Where Did All the Margins Go?

Thinking about margins - SAP and other software organisations have been growing their margins, and the banks are getting more profitable all the time.  Other organisations are continually doing the margin work as well.  For most, this means shrinking the costs.  The methods for this are well documented, slashing the workforce, outsourcing, and pressuring suppliers that are down the supply chain. 

There are two things that are happening.  Wages and salaries are static, and margins are increasing, and so the profitability of many enterprises is higher than ever.  The UK retail banks for example are posting multi-billion dollar profits, better than ever before.  Or, exactly the opposite is happening, and there is a kind of dive for the lowest margin activity possible, e.g. low cost airlines, Walmartisation, etc. 

But what is not happening in either case is the passing of money to the workers.  (Even sounds like a communist chant, margins to the workers!!)  I believe that the proportion of corporate revenue that is being passed to the workforce is the lowest currently since the end of the Second World War.  In other words, money is being made, but not by salaried employees.

So, if you give the upper management all their incentives in the form of options that require them to grow the share price, by growing earnings, is it any miracle that they do so.  (in fact, it is a legal obligation to manage with the shareholders interests in mind.) This is now having the effect of distorting the reward structure of the corporation, and therefore of much of society itself. 

So, the social contract apparent in the second half of the last century, the middle class propping up the social structure for moderate rewards has been replaced by a system where a few individuals are rewarded to take a short term rent out of an organisation, without any strategic view - remember the average CEO lasts around four years. 

And one of the most interesting parts about this is that in order to do so, there is a transfer of intellectual capital that is unprecedented in modern history.  Programmers in India and China are cheaper than in San Francisco, biotechnology in the US, now largely being run by imported Chinese post docs, could go home to Shanghai any time it likes.  (Do not interpret this as Xenophobia, I am glad that these countries are getting a fair crack at the world's trade, what I am talking about is the disruption that results...)

So, if the CEO of the large currently American corporation, (Or English, Swiss, what have you) wants to make his rent out of the organisation and retire, then he or she will be rewarded for sending the intellectual and organisational capital to the other side of the world. 

That is fine, and I do believe that it is an inevitable opening up of the world's previously protectionist markets, technology and political changes having made it irresistible. 

However, if you are a European or American teenager, you had better think hard about what you are going to do.  Your graduate training program, or university graduate job, has just been moved off-shore.  Between China, India, South Africa, and the former Russian and Eastern European states, there are probably about 100 million people who speak enough English, are educated, and motivated to work in the international workforce.  You have to learn how to compete with them, although who knows how?  Unemployment amongst European twenty somethings is pretty high, and not getting any better.  (What to do with bored, poor and socially unintegrated active people is a discussion for another time, but don't expect it to be easy.)

The transfer is going to have other impacts.  No training for the entry level jobs in the West means that there is going to be no skills transfer.  I wonder how long it will be before we see our first adverts in the "The Hindu" for qualified accountants willing to work in London, hardship allowance included...

The world is interesting.  Back to the subject of margins.  What happens to high margin living in Europe and America, when only the low margin jobs of India and China are the ones available in the world?  I don't know, but I do know we are going to find out.