While technology and know-how enabled the outsourcing process, the impetus has come from consumers and investors.
In a trend that began in the late 1970s and picked up speed in the 1990s with the opening of trade with China, India and Eastern Europe, competition from foreign imports forced U.S. firms to find cheaper and better ways of doing business.
But equally important was the push from outside shareholders. Back when the business world was dominated by family-owned firms, the owners’ personal ties to workers and neighbors made them reluctant to shift work elsewhere, even if meant giving up a bit of profit. That same sensibility persisted even after entrepreneurial owners began to sell their companies to public shareholders and hire a cadre of professional managers, beginning in the 1920s.
All that began to change, however, in the 1980s, with a wave of corporate takeovers, many of them unwanted and uninvited. Corporate executives came to fear that if they did not run their businesses with the aim of maximizing short-term profits and share prices, their companies would become takeover targets and they would be out of a job. Overnight, outsourcing became a manhood test for corporate executives.
It was into this environment of ruthless focus on “enhancing shareholder value” that the modern private-equity industry was born. Some firms, such as KKR, got their start with hostile and highly leveraged buyouts of large public companies. Others, such as the Carlyle Group, specialized in picking up the divisions cast off by corporations scrambling to demonstrate their corporate focus.
And there was Bain Capital, which mixed a bit of venture capital with corporate turnarounds and investments in family-owned firms that needed more capital, better management and strategic acquisitions to grow to the next level.
While private-equity managers like to boast that they are free to manage the companies they buy without worrying about changes in quarterly profits, the reality is that their “long term” time horizon is limited. Generally, they allow two or three years for recouping their original cash investment and seven years for selling the whole company again at a handsome profit. The standard strategy has been to load up company executives with so much stock and stock options that they don’t hesitate to make difficult decisions such as shedding divisions, closing plants or outsourcing work overseas.
Even its competitors agree that Bain was among the most successful at this game, never more so than during the 1990s when Romney was at the helm.