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Corporate Rot--Readers Respond   (April 17, 2007)

The April 5 entry on "Corporate Rot" drew a number of thoughtful responses from readers, some supporting the thesis and others contesting it.

While I understand how fluid labor markets contribute mightily to the "productivity" and adaptability of the U.S. economy, I am not persuaded that an obsession with short-term financial results, human-resource software filters and an atrophying of long-term experience are healthy trends. The facts are that corporate profits have risen to post-World War II highs ($1.3 trillion a year, fully 10% of the entire GDP) while wages have remained flat except within the top tier of wage-earners.

Is this imbalance justified in a Darwinian way, i.e. corporations have successfully adapted to post-industrial globalization while 90% of American workers have not? The larger question is: have U.S. corporations eaten their seed corn by throwing off long-term employment as a profit-diminishing yoke?

Here are six (very different) commentaries contributed by readers. (In order received)

From Michael Goodfellow:

I have a different take on the IT job market and related issues than your contributor. Your friend points to several of the real factors in his own note.

- He points out that young people (especially temporary contract people) work for less, then blames companies for hiring them.

- He points out that benefits used to be outrageously generous, then complains that companies can't afford benefits like that any more.

- He points out that managers have no technical talent and can't evaluate applicants, then blames companies for promoting technical people into management. (this is really NOT due to affirmative action -- see below.)

- He points out that HR departments and their job descriptions are unrealistic, but then notes that they can get contractors to do the same jobs without hiring them full time. In any case, I believe the Fortune 500 companies have not increased total employment in years -- they just don't hire the bulk of new workers. Small businesses (without HR departments) do.

- Employers list certifications as requirements because they can't tell good contractors from bad. In my experience, if you have a reference from another company who has hired you, talk of certifications goes away.

- Telling a manager that he doesn't have the technical skill to manage you doesn't strike me as good customer relations. I've had to tell fellow contractors to just suck it up more than once. "They aren't your friends, they aren't your coworkers and they aren't your boss. They are the customer, and the customer is always right."

- He says that taxes and business expenses require him to charge higher rates, but in my experience this is not the case. If you are travelling offsite, hotel costs would be significant, but if you are working from home, your office costs are negligible. There are no special taxes on business income -- $45 an hour as a contractor nets you about the same income as $45 an hour to an employee. You can deduct your health insurance, which a full-time employer would pay out of your wages anyway. You do have to pay both parts of Social Security, but this is not a huge fraction of income. You can deduct anything related to your job, including travel, and your computers.

The main reason for poorer self-employed income would be if you are only doing short projects and are unemployed between projects. Still, if you doubled the employee wage, it should still come out the same, even if you spend half the year looking for work. His markup is more like $45,000 / 100 hrs = $450/hr instead of $45 an hour. Is he implying he works only one month a year, and spends the rest of the year looking for business?

- He says "By law companies have to provide [health] coverage", but I seriously doubt this. Certainly not to contractors, and probably not to employees either. Although big companies usually do. A $5000 deductible is fine if you have some savings. It's a much cheaper policy than something that covers from the first dollar. No insurance I've ever seen (other than state high risk pools) has a $10,000 upper limit. A million is more likely. In any case, you can buy your own insurance from Blue Cross or other insurers if you are healthy. If you are not healthy, you are not going to get insurance from anyone, least of all a contract employer.

- He implies that Microsoft could find more Americans if it paid more. Microsoft rewards people with stock, and has made many employees (ordinary engineers) millionaires. They have lots of applicants, so there's no shortage of people willing to work for what they pay. Microsoft cannot find the people it wants because American colleges do not graduate anywhere near the number of technical people required by industry. The Department of Defense (and its contractors) employ 50% of all engineering graduates in the U.S.. Since they hire U.S. citizens only, they further decrease the supply for someone like Microsoft. Just because they have lots of applicants does not mean that they are finding the skills they want. The U.S. technology industry would fail completely if it weren't for the number of foreign engineers who work here. Since 9/11, we've tightened visa requirements a lot, and companies are complaining more loudly. They are also setting up R&D plants outside the U.S. We could really pay dearly for forcing that to happen.

- He complains that foreign workers don't have to pay the costs of living in areas like Seattle or Silicon Valley, where $100K a year doesn't go very far. This is true, but so what? This is not a problem with the company, but with the high tech areas. Both Seattle and San Jose have severe cases of NIMBY, and have been perfectly happy to let real estate prices go through the roof. Study after study for decades has listed the cost of housing as one of the top concerns of business. Why are you surprised when companies finally react by moving their business to cheaper areas? Having technical employees nearby is worth a lot, but not an infinite amount.

- The 90's boom pulled in a lot of people who did web design and general-purpose programming without much in the way of computer science background, and did it cheaply. Companies discovered that since their sites change so often, and since technology changes so often, that fresh blood that works hard is better than old timers with depth. That's due to churn in the business and technology, not a sudden hatred of employees. Newer programming environments are also a lot more forgiving, and allow lower skilled employees.

- Companies have eliminated layers of management, in an effort to become 'lean and mean'. This does mean there's no career path from technical to management jobs. However, this has always been a problem. Technical people generally don't have good people skills (they are good at technical material because they are obsessive, detail oriented people.) Generalists with good communication and people skills are generally bored to death by technical issues. IBM had twin tracks for promotion -- technical and management. It still didn't work. The clueless Dilbert boss is endemic to all technical fields. The problem is just a bit worse now that there are so few managers.

- There's no such thing as project maintenance or long development cycles when it comes to phones or other consumer electronics. My phone is 2 years old and is no longer sold by LG. Nothing they make now warrants that kind of effort. Neither do cameras or cash registers.

- I'm not familiar enough with the market to comment on his skills in detail. He lists "COBOL, Siebel and Visual Basic." COBOL is of course one of the oldest programming languages in existence. With FORTRAN, it was a mainstay all through the 70's. Since personal computers came in during the 80's, it has been less and less in demand. If you are concentrating on that language, you are locking yourself into legacy software projects run by big companies with mainframes and lots of old software they are unwilling to replace. Not a growth market. Visual Basic was hot for years, but has been mostly replaced by newer languages like Java, Pearl, PHP, etc. I don't know anything about Siebel programming. From what I see on the net, I'm guessing it's large company database software (CRM.) This again means you are locking yourself into big companies with the kind of HR practices that he hates. None of this sounds promising if you are looking for new markets. Anyone self employed needs to keep his skills current and follow the market, not just push what they know because they know it.

- Finally, guys like this usually want a union, and they want more security, higher wages, better benefits and tighter rules on hiring foreign workers. The U.S. auto workers wanted all of this too, and they got it. So which industry would you rather be working in? I'm sorry people like this lose jobs. But I'd rather that they lost their jobs than that the country lost an industry. Computer programming can be done anywhere in the world. The only capital requirements are the education of the programmer and a very cheap personal computer. We're going to have to work very hard and be very creative to keep that industry here.

From B.H.:

David is absolutely correct.

HR is a damn waste, and mostly either an internal empire building (by people who can’t do anything else) or a roadblock to getting anything done. HR’s most common answer is “no”. Now the new thing is that experience doesn’t matter, you have to have the degree. I interviewed a guy who had been programming since 1974, he was amazing, I looked at his work it was great. I couldn’t hire him; he didn't have a computer science degree. (as if any college offered a degree in computer science in 1974). Who cares? If you can do the job, do the job. This is another reason why big companies will all fail over time, only the most mediocre get and keep jobs (just like big government). The truly talented, the ones who do things differently, they all leave or go to small companies or start their own business.

Even his post misses another point, turnover is incredibly expensive. Hiring people is painful (chews up hours of “productive time”) and then you have to train them anyway. Takes weeks to months to get them to the same point where the last person was. Wouldn’t it have been cheaper to just give the last guy more money before he got pissed off and left??

Totally agree with his business approach. Everyone is a contractor nowadays. There is no company loyalty and any company that expects it (or anyone who gives it) is an idiot. If you are not ALWAYS looking for a job, you are foolish. You have to be networking all the time to work the issues. Being a full time employee vs. a contractor means that you might get severance when you get laid off, that’s about the only difference in an at will state anyways. Of course, all jobs are found thru networking and not thru HR’s methods, which again tells you how useful HR really is.

I too refuse to work for free. I need to make X to make money (taxes, capital, overhead, etc). I can sit at home and watch TV and not make money, I don’t need to work hard to not make money.

I too have been in IT for 10 years and like David, although I’m very good at what I do, I hate it. The management is terrible, there’s no leadership, the same mistakes are made over and over and over again, you never know how long you are going to be at a place, layoffs are commonplace, etc. It’s just depressing and yet really the technical work is fun and exciting, it wouldn’t be hard (and minimal money) to actually make it fun and productive. But it never (or almost never) happens. I’m building my business on the side, catering to rich people with big homes (lots of those in this area). And the next time I get laid off, I’m walking away from the tech world and going off to do service work. All those years of training and college education and classes will go to waste because the industry is so bad. But I’ll be able to sleep at night. David alluded to this in his letter and he’s right.

Again, outstanding post as usual

From K.K.

Great post, but I bet he forgot to add “in a major city at a high salary” after he wrote that the physician couldn’t find full time employment… My cousin is a physician that works with mostly low income Native Americans in rural Central Oregon and there are plenty of full time jobs available for physicians in rural America just like it is easy to get a job working for a little TV or radio station in small markets across the country but very hard to get a $1mm+ a year TV/Radio gig in a top 10 market…

It does make much sense for most firms to pay an IT guy $100K+ since they can get by most days with a lower skilled guy and just hire someone when they need more help. It is not just IT that does this most areas of corporate America tries to pay less for someone to do the day in day out stuff and just bring in a high priced guy when they need the help. We have IT people, staff accounts and loan processors who do fine at ~$60K a year with help every now and then from a $250 an hour IT guy, CPA or Attorney.

This guy should quit complaining and either find a firm that arranges work for high paid skilled people or start his own firm.

From Albert T.

I remember when I was interviewed at NY life (hq position not sales). I asked the woman how many people had they interviewed before me and their process. She said about 14 people and that first the HR interviews then they go onto a 2nd round interview to the division and the manager interviews. My guess is the manager never got to interview anyone not sure if I was #15, and yes they never called me back that job is still open btw I checked (and it was entry level to boot). That was in march or april of last year.

There are two tendencies in my view. The first is to have the perfect applicant and the second is to make sure not to overpay. One of my classmates who finished a year and a half ago basically got a job with CIT as an entry level analyst after one year he left for another firm packaging MBS. My guess is the CIT job payed to little for him to stay.

Here is the bright side in my view. Once those dead HR firms do away with most of their good staff and allienate anyone of worth from applying, they will decay and die or reform. Decay and death are very easy they are accelerated if those smart and talented people get together form a company that does exactly the same thing at half the cost with descent salaries and efficiency. Case in point LECG is a company formed by people who did exactly that. (basically professional/expert opinion for court cases etc that costs a great deal but for which those people that provided the actual service; testimony and data, were paid peanuts ergo they get 5000 for testifying for a month or so and the firm that retained them 50000. (do not know exact amounts but one of my professors did one of these and said it wasnt worth the trouble).You fire good sales people they will form a company and take half your sales in a year or two and give it to the highest bidder. The reason xerox survived and didn't go belly up is because of good sales people and culture if they fired them they would have lost relationships years in the making and xerox would have cost cut itself to death.

Reform would be brutal you would need to fire most of the people who believe they are providing a service by gatekeeping out all the "unqualified applicants", most of the people without technical knowledge in relation to their job who have some form of power to direct the company in a technical sphere. (thats sort of common sense a person who has no idea about chemical engeneering shouldn't be head of a chemical engenering division because once they think they are cost cutting on haz mat equipment you could have a problem). What made Jack Welch(former GE guy) a great manager was that he was a chemical engeneer in charge of that division as he came through the ranks.

From Aaron K.

A lot of what your recent correspondent described about the labor situation in IT (and beyond) rings true to me. Similar complaints have been festering in my mind for a few years now. I am much younger and more recent in the job market (also in IT), but I can corroborate much of what David said.

The entire field of IT is a mess. I suspect that in various ways it was injured by the malinvestment of the tech bubble, and never recovered. Hiring was so fast and haphazard then, HR departments and managers never learned how to distinguish competent employees (and prospective employees) from those just taking up space (or worse: causing damage the competent ones have to undo).

When the tech bubble collapsed, management practices only changed in one way: cost suddenly mattered. Now you still had abysmal employee selection and sorting proceeses, but in addition you were paying everyone much less. This meant (as David also described) you ended up with even more of a "brain drain" in IT, as the competent ones left for greener pastures. Why do exacting tech work, surrounded by morons, getting paid squat, when you can flip houses or flog home loans or run your own company (if you have the business acumen)?

As a result the only major holdout of the IT profession is government contracting work. That is the one area where pay has remained at levels comparable to salaries in the tech boom (which now you *need* to keep up with a decent US standard of living). Of course, accountability is even lower in that sector, so you're just as apt to be surrounded by morons as anywhere else in IT (perhaps even more so).

I believe a huge part of the problem is the "management culture" in the US that David touches upon. We no longer promote technical people from the ranks: we bring in MBAs to run the show. Sometimes (as in my case) managers still acknowledge they need "tech leads" because they themselves have no clue what is going on in terms of implementation -- but as "not real managers," we are always second-class citizens and left out of much of the business decision-making (that is, project planning and strategy, and more importantly, resource allocation).

The second part is this relentless need to cut costs and increase profits at some supernatural rate. If one chooses this path, then it isn't long until optimizing process and materials costs isn't enough: one has to work on the biggest single cost area, human resources. So ever since the tech market burst, human resources costs have had a huge target painted on them. That is why customer service has been cut back so sharply across essentially all business sectors, and why outsourcing to often mediocre developing-country labor has been done so agressively.

As a result I certainly feel like we're living in an omnipresent malaise, where nothing works and every commercial interaction is a struggle. Sure, if you count credit as wealth and ignore the systemic problems, we seem passably OK financially (for now). But it only takes a little bit of contemplation and comparison of today's norm with just a few years ago to notice that *quality* of life is deteriorating all around.

First, there are the aforementioned problems most of us encounter with the job market (especially IT -- but now those in housing are facing similar pressures, for obvious reasons). But also goods, predominantly produced in developing countries, are getting shoddier, commercial interactions are an expanding headache due to dwindling customer service, and the software that runs our tech environment gets buggier and buggier.

Here is a grab bag of anecdotal examples from my recent life that illustrate the above points:

- my last two cell phones, from totally different brands and carriers, have had critical deficiencies with some esoteric functionality: adding numbers to the phone book. The bug? A good fraction of the time, the phones lock while doing this, requiring a full power down and removal of the battery, and usually losing the number. Why is it OK to have phones that lock and lose basic information?

- the name-brand vacuum cleaner I bought recently at a major big-box store, manufactured you-know-where, broke after approximately three uses. It was cheap -- too cheap, apparently. I should have known. The problem? Plastic rotor mounts that melt! The design doesn't even make sense. Why is it now ok to have a terminally flawed design or selection of manufacturing materials in a major household appliance?

- I've noticed myriad businesses playing the game of pretending to be "real" businesses while having far less invested in customer service and support than they need to legitimately function: offenders include the Home Depot, most banks and other financial companies, and even Google (I suspect the latter will get a rude awakening when the market finally notices this, e.g., when and if Yahoo! and other competitors provide certain competing products and services with more customer service at lower margins).

I think you and readers of your blog will be sympathetic to my argument that this "great malaise" isn't just a random collection of cultural phenomena, but rather these are just symptoms of a core, long-running transformation in the US's wealth and status in the world. Not only will the US have to scale back its consumption and standards of living and wealth (absolute *and* relative to the rest of the world), but it is already happening, as evidenced by all the above trends and more (e.g. in finance). The very bizarreness and many faces of this malaise are a testament to the fact that we will go to great lengths to convince ourselves that we are NOT losing wealth, having to make sacrifices, losing our old standard of living, declining from being the world's "Sole Superpower", and so on.

I suspect we are already well along a long decline to a more "humble" position in the world, which we are powerless to stop (try as we might in the middle east). Only if you ignore the ruin of asset bubbles can you argue that the financial world "hasn't shown" this reality yet... but outside of the financial world, the evidence is already everywhere.

From M.P.

I have worked for many fortune 100 companies in the past few years. I completely agree with many of David's views. But from my experiences I believe the drive to quarter-quarter profits is sewn into the fabric of the internet.

The internet with it, the democratization of information has allowed many people to become instantly informed about any topic. This combined with inexpensive electronic trading has caused extreme stock volitality when corporate performance is not met. Now most corporate officer's rewards structure is tied directly to stock performance which leads to focusing on keeping stock value high at any cost.

At one company I worked for, it got so bad that we had to make all of our capital budgetary purchases within the first few weeks of a quarter to get approval.

The biggest problem with this corporate situation is that when times get tough instead of developing new products to help the botom line, the corporations try to save thier way to proiftability in anyway they can, like killing projects and reducing reocurring costs (headcount), to make the books look better (short term fix).

In the long run many of these companies are destined to fail, and who will suffer?? The decision makers?? No, it will be all of the average people (recurring costs) that no longer have a good paying job.
Thank you, readers for a wealth of thought-provoking commentary.

For more on this subject and a wide array of other topics, please visit my weblog.


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