The world's a better place

The Employment Trends survey predicts (and India Today reports) that the organized sector in India will expand by 5.34% resulting in approximately 1.5 million domestic jobs. Added to the four hundred thousand global jobs Indians are expected to bag, for the first time, Independent India will have a record 1.9 million jobs created in the organised sector. The nature of jobs too is evolving from being transaction-intensive to being knowledge-intensive. 10% of the jobs in India currently fall in this category, and the latter's structure is also more diverse than ever.

While several countries in Asia are riding the wings of globalization to march far ahead of the colonial rapacity that they suffered in the early nineteenth century, we find that other parts of the world are not impervious to such growth. China’s president Hu Jintao recently promised $3 billion in soft loans and a doubling of Chinese aid to Africa by 2009. Zambian copper, Nigerian oil, Tanzanian timber and South African platinum might be behind the soaring of trade between China and Africa by 40% to a record $55.5 billion last year. The impact is seen on growth in this region. For the third year in a row, sub-Saharan African countries grew on average by 6% and are inching toward 7% this year. At this rate, Africa's poverty rate will halve by 2015.

Similarly, Indian information companies find it cheaper to hire software program developers in central Europe and other low cost economies in Asia than in India. Software giants Infosys, Wipro and TCS have offices in Hungary, Romania and Russia. Vietnam's labor pool comprises around 80,000 IT graduates, a level that is increasing by around 9,000 per annum. Accenture, Unisys and Intel have established large contingents in the country.

Now, that's a run-up of the world. As a recent Forbes magazine article states, "never before have so many people been so well off, and never have so many people had the chance to improve their lot in life".

Yet, this process of growth and "creative destruction" is not without hiccups. But, that's the subject of another post.

An elite group

The International Association of Outsourcing Professionals (IAOP) has announced its list of the best outsourcing service providers for 2007. The top ten service providers include four Indian companies - Wipro Technologies, Infosys, Genpact and Tech Mahindra. However, what speaks for the significant growth of outsourcing spend in emerging markets is not the presence of these Indian companies on the list but rather, what the list masks.

In an ironic twist in the offshoring chapter, each of these Indian companies have leveraged untapped talent in diverse emerging markets such as Mexico and Eastern Europe to best service customers around the world. A significant part of the workforce of these companies comprises foreigners. Their service delivery models usually provide a common framework for managing projects and maintaining quality across all global centers of operations. In addition to boosting efficiency, service, and flexibility, this global service delivery model also helps to cater to a given customer's needs in different markets around the globe enabling scale of service spend.

And the list points to the significant growth in the outsourcing services industry. The IAOP states that "on average, companies on the list had $1 billion in annual sales, and a very high level of productivity: revenue per employee was a staggering $83,000. Employment growth was up, as well, rising 13% over the prior year to an average workforce of 13,688."

I though this is an interesting follow-up to my prior post on the slowdown in outsourcing spend. No paradoxes here?

BPO slowdown paradoxical?

The recent TPI outsourcing index suggests a significant slowdown in the number and total contract value (TCV) of BPO contracts inked in the first quarter of 2007. Tekrati reports:

The downturn in overall outsourcing contract activity is exemplified in the decline of Business Process Outsourcing (BPO). This quarter experienced the smallest number (29) and lowest TCV of BPO contracts greater than $25 million being awarded in almost five years. The BPO share of the broader market TCV was down 50 percent quarter-on-quarter and 66 percent year-on-year. The adoption rate of BPO has hit a soft patch and is expected to grow at only 2 percent year-on-year, which is well off the double-digit pace of prior years.

This one's a paradox. In the early years of outsourcing, organizations knew little about how to disaggregate strategic processes from their value chains and manage them across organizational boundaries. Not surprisingly, the management of BPO relationships was more complex, expensive and time-consuming than anticipated, and firms experienced hidden costs related to contract administration, profit margins, and in-house management. Yet, the growing dissatisfaction with BPO arrangements was accompanied by an allied increase in the number of BPO contracts inked.

Now, as organizational learning enhances management of BPO relationships and the ensuing odds of BPO success increase (evidenced in numerous industry reports, the most recent being Duke University's Offshoring survey results), we're finding a dip in the number and TCV of BPO contracts.

Explain this paradox.

Rehauling Citigroup's IT

Looks like I'll have to deliver on my promise of analyzing the financial value of outsourcing sooner than I expected.

Citigroup announced Wednesday its plans to create a more streamlined organization, reduce growth in expenses and drive future expansion as a result of a structural expense review conducted over the past three months as well as a previously announced IT optimization program in the company. The company will, it said:

Continue to rationalize operational spending on technology. Simplification and standardization of Citi's information technology platform will be critical to increase efficiency and drive lower costs as well as decrease time to market. Examples of this are: consolidation of data centers; improved capacity utilization of technical assets and optimizing global voice and data networks; standardizing how the company develops, deploys and runs applications; and maximizing value by limiting the number of software vendors to operate at scale.

Such rationalization is part of the company's campaign to cut $2.6 billion in expenses by 2008. Also included is the plan to cut 17,000 jobs - roughly 5% of its total employee base - and move an additional 9,500 positions to low-cost locations. Many of the 9,500 Citigroup jobs will be tech roles moving to India - where the company already maintains 19,000 workers who handle everything from call center support to number crunching for investment research.

Citigroup's outsourcing experience demonstrates that it's not merely outsourcing that creates value but rather, smart outsourcing. As shown in the stock chart, the company has consistently failed to meet the performance standards of competitors in its industry, including JP Morgan Chase, Bank of America or Merrill Lynch. And where it differs from its competitors may not be in the extent of outsourcing initiatives but in managing these initiatives and aligning them with an overall business vision. Citigroup lacks a clear long-term vision, aspiring to be the number one retail bank, the number one investment bank and the number one global bank. It's also plagued by operational inefficiencies. For example, the company's chief operating officer Bob Druskin has, on earlier occasion, mentioned that each of the different business segments in the company - consumer business, mortgages, car loans, etc. - has its own middle and back offices.

Outsourcing inefficient component business processes might reduce the cost of these inefficiencies but it does not make them go away.

So, before it externalizes IT functions to low cost service providers to rationalize IT spend, Citigroup might do well to address structural and operational inefficiencies and define the business strategy that dictates such externalization. Else, as this NPR broadcast voices, the company would have gone too fast too far without control.

I am shorting this one.