One of the justifications for outsourcing (firing productive U.S. workers and shipping the jobs overseas) is that it will lower costs. Then there’s reality, in which firing productive U.S. workers and shipping the jobs overseas actually costs more. Consider this from the CEO of Boeing about their new plane, the 787:
One bracing lesson that Albaugh was unusually candid about: the 787′s global outsourcing strategy — specifically intended to slash Boeing’s costs — backfired completely.
“We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home,” Albaugh told his large audience of students and faculty.
Boeing was forced to compensate, support or buy out the partners it brought in to share the cost of the new jet’s development, and now bears the brunt of additional costs due to the delays.
Some Wall Street analysts estimate those added costs at between $12 billion and $18 billion, on top of the $5 billion Boeing originally planned to invest.
And as is always the case with we Dirty Fucking Hippies, this was not only predictable, it was predicted:
And yet, at least one senior technical engineer within Boeing predicted the outcome of the extensive outsourcing strategy with remarkable foresight a decade ago…
His paper was a biting critique of excessive outsourcing, a warning to Boeing not to go down the path that had led Douglas Aircraft to virtual obsolescence by the mid-1990s.
The paper laid out the extreme risks of outsourcing core technology and predicted it would bring massive additional costs and require Boeing to buy out partners who could not perform.
Albaugh said in the interview that he read the paper six or seven years ago, and conceded that it had “a lot of good points” and was “pretty prescient.”
(full report available as a pdf)
So why do this? Well, we can thank all the people who believe that the stock market happy leads to improved economic efficiency:
Albaugh said that part of what had led Boeing astray was the chasing of a financial measure called RONA, for Return on Net Assets.
This is essentially a ratio of income to assets and one way to make that ratio bigger is to reduce your assets. The drive to increase RONA thus spurred a push within Boeing to do less work in-house — hence reducing assets in the form of facilities and employees — and have others do the work.
Hart-Smith argued that it was wrong to use that financial measure as a gauge of performance and that outsourcing would only slash profits and hollow out the company.
That works, except when it increases costs from $5 billion to $20 billion. Then, maybe not so much.
This was not a problem with the engineers or the workers, this was an utter failure by management. It was part greed: stock prices usually rise when outsourcing is announced. But it was also a slavish devotion to ideology; many CEOs actually believed this was more effective. Something to keep in mind as the ongoing assault against America’s workers continues.
A pitchfork-related aside: The Boeing CEO at the time, Philip Condit was described as changing the company culture–and not for the better:
But if there was any lingering sense of shame, it didn’t deter Condit from his taste for lavish living. In the early ’90s, he built a massive medieval-style mansion outside Seattle, replete with a custom miniature train that chugged from room to room, delivering drinks to guests. Condit hosted elaborate parties that often included poetry readings and evenings of Camelot themes, featuring characters from King Arthur.
That extravagance soon began filtering into a company culture that had been based on modesty, fiscal restraint, and the singleminded pursuit of building big airplanes. Former CEOs Bill Allen and T. Wilson both eschewed the trappings of corporate privilege. Wilson lived in the same middle-class house during his whole career at Boeing. When Condit succeeded Frank Shrontz as CEO in 1996, Boeing had three small corporate jets, and senior execs were required to fly commercial airlines to stay in touch with their customers. Now, Boeing has a fleet of corporate jets, including a 737 for Condit, done up in English-library style.
Condit’s salary also increased by 94% during his tenure, even as Boeing cratered, including drops in stock prices, orders, and deliveries.