Soon to be Adopted Government Mandates Will Propel New Offshore Business Models

How is it that  the immigration debate, the Affordable Care Act—also known as ObamaCare, and the rise of the multinational small businesses are all inextricably related to the future of global services outsourcing? BPO attorney William Bierce, partner in the law firm Bierce & Kenerson P.C. has spent a lot of time in recent years anticipating the evolution of new offshore sourcing models that are formed as joint-ventures and created largely to overcome the burdens of ObamaCare and other government-inspired mandates. In our interview, Bierce explains that new global business services operating models can ‘fly under the radar’ in avoiding negative public backlash, while soaring to new levels of productivity based around fundamental recognition of the power of the e-business concept.

Nearshore Americas: You conducted a webinar recently where you introduced the concept of the “Global Sweat Equity Business.” What is this new entity and how can globally connected entrepreneurs use it to tap into worldwide talent and keep a competitive employment cost structure?

Bierce: Taking a long-term view, I have been a proponent of the “Global Sweat Equity Business Model.” It is fueled by high-octane people, process and technology and low-octane funding.  ObamaCare’s burdens and complexities invites sophisticated foreign entrepreneurs to join hands with American small business into a new alliance for “global sweat equity business.”

This new model lets each partner bring its own inherent local presence as a capital contribution.  In lieu of having to capitalize an offshore service center, the US small business owner could establish a joint holding company in a tax-favored jurisdiction (with the requisite “economic reality” to keep its tax benefits).  The holding company would serve as a joint venture entity, and roles, responsibilities and profits could be allocated by shareholders’ agreement. Key employees might get stock options if the entrepreneurs are serious about growing market share and need such personnel for continuity and driving value.

This model would enable globally connected entrepreneurs to tap into worldwide talent, specialized knowledge and competitive cost structures. If you look at the Big Four consulting firms as well as new BPO, this model works. What took the Big Four decades to build under the traditional growth mode can now be replaced by using a more networked structure of corporate organization.  This new model keeps the business small locally in each country but ubiquitous across multiple markets. It becomes another e-business with real people across borders.  ObamaCare will undoubtedly cause many foreign and US businesses to explore and implement this model.

Small, agile “Global Sweat Equity Businesses” may fly under the radar of populist politicians and press, but larger firms looking to adapt often run into backlash by the public, prompted by politicians or quite frequently, competitors. Businesses are afforded certain protections by the World Trade Organization (WTO) but still are often subject to increased scrutiny or even harassment in some cases.

Nearshore Americas: How does the WTO protect employers who ramp up offshore operations? Are there protections that prevent politicians from intimidating employers when they consider nearshore options – such as was done to Stanley Black & Decker when they considered moving operations to Bermuda? What recommendations would you have for employers / clients who are faced with a need to mitigate the costs of ObamaCare but fear a political / Public Relations backlash?

Bierce: U.S. employers considering going offshore face political backlash. There are some basic steps to manage public opinion by aligning interests with shareholders, customers and regulators.

• Communications Strategy:  If they want to grow markets and workforces, corporate leaders need to identify and communicate their reasons for “going offshore.”   Generally, consumers and shareholders will understand the need to pursue global markets for American goods and services.
• Operational Transformation:  Automation, outsourcing and offshoring have grown due to increased compliance costs and decreases Internet infrastructure costs in The Cloud.  The resulting operational transformation takes two paths.
• Lift and Shift: The public (and unions) will be less forgiving for “lift and shift” operations where Americans are required to train their foreign replacements and then are fired as an entire business function shifts offshore.   “Lift and shift” operations might achieve cost savings for “shared service centers” (back office operations), but they are not effective for top-line revenue growth in customer-facing operations like sales and account management.  As a result, most large employers who have engaged in global sourcing and shared services adopt a “Center of Excellence” approach where back office work is held to global standards and knowledge management, process management, supply chain management and project management tools are adopted.   The enterprise becomes redefined as a series of processes for management to design and execute across global markets.
•  Business Process Transformation for Efficiency, Compliance and Corporate Governance: This knowledge-driven enterprise approach may be augmented by a renewed focus on good corporate governance and legal compliance.  Reflecting new legislation since 2002, these overriding mandates force transparency, automation and predictability in scenario-driven events like natural disasters, data security breaches, and internal violations of a code of conduct that prohibits conflicts of interest, tax fraud and corrupt payments.   These new “transparency drivers” such as business continuity planning can regroup knowledge and, at some point, enable flexibility in the sourcing and locating personnel in the administrative functions.

Nearshore Americas: What analogies can we draw from the way manufacturers selected production sites in competing states based on labor costs and regulatory environments (such as Japanese automakers siting locations in the US South vs. the union heavy Rustbelt) and the potential for today’s globalized employer to move or keep jobs offshore due to regulatory developments such as  ACA / Obamacare?

Bierce: The Internet has changed the global workforce by opening opportunities for diversification across geographies, skill sets, languages, consumer economies and service sectors.  Most importantly, the Internet has enabled remote services to grow and flourish across remote data centers, SaaS applications and mobile applications.

Internet-business models have acquired new importance in the context of the Patient Protection and Affordable Care Act of 2010 (ObamaCare).  U.S. employers now have the same incentives for diversification and global localization that spurred Boeing Corporation in 2012 to move jobs from union states (Washington) to non-union right-to-work states.  This move follows the logic of Japanese automakers in the 1980’s, by choosing non-union states to gain access to U.S. markets.  Due to its complexity, high overhead and potentially high costs, ObamaCare is causing U.S. employers of all sizes, particularly “small” employers, to develop new global workforce strategies.

Nearshore Americas: What ramifications will the penalty provisions in section 1513 & 1514 of Obamacare have on the attractiveness of onshore vs. offshore business operations? Do you see a palpable effect on employer sentiments?

Bierce: So, how can a U.S. employer legally and validly escape the tax penalties for failure to offer healthcare insurance coverage?

• Small Company: It can reduce staff to 49 full-time employees (“49’ers”) and put the rest on part-time (under 30 hours per week).  This is the first step.
• Smart Company:  It can design its workforce to generate the highest level of profits by using knowledge workers and sales personnel assisted by information technology.  Let’s start with smart query-driven data bases, templates, smart applications, videoconferencing, Cloud servers and SaaS applications in lieu of consultants.
• Outsourced Administration: The employer can outsource everything that is an expense.  This includes HR administration, payroll and compensation, benefits administration, finance, accounting, real estate management, suppliers management, legal, etc.
• Offshore Staff: It can decide to have all growth of lower-paid employees done offshore, to stay under the limits of 50 employees.

Nearshore Americas: How will ObamaCare affect H1-B recipients and their sponsors? Are there any particular ramifications? Will employers more strongly consider moving the work offshore instead of bringing the worker onshore?

Bierce: Employers hiring foreign citizen workers under H1-B and L-1 visas should be aware of the impact of integrating ObamaCare with the draft “Border Security, Economic Opportunity, and Immigration Modernization Act.” Under the immigration reform bill, American employers would need to treat foreign workers equally in terms of benefits including healthcare. Hiring foreign workers to work in the US will not escape from ObamaCare’s mandates and penalties.