A global quest for talent

The Financial Times points to the ravine of labor shortage in India, suggesting that companies must turn to new pools of workers and adjust training, or pay the price of spiraling wages in a diminishing supply chain:

India produces 2.5m graduates a year. Only 350,000 are engineers and suitable for jobs in IT. The balance are arts, science and commerce graduates who form the backbone of recruitment for business process outsourcing jobs. They emerge from education centers of varying merit, from world-class IT and management schools to thousands of mediocre technical centers. The supply chain is already stretched. A report by Nasscom and McKinsey forecasts a shortfall of 500,000 professionals by 2010, when 2.3m workers will be required to maintain the country's current global lead in offshore IT service (65 per cent) and BPO (46 per cent).

The solution? The article points to three factors that could ease the growing mismatch between the supply of recruits and demand: more young people must be persuaded of the appeal of jobs and careers in IT; the quality of potential and current recruits must be improved; and attrition needs to fall, through, for example, more nuanced matching of applicants to appropriate jobs.

However, all these options assume India to be a lone supplier of the talent pool. Perhaps, another option exists. Indian service firms could well apply their skill and experience to large talent pools in emerging low cost destinations to efficiently scale their supply. This mutually beneficial proposition speaks for a structural shift in BPO arrangements from client-provider to client-integrator-provider. In large firms, such shortages might also result in more cross-institutional links between subsidiaries. For example, Infosys' Shanghai office largely offers end-to-end software services to domestic as well as multinational companies in China. But, as communication and collaboration technologies turn more sophisticated, we will see increased mobility of labor and capital between units to service a common talent pool.

All is still well.

The future of offshoring? Not merely moving up the skills chain

Movement of tasks overseas jumps up skills chain relentlessly - OFFSHORING: Developed nations such as the US and the UK are being forced to look at their attractiveness, says David Wighton.

Apparently, the Financial Times is still taken in by how the reach and impact of offshoring have expanded to include a range of strategic business objectives. The business media's sustained focus on why JPMorgan Chase, Intel and Microsoft choose to create more than 7,500 offshore jobs in high-value areas such as research and development, and processing complex derivatives trades never ceases to amaze me. Does this sound familiar to you?

Yet the biggest beneficiaries of offshoring investment from foreign companies are not Latin America, China or even India. They are the US and the UK. McKinsey's Ms Farrell says that rather than trying to prevent jobs moving offshore, US lawmakers should concentrate on improving the attractiveness of the US to inward investors by tackling weak telecommunications infrastructure and rising health costs. US policymakers cannot avoid addressing both of these issues if the country is to continue being a magnet for foreign investment.

I think managers are more cognizant than earlier of the basic rules of offshoring - it's not for everyone, it's not just about costs, it's a complex process, and when managed appropriately, can result in significant value.

So, it's time to move on. I've said it earlier, and I'll say it again. It's time for a shift in focus of the debate. From whether we should outsource to how best to outsource. And when I say how best to outsource, I am pointing to the need to complement efficiency issues with addressing the challenge of taking care of those who are "outsourced". What are the programs that firms have in place to assist displaced workers? What percentage of savings from offshoring does this amount to? How are unions responding to outsourcing decisions? Is there an upgradation of skills happening among the workforce?

Scharmer, a researcher at MIT, talks about how generative dialogue or thinking together helps leaders address complex issues that cannot be addressed by learning and knowledge of the past. Leaders at JPMorgan, Chase, Intel and Microsoft must think together to address the human consequences of offshoring. And the media, instead of reaffirming dated beliefs, might point to these new directions.

Successful BPO - Here's how

My research on BPO is featured in the Winter issue of Sloan Management Review. You can read the article here:
http://sloanreview.mit.edu/smr/issue/2006/winter/01/

Thanks to all my readers for providing insights into the outsourcing decision processes at their firms - it was a significant component of the research.

Please email me if you'd like more detailed information on the research study.

Move over Sam, it's Shyam's time

That's what a recent article in the Hindu's Business Line suggests:

"After exports, the domestic BPO market is now set to take off in a big way and grow at an estimated 60 per cent to touch about Rs 4200 crore (42bn) in
2005-06."

"The domestic BPO business is expected to grow at 60 per cent to clock Rs 4,200 crore (4.2bn) during 2005-06 compared with Rs 2,640 (2.64bn)crore in 2004-05. As much as 60 per cent of this would be call centre work. Other activities include HR and finance and accounting operations," Nasscom's Vice-President, Mr Sunil Mehta, told Business Line here.

The domestic BPO business is expected to employ close to 50,000 people in 2005-06, he said. In terms of revenues, the market had grown 85 per cent in 2004-05, from Rs 1,425 crore (1.425bn) in the previous year.

And why not. The economy's growing at a rapid pace and although the domestic pie is miniscule compared to BPO exports, it is representative of an important shift from being a derivative economy and holds promise and lucre. In support, the service providers have developed scale and skill in outsourced functions such as customer service support and also acquired a sound understanding of the business, thanks to significant growth in exports over the past few years. Therefore, service providers too are actively exploring domestic opportunities:

Earlier today, Spanco Telesystems announced it has secured a five-year outsourcing contract worth Rs 5 crore for its domestic call centre operations under the brand name `Sparsh' from the Delhi Government. The contract involves setting up a voice and Web-based public grievance management system and providing contact centre services. Sparsh would manage Citizen Relationship & Grievance Management System (CRGMS) in Delhi.

In August last year, telecom major Bharti had announced a Rs 1000-crore deal with four business process outsourcing companies to outsource its call centre operations for the next 4-5 years. The deal signed with IBM Daksh MphasiS TeleTech and Hinduja TMT envisaged setting up contact centers in each of the four zones of the country. The same month MphasiS BPO formerly MsourcE forayed into the domestic business process outsourcing market with a multi-crore multi-year order from State Bank of India.

I've always emphasized that growth of domestic BPO is an indicator of growth of the economy. China's domestic consumption of technology will be among the top five in the world by the end of the year. Such closing of the gap seems a reasonable aspiration for the service economies in this decade of the twenty first century.

Lofty Expectations

In quarterly results posted yesterday, Infosys Technologies reported reported a 28% increase in net profit. Revenue was $559 million, up 32%. A separate statement, based on Indian accounting standards, said quarterly revenue grew 35% and net profit rose 31% from the year-earlier period. Yet, the company's American depositary shares fell $7.58, or 9.4%, to $73.06 as the result was below Wall Street expectations. That triggered Infosys's stock price to fall 4.7% Thursday in Mumbai trading.

This illustrates the lofty expectations that accompany the bright outlook for India's IT services sector. Add to this, significant wage inflation, a squeeze for human talent, a strengthening currency, and emerging low-cost outsourcing alternatives, and you have the recipe for a volatile 2006.

And who better to articulate the sentiment than a fund manager himself. In a recent article in the European Wall Street Journal, Pradeep Kumar, an investment manager at the Chola Mutual Fund in Mumbai contended, "The companies must maintain at least 30% revenue growth. Anything less, and I would consider the stocks expensive."

Outsourced to the Den

The Wall Street Journal, in a recent article, reports on an emerging alternative to offshoring. Instead of sending call-center work to India or the Philippines, a growing number of consumer-products and -services companies, from Office Depot and J. Crew to Wyndham Hotels and Sears Holdings, are outsourcing work to people in their homes here in the U.S. To support, a survey last August of 350 U.S. and Canadian call centers by Yankee Group found that 24% of agents, or 672,000 workers, are now based in their homes. IDC, a Framingham, Mass., research concern, sees the growth continuing, with home agents increasing at a rate of 24% each year from 2006 through 2010.

And why not? Research firm Gartner Inc. says 70% to 80% of home-based agents have college degrees, compared with 30% to 40% of workers in call centers. Most are in their 30s or 40s, older than the average call-center employee, and they often have management experience, say outsourcing firms. Mark Frei, a senior vice president of West Corp., Omaha, Neb., which operates both home- and office-based call centers, says home-agent turnover is only about half the 40% to 100% attrition in traditional call centers.

The cons? The Journal reports:
The pay for home agents is limited, and most jobs come through outsourcing firms and lack benefits. Also, the work -- such as taking telephone orders for things ranging from airline reservations to workout gear -- can be wearying, repetitive and stressful.
Yet, they're a boon for individuals who're constrained to work from home, including people who care for children or elderly family members at home and the disabled. And this is reflected in the significant unquenched demand for agent positions. Willow CSN will probably accept only about one-fifth of the 34,000 applications it expects to receive this year, says CEO Angie Selden.

And heck, a closer analysis of the stay-at-home demographic might enable outsourcing firms to look beyond call center work. For example, ARO Outsourcing of Kansas City, Mo., employs 225 home-based auditors, insurance salespeople and underwriters, says Michael Amigoni, chief operating officer. He adds, "A lot of other kinds of jobs could be workable under this model."

And finally, Shekhar won't have to be trained to call himself Sebastian.

The Rodney Dangerfield economy..or not

I called it the Goldilocks economy but suggested that the "not so good" part was that the "not so bad" was not being heard. The Wall Street Journal chose to call the U.S. expansion the "Rodney Dangerfield economy" because ... well, it "gets no respect." In a recent article, the Journal revisited the most derided and ridiculed growth cycle of the American economy, which it insists is one of the most impressive.

Take outsourcing, for example. Forget the 2004 debate on "jobless recovery". The reality is this.

The great American jobs machine has averaged a net increase of nearly 200,000 new jobs a month this year. Some 4.5 million more Americans are working today than in May of 2003, before the Bush investment tax cuts. The employment expansion in financial services, software design, medical technology and many other growth industries dwarfs the smaller job losses in the domestic auto industry.

Even many of the widely publicized lost jobs at Delphi and General Motors are silently offset by the tens of thousands of Americans employed at new domestic plants built by multi-national companies like Honda and Toyota of North America. This job growth has been accompanied from 2001 to 2005 with the best rate of labor productivity over any four-year period since the Labor Department started tracking this statistic. This productivity revolution augurs well for higher wages in 2006.

I agree. And so do most people. Heck, even in Germany, companies across the country are quietly striking ultra-flexible deals with workers over wages and working conditions. When Linde, the German engineering group decided to build a factory in eastern Europe last year to take advantage of that region's lower wage costs, local officials of Germany's IG Metall trade union offered to match the intended 15 per cent or so in cost savings through a combination of longer hours, more shifts and less pay for workers who build fork-lift trucks at Linde's existing German plants. Underscoring that outsourcing is no longer a dirty word. It has significant economic benefits, improves competitiveness of firms, and more important, is a part of the competitive landscape that dictates adaptation and response strategies. Well, it also emphasizes how accommodating German workers are willing to be.

So, I think it's time for a shift in focus of the debate. From whether we should outsource to how best to outsource. And I am not referring to the transition strategy's emphasis on management of the outsourcing relationship or shift in ownership of the outsourced process to the provider. I am pointing to the need to complement these efficiency issues with addressing the challenge of taking care of those who are "outsourced". The significant benefits of outsourcing suggest that the organizations and the government can and must expend more resources to assist those who've been displaced. A McKinsey Report on U.S. Offshoring states that although the U.S. has the highest job churn rate among developed countries, spending only 0.5 percent of GDP on policies to assist displaced workers, it ranks low in the range of what other developed nations allocate to this area.

Firms too could do more. Based on a policy brief by the Institute for International Economics, MGI calculated that U.S. companies could give displaced full-time employees 70 percent of lost wages and healthcare subsidies for upto 2 years at a cost of approximately 4 to 5 percent of their cost savings from offshoring over the same period. Apart from different forms of wage insurance to ease the transition, firms can prepare their employees for significant changes and shifts in their work lives, and help them invest in upgrading skills and a long-term plan of learning and adapting.

This must be the agenda for years forward. Social scientists point out that in addition to reflective learning through a focus on the past, transformational experiences occur through emergent learning while sensing the future. Organizations have a responsibility to help their employees sense their future.

A New Year Wishlist

Charles Wheelan has a good article on America's stake in India's success. Wheelan outlines why India's success is a fair aspiration to house in the new year: it's the world's largest democracy, it's where a large proportion of the world's poor live, a richer India implies a richer America, it's not autocracy and repression ridden China, and actually may prove America's answer to the latter.

Outsourcing manufacturing, outsourcing risk

In October, with pricey gasoline pinching spending and Hurricane Katrina still a fresh memory, the Conference Board's Consumer Confidence Index slipped to its lowest level in two years. A recent article in the Wall Street Journal (access requires subscription) looks at whether the index has gained ground since then. Because, of course, if U.S. consumers cool their heels long enough, it would eventually stifle U.S. economic growth.

I am not so sure about this. The U.S. trade deficit with China this year through October amounted to $166.8 billion, up 27% from the same period last year. This reflects a quarter of the total trade deficit for the period. One of the objectives of outsourcing is to mitigate the risk of economic volatility. So, when U.S. firms outsource manufacturing to China, they also outsource the risk of industry and macro economic shifts. And the lack of sophisticated inventory management technology as well as time required to transfer finished goods from China to the U.S. only exacerbates the risk assumed by Chinese firms relative to their U.S. counterparts.

So, a slowdown in U.S. consumer spending may not impact U.S. firms directly. However, given the extent of business derived from the U.S., the Chinese manufacturers may well react by lowering prices even further and the Chinese government would turn even more resistant to depegging the Chinese currency and letting it appreciate against the greenback. This, in turn, could fuel more outsourcing to Chinese manufacturers and a further decline in U.S. manufacturing. Of course, this whole argument assumes that primary consumption happens in the U.S. That could change too. As Chinese disposable income increases, the U.S. firms may well find China the new cluster of prosumption, a low-cost producer and an eager consumer.

Heck, isn't that the path to development?