The Outsourcing Conundrum

Issue 4 and Volume 108.

By Brian K. Schimmoller,
Managing Editor

Overseas outsourcing has become a hot-button issue in this year’s presidential campaign. Democrats assail the president for the job exodus under his watch, while the president promotes his fiscal policy as the best tool for economic growth and job creation. Outsourcing invites intense scrutiny in many quarters, and the power industry is no exception. Companies serving the power sector face acute pressure to reduce costs, and overseas outsourcing is a cost-saving option that can’t be discarded out of hand.

Utilities, especially investor-owned utilities, must be able to justify — to increasingly skeptical directors, investors, regulators, and analysts — every expense on equipment and services. Reconciling this “hard-and-fast” corporate financial responsibility with a decidedly “softer” social responsibility to American suppliers and American workers is a wrenching task, and the short-term, results-oriented vision demanded by Wall Street today often tilts the balance toward outsourcing.

“Until investors are willing to ‘Buy American’ at the expense of profits or share price, outsourcing will continue,” says Doug Houseman, Principal with Cap Gemini Ernst & Young. “The financial markets would destroy an investor-owned utility if it unilaterally decided that it could only source American products and services.”

For asset owners, whether regulated or unregulated, cost-cutting has become a continuous process — either to demonstrate a commitment to low retail electricity prices or to ensure a place on the dispatch curve so they can generate revenue and repay investment costs. The cost pressures trickle down to suppliers, consultants and service providers, who are subsequently forced into outsourcing.

Interestingly, the power industry is no stranger to outsourcing. Before World War II, much of the equipment used in U.S. power plants came from overseas. The industrial build-up that accompanied World War II, however, provided the technology and infrastructure to make the U.S. essentially self-sufficient in terms of power generation. Outsourcing crept back into the power sector in the 1980s and 1990s, as U.S. manufacturers turned to “global sourcing” to cut product costs.

Now, the outsourcing trend is extending to higher-value services such as design and engineering. Although reluctant to acknowledge the practice, engineering firms serving the power sector are increasingly using engineering and drafting talent from overseas to constrain costs. Overall control of a given design or engineering project has not yet jumped overseas, but a few professional engineers have privately expressed concerns about having to stamp work produced overseas by engineers and draftsmen not under their direct supervision.

So, what can be done to reverse this trend? More fundamentally, should anything be done to reverse the trend? Off the record, representatives from utilities and power plant developers have told me that, although the overseas outsourcing trend is growing, it is “not our problem.” Economists laud the benefits of outsourcing, explaining that the practice leads to greater domestic productivity, freeing American workers to focus on new markets, on new technology —on whatever will become the next new economic growth engine.

Those sentiments express an analytical, capitalistic appraisal of outsourcing. But there is also a personal, emotional side that, while admittedly subjective, is just as real. Roughly 2.3 million jobs have been lost in the past three years. Only a fraction of those can be traced to overseas outsourcing, but for incumbent politicians, each one of those lost jobs represents heavy baggage, and ripe campaign fodder for politicians running for office.

Ignoring its rightness or wrongness, a number of things can be done to stem the tide to overseas outsourcing. In complying with the Buy American Act preference, TVA and other federal utilities comparing the prices of foreign-made and domestic-made products must add an evaluation factor to the price of foreign products, according to TVA spokesman Gil Francis. The Buy American Act applies only to acquisition of products, not services, but legislation has recently been introduced in Congress to restrict government agency acquisition of foreign services.

There are longer-term steps that can be taken as well. Although cost is the main driver behind overseas outsourcing, resource scarcity also plays a role. “Outsourcing will occur in every part of the power industry where skills are scarce,” says Houseman. “Cost is a factor, but we are simply not turning out the power engineers the way we used to. Reversing the outsourcing trend in the higher-value design and engineering realm is possible, but it will take a concerted effort to develop math and science skills in our young people, to promote the value of technical careers, to encourage patent protection for American innovation, and to safeguard this innovation in American companies. It is up to every engineer to help their local schools if they want someone who can follow in their footsteps.”

In the short term, there is no magic-bullet answer to the increasing use of global outsourcing. Like it or not, the trend will continue. The cost pressures are simply too acute to expect otherwise.

Outsourcing pits the capitalistic virtue heralded as the hallmark of American culture against the nationalistic pride that stings our collective conscience when jobs are sent overseas. It’s a complex mosaic that defies simple description and resolution — a mosaic where gray obscures black and white.

Editor’s Note: It is my distinct pleasure this month to welcome Rob Swanekamp to the Power Engineering masthead as a Contributing Editor. As many of you know, Rob has extensive editorial and industrial experience in the power generation industry, and he will now be sharing this experience with our readers once per quarter. Rob’s articles will focus on the operations and maintenance challenges associated with combined cycles and heat recovery steam generators (HRSGs). His first article will appear in the May issue.

As the current Communications Director for the HRSG User’s Group, and as a former asset manager for multiple combined-cycle/cogeneration plants, Rob brings unique insight to Power Engineering. Rob’s background also includes service as an engineering officer onboard USS Texas (CGN 39). He holds a BSME from the University of Michigan, graduated from the Navy’s Nuclear Power School, and is a registered PE in the state of Michigan.