The Governance of Outsourcing

The Governance of Outsourcing

In this presidential election year, job outsourcing has become a political wedge issue for both Democrats and Republicans.

What can be done to ensure that outsourcing provides a net societal benefit?

The GAAMA model[5] is a diagnostic methodology which analyzes the amount of commerce conducted in the normative economy, as compared to the amount of commerce conducted in the economic externalities of controlled, balkanized, underground, and offshore markets. GAAMA is an acronym for:

•       Global: widespread in terms of mass and materiality;

•       Asynchronous: not timely information;

•       Asymmetrical: unequal access to or incorrect information;

•       Market: economic / financial system; and

•       Activity: researching, pricing, transacting, clearing/settling, and taking inventory.

The GAAMA Model is a three-dimensional, non-linear, dynamic paradigm. The x-axis depicts the volume function. It delineates commercial activity resulting from too many rules that cause confusion (i.e. the tax code) and/or too few rules or best practices that cause uncertainty (i.e. a computer problem without the help desk). The x-axis resolves bad trade practices. The y-axis determines the pricing function. Standards that are too high are exclusionary operational supports that direct order flow, while standards that are too low are indiscriminate price controls that act as a disincentive to commercial activity. By way of illustration, the tax code has specific rules applicable to the depreciation expense deductible for personal computers. Each rule in the tax code is held to the societal standard that it be assessed "fairly" and held to the cultural standard of "progressivity". The GAAMA Model's z-axis represents a ratio of commands-to-incentives for a given level of commerce. The z-axis posits that the smaller the ratio of commands-to-incentives, the larger the areas of normative market activity to provide a societal net benefit. The model analyzes incentives and commands to ensure their balance and proportionality with the current level of commercial activity.  

The "shadow economy" is a combination of offshore and underground markets.[6] It is a multi-trillion dollar laboratory for economic development. For a large percentage of the world's population, it is an economic sanctuary from the taxman and the policeman that provides a living from either illegal commerce and/or corruption. The shadow economy may act as either a complement to, or a substitute for, the real goods and services sector of normative commerce, depending on the nature and the extent of government-induced distortions that are the result of inappropriate and/or inefficient policies. The shadow economy will, however, serve as a low-multiple surrogate for the capital market sector of normative commerce to constrain wealth creation.

Current outsourcing-related unemployment[7] is less a function of job migration as the lack of job creation resulting from the disproportionate regulatory redlining of small-to-medium enterprises (SMEs)-the engine of employment.[8] Consider the following facts: in 1999, although fierce competition cost an astounding 32.9 million U.S. jobs, it also helped create 35.6 million, resulting in a net creation of 2.7 million jobs. At the same time, unemployment fell to its lowest level in 30 years and poverty to its lowest level since 1979. … In 2002, there were 500,000 fewer jobs destroyed in the United States than the average number of jobs destroyed for the years 1998, 1999, and 2000.[9] 

SMEs around the world face a common problem: obtaining a "sliver of equity" to enable their operations to achieve growth and positive cash flow. The core difficulty that SMEs face in their pursuit of equity financing is not investor indisposition to SMEs, but rather a fundamental failure of the one-size-fits-all approach to regulating equity securities. To correct this shortcoming, the formation of the Entrepreneurial Exchange[10] is proposed. The Entrepreneurial Exchange is a micro-cap marketplace with a governance approach that is specifically tailored for Main Street SMEs.

The United States has the only micro-cap market that is able to fund SMEs to any substantial degree. But while the bull market at the end of the previous century witnessed the globalization of capital markets, much of the wealth creation was primarily confined to the top-tier U.S. markets, such as NYSE and NASDAQ. This, in part, was due to the absence of a proportionate regulatory regime to govern the micro-cap market. Markets correct more quickly than regulators. Not only does the continuing development of regulatory proposals designed for top-tier market risk management become disproportionate when applied to the uncertainty inherent in the micro-cap market, but they also codify the chaos of the previous bubble.  Systemic change is necessary to ensure that commands supporting shareholder rights are proportionate to incentives for shareholder responsibilities. Separate regulatory regimes are required to mobilize capital for:

•       Government securities "bought" for savings accounts,

•       Top-tier issues "bought" for investment accounts, and

•       Micro-cap SME stocks "sold" to venture accounts.

In the absence of exemptive relief, costs for legal, accounting, and other top-tier-driven requirements are often greater than the benefits derived from the "sliver of equity" that micro-cap issuers seek. The cost and time required to obtain a safe harbor exemption is well beyond the means of most SME issuers. This frustrates economic development and limits job creation, innovation, and investment opportunities. The potential for dynamic increase in the percentage of wealth created by EntEx's governance process and financial infrastructure is similar to the economic transformation that occurred when the United States changed its form of government from the Articles of Confederation to the Constitution.


Stephen A. Boyko is president of Global Market Thoughtware, Inc., an international consulting company that specializes in economic governance issues.

[1] Foreign Direct Investment (FDI) is the transfer of the capital component of production to an external location. Colonization is the transfer of the land component of production to an external location.

[2] The price of a mid-size Chevrolet has increased approximately 4.5 percent per year since 1950 or roughly the same as the inflation rate for that period.

[3] If a single criterion such as cheap labor were the sole determinant for using an offshore labor market, Haiti would be the outsourcing capital of the world.

[4] Sometimes disproportionate commands result from an excess of riches caused by a state's popularity. Increases in population often result in zoning changes from industrial, to commercial, to residential that forces business to move for more favorable tax treatment.

[5] This is a modified version of the GAAMA Model presented at the 1997 Ukrainian Capital Market Conference. This was later presented as a paper entitled GAAMA: A New Perspective for Emerging Markets (Volume IV, Number 2), Boyko, 2002.

[6] The "shadow economy" addresses the demand function of GAAMA externalities. It requires an Adam-and-Eve analysis. "Adam" is an acronym for the offshore requirement of the added dimension of distance and the added means provided by technology that enables foreign competitors to overcome the "Law of Comparative Advantages". "Eve" is an acronym for the underground analysis of the expected value of evasion.

[7] A strong desire for entrepreneurial employment may be a cause of reporting anomalies that masks underlying economic strength from alternative sources of employment that recorded a surge of 650,000 self-employed workers. This number may be even higher if modern workers in limited liability companies and in consulting positions with traditional firms are not identifying themselves as self-employed. Reference:, Kane, 2004.

[8] The Small Business Administration recently reported that small firms create more than half of new jobs in the U.S. economy. A companion 2003 SBA study also found that SMEs were a major source of technological innovation.

[9] Foreign Policy, Mar.-Apr. 2004, "How to be a Free Trade Democrat," Sperling, Gene. P.71.

[10] For a more detailed explanation of the Entrepreneurial Exchange reference: Entrepreneurial Exchange (October 2003) and Capital and the Small Businessman: A Proposal for an International Entrepreneurial Exchange (May 21, 2003)