Investing, shareholders, workers and business.

[onan]

Stevesh and I were discussing a topic the other day and we both thought it would be interesting to delve into the whys and wherefores of investing. And how that affects workers and the society and economy they inhabit.


So here goes, without politics, how does everyone see business and profits, in respect to responsibilities and commitments both short and long term?

[MV/Liberace!]

So here goes, without politics...

heh heh, yeah, good luck with that.

[onan]

My observations are that there are really only two commodities, labor and resources. And those can have tangible products.


At some point many businesses bring in investors. Investors bring in capital to expand, upgrade, or both. Investors rightfully expect a return on their investment. And this is where I get kind of confused. If a company is expanding why would investors decide that their best avenue would be to outsource? Instead why not just invest in a foreign company to begin with?


Yeah I glossed over a lot... but if anyone wants to jump in and further the discussion, I welcome it.

[onan]

heh heh, yeah, good luck with that.

I am always looking to be disappointed, huh?

[West of the Rockies]

Onan said:  "My observations are that there are really only two commodities, labor and resources. And those can have tangible products.


At some point many businesses bring in investors. Investors bring in capital to expand, upgrade, or both. Investors rightfully expect a return on their investment. And this is where I get kind of confused. If a company is expanding why would investors decide that their best avenue would be to outsource? Instead why not just invest in a foreign company to begin with?


Yeah I glossed over a lot... but if anyone wants to jump in and further the discussion, I welcome it."

I wonder about this quite often.  Is there some magical number they teach in business school as to what a reasonable and moral profit is?  I know the often-parroted line is "whatever the market will bear", but is that really the best response in what I assume we would call a "moral society"? 

I knew a guy who bought a brand new house in about 1999.  A year later, having done absolutely nothing to improve the house, he and his wife decided the neighborhood had become "too ethnic" and decided to sell.  He was outraged when the realtor told him "adding $100,000" to the price he'd paid for it was not going to work. 

Just because I can charge $100 for an item I can pay someone ten cents to make for me, should I?  Sure, I know the answer is, "Well, if someone is willing to pay you $100 and someone is dumb enough to work for ten cents an item, then, yes, by all means, sell for $100."

At what point do we cross the line from "venture capital" to "vulture capital"?

[onan]

I dunno where the line is drawn.


And it is all very complex. I hate that someone makes a decision to cut staff and increase production. But I also hate workers that think they are owed a paycheck just for showing up. And work is work, although it can have some fun aspects, if it were all fun it would be an amusement park and we would pay for the privilege.

[RealCool Daddio]

My observations are that there are really only two commodities, labor and resources. And those can have tangible products.


At some point many businesses bring in investors. Investors bring in capital to expand, upgrade, or both. Investors rightfully expect a return on their investment. And this is where I get kind of confused. If a company is expanding why would investors decide that their best avenue would be to outsource? Instead why not just invest in a foreign company to begin with?


Yeah I glossed over a lot... but if anyone wants to jump in and further the discussion, I welcome it.

I have been involved in quite a bit of outsourcing over the years (I am in IT), and I can say that in the industries I have worked in (banking and oil) it all comes down to "shareholder value".  Well run publicly traded companies should be accountable to their shareholders, and in banking and energy, that will often come in the form of shareholder dividends.  The pressure to sustain, and increase dividends over time, is enormous.


Outsourcing to India, and more recently Eastern Europe and South America, allows companies to save money and return shareholder value not just by reducing direct labour costs, but by reducing a whole host of indirect labour costs - HR people, office space, equipment, etc.  Furthermore, it allows companies to focus on their core business - drilling for oil, foreclosing on old ladies, whatever.  The direct labour savings in outsourcing aren't what they used to be, and the value is really in focusing on core business.  Unfortunately, the American services industry has not been able to bounce back, and nobody retains bench strength in the US anymore.  If you need services (ie people) fast, you are going to need a business partner with an offshore or nearshore presence.


In a couple of weeks I will be visiting South America, because I need about 50 software developers in the next couple of months.  I, and my employers, would gladly buy this service locally.  Just about no one offers this service locally anymore.  If I talk to HP, IBM, whoever, they all say that the only way to ramp up that many people that quickly is nearshore or offshore.


- edit - re-reading this post, it seems like a pompous community college lecture.  Sorry, that wasn't my intent!

[Juan]

I think it's short-term thinking.  Management has turned over thinking to accountants, who look at the bottom line on a weekly, monthly, quarterly basis.  I saw it in the news business.  The accountants saw reporters as an expense rather than a resource.  When tight times came, the accountants cut expenses by cutting down the reporting staff.  The only think a local newspaper or TV station has to sell is local news and without reporters, one cannot find and report the local news.  The result was falling ratings and falling revenue.  It was worse in newspapers, where the editors decided to fill the paper with national wire stories.  As revenue continued to fall, the accountants began to see the fees paid AP for the wire service as excessive. That they plan to put in the paper now, I have no idea - few local reporters and no wire service means no news.

I think that kind of short-term, idiotic thinking prevails.  Outsource jobs, forgetting what Henry Ford taught us a century ago - if more people make more money, there are more customers for the company's products.

[West of the Rockies]

RealCoolDaddio said:  "In a couple of weeks I will be visiting South America, because I need about 50 software developers in the next couple of months.  I, and my employers, would gladly buy this service locally.  Just about no one offers this service locally anymore.  If I talk to HP, IBM, whoever, they all say that the only way to ramp up that many people that quickly is nearshore or offshore."

I'm not in this business, but why would there be such a shortage of software developers here?  Is the work too hard?  Are Americans too dumb to do this work?  Or do companies want to pay such people $1.98 an hour?

I'm not absolutely certain about the numbers here, but I recall five years ago or so when the Chicago Tribune was up for sale that the paper was making something like 19% profit per year.  That wasn't good enough.  Investors wanted more on the order of 35%.  So the paper was down-sized and sold, good jobs were lost, but, hey, fat and sassy investors made a few more dollars!

Perhaps I am greatly over-simplifying things.  I'm not against profit.  But is there, indeed, such a thing as immoral profit?  Should someone (an investor) who has money to gamble be entitled to a fat dividend check if it means a guy trying to feed his family is downsized?  Is that the American way now?

[onan]

Well run publicly traded companies should be accountable to their shareholders,

Why not also to their employees?

Unfortunately, the American services industry has not been able to bounce back, and nobody retains bench strength in the US anymore.

So maybe, outsourcing has caused a spiral, maybe a death spiral.

because I need about 50 software developers in the next couple of months.

I don't mean to be antagonistic here but 50... you can't find 50? I don't think, then again I also don't know if, it would be all that hard to find 50. Maybe 50 in your ballpark, but that is a different horse.

[onan]

Adding to my original post. Workers also invest in companies. I would suggest that their work is more valuable than the capital investment. At least in a historical perspective. Without that labor there would be little to invest in.

[Flaxen Hegemony]

My observations are that there are really only two commodities, labor and resources. And those can have tangible products.


At some point many businesses bring in investors. Investors bring in capital to expand, upgrade, or both. Investors rightfully expect a return on their investment. And this is where I get kind of confused. If a company is expanding why would investors decide that their best avenue would be to outsource? Instead why not just invest in a foreign company to begin with?


Yeah I glossed over a lot... but if anyone wants to jump in and further the discussion, I welcome it.

Great topic for discussion.  Off the top of my head, I'm thinking direct investment in the foreign company (the one things are outsourced to) might not be done because: 1) legal SNAFUs in the US or target nation might not make it worthwhile, and 2) perhaps more likely, the company outsourcing is a much larger corporation than the "outsourcee", so investing or trading in their stock on the big exchanges would net more profit for the investors (or at least net that profit at a faster rate).

Just stream of consciousness, so don't hold me to any sense-making.

[Flaxen Hegemony]

I don't mean to be antagonistic here but 50... you can't find 50? I don't think, then again I also don't know if, it would be all that hard to find 50. Maybe 50 in your ballpark, but that is a different horse.

I had the same immediate reaction when reading that line, but then thought perhaps the key word in Realcool Daddio's requirements was quickly.  I've done some consulting in HR, and mass hiring of those numbers for highly skilled positions takes time.  Billable time, of course!

[onan]

Great topic for discussion.  Off the top of my head, I'm thinking direct investment in the foreign company (the one things are outsourced to) might not be done because: 1) legal SNAFUs in the US or target nation might not make it worthwhile, and 2) perhaps more likely, the company outsourcing is a much larger corporation than the "outsourcee", so investing or trading in their stock on the big exchanges would net more profit for the investors (or at least net that profit at a faster rate).

Just stream of consciousness, so don't hold me to any sense-making.

I can understand how that may stop outsourcing. But if a company is choosing to outsource, how else would that happen, other than infusing money into a foreign company? Even if a company put up a brick and mortar themselves it is still foreign. To finding smaller companies may well be an impediment, so why outsource if so many more logistical problems are in the way?


I understand saving a buck. But to me some of this sounds more punitive (even if unintentional) than sound business.

[RealCool Daddio]

I had the same immediate reaction when reading that line, but then thought perhaps the key word in Realcool Daddio's requirements was quickly.  I've done some consulting in HR, and mass hiring of those numbers for highly skilled positions takes time.  Billable time, of course!

Yes, that is the problem.  It would take many, many months for me to hire that many people, and that is assuming I did nothing but interview candidates 40 hours a week.  I usually interview 10 people per hire, and for bespoke skills, it might be 30 per hire.  Factor in reference checks, background checks, etc., and it is an enormous task.  Plus, what am I going to do with the programmers a year from now when the work is done?  Fire them all?  I'd be doing exit interviews for a month.


But this is not a bad news story.  My company will hire 1000 people this year - engineers, geologists, field staff, managers.  Outsourcing non-core functions allows us to grow our core business, while paying a good dividend monthly.  Those dividends go into mutual funds, retirement plans, people's savings accounts - and yes, to our employees.

[Flaxen Hegemony]

I can understand how that may stop outsourcing. But if a company is choosing to outsource, how else would that happen, other than infusing money into a foreign company? Even if a company put up a brick and mortar themselves it is still foreign. To finding smaller companies may well be an impediment, so why outsource if so many more logistical problems are in the way?


I understand saving a buck. But to me some of this sounds more punitive (even if unintentional) than sound business.

I think I know what you're saying, but am unsure of what you are referring to with the words "that" and "this above.  Sorry, I think I'm just being thick-skulled here.

When you say it sounds punitive, do you mean to the outsourcer company, outsourcee company, employees of one or the other, or an investor in one or the other?

I would say it is punitive in the sense that fewer jobs are available at the outsourcer.  But even setting aside the greater number of jobs at the outsourcee, I suspect an economist might argue that outsourcing benefits the overall market, because the outsourcee can take advantage of economies of scale (i.e., they are doing call-in customer support for hundreds of larger corps).

Could you perhaps make up an example of the situation you are describing?

[onan]

But this is not a bad news story.  My company will hire 1000 people this year - engineers, geologists, field staff, managers.  Outsourcing non-core functions allows us to grow our core business, while paying a good dividend monthly.  Those dividends go into mutual funds, retirement plans, people's savings accounts - and yes, to our employees.

I see that RCD. I also think people in other countries need jobs too. I know this is a rather meandering subject matter. but I really want to get at what is the responsibility of investors and what is the responsibility of the company? I know answers aren't always easy, but at the amount of some investor's return, they are being pretty well paid to not come up with better answers.

[RealCool Daddio]

Why not also to their employees?

So maybe, outsourcing has caused a spiral, maybe a death spiral.


I don't mean to be antagonistic here but 50... you can't find 50? I don't think, then again I also don't know if, it would be all that hard to find 50. Maybe 50 in your ballpark, but that is a different horse.

No worries, Onan, I never find you antagonistic.


Every one of our employees is a shareholder, as stocks are granted as part our compensation (a grant, not a purchase plan, although we have one of those, too).  So if I save a few million bucks a year by buying some services overseas, I won't have to pay for Starbucks for a while.


Regarding your second post, yes outsourcing has decimated the domestic IT services industry - but bear in mind, the domestic IT services industry was itself built on outsourcing.  If I bought the services from IBM locally, those are still jobs my company has outsourced. So more accurately, foreign competition has destroyed the domestic market.


As I said, we would gladly buy the services locally, in this particular case. The pure labour savings for us are in millions, and our capital costs on large energy projects are counted in billions.  A few million is ultimately a rounding error.  It is really about the indirect labour costs, the ability to scale up (and ultimately down) quickly, opportunity costs, and time to market.  All of those things added up are 10's of millions, which is when people start to take notice.

[Flaxen Hegemony]

I see that RCD. I also think people in other countries need jobs too. I know this is a rather meandering subject matter. but I really want to get at what is the responsibility of investors and what is the responsibility of the company? I know answers aren't always easy, but at the amount of some investor's return, they are being pretty well paid to not come up with better answers.

Moral/ethical responsibility?

RCD has supplied a real life example with his company, so perhaps continuing the discussion using his situation and variables might be fruitful. 

[onan]

Moral/ethical responsibility?

RCD has supplied a real life example with his company, so perhaps continuing the discussion using his situation and variables might be fruitful.

good point.


I just started this thing... where it goes... I dunno. I hope to get more of an understanding for what I believe is a disconnect between workers and investors. I wish to god that every company made their employees part of management.


as to moral and ethical... to me that is always part of the equation. Whether one subscribes to that doesn't divorce them responsibility. It may well not cause them any discomfort. I am sure Mary Antoinette thought she was safe too (it's a metaphor and may not be historically acurate).

[RealCool Daddio]

I just started this thing... where it goes... I dunno. I hope to get more of an understanding for what I believe is a disconnect between workers and investors. I wish to god that every company made their employees part of management.

If I have taken the thread in a different direction than you intended, my bad.


Regarding the disconnect between investors and workers, I often see the reverse of what you describe.   In my experience, many employees have a very limited grasp of how their companies actually make money.

[Flaxen Hegemony]

I just started this thing... where it goes... I dunno. I hope to get more of an understanding for what I believe is a disconnect between workers and investors. I wish to god that every company made their employees part of management.

Well, management people are employees, too, right?   

One type of low-mid level employee involvement is certainly important, and another, not so much.  Decisions regarding work conditions, morale, internal issues, etc., should absolutely have these kind of contributions, both for higher quality of decision (because they are closer to the issue - especially true in production industries) and the morale increase from employees feeling "involved".  (Unfortunately, many of these internal focus groups or employee "suggestion meetings" are simply for show and improving morale.  Ideas are circular filed at meetings end.  I've literally seen this.)

When it comes to high level decisions, however, I think it is a little more complicated.  Your average employee simply doesn't know the strategic lay of the land for the company's market.  They certainly would have strategic values, but probably not an awareness of the likelihoods of implementing those values at a corporate level.

[Mind Flayer Monk]

I hope to get more of an understanding for what I believe is a disconnect between workers and investors. I wish to god that every company made their employees part of management.

Huh hard to answer via post because I am not sure of the answer you are looking for. I can maybe provide an analogy.
If you look at the logarithmic curve, investors are trying to drive profits to the "flattening out point" on the curve. If there is no more of the steep slope available, then its time to go. Or make new changes and try and reshape the curve. The idea is for find as many ways as possible for the steep slope curve, because everything will flatten out if you don't keep trying for that steep upward curve.


I wish I could help more.





If you look at this curve, it shows how innovation/firing people can start you back on the steep part of the curve.



As an investor, you break down as much of a business as you can into these x vs y situations (because it lets you visualize) so if you look at the big picture you may turn everything into sales vs $ of assets. You can then break it down further into sales vs number of bulldozers we own and then you can either buy more bulldozers or realize you have too many. So to an investor, employees are really just an x or a y on a graph; and the investor tries to move left/right on the graph in their minds and the real world result is hiring or firing employees.


That is just a simple model, in 2 dimensions. People also use 3D models (called an OLAP cube) to perform similar analysis.  Companies like hedge funds will extend the 3D model into 4D and 5D.

[onan]

If I have taken the thread in a different direction than you intended, my bad.


Regarding the disconnect between investors and workers, I often see the reverse of what you describe.   In my experience, many employees have a very limited grasp of how their companies actually make money.

This thread may end up talking about candied panties... I have no control and honestly if it stays interesting... all the better.


I apologize if I implied you were off topic. What I meant to say was I am interested in understanding why businesses make decisions that seem to be counter to a healthy work environment. I will freely admit, that my bias comes from hospital managements. And to a much lesser degree what I see on the news.

[onan]

Huh hard to answer via post because I am not sure of the answer you are looking for. I can maybe provide an analogy.
If you look at the logarithmic curve, investors are trying to drive profits to the "flattening out point" on the curve. If there is no more of the steep slope available, then its time to go. Or make new changes and try and reshape the curve. The idea is for find as many ways as possible for the steep slope curve, because everything will flatten out if you don't keep trying for that steep upward curve.


I wish I could help more.





If you look at this curve, it shows how innovation/firing people can start you back on the steep part of the curve.



As an investor, you break down as much of a business as you can into these x vs y situations (because it lets you visualize) so if you look at the big picture you may turn everything into sales vs $ of assets. You can then break it down further into sales vs number of bulldozers we own and then you can either buy more bulldozers or realize you have too many. So to an investor, employees are really just an x or a y on a graph; and the investor tries to move left/right on the graph in their minds and the real world result is hiring or firing employees.


That is just a simple model, in 2 dimensions. People also use 3D models (called an OLAP cube) to perform similar analysis.  Companies like hedge funds will extend the 3D model into 4D and 5D.

MFM, thanks for this... you give me too much credit, however. You may want to, if your intent is to help me understand, give me the "graphic novel" version.


What I did gather though was this point, was when growth flattened out it was time to go. Why would it be time to go? There are many companies (in my experience and all of them small) That have carved out a niche and are quite viable. And yes I am aware without some growth companies will starve by attrition alone. Seems to me there is some middle ground.


Let me give an anecdote... there may be some inaccuracies, but basically it's true. Westinghouse In the 80's was a very successful company both in government contracts and its commercial line of appliances. Somewhere in that time an executive took a large amount of capital and invested it in penny stocks. He cost the company several millions of dollars. It was the sinking of white westinghouse. He retired with a 2 or 3 million dollar parachute and continued on the board of a couple other large business.

[onan]

Another to add, I also am interested in the amount of return on investment. It is my belief that investing isn't the same as work. And if I take my money and loan it to a friend, if I charge over 6 percent, I am breaking the law. But if I buy a car and my credit sucks I can be charged up to 15 percent (maybe more). If my credit sucks then I should be forced to save until I can buy or I should have to buy a used car where the risk is lowered.

[Mind Flayer Monk]

Another to add, I also am interested in the amount of return on investment. It is my belief that investing isn't the same as work.

Hmm hard to say. I think most people shoot for 25% return on investment.
Employees are usually expected to revenue 5x their salary-so 10 guys in a department with total salaries of $1 million per year are expected to be connected to $5 million in revenue (or savings).
Thats a YMMV kind of thing.

(This is corporate stuff, I think contractor work might be around revenue at 3x wages. So if you have a roofing crew and pay them $15 an hour, you bill the client at somewhere around $40-45 an hour).

[Juan]

Another consideration is the U.S. corporate income tax rate.  It's the highest in the world. Why wouldn't a company outsource some of the work to save money?

MFM, I think your 25% ROI is too high.  Most investors I hear talking mention an expectation of 7%, with a hope of about 12%.

[onan]

I have no idea UFO Fill, 25% does seem high to me. I would think that kind of return would kill the business. But there are so many ways to finagle...

[Mind Flayer Monk]

MFM, I think your 25% ROI is too high.  Most investors I hear talking mention an expectation of 7%, with a hope of about 12%.

Noted, and thank you.