In-Depth

Readers Offer Perspective on Outsourcing's Beneficiaries

Readers raise the possibility that other stakeholders could benefit from outsourcing windfalls—especially CIOs

• By Stephen Swoyer
• 09/14/2004

Not surprisingly, their thoughts are in sync with the conclusions reached by the authors of a report arguing that CEOs benefit disproportionately from the outsourcing phenomenon.

A few readers did, however, raise the possibility that other factors are at play in the fields of outsourcing Elysium. “CIO bonus levels—outsource advocates versus non-outsource advocates—over the last five years would be a more direct measurement, especially with the recent bad economy,” suggested one reader, a project manager with a LAN services provider.

Good idea, but according to available data, anyway—wrong. Just three CIOs at companies that made the list of the 50 biggest U.S. outsourcers were also listed among the 65 highest paid CIOs compiled by Baseline Magazine. At the same time, the pay of these IT chiefs—such as Greg Bailar of Capital One Financial—is nothing to scoff at: Bailar pocketed almost $2.8 million in 2003, making him the third highest-paid IT chief. Similarly, FedEx CIO Rob Carter took home nearly $1.5 million last year, good enough for a top ten finish, while Bell South IT chief Fran Dennis placed 21st at $1.06 million.

According to Baseline, the highest-paid CIO—Bob DeRodes, of Home Depot --pocketed a CEO-worthy $7.3 million in 2003.

On the whole, however, CIOs fare relatively poorly, at least in comparison to other senior executives. Baseline found that just 66 CIOs rank among the highest-paid officers at their Fortune 1000 organizations. In addition, although 23 CIOs made more than $1 million in 2003, 17 took pay cuts.

Another reader suggested that not just CEOs, but senior executives as a whole, tend to benefit disproportionately from outsourcing.

“My question is whether or not there have been any studies to substantiate the huge difference between the CEO salaries and other senior-level or [middle] management personnel in the same organization?” wondered this reader, a software engineer with a software solutions provider. “It seems to me … that the people who know the least about what it takes to keep a company viable … [drain] more money … from the payroll. Meanwhile, those actually holding up the company are having their jobs sent overseas.”

This reader also zeroed in on the strange uniformity of the jobs that are typically sent overseas—namely, non-executive positions: “I haven’t seen any of the senior executive positions going overseas for U.S.-based companies in the global market. Makes one wonder, wouldn’t you say?”

Most readers endorsed this perspective. “Personally I have gone through mergers/outsourcing/consolidations and so forth and I do agree the board—[the] ones on top—reap the benefits [of outsourcing], leaving the worker out to dry,” wrote one reader, an IT professional with a prominent financial services company.

This reader and several others invoked the dreaded “R” word—regulation—as a potential counter-measure: “Even a union cannot stop that. What can stop it is regulation from Congress saying [that] ‘Even if a company saves [by outsourcing] it must be because it needed to save—not to put bigger profits in the pocket books of a few.' But you and I know it will never happen.”

Another reader—an IBM employee, no less—wrote in to correct a statement that Big Blue planned to add 19,000 new jobs in the U.S. next year. “The IBM-announced 19,000 jobs that they will be hiring are not all in the US,” she asserted. “IBM has refused to state where in the world those jobs will be.”

We also heard from another IT professional who may have plucked one of those new IBM jobs—thanks to outsourcing, no less. This IT professional, a U.S.-based employee of a prominent global telecommunications firm, says his company’s CEO has promised to aggressively cut costs. “Initially, that meant laying a lot of people off, but now that there’s really no one left to lay off, he’s trying to cut costs in other ways,” he said.

As a result, this individual, along with several colleagues, will move over to IBM, where they’ll provide outsourced support to their former employer. There are several benefits, he concedes, such as the fact that Big Blue offers better (more affordable) terms for life insurance.

There’s a possibility that the skepticism of many readers is well placed. A bevy of prominent economists—such as N. Gregory Mankiw, the chairman of the White House Council of Economic Advisors—have famously championed outsourcing, arguing that, on balance, it creates new jobs even as other jobs are sent overseas (see http://www.esj.com/news/article.asp?editorialsId=856). Yet, as related in the August 2 issue of The New Yorker—not all economists are convinced. In an article that could challenge the orthodox understanding of the economics of outsourcing—at least in the mainstream marketplace of ideas—New Yorker staff writer John Cassidy cited the work of economists Ralph E. Gomory (president of the Alfred P. Sloan Foundation) and William J. Baumol (of NYU), co-authors of the book "Global Trade and Conflicting National Interests." Gomory and Baumol have done extensive research into what happens when countries with low-wage economies begin to compete against countries with high-wage economies. The results, both economists say, aren’t pretty in the long run—in spite of potentially encouraging early returns.

“If the wage differential between two trading countries is sufficiently large, the loss of industries to the low-wage, underdeveloped country may well benefit both countries at the national level,” said Gomory in testimony before Congress earlier this year, according to Cassidy. “However, as the underdeveloped country develops and starts to look more like the developed one, the balance turns around and further loss of industries becomes harmful to the overall welfare of the more developed nation.”