I spent a lot of time writing about ATMs: the "double-dip," used to describe the result when your bank charged you a fee for accessing your funds at an ATM not in its network, despite the fact that it also collected a fee from the network owner. That looks like incredibly small potatoes compared to the double-dips we are seeing now.

While President Obama has mentioned for companies with overseas operations, he hasn't mentioned any specific requirements for companies accepting government bailout or stimulus money to avoid sending work offshore.

I feel completely justified in directing anger toward AIG over its retreats and their bonuses. I've been to a few retreats in my time, and I've even gotten some bonuses. Neither are required to run a business. They're among the first line items most companies cut in an effort to reduce operational expenses. According to a new survey by tax, audit and advisory firm Grant Thornton LLP, 69 percent of U.S. companies are issuing bonuses below 2008 targeted levels, with more than 25 percent not awarding bonuses at all. And bonus budgets are expected to shrink further. Half are also freezing executive base salaries in 2009, while another 15 percent are implementing salary reduction measures. And let's not forget the companies and/or imposing across-the-board salary freezes or cuts.

Grant Thorton does note that 25 percent of companies have implemented, or are considering implementing, programs to retain employees. But such programs are meant for top talent. Who fits that category at AIG, which lost $61.7 billion fin 2008's fourth quarter, the biggest corporate loss in history?

Offshoring is a more nuanced matter. Unlike bonuses and retreats, offfshoring has as an effective strategy to cut costs and drive efficiencies. According to a survey by CareerBuilder.com and the University of Pennsylvania's Wharton School published last spring, offshoring at least some IT operations results in annual savings of $20,000 per head for most companies, with savings rising to $50,000 for 15 percent of employers. Another stat from The Hackett Group: Global 1,000 companies now save more than $16 million a year by offshoring back-office operations, more than half of it due to IT cost savings. Establishing offshore operations also helps multinational companies based in the U.S. , a strategy looking more necessary in light of America's shrinking GDP.

Do companies accepting bailouts have a responsibility to get work such as merger-related integration projects done as cost-effectively as possible, even if it's not by workers in the U.S.? Would it be OK if they outsourced those tasks, but didn't offshore them? As a commenter on Loraine's post wrote:

"If a bank takes government money and fails, it is hurting taxpayers much more, than if it uses profitable means, like outsourcing to stabilize its finances again. If JP Morgan did not outsource and if it could not be profitable, all the thousands of JP Morgan employees would lose their jobs. So it would NOT help the U.S. economy and it would not be a service to taxpayers."

The commenter also pointed out that the U.S. profits when economies in countries like India improve, because people in India want to buy products such as Nike shoes and McDonald's Big Macs. And he's right. Globalization is a tangled Web of co-dependency.

What I would like to see, whether companies are accepting bailouts or lobbying for stimulus money, is . With its formidable marketing resources, IBM should be able to communicate to Americans why it's important for it to expand its worldwide delivery model to accommodate changes in supply-and-demand. If it has to take some hard PR knocks because it's adding jobs in emerging markets and cutting them in America, then so be it. Ditto for JP Morgan Chase. And for those weasels at AIG, for that matter.

Feel free to join a discussion on this topic in IT Business Edge's Knowledge Network.

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