The high cost of cheap labor

    

In an amazing, but not really very surprising, article in the Economist we learn that the big companies are boosting headquarters staff – “Some 44% of the firms had increased the headcount at HQ, whereas only 28% trimmed.”

Why? “Globalisation meant that the mother ship had more far-flung operations to oversee; new digital technology made it easier, in theory, to centralise control and oversight; and, starting with America’s Sarbanes-Oxley act in 2002, deregulation gave way to a growing regulatory burden, bringing with it a bigger head-office compliance operation.”

In other words, Chasing cheap labor to backwater, third world countries makes it pretty hard to keep track of things, they think solution is massive ERP which drives massive staff and massive waste, and the corruption level in these countries is off the charts making it really hard to be sure the money is under control making a bunch of auditors and accountants necessary.

Just how massive is the 100% non-value adding waste at corporate headquarters in these companies? At P&G – a train wreck of a company if there ever was one in terms of having no clue as to what adds value in the eyes of customers and what doesn’t - 25¢ out of every dollar they charge for soap goes to pay the utter waste of headquarters. A third of the price of a can of Coke or Pepsi goes down the headquarters rat hole. L’Oréal – the big cosmetics company flushes 20% of the moany you pay them down the corporate drain – which makes them twice as lean as competitor Estée Lauder, which squanders nearly 40¢ on the dollar on expenses customers are wholly unwilling to cover.

The amazing part is that these numbers don’t even include advertising, and a common trait among the companies that relegate the value creation part of the business to anywhere people will work for a handful of peanuts a day is a belief in hyping the brand – creating the illusion of value is more important than the actual value.

Of course none of the headquarters staff at these companies would agree that they add no value. They most certainly are among those who cloud the difference between ‘necessary’ and ‘value adding’. And they could not possibly follow the inherent logic that there is a linear relationship between gutting value and creating waste. Putting value adding in the hands of people in far-away places; people who are largely uneducated, culturally remote from the company and its customers often not even speaking the same language as the customers and management, and who typically could not afford the product if they wanted to makes it really, really hard for those people to drive improvements, solve problems or even catch defects. For that matter, management knows that going in and manages them by top down control and force, rather than by inclusion and empowerment. So, given the output from such a bunch it inevitably requires a big computer and lots of headquarters eyes to get any semblance of the right stuff from the factories in Vietnam and Bangladesh.

Same with suppliers. The ones with the lowest selling prices are just about always the ones with the long lead times and ineffective quality systems = if they have a formal quality process at all. So it requires a lot of inspectors and mountains of inventory to get the right stuff to the customers at the right time in any sort of usable quality.

So the corporate folks are right. They are necessary, but that are only necessary because the company has so aggressively gutted the value creation part of the business. And they are only necessary because they have so wholly bought into the mantra of one former Bain employee and Harvard graduate who said, “Any reasonable business analyst would laugh me out of the room if I claimed that P&G was purely a manufacturing business. We all know that they are also a marketing giant.” She writes, “P&G’s marketing helps them grow their market share and achieve the scale that is so key to their years of profitable growth. P&G spends two thirds as much on marketing and overheads as they do on cost of goods sold.”

All of this nonsense is at the root of the reason why so many of these companies are struggling to make money at all – especially in their core businesses. It’s why they are so enamored by innovation – the idea that they have to find something revolutionary to sell since fewer and fewer people are interested in buying the stuff they relegated to third world production and now sell by hype rather than truth (the truth about how shoddy and cheap their products have become would often kill sales completely).

The article in the Economist cites guys like Warren Buffet and Jeff Immelt as crusaders against such corporate bloat. The problem is that neither of them understands the necessity for bloat to offset the hollowing out of value. They want lean staff and dirt cheap labor – to have their cake and eat it too. Won’t work – can’t work.

These big guys are dying a death by a thousand cuts. Little by little, product by product, CEO by CEO, restructuring plan by restructuring plan, they are becoming less and less relevant and less and less profitable, continually eating their seed corn by selling off bits and pieces of themselves until one day they will be gone and no will even notice …. think once mighty Motorola.

But to the last day they will undoubtedly think the last guy to leave the corporate headquarter , turning out the lights for the last time, was ‘necessary’.

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