A Theory of Evolution

Andrew Hill pens an interesting piece in the Financial Express on how outsourcing and offshoring continue to evolve as an increasingly important part of good business practice:

About 10 years ago, I visited a nut factory in Italy and learnt something astonishing about pistachio production. Closed nuts, the bane of the pistachio-eater, were being shipped to China where they were cracked open by hand, exported back to Italy, packaged and sold on.

Here, I thought, was the irreducible kernel of outsourcing: a basic task that would always be done in the country that could supply the cheapest labor force. Nut-cracking would move around the world, shifting from country to country as workers' standards of living, expectations and skills improved. How long would it be before China grew out of pistachio-opening and developed higher-value manufacturing and services companies, while other countries took on this menial job? Could even the US or Britain, if they lagged too far behind in a global skills arms race, eventually turn into nations of nutcrackers?

Well, of course not. Because, as Hill points out, outsourcing decisions are no longer dominated by cost considerations alone. Firms are increasingly leveraging outsourcing to realize complex value equations and a wide range of strategic business objectives. An allied shift is occurring in supplier offerings as well. As cost objectives are realized in the first or second year of a seven year outsourcing contract, suppliers are increasingly feeling the need to innovate and reconfigure traditional service offerings. This, in turn, has resulted in a blurring of boundaries between different service provider groups and the outsourcing forms that they represent. While low-cost offshore service providers such as Infosys and TCS grapple with business needs to retrain staff and offer value added services at low costs of process ownership, the Accentures and McKinseys are looking to make the shift to a "globally integrated enterprise" and reduce costs of operation.

This suggests that it's not the business case for outsourcing that is eroding. Apple's decision to shut down its offshore operations and Powergen's decision to move its customer service operations back are reflective not of the firms' failure to realize cost savings but of their decision to structure operations based on a combination of efficiency and available skills. They're also reflective of the blurring of boundaries between various forms of outsourcing - near-shoring, offshoring, onshoring, etc. and the erstwhile distinctive role that each had in the manager's toolkit. Hill concludes:

The nut factory I visited - New Factor, near Rimini - looked at the time like many family-owned Italian import-export businesses, run from the centre by savvy entrepreneurs who tended a network of distant suppliers and customers. It now has an "offshore" operation - in Ukraine - where walnuts are cracked by hand. Nut-cracking, in this case, is not the lowest rung of the outsourcing ladder but an important way of improving a product harvested nearby: workers extract the flesh by hand, because unbroken kernels are more use to cakemakers and confectioners than walnuts broken open by machine.

As for China's pistachio-openers, they disappeared a few years ago. According to Alessandro Annibali, New Factor's boss, Californian farmers have developed "a fantastic automated system to open the nuts". Was that an advance or a reversal for outsourcing? Neither - just a good, old-fashioned example of business innovation.