Is There Stealth Outsourcing in Your Future?

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"Outsourcing"
is all the rage these days, in both senses: popular (CEOs) and fury
(union members).

Outsourcing
is a constant process. It is as basic to life as death is. As the
clock ticks, you can hear the outsourcing process. You are its target.

Well, you
were leaving anyway, right?

In the early
stages of any booming market, insourcing is all the rage. Some industry
gets hot. In come lots of would-be replacements, all offering to
do things cheaper, faster, better.

It doesn’t
matter what the field is: big money attracts people who want to
get in on "the gold rush." Then the gold peters out. There
are a lot of miners out there, sifting pans in hand, with not much
dust per dirt load.

The market
for real estate brokers is now in the down side of its gold rush.
Because of the monetary policies Federal Reserve System after 1995,
a real estate boom took hold. Millions of buyers took advantage
of low long-term interest rates to bid up the price of home ownership.
Real estate brokers started doing better than people in other professions.
So, at the margin, newcomers arrived, trying to get a piece of the
action.

Today, the
bubble has reversed in some areas, such as Boston. It is slowing
down in the other boom areas.

Meanwhile,
those businesses that are located in the middle of these boom regions
find it increasingly expensive to recruit new employees. The local
cost of living is high because of appreciated real estate.

There are places
to go where you can buy the lifestyle you want at a lower price.
There are
even websites that let you identify such places. Just type in a
zip code.

Any company
CEO who isn’t paying attention to such geographical options is costing
investors and employees a lot of money.

SILICON
VALLEY

Silicon Valley
is the premier example. In San Jose, the median priced home is now
$700,000. Asking prices are higher than sale prices, but the price
is still very high. You
can verify this on the following site, which reports the median
price of housing in most major American cities.

With 5% down
and a mortgage rate of 6.3%, a 30-year fixed-rate mortgage would
require $4,000 a month. To this add home insurance, taxes, maintenance,
and the PMI (under 20% down) extra payment. Face it: the buyer will
be paying $60,000 a year for his nondescript 3-bedroom, 2-bath stucco
house. Then taxes will rise. Then maintenance costs.

What kind of
salary scale is required to hire people who need $60,000 a year
just to buy a mediocre home?

The San
Jose Mercury News ran a
story on the job market in Silicon Valley
. It’s an employer’s
market, even for highly skilled technicians. Companies are outsourcing
— hiring people outside of Silicon Valley.

Outsourcing
to India is visible. Outsourcing to North Dakota isn’t.

If you possess
highly unique skills, you can get a job in Silicon Valley. This
is always true. But your average grunt, with a Harvard MBA and a
degree in engineering, is out of the running.

Jeri Ann
Smith got laid off in August 2003 after 21 years at Hewlett-Packard.
Even with her experience, her MBA from Harvard and an engineering
degree from the University of California-Los Angeles, Smith struggled
to find a job in tech. So Smith got a license to be an investment
adviser and joined a firm her parents started.

"It’s
wonderful not to have the threat of losing your job looming over
you," Smith said. "I feel I have much more energy to
tackle a new career here than I would at another tech company
where the management could change and I’d be left out again."

Yes, siree,
Bob: just get a job from mom and dad, and job insecurity disappears
. . . until mom and dad decide to retire.

Then there
is the sad tale of Karl Troutman.

The former
fiber-optic technician was laid off from Agilent in August 2003.
Since then, Trautman, 62, has done some contracting work, filled
in as a maintenance worker and tried unsuccessfully to land a
job. "I keep reading about how things are looking up,"
Trautman said. "But it’s really deceptive. It’s not true."

While some
valley employers are on a hiring spree, most of it is outside
the region. In 2005, Intel hired 14,900 people. Apple Computer
added 3,105. Google snagged 2,659. EBay tagged 3,500.

But these
gains are offset by continuing cost-cutting and restructuring,
as well as by valley companies hiring in other regions where the
cost of living is cheaper. According to payroll statistics from
the state, Silicon Valley has only added a minimal number of jobs
in the past year.

The other development
is that the percentage of local jobs in high technology is declining.
Where is the job growth? At the lower end of the skill set.

Over the
past five years, tech’s share of jobs in San Mateo County has
shrunk to only 26.3 percent after peaking at 31.6 percent in 2001.
Other non-tech industries have been more robust, such as construction,
which had a net gain of 2,200 jobs in the past year; or restaurants,
which expanded by 1,500 positions; or education, which added 900
jobs.

So, here we
have the general population sitting in high-priced housing. New
buyers must come from within the region: sellers of homes who are
moving up. But at the margin, few new buyers qualify for mortgage
loans. Outsiders are locked out.

The problem
is, we all grow old. Then, one by one, we move into very, very small
quarters. Utility costs drop. Maintenance costs fall. Everyone will
eventually move out of the homes in Silicon Valley.

Who will
be moving in?

Those who got
there early and bought their homes are paying enormous rents. If
they sold their homes, took and money, and invested — if nothing
else, by issuing a mortgage to the buyers — they would be pulling
in $4,000 a month. They are not pulling in a dime. They are paying
high property taxes and maintenance costs. They are maintaining
their lifestyles in their ticky-tacky houses — the phrase coined
by Malvina Reynolds in 1961 ("Little Boxes"), a song that
came to her as she was driving from Berkeley to Palo Alto. Supposedly,
it came to her in Daly City. For those of you who don’t remember
it, it goes like this:

Little boxes
on the hillside, Little boxes made of tickytacky Little boxes
on the hillside, little boxes all the same.

There’s a
green one and a pink one and a blue one and a yellow one.

And they’re
all made out of ticky tacky and they all look just the same.

And the people
in the houses all went to the university, Where they were put
in boxes and they came out all the same.

And there’s
doctors and there’s lawyers, and business executives.

And they’re
all made out of ticky tacky and they all look just the same.

And they
all play on the golf course and drink their martinis dry, And
they all have pretty children and the children go to school.

And the children
go to summer camp and then to the university, Where they are put
in boxes and they come out all the same.

And the boys
go into business and marry and raise a family.

In boxes
made of ticky tacky and they all look just the same.

Now they’re
40 years older. The people, I mean. And so, one by one, they move
to dramatically smaller quarters.

HEARTLAND
AMERICA

Outsourcing
isn’t just going to India. It’s going to heartland America, where
it’s humid and the breezes blow through in tall spirals at 160 miles
per hour.

The most overpriced
housing in the country, according to a
recent study by a Ph.D. economist
who lives in outrageously
expensive Claremont, California, is San Mateo County, California
— in between Silicon Valley and San Francisco. He says there is
no sign of a housing bubble anywhere else in the 10 major urban
areas he studied. (Yes, he says that.)

So, if you
were planning to locate a high-tech company, where would you pick?
You would look for a university that cranks out engineers and technicians,
but one that is located in a low-cost area, where you can buy homes
at depressed prices.

There is such
an area. Let me give you a hint. It’s located almost midway between
North Zulch and Snook. Got it placed mentally?

It’s College
Station. That’s in Texas. It’s the home of Texas A&M.

In
January, CNN rated College Station dead last out of 299 American
cities in terms of underpriced housing.

Texas A&M
cranks out lots and lots of engineers. It’s a conservative university
politically, probably the most conservative university faculty in
the United States. There is a good old boy network in the state
for A&M graduates, matched only by the old boy network of UT
Austin grads. There is money in Texas.

The town is
not very lively, unlike Austin, so it attracts students who are
content to study, go to football games, and drink, not necessarily
in that order. But the engineers are a studious bunch.

College Station
is one of many similarly blessed college towns. Students attend,
learn to like the region, and would be willing to stay if they could
get jobs. They would be willing to work for less pay to buy lifestyle.

College Station
is the obvious location for a high tech boom. I saw what would happen
in Austin in 1987, when Texas real estate had crashed. I told people
that if I ran a company in Silicon Valley, I would re-locate to
Austin. Nearby, Round Rock became the home of Dell Computer.

There is no
good reason why College Station could not become the next Austin
as a high-tech center.

This would
be stealth outsourcing.

OPPORTUNITIES
FOR GROWTH

The technological
best and brightest can live anywhere. There are jobs for them. They
can buy those tick-tacky houses, though just barely. But what kind
of lifestyle can a person enjoy who is forced to pay $60,000 a year
for 30 years, just to live in a nondescript house?

This cannot
go on, and it won’t go on. The process of attrition will overwhelm
any company that decides to locate in a former gold rush area whose
real estate got bid up during the rush.

Teams are important
in high-tech settings. A team can live anywhere. Core teams are
kept close to the CEO. Other teams are not crucial geographically.

Typical is
Netflix. It has 1500 employees, but only 300 of them are in Los
Gatos, a Silicon Valley area. The rest are scattered across the
country. The core technology team is in gold rush country. The rest
of the teams aren’t.

Start-up companies
could open branch offices for recruiting purposes, located close
to Stanford and Berkeley and the tech centers. They could advertise
like this:

Algorithm
specialist wanted:

Sell your
home for $700,000
Buy
a $350,000 mansion in College Station, Texas
Pay
cash for it.
No
more mortgage debt. Ever.
We’ll
pay you $100,000 a year.

When Google
starts opening branches in places like College Station, investors
will know that the company is serious about staying ahead of the
pack. Local teams can be assembled far from Silicon Valley.

Programmers
will opt for lifestyle, just like everyone else. If you can buy
a better lifestyle for less money, pay lower taxes, and bear lower
debt, why not make the move?

India is one
such outsourcing center. It is not the only one.

There is no
reason for any but the best and the brightest to stay on the core
central team in Silicon Valley, New York City, Chicago, or Boston.

When investing,
look for companies that have relocated or that are planning to.
These companies are not being run for the convenience of the CEO
and his wife, who paid off their mortgage fifteen years ago.

Thirty-five
years ago, I was hired by an outfit in Westchester County, New York.
Real estate was high. I was a low-level employee competing against
New York City stock brokers for housing. The boss lived in a free
home, had a free car and a free chauffeur, and never offered a raise.
He passed on most of his expenses to the organization, tax free.
I quit after a year and a half. I could see that he was living his
life for his convenience, not with any vision of how to replace
an aging staff. I knew he would run the organization into the ground.
He said he would: "I will ride my bicycle until I fall off."
He did.

The man who
replaced me — a "kid" in his forties — later confessed
to me: "If I had been sensible, I would have burned down that
house." The organization drifted into obscurity. That free
home seduced every subsequent CEO. They could never hire bright,
energetic types who might have kept the organization growing. They
would not offer wages that allowed young men a way to own their
homes without massive debt. They never felt the employees’ pain.

Pretty soon,
there were no high-level employees.

CONCLUSION

How is your
company run? For the convenience of the CEO or the employees? If
it’s run for the convenience of the CEO and his immediate cronies,
then your future is in danger. They will suck the capital out of
the company. The most important capital is brainpower.

A wise CEO
looks at the company’s ability to hire better talent cheaper. Today,
the country’s eyes are focused on India. This is an optical illusion.
The significant outsourcing is domestic.

The Japanese
auto producers did not build factories in Detroit. They built them
in Tennessee. Detroit is going bust. Tennessee, despite tornadoes,
isn’t.

If you have
a vision for your career that is hampered by your CEO and his wife,
then you should consider outsourcing your employer.

Go
to where the future is. Go to where old people are retiring and
young people are moving. There is a phrase that describes such places:
"Newlyweds and almost deads." Demographer Jack Lissinger
has called them "penturbia."

That’s where
the future is.

April
17, 2006

Gary
North [send him mail] is the
author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible
.

Gary
North Archives

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