The end of the American Century
…as represented online in the last few days. Noted without comment for readers here, who will no doubt recognize the similarity to the theme of How Computer Games Help Children Learn: that we have to think in new ways about education for a changing and increasingly competitive world.
From Newsweek (with commentary on DailyKos):
Look around. The world’s tallest building is in Taipei, and will soon be in Dubai. Its largest publicly traded company is in Beijing. Its biggest refinery is being constructed in India. Its largest passenger airplane is built in Europe. The largest investment fund on the planet is in Abu Dhabi; the biggest movie industry is Bollywood, not Hollywood. Once quintessentially American icons have been usurped by the natives. The largest Ferris wheel is in Singapore. The largest casino is in Macao, which overtook Las Vegas in gambling revenues last year. America no longer dominates even its favorite sport, shopping. The Mall of America in Minnesota once boasted that it was the largest shopping mall in the world. Today it wouldn’t make the top ten. In the most recent rankings, only two of the world’s ten richest people are American. These lists are arbitrary and a bit silly, but consider that only ten years ago, the United States would have serenely topped almost every one of these categories.
And Time (with commentary by Thomas Barnett):
Mark Alexander, a Dallas attorney, says he’s ethically obligated to do what’s best for his clients, “and that includes saving them money.” So when one of them asks him to research a securities-fraud topic, for example, or breach of contract, he doesn’t even think about applying his $395 hourly rate. Instead, he calls Atlas Legal Research, an outsourcing company based in Irving, Texas, that uses lawyers in India to provide the service for $60 per hr. “When a client pays me a $25,000 retainer and I can save them money, I will do so,” says Alexander. Handing off the work to a $225-per-hr. junior associate is not an option. “They don’t even know where to stand in the courtroom,” he says.
While the Americans learn, well-trained lawyers in secure offices in Mumbai (formerly Bombay), Bangalore and Gurgaon (outside Delhi), who typically earn $6,000 to $30,000 annually, do legal grunt work. Alexander’s sentiments may explain why outsourcing is blossoming in the legal profession, which is known–and often despised–for its high prices. Law-firm partners bill at a national average of $318 per hr. and at $550 per hr. at large New York City firms, according to a 2007 survey by Altman Weil, a legal-consulting company. Starting salaries for attorneys at some large firms now stand at $160,000. So a U.S. company’s simple problem can generate hundreds of thousands of dollars in fees.
The considerable savings is perhaps one reason Forrester Research, based in Cambridge, Mass., has projected the offshoring of 29,000 legal jobs by the end of the year and as many as 79,000 by 2015. It’s part of India’s inevitable move up the corporate food chain, from lower-value business process outsourcing–like call centers–to knowledge process outsourcing (KPO). The latter category encompasses higher-skilled jobs, such as engineering and medicine, and relies on the KPOs to behave more like branch offices of U.S. companies.
David, this is a well written piece. Thanks for your thoughtfulness, and insight.
I apologise for the length of this comment, but I didn’t want to minimize the significance of your piece with some glib response.
Yes, the reality is certain, and it is different from that which most Americans assume to be true. There is a larger economic world out there, and most of it is not American.
I was reading Freedman’s The World is Flat a while back, and, somewhere in the middle, I became frightfully aware of this fact, and of the reality that most of my associates in business believed otherwise. The world’s business models had already changed, and many of us were ignorant of that reality. It became eminently clear that, as Americans, we are erroneously convinced that our long established, mechanical business models, remain the right and true way, and that we should continue to force business to fit those models. This is our form of insanity.
If we are to survive, we must get with the picture.
I appreciate your inclusion of the account of the Dallas attorney, Mark Richardson, who said that, out of ethical obligation, he must do what’s best for his clients, and “that includes saving them money.†His assessment reflects what I believe to be a misapplication of the economic reality he describes. His ethical responsibility is not to “save his clients money,†rather it is to allocate their resources to produce the greatest value for their investment paid to him. His description of using the lawyer in India at $60 per hr. instead of using his regular rate of $395 per hr. or his $225 rate for a junior associate, suggests that his rates are, somehow, too high. I think this perception is common, and a misunderstanding of the real value proposition to be considered. There is a world of difference, and understanding that difference will illustrate the problem many Americans have with concepts such as outsourcing, or off-shoring.
We have a natural distaste for both. It appears that available talent off-shore will take jobs away from Americans. We can’t possibly remain profitable if we are forced to reduce our fees to compete with these off-shore providers, so we think. And, so we fear. However, we miss the basic economics of the opportunity.
America’s infrastructure is considerably well-developed and expensive to maintain. We are also well-entrenched in it. We can’t, and shouldn’t expect to eliminate it, which would be necessary if we are to attempt to compete in this world economy taking the fear-based approach inherent in the “save money†models. Instead, we need to embrace it, to recognize its value, and then use it to our real advantage in the development and delivery of the products and services it can produce. That infrastructure affords us opportunity unavailable and undeliverable by our “competition†in places as of yet under-developed.
The basic tenant of our capitalist economy is the free exchange of resources to gain other, more valuable resources for the betterment of our lives and our companies. At the core of every financial transaction is the idea that all participants gain value in the transaction. A consumer receives greater value from the transaction than what he spends. The seller receives greater value than what he spends to provide the product or service. Done right, both sides profit.
In the case of the attorney, the client chooses to buy services that provide a greater value than the associated expense. It is the ethical responsibility of the attorney to do just that. Here is where the decision to of-shore aspects of the transaction comes in. The basic research task described is an example of a non-strategic offering. Grunt work in simple terms. Such work may provide some value to the client, but the value of that work should not be understood in the framework of the cost to produce it, but in the value of the impact of the work done. The two are really not related. If attorneys in India can provide the entirety of the value to be received for 25% of the cost of attorneys in America, so be it. The value realized is not diminished at all. If attorneys in India are happy and fulfilled only requiring $60 per hr, an efficiency is created, making it possible for the American attorney to deliver the same value to his client at a reduced cost, first to his firm, and secondly, if he should choose to reduce his fee to deliver that value, to his client.
So, off-shoring actually enables the attorney to increase his value to his client, but that value does not lie in his ability to “save his client money.†Such a limited view diminishes his value to his clients, and violates his ethical responsibilities toward his own firm. Both parties have the ethical responsibility to maximize each other’s value, and earnings. Saving money may occur, but cannot be the foundation for value description. Since there is an opportunity to off-shore, the greatest value can now be realized from better utilization of the American attorneys. They can now apply their creativity to strategic activities with the opportunity to add vastly greater value to their clients, tasks well worth the $300+ per hr that they need to maintain the operation and necessity of the firm.
The distinction between the two perspectives lies in the way we tend to view a pricing model. We tend to choose something from our mechanical, manufacturing business models. We consider cost, add some “fair markup,†and assume the rate to be some sort of value. In reality, there is no cost + fair markup anywhere in the value equation. The value exists only in the mind of the customer, and it is not cost plus. The cost has no significance to him, only that, all things considered, the purchase costs less than the economic value received. Should the law firm be ethically able to charge $300+ per hr for services it provides? Absolutely. However, and this is the critical distinction, it can only support the fee if the value provided is worth multiples of the fee to the customer.
Only when American companies end their love affair with cost plus pricing and adopt value based fees, will we be able to fully embrace every opportunity to send our less-strategic work overseas, and use our own expert resources to do what we do best. Then our companies will become what our well-developed infrastructure requires, that is high value/ high margin enterprises.
CJ–
I do appreciate these thoughtful comments. (Sorry it took a while to reply–it is the end of the semester here.)
I think it is interesting that we are coming at some of the same challenges and transformations of the global economy from different perspectives–you from business, us from education; you trying to change how businesses think about what they do, we trying to change how people think about what kind of education prepares young people to think in these new ways.
In any event, thanks for joining the conversation. I hope you’ll keep in touch through the blog.
David