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Outsource Nation-

Some of America’s top innovators and CEOs speak out on why jobs are leaving in droves and how to get them back

As of October, 14 million Americans are unemployed. The Labor Department reports that new unemployment applications are averaging over 400,000 per week and the percentage of Americans out of work has been over 9% for every single month but two since May of 2009. In August, zero net jobs were created.

As the unemployment numbers indicate, many Americans are acquiescing to the hand-out of big-government entitlements while others, in the interest of self-preservation, are seeking work outside of the United States.

 The 2009 World Development Report finds that “Eight million Americans change states every year, migrating to reduce distance to economic opportunity.” Two years later, people are increasingly willing to migrate not only across states but globally, causing a loss of workers in American service, labor, technology and manufacturing sectors. Also lost to overseas employment are talented innovators whose ideas will instead be developed for companies in Singapore, Japan, Malaysia, China, and Europe.

 The costs associated with losing even one worker have far-reaching ramifications. Hundreds of thousands of dollars from that individual as well as their family members are lost over time in the money they would have spent on domestic housing, transportation, food, entertainment, taxes, and professional, medical, legal and other services – all money now spent elsewhere for the benefit of a foreign economy. 

 Perhaps even more concerning are the challenges of survival that business owners face every day. As a solution, more and more are outsourcing work to countries with fewer regulations and cheaper labor.

    Outsourcing is more than a trend. As borders become obsolete, the idea of being based in one place and having employees in several others is becoming embedded in the fabric of our society. Even in better times, the domestic economy would have had to adjust to this new way of doing business, but in the midst of a national economic crisis, questions arise as to the greater implications that outsourcing has on the American economy and our ability to compete in a global market.

 As Americans face the worst job market in generations, exactly what conditions are driving business owners to outsource, and is it paying off?

 I spoke with a few of America’s CEOs and innovators on the reasons that outsourcing is on the rise, the price we’re paying for it and what we need to do to get our jobs back.

A Culture of ‘Bigness’

 Morris Panner is CEO of GroupFlier, a mobile communications company. A self-described “Democrat whose politics are undeniably liberal on social issues,” Panner is highly successful: He’s the developer of two start-up companies as well as a now and then celebrity in his own right, making the occasional appearance on news shows like Fox to exchange ideas on how to make things better.

If he chose to, he could just as well enjoy his success and not bother fighting for the next generation of big thinkers. But at heart, Panner is a champion for the little guy and represents the essence of the American Dream: you may not know who he is, but he’s out there envisioning, building, and creating. Like many, however, he also recognizes the increasing challenges that small businesses face in America today.  Last year he wrote a piece in The Washington Times entitled, “Strangling Innovation with Red Tape,” a battle-cry for entrepreneurs to demand an end to excessive government regulation, insider deals and big-money lobbyists.

Lamenting the days of innovation for the sake of competition and results, Panner takes umbrage with the fact that Washington lobbyists make multi-million dollar salaries to represent special interest groups with little tangible result for American people.

 “Staunchly pro-business,” Panner believes that new ideas properly implemented can change the world.” It’s hard to get much more optimistic than that. But today the business game is no longer about the innovative idea or the great new product or service that will benefit people.

“(As entrepreneurs) we are hardly represented by the business lobbying interests in Washington. Like most Americans, I recoil at the fact that the man who runs the U.S. Chamber of Commerce earns about $3.9 million a year. He doesn’t represent me.” Then Panner wonders: “Just who is he representing that can afford to pay him that kind of money and why do we have to pay that kind of money for common sense business rules? That really starts to show how the problem isn’t about Democrat or Republican, but about a broken system that favors the status quo over entrepreneurs and new ideas.”

He points out that “In 2009 and 2010, Capital Tax Partners, a leading lobbyist representing Goldman Sachs, Apple and others, earned about $20 million in fees, according to the Center for Responsive Politics.”

A system so centered around who has the biggest wallet and best connections inside the Beltway  does give one pause to consider how far Thomas Edison would have gotten with his incandescent light bulb if he would have had to bankroll the cadre of lawyers, lobbyists and regulatory experts he would need today. The same question goes for Eli Whitney, Samuel Morse, Henry Ford, Andrew Carnegie, and so many other American Innovators who had the freedom to develop, grow and change the world.

Also choking out progress is the behemoth of government regulation imposed on small business. “We are creating so much regulation over tax policy, health care, financial activity…It is always hard to start a business. It is especially hard to start an innovative business, one that will foster a new technology or business method.”

When Panner sold his last business, he spent $400,000 in auditing fees to prepare it for sale. To establish GroupFlier, he spent more in administrative, legal and regulatory costs than he did in infrastructure for technology and innovation, and that kind of imbalance is just wrong, Panner says.

He warns that combined expenditures of federal, state and local government are rapidly taking over the U.S. economy and if left unchecked will choke out the last remnants of entrepreneurialism as it once was. “At the beginning of President Obama’s term, government spending made up 35 percent of gross domestic product. Now, it is up to almost 45 percent, which puts us seventh among advanced economies.”

“From an entrepreneur’s perspective, we need a national campaign to create transparency in our legislation and a national moratorium on the creation of commissions, regulators and czars. We should reject bills that are thousands of pages or that delegate vast authority to unelected regulators.”

Panner the social Democrat concedes that the Obama Administration does little in the way of making it easier for business owners create, grow or develop domestic jobs, noting that “Innovation depends on clear and transparent rules. Only incumbent businesses with large bankrolls have enough money to hire hi-priced lobbyists to advocate on their behalf, and this system makes it extremely hard for new companies to gain any traction.”

So what does all of this mean in terms of outsourcing? With a 25,000 page tax-code and a 2,500 page health-care plan that few have read, much less understand, Panner says that such excessive government regulation makes it difficult to be U.S. based.

Panner himself has never moved jobs overseas and says he’s struggled hard to stay domestic. Even the most basic functions, such as hiring, are impossible to factor into a budget: referring to the Obama health care plan, Panner says “You can’t possibly predict what health care will cost you for even one employee, and some regulations change from state to state, further complicating issues like hiring consultants or telecommuter positions. In Massachusetts, for example, Panner says if you hire more than five employees you have to adhere to both Federal health care regulation as well as an additional set of State rules. There’s a point where it just doesn’t make financial sense to grow.

People’s attitudes about their careers are changing, too, towards a decidedly global outlook. People today know they won’t work for the same company for twenty years, and as a result, loyalties on both sides have changed: people move around and companies outsource.

As for effecting change and keeping jobs within the U.S., Panner says, “The average person has less and less of a voice. It’s hard to imagine anyone being against better health care for all or rights for workers, but people are smart and they realize that all of these laws are expensive.”

Is there any hope? If you ask Panner, there’s a lot. “We Americans have great innovation. The ‘culture of bigness’ has taken over our political system but people are demanding change. I think we’re going to see reform.”

Karmic Reckoning 

When Craig Wolfe, owner of Celebriducks began his rubber duck manufacturing business in 1998, he had trouble finding all the components he needed to base operations in the United States. First created by Seiberling, rubber ducks used to be made entirely in the U.S. but increasing regulation, cost and a trend away from manufacturing sent the industry entirely overseas.

Today Wolfe’s company has manufactured over a million genuine rubber ducks, including ducks with celebrity faces. Averaging about 100,000 ducks a year, Wolfe does the artwork and sculpting in the U.S. but his manufacturing is in China, where he employs about 100 people.

 “At some point we as a country started giving up all our manufacturing to foreign countries with lower wages and fewer regulations and ultimately U.S. facilities couldn’t compete with that. That’s why today we have toys with lead and other safety concerns.”

Wolfe says we gave up manufacturing in favor of technology-based industries, and now we’re even on the backside of that era, as high-tech jobs, too, are becoming global, not U.S. based.  “It’s all driven by price and three cursed words: ’Maximizing-shareholder-value.’” Companies are increasing profits by firing people and going overseas and it’s gutting the workforce in America. People are happy when their stocks go up, but they have no idea why they’re going up.” A shrinking workforce in turn leaves behind desolate factories and skilled trades that die off after a generation.

“We’re losing innovation and manufacturing because there’s been too much emphasis on service-oriented industries,” says Wolfe. He says America bought into the notion that services are where it’s at and that manufacturing is old news. Companies that wanted to remain state-side have been squashed out by oppressive government regulation that makes it too cost-prohibitive to continue a “Made in America” policy: it’s either outsource or die.

As a member of the Fair Trade Association, Wolfe says that U.S. factory workers make approximately five times more per hour than their Chinese counterparts. Even with the expense of shipping containers from China, he has less stress, better control and more time for customer service.

Even so, the patriot in Wolfe wants to re-open rubber duck manufacturing at the site of the old Seiberling Estate in Ohio and is in the process of making the transition.

To do this he will have an overall cost increase of 20-25%. He’ll have to continue to import materials, molds, spray masking and other essentials that aren’t available in America, and he’ll increase his liability in everything from worker’s comp to OCEA regulations and a host of litigious areas related to the American business culture.

An additional result of the country’s shift from manufacturing to service is that one of Wolfe’s biggest challenges in re-establishing U.S.-based operations is the remarkable lack of skilled labor. Wolfe says it’s been challenging to find people who are trained in manufacturing and machine operation as well as maintenance and repair. “Seasoned factory workers are ole-timers now,” he says, and training a new generation will have to be an additional component of his expenses.

Even so, Wolfe emphasizes the upside: ditching China and basing his plant in Ohio will create jobs for factory workers, truckers, printers, box makers, mechanics, officer suppliers, tool and equipment reps, machine sales, service and repair specialists and administrative and office personnel. That’s not to mention the local cafes, schools, banks and other retail outlets that will receive the residual benefits from a thriving local industry. “It’s really come to light what we’ve done to America,” Wolfe says, “The ripple effect can work in the positive as well as the negative.”

As a society “We’ve gone overboard focusing on money for money’s sake – investing in stocks, dot-coms, the housing bubble and living far beyond our means on credit – now we have foreclosures and disaster. Whenever you put money ahead of ethics it will ultimately fail.”

“As a society, we have to do business more in harmony with ethics. The problem is bigger than policies. It really all comes down to greed.” Wolfe laments the national trend of blaming the other guy for personal economic crisis. Phrases like, “strategic default” have cropped up in financial-speak for people who willingly walk away from home mortgages. This kind of flippant irresponsibility is becoming acceptable in both private and corporate culture. Wolfe recalls companies like Hershey, Ben & Jerry and others that built their business on ethics and a policy of giving back to the local community. And while it’s highly in vogue for a company to wear its environmentalism on its sleeve, much of this has become superficial. “The problem is that we’ve become so overly structured and bureaucratic. Everything is a campaign or a publicity stunt. The human dimension is lost.”

Is there any hope?

“Yes, oh yes, there’s always hope!” says Wolfe. “Life is inherently good and every human being has a spark of good in them.” Wolfe observes the irony that things have gotten so bad that it’s beginning to make people realize the way we’ve been doing things as a culture is not fulfilling, and Wolfe believes that’s causing people to search for ways to make things better.

“We’ve been seeking money for money’s sake; living way beyond our means, worshipping materialism and now it’s all come back to us and we realize that we’re not fulfilled. But that’s a good thing.”

The bigger question is can this kinder, gentler nation translate into more domestic jobs? Perhaps if more business owners think like Wolfe, then there’s a chance.

The Age of the Micromultinational

Semyon Dukach was born in Russia and grew up in Texas. With a Bachelor’s from Columbia and a Master’s from MIT, his ivy-league smarts at the Blackjack table made him the legendary subject of the book, Busting Vegas by Ben Mezrich as well as the film, 21, starring Kevin Spacey. Dukach has since acquired, developed and sold several businesses and it’s a wonder that his LinkedIn page summarizes his skills with the gross understatement: “I’m good at starting businesses.” His most recent is SMTP, Inc., an email marketing and delivery service based in Cambridge, MA with staff outsourced to the Ukraine.

 He initially began with ten employees spread out across several states and made the gradual process to move twenty-seven of his thirty-two employee positions to the Ukraine as well as a number of consultant jobs scattered across the globe.

The decision to outsource wasn’t without challenges. Dukach says initially the quality of customer service from Kiev was inferior to American counter-parts but through training the quality has drastically improved. Regarding the cost of U.S. jobs lost to Ukrainians, Dukach is a pragmatist who sees the realities of a globalized planet: “The world is changing. Everything is fluid. Borders are opening up more and more.”

He can find quality people across the globe now, not just in America, and the barriers to managing a global staff are not what they use to be. “Less of what you do has anything to do with what country you’re in. It’s doesn’t really matter if our sales guy is in Connecticut or the Ukraine.”

When asked if Dukach thinks there’s a responsibility on the part of American businesses to employ American workers, to create jobs based at home and support the domestic economy, he is again practical and more along the lines of a strict but caring parent. Quite simply put: cost dictates where best to hire; it’s a 2 to 1 factor, and for almost any business that’s relevant. “The U.S. is the greatest country in the world which means that wages are the highest in the world,” says Dukach.

He points out that globalization has created an atmosphere where physical control over a space or a region is less and less significant, that people have more choices than ever where to work, where to buy and where to live, therefore rather than a focus on competition between states or regions, the United States must take an attitude of becoming more globally competitive.

A piece in Foreign Policy entitled, “Micromultinationals Will Run the World,” lays out a look at the future, and the future is now:

 “The early 21st will be the age of the micromultinational: small companies that operate globally. They can already draw on email, chat, social networks, wikis, voice-over-Internet protocol, and cloud computing — all available for free on the web — to provide their communications and computational infrastructure. They can exploit comparative advantage due to global variation in knowledge, skills, and wage rates. They can work around the world and around the clock to develop software, applications, and web services by using standardized components. Innovation has always been stimulated by international trade, and now global trade in knowledge and skills can take place far more easily than ever before.”

 As Dukach sees it, it’s really a matter of common sense: U.S. Government policies should be such that it’s more attractive to do business within the borders than elsewhere. When that happens, more companies will base operations in America.

“People all over the world understand each other better. They read the same blogs and visit the same websites.”  Precisely because people can leave the U.S. and work anywhere, the actions of government towards job creation and support for business do matter. People and businesses are going to go where there is least resistance for success.

Overall he sees this as a positive. “The United States is still the most tolerant culture on the face of the earth. Democracy and the rule of law is clear and predictable. Living here is safe and it’s easy to travel across borders compared to a lot of places. But,” he adds with a word of caution, “incrementally the advantages are becoming smaller. All governments are competing for the best economic climate, and ultimately that’s a good thing.

Survival Mode

Panner, Wolfe and Dukach are three out of thousands of American entrepreneurs trying to grow and prosper, and they serve as a barometer for the symptoms and causes of what’s pushing the outsource trend.

As each has observed, businesses large and small are in survival mode. A greater bottom line dictates decision making and if outsourcing hinders job growth at home then it could be seen as a necessary casualty.

Earlier this year GE’s health care unit announced that it will move the headquarters of its 115 year-old x-ray imaging machine factory from Wisconsin to China, where they will invest $2 billion and open six “customer innovation” centers (It’s worth noting that GE CEO Jeff Immelt is also leader of President Obama’s Jobs Council and the architect of the outsourcing initiative, leaving one to wonder what exactly Obama is doing to encourage companies like GE to keep their operations and thousands of jobs in America). As of 2009 GE employed 36,000 more people overseas than in the United States, the opposite of a decade ago.

One of President Obama’s campaign promises in 2008 was the creation of Green jobs across the country that would increase employment and make America a leader in the growing Environmental industry. Instead, many Green jobs have gone straight to overseas workers. The last U.S. factory of incandescent light bulbs in Winchester, Virginia closed earlier this year and sent its thousands of new jobs to China and Mexico where the new, Greener CFLs will be made.

At its height, the factory’s 500 employees made over 2.5 million light bulbs per day, but GE determined that the new CFL bulbs are “too expensive to be done at U.S. wage rates,” according to a report from The Heartland Institute.

Around July 2010, GE took out a full-page ad in The Winchester Star that read: “Keep jobs here and across the country. GE is a good friend and neighbor around here. We provide high-tech, good paying jobs for many. These jobs support countless other jobs in our community – in schools, shops, entertainment and manufacturing.” Three months later GE closed the Winchester Plant and fired the remaining 200 workers.

Workers at the plant were highly offended by the ad, knowing that their jobs were about to end. At the company-wide announcement of the Plant’s closing, the manager said, “We’re all in the same boat; we’re all in this together.” That manager got to keep his job with GE and was relocated.

Hostile Feds

The news is prevalent with stories of private businesses being pushed around by the current Administration, further adding to the attraction of outsourcing or relocating overseas altogether.

Legendary Nashville-based Gibson Guitar has been raided twice by armed Federal agents over a disputed charge of improper exportation of rare wood from India. The Indish government seems to have no issue with Gibson, who follows industry standard and has been exporting the wood for years.

Gibson CEO Henry Juszkiewicz estimates the raids have cost him upwards of $3 million, which resulted in both factories being temporarily shut down and the company’s 2,000 workers sent home. Juszkiewicz claims that agents told him he would be better off to just relocate his company – and his 2,000 jobs – to India.

Obama appointee Lafe Solomon and the National Labor Relations Board’s filed suit to block Boeing from operating a $750 million aircraft assembly line in South Carolina – a right to work state – instead of pro-union Washington State.

The suit raises big questions as to the authority of the NLRB to tell private businesses where they can and can’t operate. For South Carolina, 1,000 jobs will be directly affected as well as hundreds of employees in residual support industries that would establish business in the area.

In an interview earlier this year, Home Depot founder Bernie Marcus made his feelings clear about the current administration’s policies toward American business: “Home Depot would never have succeeded if we’d tried to start it today. Every day you see rules and regulations from a group of Washington bureaucrats who know nothing about running a business. And I mean every day. It’s become stifling.”

Steve Wynn, famous casino developer and CEO of Wynn Resorts, likewise railed against Obama’s anti-business policies while speaking on a company conference call last July:

“Those of us who have business opportunities and the capital to do it are going to sit in fear of the President. And a lot of people don’t want to say that. They say, oh God, don’t be attacking Obama. Well, this is Obama’s deal. And it is Obama that is responsible for this fear in America. The guy keeps making speeches about redistribution and maybe we ought to do something to businesses that don’t invest, they are holding too much money. You know, we haven’t heard that kind of talk except from pure socialists. Everybody is afraid of the government and there is no need soft-pedaling it. It is the truth. It is the truth.”

Wynn’s commentary is typical among investors today, and domestic jobs are suffering for it. Outsourcing is cheaper, less regulated, and the current atmosphere will foster more of it.

Earlier this week Speaker of the House Jon Boehner summarized the situation by saying that American job creators are essentially “on strike” over the Obama administration’s job killing policies. Many small business owners feel under attack, particularly in light of the President’s recent unveiling of “The Buffett Rule” to raise taxes on the wealthy, which under his plan will include many small business owners. Such a move may further threaten jobs and lead to more outsourcing as businesses do what they must to cut expenses.

In his interview, Bernie Marcus issued a challenge to small business owners:

 “It’s time to stand up and fight. These people in Washington are out there making your life difficult, and many of you won’t survive. Why aren’t you doing something about it? The free enterprise system made this country what it is today, and we’ve got to keep it alive. We are on the edge of the abyss.”


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