CFO Magazine

Kris Frieswick, CFO Magazine


June 7, 2004

The Backlash: The only thing that will make the furor over offshoring worse is hiding from it.


Not since the North American Free Trade Agreement debate, when Ross Perot evoked the "giant sucking sound" of U.S. jobs pouring into Mexico, has offshoring attracted so much angry attention. Today, the debate over the decision to outsource jobs to other nations has taken on the tenor of a crusade, pitting corporate "Benedict Arnolds" against the American worker. Companies claim to be impervious to the uproar, which they chalk up to election-year political rhetoric. In an exclusive CFO magazine survey, the majority of CFOs who are currently offshoring say that the backlash against sending U.S. jobs overseas has had no effect on their plans. In fact, they say, negative publicity is at the bottom of their list of offshoring risks.


But the public outcry may be scaring them a bit more than they care to admit. Some companies have delayed signing offshoring contracts. Many more refuse to discuss their offshoring efforts, and have asked their offshoring providers to do the same.


This reticence may fade in time. But whether it evaporates as the economy improves (as 49 percent of our survey respondents expect), ends with the election (as 17 percent say it will), or reflects a long-term change in public attitude (15 percent), the current "duck and cover" response is only making matters worse. And since they clearly have no plans to stop offshoring, CFOs need to do a far better job of making their case.


Companies have been offshoring — loosely defined as relocating U.S. jobs to lower-cost overseas locations — for decades, if not since the beginning of the Industrial Age. This time, however, the jobs they are sending overseas are high-paying, white-collar ones formerly held by people who expected their college degrees to protect them. In fact, 47 percent of survey respondents said the majority of the jobs they moved overseas paid $50,000 or more before they were offshored, and 19 percent of respondents said 100 percent of the jobs they offshored paid $50,000 or more.


Proponents argue that the United States, as an innovation powerhouse, will yet again invent its way to new levels of prosperity and employment, and that jobs will be created in industries that haven't even been dreamed of yet. However, as companies increasingly begin to offshore more-creative, judgment-based tasks — like analysis or research and development — critics of this theory (including some of the CFOs we surveyed) worry that this time, U.S. industry may be offshoring the Golden Goose.


All these factors — angry white-collar workers, concern that the United States may lose its creative edge, a seemingly jobless recovery, and a pending Presidential election — have converged to add fuel to the argument most people ignored in the 1990s. Democratic Presidential candidate John Kerry has proposed altering the corporate tax laws to encourage companies to keep jobs in the States, and President George Bush has indicated he may be open to expanding to service workers the benefits of the Trade Adjustment Assistance program, a federal program created to help manufacturing workers who lose their jobs to offshoring or import competition.


Stacks of Bills


Not content to wait for the outcome of the probable Bush-Kerry contest, legislators across the country have responded to the offshoring outcry by rushing to do something — anything.


According to the National Foundation for American Policy, legislators in at least 35 states have proposed more than 100 anti-outsourcing bills, with more than a dozen bills circulating at the federal level. To date, the states have not passed major anti-outsourcing restrictions, although efforts continue.


In March, the U.S. Senate approved an amendment by Sen. Chris Dodd (DConn.) that prohibits federal contracts from being performed overseas unless the President deems a contract to be in the interest of national security. That legislation awaits further action in both the Senate and the House of Representatives, even though observers say that measures giving U.S. companies preferential treatment violate World Trade Organization commitments made by the United States.


Likewise, proposed state laws may inadvertently violate the commerce clause of the U.S. Constitution if language intended to prevent jobs from going overseas also keeps them from going to other states, concluded a legal analysis by the National Foundation for American Policy. If passed, these laws will also impose higher costs on any company or state or federal agency currently using offshore services. That argument has already been used to kill at least two pieces of state-level anti-offshoring legislation.


Even some shareholders — a class that more typically rewards cost-saving measures like offshoring — are balking at offshoring initiatives, albeit without much success. The pension fund of the Communications Workers of America placed anti-offshoring shareholder proposals on the proxies of at least three major companies: General Electric, Sprint, and IBM. The GE and Sprint proposals sought a study on the reputational effects of offshoring, and the IBM proposal sought a study to determine if compensation programs at the company promote short-term, cost-based decisions, like offshoring. All three failed to gain shareholder approval.


Stuck in the Middle


It is the cost savings, of course, that often make the CFO a company's chief proponent of offshoring. In fact, 42 percent of the CFOs in our survey whose companies outsource offshore reported net savings of more than 20 percent on offshored expense areas (see "Offshoring by the Numbers").


While they report that they aren't concerned about negative publicity from offshoring, they are far less willing to promote those savings or even talk about the topic than they were 12 months ago.


Now, in fact, some companies are actually putting offshoring plans on hold. "We've had a couple of clients say that because of the current political situation, they want to defer signing their contracts," says K. Srinivasan, senior vice president and national sales director for Polaris Software Lab Ltd., an offshoring company based in India. Although the companies he works with are "very supportive" of offshoring, he says, "they want to make sure they don't rub people the wrong way."


And consider this: a year ago, Clarence Schmitz, chairman and CEO of Outsource Partners International, a New York-based finance and accounting offshoring firm, was interviewed for what he describes as "a bit of a puff piece" on the "CBS Evening News." Companies that were using offshoring were even portrayed in a slightly positive light. "It was like a 'Gee, we didn't know that companies did this,' kind of story," he says. "We even got a couple of new clients from it." Today, Schmitz says clients don't even want press releases issued when they sign a contract with OPI. "It's amazing how much things have changed in one year," he says.


Indeed, a year ago, offshoring companies announced dozens of new deals each week, and their clients were usually happy to discuss the anticipated cost savings in public. Today, few if any companies will agree to be interviewed on the topic. Among the companies contacted for this story — all of which are known as leaders in offshoring strategy — the vast majority declined requests to interview their CFOs. Even offshore service providers were hard-pressed to come up with any clients that were willing to speak on the record.


This silence is endemic across the U.S. corporate landscape, says Virginia Garcia, a senior analyst at TowerGroup, a Needham, Massachusetts-based research and advisory firm. "A lot of my clients say, 'This is what we're doing, but you can't talk about it, because we can't talk about it, because there's a directive that everything has to go through the marketing department' — and they're being very tight-lipped."


Perhaps the conundrum was best expressed by the communications director of one Fortune 50 company, who told CFO, "If you were the communications director of a multibillion-dollar, multinational company, would you want to be out in front on this subject?"


More often than not, the answer to that question has been a resounding no. And that, say some experts, is the worst possible approach that companies can take if they want to bring the backlash to a speedy end. The deafening silence not only leaves an information black hole, but it also lends credence to the growing popular perception that there is something fundamentally unsavory about offshoring. If there weren't, why would CFOs and other executives be so reticent to talk about it?


"The silence is being interpreted as deception," says Garcia, "especially in the financial-services industry. And that's not a trait you want to associate with your bank, or any business. This silence allows anti-offshoring groups to make the story into whatever they want it to be. Instead of reinforcing a positive message, the silence creates a negative message over which companies have no control."


The Nearer Shore


Of course, it is difficult for an American CFO to stand up to the groundswell of nationalistic fervor that holds that jobs created in the United States should stay here, especially during tough economic times. Many critics say the implicit nationalism behind the anger over offshoring demonstrates how poorly many Americans understand what it means to be part of a global economy.


After all, in an era of multinational corporations, what exactly is offshoring? Take GE, for example. About 45 percent of GE's employees are located outside the United States. The company has added 100,000 jobs in the past 10 years, much of them through acquisitions of foreign companies. During that period, GE's employment levels in the United States have remained static at 160,000. That could lend credence to the argument that offshoring is a main cause of the jobless recovery. However, GE spokesperson Peter Stack argues that compensation and benefits for the company's U.S. industrial jobs have climbed by 4.5 percent a year during that period. The company's offshore work is done mostly through "captive" GE employees located overseas. Is it still considered offshoring if the foreign workers are full employees of the company and no net jobs were lost back home?


The question gets more complicated when one considers the plight of foreign-based CFOs of American firms. When Len Rinaldi, CFO of the UK-based EMEA division of Lucent Technologies (which is based in Murray Hill, New Jersey), moved jobs from one EU country to another as part of an offshoring contract with cash-collection company Equitant, he encountered the same push-back that U.S.-based CFOs are feeling. "The European works councils are very strong here," says Rinaldi. "You have to justify yourself significantly to move jobs around the European Union. They're still extremely nationalistic." Still, he doesn't consider the job moves to be offshoring, since all stayed in the EU.


Rinaldi faced a greater outcry when he moved R&D jobs from the EU to India as part of another offshoring contract. This phenomenon — in which offshoring to emerging overseas economies incites more of a backlash than "near-shoring" to an economically, ethnically, and culturally similar country — is one reason that many large offshoring companies like India-based Wipro and Infosys are setting up "near-shore" facilities in Canada and the United Kingdom. Many are even repositioning their service offerings so that they can give companies the option of keeping some of the outsourced positions within the United States instead of offshoring everything right away.


"You can see the relief on the CFO's face when you tell him he doesn't have to offshore to get the savings," says Craig Tobin, senior vice president of sales for Dublin- and Sacramento, California-based Equitant. "We tell them they can keep the jobs here now, improve their processes, and when they're ready, they can offshore."


Tobin also points out that many CFOs are considering outsourcing to large U.S.-based companies, like IBM Global Services, so "they can say, 'We've gone to IBM, so we're not making the decision to offshore those jobs.'" That way, any future decision to offshore will be the outsourcer's decision, not the CFO's.


CFOs at companies that offshore say that while they're not doing any less than they did before the backlash, they are trying to be more "sensitive" about how they handle the offshoring process. IBM Global Services, for example, which was lambasted in the press for asking laid-off employees to train their offshore replacements, has ended that practice, and, according to IBM spokesperson Clint Roswell, "We've redoubled our retraining efforts for people whose skills are no longer in demand from our customers."


Tell the Story


CFOs already make the effort to explain the rationale for offshoring to their employees. When Gene Godick, CFO of Malvern, Pennsylvania-based Verticalnet Inc., sent software product development to India through Symphony Services, he spent a lot of time talking with employees. Some were more receptive than others. "We had one employee [who was being laid off] who called our CEO unpatriotic," recalls Godick. That employee was later rehired, he says, for one of the new jobs made possible by the savings incurred by the offshoring contract. "The employees respected our honesty," says Godick. "A lot of companies just tap employees on the shoulder and say, 'See ya.' " In fact, he says, the senior development team in the States helped select the offshore provider. "They knew why we had to do it," he says.


If CFOs can sell offshoring to employees, one wonders why they can't do a better job of selling the concept to the public.


Several companies, including Genworth Financial Inc. (a GE insurance spin-off) and Gillette Co., have issued statements in their annual reports warning about the potentially negative financial consequences of state and federal anti-offshoring legislative proposals. Others have launched aggressive lobbying efforts against the legislation, although in keeping with the "radio silence" approach to the backlash, they refer to these efforts only obliquely.


"It's still too early to tell what the far-reaching business effects will be of the current debate. We're making sure that the positive offshoring story is part of the dialogue," says GE's Stack, "but we're not aggressively telling the story." In other words, lobbyists for companies like GE are working hard on influencing the legislative angle, but saying little publicly.


The continued public silence is also curious because companies have no plans to stop moving some operations overseas. Some, it is true, are delaying the initial move until the political furor subsides. But of those that are currently offshoring, 64 percent plan to increase their offshoring levels, and another 23 percent plan to keep their levels constant. Lucent's Rinaldi says he has no plans to pull back. "In an election year, no one is going to vote for fewer jobs and higher taxes, but you can't avoid the global economy that we're in," he says.


Indeed, whether or not the American public likes offshoring, many CFOs feel strongly that they have no choice. "The markets demand offshoring," explains Verticalnet's Godick. "There are venture capitalists out there that won't fund a company unless there's a plan to offshore parts of development. There's a huge disconnect between politics and reality as far as what companies are doing." He adds, "It's hard for me to sit here and tell a shareholder, 'We're going to be patriotic. We're keeping jobs here. You don't mind if we get lower returns, do you?' "


"There has been a tremendous willful disregard for the global nature of our economy right now," echoes Stack. "The small tool-and-die plant in Illinois is competing with a plant in Bangalore."


CFOs, in other words, are in the uncomfortable position of telling Americans that they are truly competing for jobs with the rest of the world, including countries where people are college-educated, creative, ambitious, smart, and willing to do the job for less than half the pay.


"Right now, no one is talking, because it's such a politically sensitive issue," says Garcia. "But now is the time to get the message right. Soon, [offshoring] will be ubiquitous, and anyone who's not doing it will be off the competitive map."


Kris Frieswick is a senior writer at CFO.


Offshore Yourself


Will CFOs find themselves outsourced someday? Already 21 percent of companies that offshore (or plan to do so) send finance functions overseas, and that number is growing. General Electric, long a leader in offshoring, has some 2,000 finance workers in India. Some of them even write parts of the management discussion and analysis for GE's annual reports, said CFO Keith Sherin at the CFO Rising conference in March.


Chicago-based NutraSweet Co. recently domestically outsourced almost all of its finance staffers (the CFO was spared), while accounts-payable positions were sent overseas. "Offshoring is a nonissue because we're a global company," declares CFO Jim Stanley. He says that NutraSweet is not actively seeking to offshore any more of the finance functions, but "we're always reviewing those sorts of things."


"A lot of my peers would say, 'I'd never offshore general ledger or accounting,'" adds Len Rinaldi, CFO of Lucent Technologies's EMEA division. But if policies and procedures are sufficiently standardized, he says, there's no reason those functions couldn't be "regionally deployed," although he stresses he has "no current plans to do so."


Offshoring is increasingly common in the tax and accounting world. Clarence Schmitz, chairman and CEO of Outsource Partners International, says his company's offshore employees are on tap to process about 12,000 to 15,000 tax returns this year. "As those people become more comfortable and knowledgeable with tax returns, they want to take on more responsibilities," says Schmitz. "As long as they've gone through two or three tax seasons, they're ready to take on more-complicated tax returns. After four or five seasons, they're the equivalent of a Big Four tax manager. At that level, you're going to have huge labor arbitrage."


Still, Rinaldi is emphatic that the CFO function itself cannot be offshored. "I don't see my job [being offshored]," he says. "Accounting functions can get more efficient, but business finance is a consultant role, and that's where it should stay."


But while the current generation of CFOs is unlikely to find itself outsourced, the movement of finance functions overseas does raise the question of where the next generation will come from. The loss of an apprentice system is an often-overlooked issue in the offshoring debate. Even Schmitz, a strong proponent of outsourcing, agrees. "When I look back on my career as a CPA, there was a rite of passage. You prepared tax returns, then became a reviewer, then a strategist, then a partner. If that lower level of job training is wiped out by going offshore, it's a real problem." —K.F.

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