“Startup America”: A Vision for American Entrepreneurs: What Role for Global American Entrepreneurship?

February 11, 2011 by

On January 31, 2011, President Barack Obama’s office released a “Startup America” plan to promote entrepreneurship. The “Startup America” initiative proposes to “celebrate, inspire, and accelerate high-growth entrepreneurship” throughout the nation by coordinating public and private effort to create “innovation ecosystems” that brings together innovative entrepreneurs, corporations, universities, foundations, and other leaders, working in concert with a wide range of federal agencies. The “Startup America” initiative seeks to promote entrepreneurship as the core of an innovation strategy for achieving sustainable growth and quality jobs. It builds on the Job Creation Act of 2010, but does not address many legal issues in the global economy.

Overview. Given the high level of unemployment in America, President Obama is taking a new initiative to promote small businesses for U.S. job growth. The program addresses key issues in:

  • capital investment in “high-growth startups,”
  • education and mentorship to empower entrepreneurs,
  • commercialization of federally-funded research and development in which taxpayers invest about $148 billion per year,
  • identification and removal of “unnecessary barriers” to high-growth startups; and
  • collaborations between large companies and startups.

Tax Incentives for Small Businesses.

Capital Gains Tax Exemption. “Eligible small businesses” would qualify for permanent elimination of capital gains taxes on their share. Already the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“2010 Job Creation Act”) provides a 100-percent exclusion from tax for capital gains realized on the sale of certain small business stock held for more than five years. Under current law, the amount of gain eligible for the exclusion is limited to the greater of $10 million or ten times the taxpayer’s basis (net investment) in the stock. This tax relief applies to qualified small business stock issued after December 31, 2010, and before January 1, 2012. President Obama’s FY2012 budget proposal would make this provision permanent to increase private sector investment in small businesses.

Eligiblity Rules. The 2010 Job Creation Act limits the tax incentive to C corporations, whose profits are taxed at the corporate level and again, upon distribution of dividends, at the shareholder level (where shareholders pay their proportionate tax share on dividends received) This limitation contradicts decades of efforts to promote small business through S corporations, limited liability companies and limited partnerships, whose owners are taxed on the entity’s income but the entity does pay taxes.

Empowerment Zones. The Job Creation Act of 2010 extended through 2011 the period for designation of “empowerment zones” in the U.S. Jobs created in “empowerment zones” allow certain tax incentives for investment in such zones, including wage credits, accelerated depreciation of business equipment, tax-exempt bond financing, and deferral of capital gains on the sale of business and investment property. The one-year extension would become permanent under the “Startup America” initiative.

Work Opportunity Credit. The Job Creation Act of 2011 extended through 2011 the existing work opportunity credit for employers.

Small Business Administration.

The Obama initiative would use the SBA for additional lending to small businesses. This would be useful but is already available and merely represents an effort to allow some adjustments in existing lending criteria.

Piggybacking on Private Sector Initiatives.

The “Startup America” program would rely on existing non-profit organizations and private businesses to promote mentorship, special educational training in entrepreneurship and private equity investments in new small businesses. This is nothing new, including “partnership” with existing initiatives that the government did not initiate or specially support till now.

Critique.

Dysfunctional Tax Policy. As a matter of tax policy, exemption from capital gains stimulates capital risk investment. New business investment typically includes R&D, capital expenditures and jobs. But most entrepreneurial ventures are small, do not hire large numbers of employees and cannot expand employment because they focus on R&D and product development. Venture capital is essential since, unlike large corporations, small businesses lack cash reserves and the ability to issue bonds in capital markets.

This tax policy is dysfunctional because it fails to grant tax benefits for operations and thus fails to assist investors who would invest (or not) regardless of the capital gains incentives. Small businesses lack working capital, so long-term capital gains exemptions do not fill the gap caused by increased caution and reduced levels of bank lending. As one commentator noted, with no working capital, small businesses just go bankrupt. The legislation would have been more effective if it hadincluded some incentive for increased lending rates for banks (allowing the banks to lend to smaller companies with some levels of viability risk). Further, capital gains tax exemption is not the prime motivator for venture capital or private equity, which both seek high growth in cash flow, market share and slower growth in employment and capital expense costs.

Band-Aid® Solutions. The Job Creation Act of 2010 was a temporary palliative to extend expiring tax incentives, expiring exemptions under Bush-era estate tax reductions and other plans. The Startup America program focuses on making such incentives permanent.

Aside from putting one Band-Aid® on top of another, the Startup America initiative fails to address the core challenges of the global “knowledge economy” built on the WTO’s Uruguay Round agreements in 1993. The initiative lacks inspiration or information about the global services economy, global sourcing, comparative advantage in sourcing of services, and the viability of the American entrepreneur as a competitor in global markets. The vision for “entrepreneurial education” has roots in private enterprise and private initiatives for private enterprise. It does not seek to understand foreign cultures, purchasing habits or languages. It seeks to promote clean-tech and “innovative” jobs, but these sectors are small. There are limits to both the wisdom and financial capacity of the Government to promote local jobs.

But, at least, it’s not as nationalistic as certain countries, which merely convert the Government into the Employer of Last Resort in lieu of the dole.

Global Entrepreneurship. President Obama’s newfound zeal for promoting small business might be more effective if he were to promote “global American entrepreneurship.” A global approach would promote:

  • sustainable cash flows from global revenues to support, upon repatriation, American investors;
  • increased American wealth from classic global capitalism;
  • increased American competitiveness, as to small and large businesses, as entrepreneurs look to global markets for both sourcing of innovative talent and sales of goods and services;
  • substitution of American services for foreign services, in cases where foreign BPO service providers have developed robust service delivery models with lower costs per employee.

Global entrepreneurship needs to address key challenges for any modern business:

  • the procedures for developing and implementing an entrepreneur’s business plan, including the unique selling proposition that relies upon proximity to the customer, cultural fit, flexibility and speedy adaptability;
  • the uses of insourcing and outsourcing in innovation, global entrepreneurship, strategic alliances and capital allocation;
  • mobility of people, process, technology and products and services to reach growth markets;
  • technological innovation, including process innovation;
  • intellectual property rights as the core foundation for a knowledge-management economy, especially in countries that lack either the laws or the culture for protection and vigorous enforcement;
  • redundancy, resiliency and robustness of the technological platforms, such as the public cloud;
  • branding;
  • compliance with complex regulatory mandates;
  • internal operational governance including transparency and responsiveness to stakeholders (as broadly defined); and
  • risk management.

The editors welcome your thoughts on this controversial topic of law, public policy and international trade in managed services. To contact us, please e-mail: publisher@outsourcing-law.com.

Further reading:
• “Startup America” Initiative: http://www.whitehouse.gov/startup-america-fact-sheet (Federal Government website)
• Private Sector Entrepreneurship Training: www.startupamericapartnership.org (Not-for-profit organization)

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Outsourcing Law & Business Journal: Dec 2010/Jan 2011

January 20, 2011 by

OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services.  www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com.

Insights by Bierce & Kenerson, P.C., Editors.  www.biercekenerson.com

Vol. 10, No. 10 (Dec 2010/Jan 2011)
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Editor’s Note: Happy New Year to everyone.  We look forward to 2011 and anticipate many changes in global sourcing as the economy continues on its road of recovery.

To open up the new year, we are participating in a webinar (full disclosure, the speaker is the Editor of this newsletter) on:

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Webinar Announcement
“Global Entrepreneurship and the Evolution of the New Global Enterprise”
February 17, 2011, 11am – 12:20pm, EST US

Speakers:
William B. Bierce, Esq., Bierce & Kenerson, P.C.
Ed Nair,  Editor of Global Services Magazine

Description:

The struggles of the entrepreneur and owner-managed businesses are well known. The real struggle arises when they try to achieve scale and breadth through globalization. They face many challenges in developing and managing an overseas sales presence, brand management, technical presence, business organization, intellectual property and operations.  However, the miracles of modern technology, educational diversification, social media and long-distance collaboration now enable some innovative uses of established legal, tax, organizational and operational structures. In short, it’s time to rethink and extend the classic business models for entrepreneurship.

This webinar delves into the idea of global entrepreneurship in the “new normal” economy. Global excellence is not a concept reserved for large companies like Accenture, Genpact and WNS, but can be implemented across the spectrum of both Fortune 500 companies and owner-managed businesses. For more information, click here.

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1.   Failed Software Development:  De Beers Debacle.

2.  Indian Taxation of “Body Shops” and Onshore-Offshore Model:  100% Tax-Exempt No Longer?

3.  Humor.

4.  Conferences.

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1.  Failed Software Development:  De Beers Debacle. When can a software developer (such as Atos Origin) walk off a critical systems design project for business-process transformation when the customer (such as the De Beers Diamond Trading) fails to provide the necessary subject matter expertise?   Atos Origin found out, in a London court decision in December 2010, that it might have been able to do so but failed to protect its legal rights properly.  Consequently, it owes net damages of over £1.4 million (about US$2.25 million).

This article addresses best practices in “fixed fee” services agreements in business process management.   Instead of transforming the diamond industry’s leader into an efficient integrated operation, the tale involves over a million Pounds Sterling due in damages, an adverse lawsuit outcome, adverse corporate publicity and intensified scrutiny of individual careers.

….The detailed opinion of Judge Edwards-Stuart of the specialized UK technology court offers actionable lessons learned at considerable cost and frustration for both the enterprise customer and the technology services provider – particularly including the necessity of very smart, project-customized contracting up front.  De Beers UK Limited (Formerly: The Diamond Trading Company Limited) v. Atos Origin IT Services UK Limited (UK High Court Of Justice, Queen’s Bench Division, Technology and Construction Court, Dec.16, 2010).As with shared success, shared failure means both parties made mistakes.  The key lessons for all enterprises from this costly project and its consequent large commercial litigation relate to the well-known but hard-to-tame beast of “scope creep.”  The “scope creep” challenge has extra vigor in two particular contexts, which both existed in this transaction: (a) fixed-fee pricing models, particularly for business process transformation from silos management to integrated resources management across business segments and (b) blended vendor-customer control and staffing of extensive, expensive endeavors.  This true fable raises many questions on “best practices” in initially designing and drafting agreements and then managing projects for sourcing and systems integration.   Ready for some fun?  Click here to follow along:

I.         Unique Business Process Methods – Diamond sorting is a unique and complex process, more than what both the customer and service provider envisioned.
II.        Chronology – Timeline of events.
III.       Project Plan – De Beers (DB) and Atos development plan failures.
IV.       Business Process Mapping and Pilot Project Management – What went wrong during this phase.
V.        Pricing for Fixed-Fee Projects – Why this type of pricing structure and its change control procedures failed.
VI.      Governance – Good governance procedures in place, but not enacted properly.
VII.     Failed Governance: Termination for Anticipatory Repudiation – Which side was ultimately responsible for the termination of this contract.
VIII.    Conclusions.

2.  Indian Taxation of “Body Shops” and Onshore-Offshore Model:  1000% Tax-Exempt No Longer? In mid January 2011, Indian tax authorities reportedly directed Infosys to explain, in a tax audit, why the existing tax exemption on revenue from software exports should apply to revenue generated by employees providing services outside India, at customer locations in “onshore” countries like the U.S. and Europe.  Indian Income Tax Law Sections 10A and 10AA exempt from Indian tax the export income of Indian companies in special economic zones.  The question is whether the work performed outside of India qualifies for the Indian income tax exemption.  It is a new perspective on the legal interpretation of the common practice loosely referred to as “body shopping,” which has many different meanings.  For Infosys, the amount of income that could be taxable is reportedly 400 crore (400 times 10 million Rupees, or about $87.7 million).  For more, click here.

3.  Humor.

BPMN, n. (1) BPM notation, a software development standard; (2) composer’s toolbox for making music, animating people and stimulating economic growth across supply chains and value chains; (3) musical score for the business world.

XBRL, n. (1) Extensible Business Reporting Language; (2) meta-language for computers to analyze business financial and regulatory compliance; (2) open-source taxonomy, or dictionary, for use in tagging, characterizing attributes and their interrelationships, and for computing and reporting specific corporate actions, accounting results (e.g., “net profit”) and business events (e.g., “unauthorized non-deductible expense”) to meet financial accounting standards and regulatory mandates; (4) man’s feeble and futile attempt to create a “global solution” to a cacophonous Tower of Babel in accounting standards; (5) a perennial work in progress, both for definition and for implementation (6) digital …expialidocious.

4.  Conferences.

January 22, 2011, Legal Technologies India 2011, New Delhi, India. A very unique forum which creates a discussion platform for all stakeholders in the legal services value chain for generating new thoughts and for effectively understanding and deploying technology to increase work efficiencies.  A conference on the need, relevance and the implications of technology in the legal systems. The objective of the conference emphasizes the growing and vast avenues prevalent for technology in the legal arena and how legal systems can evolve to a simpler, systematic and a cost effective modus operandi. The conference aims to bring together expertise, competence and technology in managing all the constituents of legal affairs including LPO. The legal fraternity can be brought in the gamut of technology through a smooth transition involving low and nominal cost with minimum hassle. The advantages of such a transition are manifold ranging from increasing the efficiency of the day to day work to maximizing output in a shorter time period. More tasks can be covered with exceptional levels of accuracy and reach with the right mix of technology and advanced systems. For details, please log on to: http://www.cerebralbusiness.com/legal/ To register for the conference, please write to: s.tak@cerebralbusiness.com.

January 27, 2011, Global Services Conference 2011,  New York, New York, focuses on Enabling Business Transformation Through Global Sourcing.

  • Full day with over 15 key sessions: Transformation, Supply Risk Monitoring, Collaborative Sourcing, Program and Governance Management, Cloud-based Service Delivery, Nearshore,  Outsourcing Destinations Competitiveness.
  • 25+ Speakers from leading global enterprises: Novartis, Applied Materials, Baker & McKenzie, SAP, Kaye Scholer, Wells Fargo, Mass Mutual, Forrester Research, Bancolombia, Assenda, ABB, Credit Suisse, and Bank of Tokyo Mitsubishi.
  • Track 1: Next Practices in Sourcing Leadership
  • Track 2: Best Practices in Sourcing Maturity
  • Networking opportunities with industry peers

For a special 50% discount for our subscribers, click here for more information. To register, visit their website.

February 8, 2011, Global Sourcing Council presents its 3s (Sustainable and Socially Responsible Sourcing) Awards, New York, New York. The Global Sourcing Council, a non-profit association of businesses, trade organizations, government agencies and academics is proud to announce the 2011 3S (Sustainable and Socially responsible Sourcing) Awards. The 3S Awards will recognize exceptional achievements in the global sourcing marketplace by individuals and organizations for their commitment towards Sustainability and Socially responsible Sourcing practices.  To register and get more information, visit:  http://www.gsc3sawards.com/

February 14-16, 2011, IQPC presents its 4th E-Discovery Finance Conference, New York, New York, focusing exclusively on the financial services industry.  The Dodd-Frank bill is the most comprehensive legislative overhaul of the financial services industry since the Great Depression, and financial corporations must respond and adapt immediately. Changing technology creates quickly moving targets for corporations to reach. The burden falls on legal, information security, record retention, and IT departments to ensure the best review, retention, and destruction policies and procedures.  A successful e-discovery team can mitigate the costs of e-discovery, reduce the volume of extraneous data, and avoid sanctions and other judicially imposed penalties.  Highlights include strategies to:

  • Keep costs down while maximizing efficiency.
  • Comply with stricter, more expansive regulations.
  • Implement and adapt to new technologies in order to “future-proof.”
  • Stay out of the headlines for non-compliance or sanctions.

To obtain more information, click here.

February 14-16, 2011, Legal Process Outsourcing Conference, New York, New York.  With advanced technology and tight budgets in a downturn economy, companies are exploring more cost-efficient alternatives for high quality legal work. CEOs and CFOs are putting tremendous pressure on their employees to cut spending and given the exorbitant cost of legal spend, in-house counsel are feeling the pressure more than most. Although legal outsourcing is not a fit for every law firm and in-house legal department, the legal community simply cannot ignore the expansion of the LPO market. This event will take an honest look at all sides of LPO and address the challenges, ethics, implications, and strategies of legal outsourcing. Attending this Summit will help decide where your company fits into this new outsourcing dynamic. For more information visit their website.

February 21-23, 2011, International Association of Outsourcing Professionals (IAOP) presents its 14th edition of The Outsourcing World Summit, Indian Wells (Palm Springs), California. This conference, through case studies, educational sessions and presentations, provides participants with news of the latest developments affecting the outsourcing industry and their profession.  Its theme is Embracing Change – How Outsourcing Professionals Can Lead Their Companies to Success in This New Outsourcing Landscape.  For more information, visit:  http://www.iaop.org/Content/23/154/1099/Default.aspx

March 1-3, 2011, SSON presents the 15th Annual North American Shared Services & Outsourcing Week, Orlando Florida. As SSON celebrates 15 years of serving the needs of the shared services and outsourcing community, this conference will bring added value to our participants through inspired structured networking, innovation and meaningful, leading edge content.  Featured presenters will include numerous buy-side executives from a wide range of industries.  You will meet and network with the very best thought leaders, practitioners, providers and advisors in the shared services and outsourcing space, connecting with over 1,000 senior level attendees from various sectors all over the region.

If you want to seek fresh initiatives and reach new thresholds of productivity or revenue growth, are looking for game changing, innovative content and ideas to leverage technologies, and desperate to leave behind old legacies and shape the future of the sourcing world, then this event is for you.  For more information, click here.

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FEEDBACK: This newsletter addresses legal issues in sourcing of IT, HR, finance and accounting, procurement, logistics, manufacturing, customer relationship management including outsourcing, shared services, BOT and strategic acquisitions for sourcing. Send us your suggestions for article topics, or report a broken link at: wbierce@biercekenerson.com. The information provided herein does not necessarily constitute the opinion of Bierce & Kenerson, P.C. or any author or its clients. This newsletter is not legal advice and does not create an attorney-client relationship. Reproductions must include our copyright notice. For reprint permission, please contact: wbierce@biercekenerson.com . Edited by Bierce & Kenerson, P.C. Copyright (c) 2010, Outsourcing Law Global LLC. All rights reserved.  Editor in Chief: William Bierce of Bierce & Kenerson, P.C. located at 420 Lexington Avenue, Suite 2920, New York, NY 10170, 212-840-0080.

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