Capital Tide

For some reason, in Virginia I found myself in a herd of MBA candidates. They were out day hiking, taking a break from the sometimes surreal world of a full-time business school. It seems that a good deal of the MBA program is about how to lie to employees effectively. It also seems that there are proportionately a lot fewer economics majors in MBA programs than there used to be. I asked the crew what they did for their undergrads: three histories, an anthro, a psych, two journos and a lit. More troubling is that the MBA program, at least as far as these young folks had found, had precious little refresher material on microeconomic concepts.

This might have little to nothing to do with a trend I've seen, both in personal anecdotes and in the weeklies, about the failure of the mass offshore movement. By the end of the decade, mass offshoring of complex business processes will have destroyed more net capital than the 1997 East Asian Financial Crisis. It seems incredible than anyone could underestimate the costs of moving whole businesses overseas, but then again, we are dealing with a generation of business leaders that were as likely to memorize Yeats as Keynes, or were just as likely to encounter a business professor who burnt tiny effigies of Keynes in the mistaken belief that the macroeconomic scion was some sort of Marxist ne'er-do-well.

Back to capitalization. Capitalization is, very broadly speaking, when you spend money now to make (ideally) more money later. Offshoring is a form of this, no matter what they tell you in the PowerPoint slide. To offshore effectively you need working capital for the process, which means you need double the money for the period in which the offshoring takes place. That's if you design the process effectively, which is hard to do since humans and nations don't have a clearly calculated depreciation rate. Effective design also becomes difficult when you are blinded by raw greed. It is also hard to design something when you don't know what the design of your business is, which is more likely than you might think. It's possible to have a great business without anyone knowing exactly how it runs. I think this is a fact many people would do good to ponder.

Raw greed can be a bigger problem then it sounds. Much of the value created in capitalization is based on the amount of money you think you will save *right now*. That estimated saved money then goes back in time - I kid you not- as profit for whatever bag of hot air kicked the idea out in the first place (incidentally, perversion of this Back to the Future mechanism is what got Enron into so much trouble). Hence Mr. PowerPoint Offshore Consultant, for example, sells Company X on offshoring because ten million spent this year out of a hundred million net will save fifty million over the next five years. What he might not mention is that ten million spent on real capitalization will grow the net by ten percent, which is- surprise!- fifty million over five years, the same Bullet Point Brad "saved" you in his five year plan. Except one is growing the value of your company, and the other one is, at best, holding steady, or, at worst, resulting in value destruction. Hello Mr. Dell, what seems to be the problem?

Offshoring can work, and it can work damn well, but if you can't sit down at a table with someone and explain your business vision in a minute or less, you probably are not going to have much luck. Complex business practices are developed over decades (and sometimes generations) of interplay between skilled personnel, and unless you've developed Neuromancer-level brain uploading technology, there is no way you can suck their brains faster than they're growing them. If you can document your business faster than it can work, I suspect your business probably wasn't terribly vital in the first place. If you freeze the business for offshoring purposes, you better hope really hard that Bullet Point Brad was right about this offshoring business, because if he wasn't, you'll grow holes no consultant will be able to stitch back together. Better ready the golden parachute.

The real force at work here, I feel, is not so much good business practice as it is a vote of no-confidence on the part of our business leaders, who lack any faith in the ability of the American workforce to deliver past the current generation. History majors don't study much in the way of non-Western cultures, so perhaps it is natural for this new crop of MBAs to suspect that the East exists in some sort of timeless work bliss. Which is fine for people to believe. Watching dumb people learn new things is one of those little things that makes me so damn jolly.