What I Told Congress

Here's a transcript of columnist Chris Kenton's thoughts on overseas outsourcing before the House Committee on Small Business

Mr. Chairman, members of the committee. While I don't presume to speak for the small-business community, I'm grateful for the opportunity as a small-business owner to add my perspective to the debate on the outsourcing of white-collar jobs (see BW Online, 6/30/03, "Overseas Outsourcing: The Word on the Hill").

Cymic [my company] has been in business for 15 years in the San Francisco Bay Area, providing marketing services to large technology companies like Motorola, Intel, and Dell, as well as to startups like Ascend Communications -- a company we worked with from the time they were five partners working in a garage until they were sold to Lucent [for what was then worth $24 billion in stock]. We're all too familiar with the process of creative destruction, even in our own business.

Two years ago we'd grown to 35 employees, earning more than $3 million in annual revenue, but in the wake of September 11, we lost 95% of our sales and were forced to lay off 90% of our people. Our principals have had to face down both business and personal bankruptcy, while losing our offices and most of our equipment.

We've made heroic efforts to survive the current economy. Part of our survival effort depends on developing new products and services to remain competitive. In the past, we relied on our own software programmers to develop new products, or we used one of our many development partners. But with literally no labor or capital resources available, we simply can't afford such investments in these economic times.

Recently, we defined a new piece of software and received local estimates averaging about $5,000. That sounds like nothing, until you consider that we have to weigh every investment we make with the mortgage payments on our homes. Through an online search we were able to find a programmer in Argentina willing to develop our software for under $200. The software is now in the final stages of development, and we'll be offering it as a new service to our clients within the next six weeks, which represents a new opportunity for much needed revenue for our company.

Our project pales in comparison to the million-dollar outsourcing deals among large corporations, but it highlights a lesser-known trend of overseas outsourcing among small businesses. My concern today is that the cry for new regulations to deal with outsourcing among larger corporations will have unintended consequences for small businesses like mine that use overseas development to create opportunities that would otherwise not be open to us.

Since many of my clients are large technology companies, I'm well aware of the plight of workers who've lost jobs to L1 and H1B visas. I strongly believe we should not allow the immigration system to be exploited for the production of cheap labor, but I also believe we should not allow trade policies to be exploited for preventing the development and patronage of offshore labor markets. While the intended effect of such policies is the protection of American jobs, I believe the unintended consequence will be a stifling of opportunities for small business.

The potential loss of white-collar jobs is certainly a legitimate concern for congress, but before we consider new regulations, I think we need to be honest about the root causes. It's ironic that many of the technology jobs moving overseas today are the very same jobs that created the infrastructure that makes outsourcing possible. And it's naive to believe that the loss of such jobs will be stemmed by preventing outsourcing. Today, thousands of programmers are working on advanced systems to automate much of the programming done by humans -- creating the opportunity to outsource to the cheapest labor source of all, computers. The simple fact is that the driving purpose of technology is, and always has been, the reduction and elimination of human labor. And as technology eliminates time and distance, it becomes ever more efficient. While we try to reduce the impact of issues like outsourcing, there are already systems on the production line ready to create the next wave of upheaval. This so-called creative destruction ensures that the definition and mix of jobs that comprise the American economy will continue to change -- unless we decide we want to forestall technological innovation altogether. The process certainly creates new jobs along with each new technology, as well as a burgeoning industry of training. But whether it leads to net increase or a net loss in jobs I think is largely unknown.

Since we are forced to manage rapidly changing symptoms, I believe we need to act consistently, according to a set of fundamental principles. That's where I believe the true debate lies. The first principle I believe we should focus on is building parity in the standard of living among nations rather than building walls to prevent encroachment on our own.

I do believe in a role for the government in many areas of regulatory policy, but I think the creation of trade barriers to prevent outsourcing would be costly, problematic, and ineffective. I'd rather see efforts geared toward leveling the playing field among competing nations. There are serious issues that make outsourcing unnaturally attractive, including the manipulation of currencies by foreign governments, the suppression of workers rights and the absence of environmental regulations in foreign countries. Although the gap between the standard of living in other nations and our own has created an opportunity for cheap labor today, I believe that focusing our trade policy on eliminating those gaps provides the greatest benefit in the long run. I believe such an approach is consistent with our role as a world leader, in this case leading other nations to a better standard of living, rather than simply focusing on protecting our own.

The second principle I'd like to suggest is to differentiate between outsourcing for organizational efficiency and outsourcing for innovation. This is a fundamental difference between large and small businesses, and I think we need to explore how regulations may cause unintended consequences for small businesses. Small businesses provide much of the energy in our economy, driving innovation and pushing larger businesses to evolve. Small businesses also play important roles in the success of larger businesses by providing critical support services and expertise. While I can see problems -- and indeed some abuses -- among large businesses pursuing ever lower costs and higher margins, I think any policies designed to mitigate those abuses should be examined for their impact on small businesses. While larger companies use reduced development costs in global labor markets to improve margins, small companies use the opportunity to innovate in ways that would otherwise require increasingly costly investment capital.

If history is any guide, the next major innovation that creates new jobs and a spark in the economy will come from a small business, maybe a business that is only able to innovate by utilizing the global communications infrastructure to maximize every dollar of investment. We should guard against the unintended consequences of job protection that would stifle that opportunity. Thank you, Mr. Chairman, and members of the committee.

Christopher Kenton is president of the marketing agency Cymbic

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