The Trump administration is serving as a grueling case study of how an administration—even one stocked with CEOs—can’t run the government “like a business,” no matter how many efficiencies it promises to find. The latest example comes from the State Department.
Secretary of State Rex Tillerson, the former chief executive officer of ExxonMobil, is trying to cope with falling top-line revenues through the easiest tool known to managers—taking it out of payroll. Reports are circulating that the State Department, through attrition and some layoffs, wants to reduce its staff by 2,300 as part of the Trump administration’s budget proposal (which boosts defense spending at the expense of just about everything else, and which Congress is unlikely to adopt).
One of the ways big multinational corporations slash labor costs—aside from just firing people—is to replace expensive American workers with cheaper foreign ones. And the secretary of state does indeed seem vexed at the high cost of employing diplomats. As Bloomberg reported, “Tillerson was taken aback when he arrived on the job to see how much money the State Department was spending on housing and schooling for the families of diplomats living overseas, according to one person familiar with his thinking.”
Now, large companies are, in fact, similar to the State Department. Steve Coll has noted that ExxonMobil effectively has its own foreign policy. Its operations, customers, and stakeholders are more likely to be overseas than at home. For large U.S. companies like Coke, Intel, IBM, and McDonald’s, the U.S. is increasingly a rump operation. And so they maintain operations of various size and scope all over the world, depending on how that geographic area fits into their overall strategy. In some countries, the presence is a small, token one. In others, the companies maintain a massive footprint.
That’s the similarity. But there’s a huge difference. The State Department’s operations have to be staffed by American citizens—from the top regional bosses (ambassadors) to the middle managers (attaches, consular officers, program managers) to the service staff (security). Which is decidedly not how American companies do it.
In fact, the best practices of corporate management often dictate that CEOs of large global organizations do precisely the opposite. Yes, American companies send their own managers and staffers abroad. But it doesn’t always make sense, from a business perspective and an economic one. When it operates overseas, the State Department is effectively operating on American territory*. When a Fortune 500 company operates overseas, it is operating within the local economy. It may have to hire thousands of locals to staff its operations, negotiate the local culture and bureaucracy, and deal with the arcana of government. You need people who understand the nuances of how to market fast food in India, pitch professional services in Germany, and negotiate the regulated telecommunications regime of Indonesia. It is in your interest to make it seem as if you are part of the local scenery.
That’s not the only reason you might use locals. This is a generalization, but Americans don’t make very good expatriates. We’re generally quite provincial and bad at mastering foreign languages (which can be a prerequisite for working in many places). We find it difficult to assimilate into other cultures. We are used to high living standards, which makes it expensive to maintain us when we are planted overseas. It’s not just wages. When you ship an American to work for you abroad, particularly in an emerging market, you pay a significant premium. They can only live in certain type of housing and certain types of neighborhoods. They might require extra security or a driver. They expect to travel back to the United States, and their kids will likely need to attend a specialized and expensive private school. And dealing with their taxes and benefits is more complicated.
Which is why U.S. companies increasingly put their foreign operations in the hands of foreigners, and not necessarily ones from the countries in question. They have the experience, temperament, and ability to navigate foreign markets better than Americans do. The CEO of Yum China Holdings, the spun-off China operations of KFC and Pizza Hut, is Indian. The head of Starbucks’ European, Middle East, and Africa unit, which is based in London, is Dutch. The person who runs IBM’s Philippines division is a Filipino who was raised and educated in the U.S.
And increasingly, the path to the top of American multinationals comes through these rapidly growing international operations. McDonald’s CEO Steve Easterbrook joined the company in his native England in the 1990s. Or take Coca-Cola, perhaps the most iconic American company. The current CEO, James Quincey, is of British origin, and worked his way up through the company’s Latin American and European operations. He replaced Muhtar Kent, who started with the company in Turkey and spent most of his career in Turkey and Europe. Kent replaced E. Neville Isdell, a native of Ireland who had joined Coca-Cola in Zambia and worked his way up through the European and British operations.
So here’s an instance where the norm in corporate America simply can’t be the norm in government. You can’t hire foreign nationals to be the public face of your foreign operations, or to run them. As a matter of policy, you literally have to be a U.S. citizen to work in the foreign service. It’s possible to outsource the conduct of foreign policy to the military. But it’s impossible to outsource the business of the State Department to cheaper foreign workers. If Tillerson is seeking to save money on his payroll, the only think he can do is simply fire people and reduce staffing levels sharply across the board.
Which leaves the final, telling difference between business and government. When companies reduce staff sharply, they often reduce operations by a commensurate amount, closing stores or restaurants or factories. But Tillerson is also constrained in this regard, too. As much as members of the Trump administration might like it to do it, the State Department simply can’t pull out of anywhere.
*Correction, May 1: This post originally described American embassies as “literally operating on American soil.” While embassies have full control over the land on which they sit, the sites are not sovereign territory.