An Indian Hangover - Outsourcing Efficiency or Corruption

Here's a Slate article that points to the negative effects of corruption at the Indian DMV.

The study draws its conclusions by examining the process of obtaining a driver's license in three randomly assigned groups of Indians who sought a driver's license. One of the groups was assigned a cash bonus for obtaining a license in 30 days, another was given driving lessons to better equip for the screening process while the control group was offered neither. The subjects in the group with the cash incentive outsourced the process to an expert agent to increase the efficiency of the entire process. The agent stood long lines and even took the driving test in some cases. Consequently, 65% of the subjects in the group with the cash bonus incentive got a license compared to 45% of the group which was offered driving lessons and 35% of the control group. Slate states:

"This study confirms the view of the World Bank, which has identified corruption as among the greatest obstacles to economic and social development. Payoffs at the Indian DMV may save some qualified drivers some time. But it has the bad direct effect of allowing unsafe drivers on the road. And it has an even more corrosive indirect effect: If bribes are more likely to get them a license than driving lessons, applicants have too little incentive to learn how to drive before hitting the road and each other."

Now, look at the picture of Delhi traffic in the Slate article. While a motley medley of cars, buses, rickshaws, scooters, cycles, the occasional march of cows and the lone elephant make for incessant honking, jams, and general (exciting?) chaos, they do not lend themselves very well to code and rule definition. Rules are broken all the time - traffic signals are violated, one way streets change direction, no right of way exists in this land, speed limits are conspicuous by their absence and ...well, you get the picture.

So, the normative goals of an objective driving test are ambiguous at best. "How to drive" involves developing the ability to maneuver sinuous routes, developing sharp reflexes and strong nerves. And no driving test creates incentives to drive well - your love for life usually suffices.

An anthropologist for P&G who characterizes country populations toward effective product launches for the company typified the Indian people as a practical population. And that's just what the experiment proves. Another case of successful BPO.

Outsourcing Education

Next week marks the end of my month-long trip to India. The country underscores many challenges that the world will face in the next generation - poverty, public health, ethnic and religious conflict - but at the same time, heartens with the realization that even faced with momentous odds, people actively believe in and engage in the search for a better world.

How to advance human well-being is a daunting question that countries grapple with. Economic development, health, education and equity are important indicators. During the last month, I met with CMU alumni and business leaders from diverse industries. At a seminar at the Indian School of Business, I also had the opportunity to chat with colleagues in higher education. Like many of them, I too believe that universities have an important role to play in advancing the people's search for a better world. In India, where the dominant focus of economic reform is job growth, the role of universities and higher education, in general is more important than ever. In a dated (yet relevant) column, Nirvikar Singh, a professor at the University of California, Santa Cruz, points out that:

If labor is more productive, then the demand for it also increases. Labor productivity increases with greater physical capital, managerial ability or education and training. If domestic savings are insufficient, then foreign savings can substitute as a capital source. These have been coming into India, but cannot be fully absorbed due to institutional failures in the financial sector and government fiscal imprudence, that forces a relatively tight monetary policy. There is no shortage of managerial talent in India—much of it is being exported.

The big constraint is human capital. Currently, government jobs in India (except for the elite services and the armed forces) rarely provide opportunities for developing productive human capital. Software and BPO have shown what can be done by industry-led training. However, there is a tremendous supply bottleneck in India’s higher education.

It is in this context that the outsourcing of education assumes importance. Foreign investment in higher education can both increase available human capital by expanding education as well as raise the overall productivity of entrants to the workforce. Universities like Yale and Stanford have shown interest in establishing greenfield campuses in India. However, such investment is constrained by the government. An expert committee headed by noted scientist CNR Rao, which was set up last year to advise the Government on the entry of foreign universities into India, outlined a set of stringent recommendations for potential entrants. De-novo institutions shall not be eligible. No poaching faculty from Indian colleges. No sending profits back home to parent institutions abroad. No franchising or offshore study campuses. Nirvikar, in his column, notes that this report on foreign entry in higher education is a "grave disappointment".

Outsourcing education is but a part of intelligent reform that is required for the enhancement of human capital, job growth, and economic development. It is especially important in the context of the (unfulfilled) responsibility of the government and universities to provide higher education to all who aspire for it. The lack of political commitment of public funds and poor quality of education in some universities represent slack that the unregulated private sector takes up at considerable cost to students. So, should private foreign funds be allowed to compete in higher education? The answer is a resounding yes.

In fact, the globalization of education services should be seen as an opportunity, and a pro-active approach is required to benefit from such globalization. The stakes are huge. Reform is imperative and feasible.

Striking a Balance

It seems that the last few years have seen significant growth in the outsourcing of document management and/ or imaging services. A report from the Palo Alto, Calif.-based research firm Frost & Sullivan, titled "U.S. Electronic Document Management Systems for Healthcare," backs up this point, and predicts that the U.S. market for electronic document management systems will top $209 million by 2008. The demand for document processing services seems to be driven by requirements of regulatory compliance, workflow optimization and productivity, and improved customer service. Some examples include:

• The transitioning of hardcopy documents - patient admittance forms, insurance claims and Medicaid case files - to web-based archives in healthcare organizations allowing continual accessibility to critical information.
• The capture and maintenance of unique documents - such as blueprints or research notes – in electronic databases of manufacturing and energy companies to respond to construction bids, preserve R&D findings and accelerate product time-to-market.
• The digitization and archival of business-critical documents by banking and insurance firms to speed accessibility toward meeting government regulations and court-ordered production schedules.
• Provision of higher-quality images that open quickly with either dial-up or broadband Internet connections, and therefore, allow effective displays of products on the Web.

This is also one area of outsourcing that is largely done onshore to meet varying retention requirements and achieve competitive advantage. One India-based service provider I spoke with, mentioned that the client, an insurance firm, employed onshore digitization services and digital copies of the claims (and that too, with strategic, competitive information such as renewal dates suppressed) were transferred to the Indian provider for processing.

This represents an area where onshore digitization feeds into offshore processing, thereby reducing the total cost of ownership of the business process. The onshore element also introduces a safeguard into the process. As security of outsourced transactions emerges as an important area of concern, much interest and early practice is under way to combine the security of an onshore information and document guardian, in combination with the cost advantages of offshore processing.

India - Week 2 in Perspective

A few days after last week's Friedman-like, candy post, I found myself in several state-of-the-nation discussions with friends in Bombay. One of them, the founder of a technology start-up in India, remarked that from his experience and interactions with both Indians and Americans, he found the average Indian's analytical skills and understanding relatively superior. My friend's belief in the "superior" technical understanding of the Indians speaks to the larger concern in the U.S. regarding erosion of skills and knowledge, particularly in science and technology education. However, it's also anecdotal. So, I tried to unearth some statistics in support.

A figure oft quoted in the media to emphasize the decline of science and technology in the U.S. is one published in a report by the national academies of sciences, engineering and medicine eight months ago. The report argued that China and India combined graduate 950,000 engineers every year, compared with 70,000 in America. However, a team of researchers from Duke was quick to point out the flaws in these figures and the problem in using them as shorthands for vulnerability of the U.S. They found that U.S. engineering schools graduate 137,000 four-year degree-holding engineers, India graduates 100,000 engineers a year and 351,000 engineering students graduate every year in China (The national academies has subsequently revised its report to reflect these figures). The Duke study also found that while India's and China's best is as good as our best, "the average engineer from the U.S.A. is far better than the average engineer from India and China".

However, let's not take the Duke team's word for it. Although evaluated along various subjective parameters to present a representative picture, I think facts on the country as a whole might be more illustrative. Consider these facts from recent media reports:

• Over the past 20 years, America's growth rate has averaged just over 3 percent. Productivity growth has been over 2.5 percent for a decade now, again a full percentage point higher than the European average.
• In 1980, the United States made up 22 percent of world output; today that has risen to 29 percent.
• The U.S. is currently ranked the second most competitive economy in the world (by the World Economic Forum), and is first in technology and innovation, first in technological readiness, first in company spending for research and technology and first in the quality of its research institutions. China does not come within 30 countries of the U.S. on any of these points, and India breaks the top 10 on only one count: the availability of scientists and engineers.
• In virtually every sector that advanced industrial countries participate in, U.S. firms lead the world in productivity and profits.
• The situation with regard to higher education is even more dramatic. A new report, "The Future of European Universities," from the London-based Center for European Reform, points out that of the world's 20 top universities, 18 are American. The U.S. invests 2.6 percent of its GDP on higher education, compared with 1.2 percent in Europe and 1.1 percent in Japan.
• The situation in the sciences is particularly striking. A list of where the world's 1,000 best computer scientists were educated shows that the top 10 schools were all American.
• American spending on R&D remains higher than Europe's, and our collaborations between business and educational institutions are unmatched anywhere in the world. America remains by far the most attractive destination for students, taking 30 percent of the total number of foreign students globally. These advantages will not be erased easily because while China and India are creating new institutions, "it is not that easy to create a world-class university out of whole cloth in a few decades".
• "The American economy is also particularly good at taking technology and turning it into a product that people will buy. An unusual combination of an entrepreneurial culture, a permissive legal system and flexible capital markets all contribute to a business culture that rewards risk. This means that technology is quickly converted into some profitable application. All the advanced industrial countries had access to the Web, but Google and the iPod were invented in America. It is this skill, as much as raw technological brain power, that has distinguished the American economy from its competitors".
• And then there are the demographics. The United States is the only industrialized country that will not experience a work-force or population loss in the coming decades.
• The United States' share of the global economy has been remarkably steady through wars, depressions and a slew of rising powers. It was 32 percent in 1913, 26 percent in 1960, 22 percent in 1980 and 27 percent in 2000. With the brief exception of the late 1940s and 1950s--when the rest of the industrialized world had been destroyed--the United States has taken up about a quarter of world output for about 120 years.

But, don't get me wrong. I think we still need to pay heed to what my friend said. India is confident, energetic, ambitious and desperate to move ahead and out. And she is 1 billion people strong. This represents not just an endless supply of low skilled labor but also the growth of talented, high-skilled workers and a buyer's market in brains. The Financial Times, in an article last month, stated that "innovative companies will chase 'cheap smarts' as relentlessly as today's cost-conscious multinationals pursue cheaper manufacturing and call-centre capacity. Try commanding a premium wage as a post-doctorate in that marketplace. Knowledge is not power; it is on sale". Therefore, as the economics of supply and demand pervade all aspects of the economy, the U.S. must recognize the real and daunting challenges posed by the Asian bazaar.

Fareed Zakaria, in a Newsweek article, points out that the United States' history of worrying that it is losing its edge is what prompts it to be flexible, resourceful and resilient. After all, as Andy Grove puts it, "Only the paranoid survive." But, as I denied and dismissed what my friend said, I was not really that scared. And that is the problem. Although intelligent debates rage in circles of the media, politicians and corporate executives, mainstream America is still unconcerned. We have one of the worst healthcare systems in the developed world, our public school system in turning increasingly dysfunctional, we are borrowing 80 percent of the world's savings, and our entitlement programs threaten to bankrupt. Policies could correct but they require a broader recognition and acknowledgement of their necessity. We must recognize the inevitable growth of India and China. We must recognize the grave danger of closing ourselves off from competition and collaboration. We must enhance our strengths - innovation, inclusiveness, and flexibility - to ease the growth of 3 billion capitalists and respond to new challenges as we have done in the past.

For although we're dominant now, the world is catching up.