Service Infrastructure and BPO

IT is increasingly playing a significant role in increasing the efficiency and effectiveness of outsourcing transactions. This is especially true as outsourcing becomes knowledge-intensive, is marked by extensive coordination and collaboration, and requires new ways of acquiring and managing computing and business processes. Not surprisingly, the industry sectors that spend maximum worldwide on IT (financial and information services at 36% and manufacturing at 20%) are also the ones that outsource the most business processes and functions.

Firms like IBM are responding with technology initiatives like On Demand Business and Services Sciences, Management and Engineering. These investments in service and coordination infrastructure help reduce the transaction costs of outsourcing and improve management focus on more strategic issues in management of the outsourcing relationship. This is exemplified by start-ups like Exterro. Given that outsourcing is largely driven by global communications, low cost labor and technology innovation, these technology innovations address all components of the value equation and help fuel outsourcing growth.

It would be interesting to examine the actual long-term savings, including order of cost reduction and improvement in relational quality, that accrue to firms on account of such embedded technology. For now, they're an indispensable mediator in the BPO relationship. Just like advisory consultants, law firms and market analysts. And heck, more proof that outsourcing creates jobs.

The Legal Immigrants

In the midst of the heated debate on the future of the millions of illegal immigrants in the U.S., the Wall Street Journal had an interesting article on the dismal state of our system for admitting foreign-born professionals. This is in the wake of the scheduled mark-up of Arlen Specter's immigration bill today by the Senate Judiciary Committee.

The key highlights of Mr. Specter's proposal:

• The annual cap on H-1B guest worker visas for immigrants in specialty fields like science and engineering would rise to 115,000 from 65,000. Moreover, the new cap would not be fixed but would fluctuate automatically in response to market demand for these visas. "According to a new study by the National Foundation for American Policy, our broken system for admitting foreign professionals also contributes to outsourcing. Since 1996 the 65,000 annual cap on H-1B visas has been reached in most years, sometimes only weeks into the new year. This leaves employers with the choice of waiting until the next fiscal year to hire workers in the U.S. or hiring people outside the country. Many companies concede that the uncertainty created by Congress' inability to provide a reliable mechanism to hire skilled professionals has encouraged placing more human resources outside the United States to avoid being subject to legislative winds." Remember my earlier post on Dell's aggressive hiring in India?


• Another important reform addresses foreign students who want to work here after graduating from U.S. colleges and universities. As quoted in the Journal, "it doesn't make a lot of sense in today's global marketplace to educate the best and brightest and then send them away to England or India or China to start businesses and develop new technologies for U.S. competitors".


• Mr. Specter would let more foreign students become permanent residents by obtaining an advanced degree in math, engineering, technology or the physical sciences and then finding work in their field. "It's unfortunate that the U.S. isn't producing more home-grown talent in these areas, and the fault there lies with our K-12 educators and their political backers who tolerate poor performance. The reality today is that the U.S. ranks sixth world-wide in the number of people graduating with bachelor's degrees in engineering. Jobs will leave the U.S. and our economy will suffer if bad policy limits industry's access to intellectual capital."

The immigration demonstrations highlight the state of the 11 million illegals already in the country. But the highly skilled and educated foreigners who are an active part of the labor market are not demonstrating. They have more options than ever in Asia and Europe. And as the Journal points out, we drive them away at our economic peril.

Don't be afraid of offshoring

At least that's what this article in Business Week says post a closer look at the workforce in India and China. Various statistics on: the employability of legions of college grads in both countries by MNCs, growth in talent pools, service jobs expected to be offshored in the next few years aim to convince that offshoring is a relatively small phenomenon in the scheme of total employment, and is likely to have limited impact on average employment and wages in mature economies.

Ask the markets - the global economy is a good thing

Dell announced today that it plans to double its head count in India to 20,000 in three years. Many of the new hires would be in sales and support positions. Dell also plans to hire more Indian workers for research and development and product testing. The company is also looking for a site to establish a manufacturing plant in India. The PCs Dell sells in India today are built at its factory in Penang, Malaysia. A computer factory in India would help Dell avoid import taxes and improve its current position in the Indian PC market.

Ditto with Wal-Mart which announced its plans to hire up to 150,000 employees in China over the next five years. A response to the significant growth in Wal-Mart's international division which is growing faster than its larger U.S. operations. In 2005, the international business saw net sales and operating income rise 11.4 percent, compared to 9.4 percent for sales and 8.2 percent for operating income at the U.S. division minus Sam's Clubs.

India and China are gaining firms' attention not just as low cost service providers and manufacturers but as developing markets that fuel sales and profit growth. More and more firms are strategically building assets in these countries to improve their positions and accelerate market share gains.

And the markets only affirm firm beliefs. Dell shares rose 0.68, or 2.3%, to close at 29.76. Wal-Mart shares rose $1.07, or 2.3 percent, to close at $47.76 on the New York Stock Exchange. The global economy is a good thing.

Shake a bottle of champagne for one hour - huh?

"India Rising: One Billion Reasons to Care" - this ABC video has caught the fancy of many. This commentary is dated but when I got what was probably the tenth email from a friend with a proud link to this video, I could not resist.

Boy, is this one a hyperbole!

The video begins with a brief introduction to the world of outsourcing - "Do you need to touch your customers? Does your job require handshakes and eye contact? If not, there is an Indian, perfectly qualified, who would do your job at one-tenth your salary and who'll work six days a week, twelve hours a day, and there are more English-speaking Indians then there are Americans, and most are wired in more ways than one".

Then, the reporter wanders off to explore the country that fills us with equal parts of "pity, wonder and awe". First encounter: a woman in a Mumbai slum. When asked how long she's been living there, she replies "many years" which is promptly translated and voiced as "twenty five years". Really? Following this, the reporter is puzzled by the impoverished state of the country. Diversity and democracy quickly explain paradoxical poverty. But, alas! nothing explains the "150 million peaceful Muslims". Subtle. Peaceful muslims are almost an oxymoron, aren't they? The cliches don't end there. No sire. While "stepping over rats", the reporter discovers shanty with Pentium III. CK Prahalad promptly chips in "This is a metaphor for India: what you see on the outside is not what it is on the inside".

And when drama abounds, can Friedman be far behind? What's that you clamor for? A metaphor for India's pent up aspirations? Well, now's when you read the title of this post. Friedman warns against getting in the way of the cork of that champagne bottle. Text polls on Radio Mirchi only confirm what ABC's always known - with the malls and McDonald, India's youth don't want to leave the country. They're staying put.

Don't get me wrong. I do believe that India'll be a force to reckon with in the new century. What I wasn't ready to accept was the death of honest and balanced reporting.

If you're still denying your boredom, read no more.

No cheers for equality

An article in this issue of Fortune magazine, "The Poor Get Richer: Blue-collar workers are making salary gains- but don't cheer yet," makes interesting reading. Geoffrey Colvin draws attention to the fact that a new Fed study of family finances indicates that incomes are converging in the U.S. However, he cautions that before we cheer, we must take note that between 2001 and 2004 (the most recent year for which data are available), incomes of the poorest 20% of families increased while incomes of the richest 20% fell. Basically, the poorest families' share of total incomes grew, and the richest families' share shrank.

What could that trend reversal mean? The most obvious explanation seems highly counterintuitive: The skill premium, the extra value of higher education, must have declined after three decades of growing. The Fed researchers didn't pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein at the Economic Policy Institute did, and they found supporting evidence in the new Economic Report of the President, issued within days of the new Fed survey. It cited Census Bureau data showing that the premium had indeed fallen sharply between 2000 and 2004. The real annual earnings of college graduates actually
declined 5.2%, while those of high school graduates, strangely enough, rose 1.6%.

One possible explanation is that outsourcing is impacting the white collar jobs more than it is low skilled jobs in the firm. Perhaps, most of the low skilled jobs that draw interest from high school graduates have already migrated to low cost destinations so that a majority of jobs currently being pursued by high school graduates are those that cannot be easily transferred overseas. Read trucking, construction, etc. However, as firms increasingly outsource strategic capabilities and functions like manufacturing, product design and development, engineering, and R&D, college graduates feel the pinch. And if this trend keeps up, it'll impact incentives for higher education. So, even when the baby boomers retire, we might have to import technological talent to maintain competitiveness.

Hmm, wage equality - good. Lower incentives for education - not good. Like Colvin says, we must be careful what we wish for.

Smart Outsourcing from the Entrepreneur's Playbook

I've never blogged earlier on small business outsourcing, an indication of the fact that I never dwelled too deeply on the specific opportunities and challenges of small business outsourcing. Well, that changed with this exemplar case on "FreshBaby", a homemade baby-food business that was founded in 2002 by Cheryl Tallman. Smart outsourcing, which in the firm's case, involved outsourcing all operations - manufacturing, warehousing, distribution, accounting and legal - except the firm's core competences - product design and sales - was instrumental to growth in revenue growth and market share.

So far, so good: Fresh Baby's sales tripled, to $300,000, between 2003 and 2004, but leveled off last year as Tallman spent more time on beefing up her distribution system and less on marketing and sales. Now both Whole Foods and Wild Oats Markets sell Fresh Baby.

Artful outsourcing is a powerful lever that can be used to achieve a variety of strategic business objectives. And it's for everyone.

Insuring American Workers in the Era of Offshoring

Here's an interesting Brooking's brief on what the Federal Government can do to strengthen the existing safety net for American workers in the face of technological change and accelerating job turnover:

We propose a new wage insurance program to provide incentives for more rapid reemployment and on-the-job-training—a program that insures earnings for permanently displaced workers who secure reemployment at lower pay. It would cost roughly $3.5 billion a year to provide permanently displaced full-time workers who secure reemployment with insurance on 50 percent of their earnings loss up to a cap of $10,000 a year for two years. An insurance policy costing $25 per worker per year is a small price to help displaced American workers get back to work more quickly, seek opportunities in new sectors, and gain more valuable reskilling through on-the-job training.