BPO Journal

The difference between mediocrity and accomplishment

2007-12-01T14:26:00.000-08:00

It might well be defined by the chance to work hard at work worth doing. In my world, this is also known as a tenured faculty position in a business school of choice. I will be busy the next few months looking for that job, and hence, it's unlikely that I will find as much time to blog.

Check this space for updates on that next big chapter in my life.

Flash!

2007-11-07T23:19:00.001-08:00

FT's new Podcast Player page is up.

Financial Value of Outsourcing - IV

2007-11-01T22:12:00.001-07:00

Here's a look at the financial value of another outsourcing deal off the list published by HRO Today - a $4 billion / 7-year utility based deal between American Express (AXP) and IBM inked in February 2002. I've compared post-outsourcing returns of American Express with the closest size and book-to-market matched firm in the same industry that has not engaged in an outsourcing initiative of significant value - Freddie Mac (FRE). As shown below, AXP outperformed FRE by nearly 52 percent.

Financial Value of Outsourcing - III

2007-10-24T07:52:00.000-07:00

In early 2003, HRO Today reported on the top 24 IT outsourcing transactions implemented over the past 15 years. These transactions amounted to over $100 bn in outsourced services. For my third post on the financial value of outsourcing, I've selected one off this list - the $3 billion / 10-year IT outsourcing agreement between General Dynamics (GD) and CSC that was inked in May 1998. Again, I've compared the firm's post-outsourcing returns with the closest size and book-to-market matched firm in the same industry that has not engaged in an outsourcing initiative of significant value - Magna International, Inc. (MGA). As shown below, GD outperformed MGA by over 100 percent. The abnormal returns are consistent with the respective increase in operational performance of the two firms.

Financial Value of Outsourcing - II

2007-10-15T06:10:00.000-07:00

The second example of the financial value created by outsourcing is presented in the context of Best Buy, Inc. In late January 2004, the company signed a seven-year outsourcing agreement with Accenture HR Services. As per the contract, Accenture would provide a range of services that included compensation, payroll, benefits, bonus administration, and performance management, among several others. Best Buy retained overall HR strategy, guiding employees to achieve its customer-focused transformation. The details of the deal can be found in this release here.

As in the previous post, I compared the three year post-outsourcing stock performance of Best Buy (BBY) with its closest size and book-to-market matched competitors that have not engaged in an outsourcing initiative of significant value (this rules out Circuit City) - Bed Bath and Beyond (BBBY) and Radioshack (RSH). As shown in the graph below, BBY outperformed BBBY by over 45 percent and RSH by over 80 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. As in all analyses, while the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Again, the financial performance of the companies is largely consistent with their respective gains in operational performance.

The Financial Value of Outourcing - I

2007-10-07T21:34:00.000-07:00

I had earlier blogged about introducing a series of posts that compare the overall financial value of companies that have outsourced a critical business process or function with similar firms (in terms of market size) in their industry that have retained that function in-house. Much like my post on Boeing and Airbus. Considering that 177 visitors on BPO Journal believe that there is a spike in their stock price surrounding an offshoring agreement (I should have attempted to capture how many of these were clients versus service providers since in the case of the latter, the offshoring announcement represents a clear tangible increase in revenue), I thought it's time I start the series. Every week, I'll examine one or two deals. Of course, only contracts of significant value may be directly linked to increases in firm efficiency and ensuing investor response.

The first on offer is Metlife. In July 2002, Siemens Business Services signed a major IT outsourcing contract valued at nearly $180 million with New York-based insurer MetLife for services within SBS's SieQuence solution methodology. The details of the deal can be found in this release here.

Below is a comparison of Metlife's three year post-outsourcing stock performance versus its closest size and book-to-market matched competitor that has not engaged in an outsourcing initiative of significant value - Allianz Insurance. As shown below, Metlife outperformed Allianz by nearly 60 percent. The comparison is based on historical stock price information obtained from Yahoo Finance. While the difference in stock performance may be attributed to other strategic choices of the firm, comparison with a firm from the same industry and with similar size and book-to-market adjusts for industry shifts and response to competitive pressures. Moreover, if you examine the accounting statements of the two companies, you'll find that the financial performance of the two companies is consistent with their respective gains in operational performance.

An Uneventful Summer

2007-10-07T21:06:00.000-07:00

The writing's back. Not counting the climb of the rupee from 40.85 to 39.49 to the dollar and India's triumph in a hip and swift version of cricket, it was a fairly uneventful summer. Wrote up most of my dissertation, decided this is a good year to graduate, and learnt from Harold Bloom how to read and why.

Summer hiatus

2007-05-18T21:38:00.001-07:00

I believe BPO Journal has a life of its own and after two work filled years in a row, it's only fair that she take a break.

Somewhere, a Swedish man is saying "You are crazy. This blog has no feelings."

Oh well, the comeback (in October '07) will only be better.

Happy Birthday

2007-05-08T12:08:00.000-07:00

BPO Journal is a little more than two years old now.

Given the inherent problems with statistics, I am sure you'll be happy to take my word that it's been a good run. To the regulars and oft first-timers who frequent the site everyday, thanks for your comments and feedback.

Rebranding TCS

2007-05-03T20:37:00.000-07:00

"Strong partners have the knowledge to measure promise against reality, the flexibility to seize opportunity, and the experience to deliver certainty"

So reads Tata Consultancy Services' (TCS) full-page ad in the Wall Street Journal. The message is reiterated in the company's corporate brochure and other media outlets as part its $10 million 'Experience Certainty' advertising campaign.

Why blog about an advertising campaign, you ask? That's because unlike the myriad of campaigns run by global IT giants IBM, Accenture and so on, or even the Indian service providers Infosys or Wipro, this is the first branding exercise ever by India's oldest and largest IT services company.

And many might argue it's due. A recent Business Today article reports that with annual revenues of over $4 billion, TCS is the eleventh largest player globally. In terms of market capitalization, the company is ranked fourth globally, behind IBM, HP and Accenture. The company's headcount of 89,000-plus employees also ranks fifth in the global order. Further, this workforce is truly global with almost 10% of the employees located outside India, thereby, facilitating global service delivery models and significant scale benefits. Yet, it is Infosys that finds mistaken mention in the Economist as India’s largest it services company and forms the context for Tom Friedman's yarn on the flat world.

But TCS is not aiming for brand recall among Indian outsourcing providers. Based on the findings of a recently commissioned study by strategic branding firm Siegel+Gale that people were not sure which outsourcing firm was third in the global pecking order after IBM and Accenture, TCS wants to fill that coveted position.

And the new campaign is a part of a 10-month effort of becoming a familiar name in the boardrooms of Europe and America.

Experience certainty.

The world's a better place

2007-04-30T08:26:00.001-07:00

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

2007-04-23T00:03:00.001-07:00

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?

2007-04-17T08:37:00.001-07:00

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

2007-04-12T20:34:00.000-07:00

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.

Does outsourcing create financial value?

2007-03-31T09:58:00.001-07:00

Sometime early next month, I plan to start a series of posts where I'll compare the overall financial value of companies that have outsourced a critical business process or function with a similar firm (in terms of market size) in its industry that has retained core functions in-house. Much like my post on Boeing and Airbus. A pattern should speak fairly conclusively about the financial value of outsourcing.

Oh, I promise not to be biased.

A carload of irony

2007-03-27T13:04:00.000-07:00

Inspired by the success of the Chinese LaCrosse, General Motors has stated that the Chinese design team for the company will design the next Buick LaCrosse, due at the end of the decade, for the entire world. The Chinese team will have complete control over the interior design and partial control of the exterior design and overall logistics.

This is a discernible shift from the times when American tastes and preferences defined those around the globe. Now, with 50% of organizational sales coming from outside the United States and the Chinese market growing the fastest, it's only reasonable that Chinese sensibilities inform product design and development for the American consumers.

Now, that's a carload of irony!

All in the family

2007-03-23T22:39:00.001-07:00

"Don't ever take sides with anyone against the family again. Ever."
Michael Corleone to Fredo

Last week, I was chatting with a friend of mine, who recently relocated to India as the human resources head of a leading US-based technology firm. In the first few months of her new job, she found that acquiring talented human resources in India did not just involve making a pitch to the pertinent candidate - it often involved wooing the entire candidate's family. “Helicopter parent,” a tag coined in the early 1990s in the U.S. and made popular by the media, refers to a parent who hovers over a child of any age, and “Blackhawks” are extreme examples of this. However, "helopats" are ubiquitous in India and are in fact, the order of parenting. Parents and children live under a single roof in many Indian families, and often engage in cooperative decision making in both social and economic matters. Consequently, individuals well into their twenties and thirties typically defer to the authority of their parents who, in turn, take on significantly influential roles in directing individuals' careers.

My friend went on to say that what seems a mere cultural difference is now institutionalized in her firm as a recruiting strategy that addresses concerns of employee churn and attrition. Employee perks such as health insurance or club memberships extend to family members, the latter are flown in for company tours and events, and candidates are encouraged to bring along with their résumé, a family member who might well be the audience for the organizational pitch about culture, benefits and career potential. Since the company actively started wooing employee families in early 2006, its annual attrition rate has dropped to below 10%, significantly lower than the 15% industry average for software programmers in India (Source: Hewitt Annual India Salary Increase survey 2005).

Cool!

2007-03-18T20:38:00.001-07:00

An article in FastCompany provides examples of companies outsourcing brand invention and management - a truly core organizational function - to keep up with changing customer needs and preferences, manage the risk of staying cool and stay nimble and flexible.

Ronald Coase sought an answer to the question, "Why do firms exist?" more than thirty years and answered it in Noble-prize-winning terms of costs of transacting and internal organization. The examples in the article are evidence that as advances in technology diminish costs of transacting and firm boundaries become increasingly fluid, firms in future may well be viewed as clusters of temporary interdependencies that come together to achieve a shared economic objective.

India bears the brunt of selling

2007-03-14T22:51:00.000-07:00

The Indian sensex dove 453 points today. All stock markets are volatile but some are more volatile than others.

A book after my own heart

2007-03-11T20:44:00.000-07:00

Are you serious about your bullshit?

Market meltdown

2007-03-06T06:46:00.001-08:00

The Indian stock market was hit particularly hard in the recent Asian stock market slam. The benchmark Sensex tumbled over 471 points on the Bombay Stock Exchange on Monday, a fall of over 3.67%. Eddy Elfenbein submits that although the index has now lost 2,400 points in the last two weeks, the worst may be yet to come.

Cutting through the outsourcing hype

2007-03-02T08:27:00.000-08:00

Gartner's hype cycle is a graphical representation of the maturity, adoption and business application of specific technologies. It depicts how and when technologies move beyond the hype, offer practical benefits and become widely accepted.

In 2005, it seemed that outsourcing initiatives were largely in the "trough of disillusionment". For example, 70% of the participants in a survey by Deloitte Consulting ("Calling for a Change in the Outsourcing Market", April 2005) cited significant negative experiences with outsourcing projects. The firms stated that although outsourcing is largely driven by cost-related objectives, they experience hidden costs related to contract administration, profit margins, and in-house management. Therefore, the management of outsourcing relationships was discerned more complex, expensive and time-consuming than anticipated.

However, recent reports such as this IMF working paper on offshoring, productivity and employment or the recent survey results of Duke's Offshoring Research Network suggest that outsourcing is traversing the "slope of enlightenment" toward the "plateau of productivity" (!!). Of course, I am not sure how Gartner defines productivity, but let's just say that we're seeing more evidence that several firms across diverse industries are increasingly learning how best to leverage outsourcing to create strategic value.

The Price of Economic Nationalism

2007-02-24T09:50:00.001-08:00

Last April, I blogged about how Boeing (NYSE:BA), for the first time, was outsourcing more than half the structure of its 787, pieces of which were being manufactured in six different countries. Over the past year, this outsourcing initiative has helped Boeing streamline operations and acquire a slew of new orders for the "Dreamliner" jet, re-establishing the company as the number one commercial aircraft company.

Contrast this with the experience of its competitor, Airbus that has suffered delays on its A380, will have to spend heavily to design, from scratch, a competitor to the 787, and suffers from incurring costs in pricey euros while generating revenues in cheap dollars, in which jets are bought and sold. Airbus is also paying a heavy price for economic nationalism that renders it difficult for the firm to mitigate process inefficiencies and reduce costs through competitive measures as bringing in in new partners and outsourcing work outside Europe. For example, French president Jacques Chirac emphasized that restructuring efforts must maintain "absolute equilibrium" in employment and technology. Given the conflict between the roles of the government as owner and regulator, Airbus will always find it more difficult than Boeing to enhance efficiency and trim costs:

Airbus has some 57,000 workers and another 30,000 employees of contractors under its wing. Half the job losses will hit the latter group while Airbus itself will lose 5,000, mainly in Germany and France where most production happens. Strict European labour laws and political sensitivities dictate that the cuts will come through natural attrition. The bulk will be split roughly evenly between Germany and France (though Britain and Spain will share the pain). But before any ink was dry union leaders were already threatening to block reforms. (The Economist, Feb 2007)

And the difference is evidenced in the difference in the stock price of these companies. Perhaps, this discipline of international financial markets is what will ultimately prevail over economic nationalism. Meanwhile, it's more evidence that outsourcing creates financial value.

Counting the Savings

2007-02-17T02:26:00.001-08:00

This report by the Boston Consulting Group suggests that offshoring hitherto considered a cost saving tool for transaction intensive business processes, is fast evolving into a powerful organizational lever for business transformation:
Although 65% of India’s 180,000 outsourcing services work force is involved in transaction-intensive services like call-center support or check processing, the industry as a whole helps its clients save $1.5 billion annually, according to a recent research paper, “Offshoring: Beyond Labor Cost Reduction,” by the Boston Consulting Group (BCG). (India’s outsourcing services industries employed about 415,000 people as of March 2006, according to India’s National Association of Software and Services Companies). GE alone saves more than $350 million annually after offshoring about 900 different processes to India, according to the paper, which was written by analysts in BCG’s New Delhi offices.

It would be interesting to look at whether these savings translate into more transformative measures of performance such as innovation, customer satisfaction, market share or profitability.

Bridging the Digital Divide

2007-02-12T20:48:00.001-08:00

The benefits of technological advances and globalization have not yet touched the lives of many of India's people. A quarter of the population still lives below the poverty line and the Internet penetration rate is a little over 3%. Consequently, innovations that pop in this space have the potential to generate maximal fizz or profits.

One such innovation that only recently caught my eye is India Post's ePost service that allows email to be delivered as snail mail and vice versa. Delivery times in the former case average a day compared with about a week by snail mail. And the profits? The launch of corporate e-post, which is being promoted as an inexpensive and effective means to reach the hitherto unconnected masses. An article in this Indian daily suggests that corporate customers can "print their messages including text and picture on official letterheads and send them simultaneously to up to 9,999 addresses in one go".

Yes, if the digital divide must be bridged and the empowering benefits of the Internet must be enjoyed by all, so must the perils of corporate spam.

The Machine is Us

2007-02-04T13:00:00.001-08:00

One of the coolest and most inspiring videos on Web 2.0 - I have a ten page long introduction to Web 2.0 in my research article on the use of blogs in academic research. Wish I could use this instead.

The academic community will need to soon rethink this whole business of traditional publishing in journals. Yea, I'll stop there.

Offshoring to the U.S.

2007-01-29T19:00:00.000-08:00

If you examine the top 50 outsourcing contracts (by value) inked over the last decade, you'll find that an overwhelming majority of them involve U.S. service providers. A broad generalization is that as we move along an increasing continuum of strategic value of outsourcing (reduction of costs for transaction intensive business processes on one end and business transformation on the other), we find ourselves making the journey across the Atlantic from India to the U.S.

Interestingly, while much interest and discussion in the offshoring space has focused on the transactional end of the spectrum, little is known about strategic offshoring that happens to the U.S. So much so that the conceptualization and imagery of offshoring has shifted from its inclusive characterization of inter-country outsourcing to be limited to outsourcing to low cost destinations or emerging markets such as India and China.

Further, while a large percent of the client firms involved in the top 50 contracts are from Western Europe and Japan, a few firms outsourcing their business processes are also India-based. More evidence that globalization, global diffusion of competencies and development are good for the U.S. And that we're still traversing the circle.

Offshoring - Decision to outsource

2007-01-22T19:33:00.000-08:00

The research, so far, on offshoring suggests that the three main motivations to offshore include:

Reduction of costs,
Access to competitive capabilities not available within the firm, and
Pursuit of a growth strategy.

Are these applicable to your key, strategic offshoring engagements? Why did you offshore that product design function in your firm? Or that R&D capability?

Please take the offshoring survey on this page and inform.

Offshoring series

2007-01-22T08:40:00.000-08:00

My dissertation comprises three essays on outsourcing – the first two essays focus on issues of governance choice in BPO relationships, including the different governance forms that firms use to create value and the drivers of these governance forms. The final essay in my dissertation takes a closer look at the financial value (read abnormal stock returns) created through outsourcing and analyzes whether these returns are consistent with the efficiency gains realized.

Your comments and feedback over the past two years have served as an important input to my research. Now, as I examine the above issues in the context of offshoring, I’d like to hear from you how these issues play out in your organizational contexts.

Also, I have a survey up on BPO Journal. 16 questions long with the promise to take up less than 15 minutes of your time. No identifying information is required. All responses will be treated as confidential, and results will be published (only in aggregate) over the next month on this blog. I am sure you'll find these analyses and results a valuable tool to design your offshoring relationships and objectively benchmark your performance. Do ink at your convenience.

Mail, comment and inform!

Back home

2007-01-14T07:49:00.000-08:00

Friday marked the end of my month-long trip to India. Seems like I arrived just in time as well - all flights from Dallas into Austin were cancelled on Saturday due to that nasty winter strom.

The 10 Best (and 10 Worst) Companies for Call Center Service

2007-01-06T10:31:00.000-08:00

Rich McIver mailed me this link to an article in CRM Lowdown that honors the companies that have made customer service a priority and shames those that haven't.

Most of the hall of fame and shame are consistent with personal experience.

India Number One

2007-01-02T22:03:00.000-08:00

So claims Swaminathan Aiyar in his column in the Times of India as he emphatically announces India’s professed transition from "a global supplier of software, generic drugs and auto components" to "a global managerial power, one that can take over multinationals across the world and improve their performance". He stakes his claim on the basis of India Inc.’s takeovers during the year 2006 – for example, Tata Tea acquired US energy drinks manufacturer Energy Brands for $677 m. Dr Reddy's Labs acquired Betapharm of Germany for $570 m. Suzlon acquired Eve Holdings of Belgium to become one of the world's top manufacturers of windmills, etc.

Well, hope is a good emotion to start the New Year with. So, for the first post of 2007, I’ll harmonize tunes with Aiyar and summarize all that seems well in India. Some of this touched my life and longing during my last month here in the country while much of these economic achievements fail to improve the lives of a majority of Indians. Yet, they should bring comfort and confidence as India moves forward into 2007.

As the country looks forward to the eleventh five year plan for 2007-2012, it considers real GDP growth rates of below 9% a failure. Contrast this with the sixth five year plan in 1980-85 where the country seemed content with an average real growth of 5.2 per cent.
There’s greater recognition than ever of India’s and Indians’ economic potential. There’s Aiyar’s list of takeovers by Indian firms. Then there’s Uncle Sam’s warmth wrapped in the Indo-US nuclear deal. A leadership role in global governance seemed imminent last year with Shashi Tharoor coming close to being UN Secretary General. Kiran Desai won a Booker. And, of course, all that talk about outsourcing, software exports, and becoming the third largest economy (after the United States and China) in the world by 2007 if one uses purchasing power parity. Ah, before I forget, only 14 IITans took a plane overseas this graduating year.
Manmohan Singh, in the cover story of “The Week”, writes that “India has become a net aid giver rather than an aid recipient”. This marks a broader shift away from the notion of a constrained economy, evident in the increase in savings rate (from around 23% in 1982 to around 30%) and investment rate (from around 25% in 1982 to around 30%), FDI and easy access to capital and equity markets.
There’s a discernible shift in consumption. Consumption at 64% of GDP is even higher than China’s (at 42% of GDP) and is reflected in greater choices and better quality of goods and services. This might be a good place to talk about rising inflation but I’ll stick to my promise for now. A marked change from the shortage economy of the eighties.
A heartening impact of civil society in the organs of the government finds place in the new India. My earlier post on outsourcing justice demonstrates that the influence of civil society on the judiciary was the star of 2006. This was reflected in broader cases of justice for the disempowered, public interest litigations, increased consumer awareness, and government support for woman empowerment.
Finally, something that was very visible to me as an outsider was the significant increase in the country’s confidence. Aggressive self-assertiveness is a far cry from the meek Indian of yore, and is to a large extent, a function of India being a young country, with a median age of 24 years.

There is some improvement in social indices such as woman empowerment infant mortality and literacy rates. But, I cannot cite them without talking about what’s obviously unchanged in the country. So, shall desist from that line of commentary.

And on that optimistic note, here's wishing all of BPO Journal’s readers a great year ahead!

Justice outsourced

2006-12-27T03:38:00.000-08:00

News is always more newsworthy in India - corruption scandals, hostile neighboring countries, and just yesterday, a uranium-based ash analyzer went missing in Jharkhand with no action reported so far. However, over the last few days that I've been here, there's something else that's grabbed the attention of the masses that's all over the news.

Two high-profile criminal cases. Priyadarshani Mattoo, a young law student, who was killed by Santosh Singh, the son of the commissioner of Police in Delhi after years of stalking and harassment. Jessica Lal, an aspiring model, who was killed by Manu Sharma in a fit of rage, when refused a drink after hours in a local pub. In both cases, the accused had managed to secure their acquittal in the lower trial courts for their heinous crimes. And everyone mouthed resigned sighs. This was India, after all. Such justice was their fate, wasn't it?

But that was not to be. Given the gross inefficiency of the legal and judicial system in the country, there was only one thing the stakeholders could do - outsource the judicial process. And that's exactly what they did. The jury of nine in the United States that uses rules of common sense to judge cases was replaced by a jury of several millions to try these high profile cases. Youth activists groups such as "Justice for Priyadarshani" and "Justice for Jesicca" were established, SMSs turned into protests, angst ridden letters were published in leading dailies and millions took to the streets in quiet protest. Several candlelight vigils, vehement newscasts, undercover investigations and outpourings of outrage later, the high court responded. The denouement was quick and prompt dispensation of justice.

In the case of Santosh Singh, the judges took just two-and-half months for admitting the appeal of the Delhi police, hearing the arguments on day-to-day basis and pronouncing a guilty verdict.
Similar was the fate of Manu Sharma, who was pronounced guilty for murdering model Jessica Lall by the same Bench.

Are there pitfalls to cases being tried in this manner in the media and the general public? Of course, but that's the subject of another post. And given the dearth of efficient alternatives, justice by the people, for the people, of the people is being taken very seriously here in India.

Outsourcing Contracts - Old wine, new bottle

2006-12-12T06:48:00.000-08:00

Feel like I've been living my life in conferences this past week. After the International Conference of Information Systems in Milwaukee last week, it's the Indian Symposium on Information Systems at the Indian School of Business in Hyderabad this week.

The subject of my presentation at both places is the governance of outsourcing relationships. In particular, I make the point that as outsourcing initiatives become more strategic and collaborative, the outsourcing contract, in addition to its traditional function of resolving incentive conflicts between the firms and protecting the client from possible adverse behavior of the provider, takes on a more interesting role. The allocation of risk embedded in the outsourcing contract facilitates information sharing between the client and the vendor to address cognitive conflicts, develop a shared understanding of the outsourced process and related interdependencies and effectively execute the process across firm boundaries.

I explored this premise in the context of two dominant outsourcing contract forms - fixed price and time and materials. The client shares risks and rewards with the provider in time and materials contracts but the provider primarily bears risks and reaps rewards of cost saving efforts in fixed price contracts. I found that concomitant with this incentive structure, there was increased information sharing in time and materials contracts.

Practitioners that I met at the conference stated that this finding is aligned with the broader shift in the practice from penalties to rewards and from transactional pricing to incentive pricing structures. Thus, even though fixed price contracts protect the client maximally from risk, it is inclined to choose time and materials contracts that yield maximal information sharing and coordination of actions across firm boundaries.

So, a fundamentally new role for contracts in the evolving outsourcing landscape. Old wine, new bottle.

Un-conference

2006-12-06T16:39:00.000-08:00

Refers to "a conference where the content of the sessions is driven and created by the participants, generally day-by-day during the course of the event, rather than by a single organizer, or small group of organizers, in advance".

Well, me, am off to a regular ole' conference - the doctoral consortium at the International Conference of Information Systems. Will mull and present on value creation in outsourcing relationships.

Updates from the experts in the field next week. Check this space for updates.

Green Outsourcing Cometh

2006-12-05T16:04:00.000-08:00

Global warming and shifting weather patterns may take a few decades to wreak their touted havoc - the end of Shishmaref, climatic refugees et al. - but the business opportunities are clearly here. And why not? A report by Germanwatch, a German environmental group, finds that among 56 industrialized nations, the United States ranks third-worst in dealing with climate change. China and Saudi Arabia are rated worse.

California democrat, Sen. Barbara Boxer has said on several occasions that legislation on climate change will be her top priority as chairwoman of the Senate Environment and Public Works Committee. She plans to hold discussions and hearings early next year with scientists, environmentalists and religious leaders who want to address climate change. She also will ask business leaders to testify about their efforts to limit greenhouse gases.

And the business leaders are in agreement. In a recent Business 2.0 article, which asked "25 of the brightest minds in business", how to succeed in 2007, Vinod Khosla urged companies to compel their investors to go green, and Howard Schultz and Laura Scher asked firms to dare to be social entrepreneurs who don't cover up mistakes with growth. Schwartz of Sun Microsystems too, over the past couple of years, has been very vocal on the need to shift to an efficient model of business computing. He, very eloquently, points out that this does not necessarily translate into reduced volume of business:

"...If you double the performance of a machine, customers don't buy half as many, they tend to double their order. Same goes for utilization, if you can double server utilization via Solaris containers or VMWare, people don't buy fewer computers - they buy more. The value of innovation, at least to our core customers, is growing so fast that if the price declines, the overall return (value/price) goes through the roof - encouraging a feedback loop. Moore's Law and free software drive relative pricing down, and customers accelerate their growth..."

And this is very pertinent to the case of outsourcing. Technology is a key enabler of coordination of outsourced tasks between the client and the vendor, including developing shared understanding of process tasks and interdependencies, efficient responses to changes in the process environment, and controlling and monitoring process outputs and performance. Also, modern information intensive business change rapidly in response to changes in the environment and value chain exchanges, rendering the ability to process new information a key source of efficiency and firm competitiveness. Thus, technology and efficient computing is central to process performance.

However, studies show that in leading technology companies, performance per watt has remained roughly flat over time, even after significant efforts to design for power efficiency. In other words, every gain in performance has been accompanied by a proportional inflation in overall platform power consumption. This represents a significant opportunity to service providers. If they nail the recipe for energy scale efficiencies in computing through better products and processes, they buy themselves growth, credibility and an investment in what Al Gore likes (that's gotta be good!).

Not to take away from the process and managerial capabilities that leverage these technological resources to create value. When 70% of the respondents to Deloitte's offshoring survey indicated dissatisfaction with their outsourcing arrangements, it was not efficient computing that was getting in the way. But, make no mistake - I am not selling this issue as the gravy. It is clearly the meat in efficient outsourcing.

Dare to compute green.

Do contracts matter?

2006-11-30T16:42:00.000-08:00

Ousourcing contracts are largely viewed as control mechanisms that allocate (outsourced) process risk between the client and vendor. This allocation of risks and rights establishes cooperative intent between the firms and precludes each firm acting in its own self-interest. So, (hypothetically), if the client firm was to trust the vendor implictly (reiterate, hypothetically), does it imply that the relationship would still need a contract?

My analyses over the last few days scream an emphatic yes. This is because contracts don't address issues of incentive conflict alone in the outsourcing relationship; they also address issues of cognitive conflict. Cognitive conflict refers to the fact that although the client and the vendor might share cooperative intent, they might not have a shared understanding of process workings or the responses required to enact such intent and adapt effectively to process contingencies. Cognitve conflict in the outsourcing relationship is largely addressed by sharing of information, not risks, rights and rewards.

And how does the contract help in this regard? Well, the contractual specification of task and reward interdependence influences patterns of interactions and therefore, strength of ties between the firms. For example, outsourcing initiatives where the user firm and the service provider jointly own the outsourced process often formally specify modes of integration such as steering committees, executive dashboards and cross-functional teams that meet regularly to resolve process issues and discuss project updates and progress, thereby, creating norms for collaboration that are conducive to joint action and information sharing and dissemination, all of which help mitigate cognitive conflict. So, as some researchers are pointing out, the codification of knowledge and information sharing routines in the contract helps build relational capital and collaboration capabilities. A knowledge repository, if you will, for effective coordination between the firms.

Funny, we've made it all about trust so far. The lower the trust levels between the firms, the more complex will be the contract. Not any more.

But again, here's how my discussion of this post with an outsourced process owner went earlier this week:
Me: "Assume you trust your provider completely..."
He: "Deepa, there's no such thing as trust in business..."

My research's moot.

Inspired!

2006-11-28T15:08:00.000-08:00

A loyal (and considerate, might I add) reader pointed me to this article in Business 2.0 earlier today. Fred Wilson, Managing Partner of Union Square Ventures writes about how blogging has become a critical piece of businesses:

"Blogs need to be real and personal. Reading it should be like hanging out with you. I play music for my readers. I show them videos I like. I tell them what I did over the weekend. And I tell them what is happening in the technology, Internet, and VC markets.

And it works. About 50,000 people come to my blog every month. The site brings in about $30,000 a year now in ad revenue, and I donate it all to charity. Most important, I'm getting to know entrepreneurs of all kinds - in India, Australia, England, China, and Silicon Valley. They read my blog, correct me when I'm wrong, pound the table when they agree with me. I get to know them, and they get to know me. When it comes time for them to raise money, they know who to ask. And for me, the blog acts as an amplifier and a filter. I see many more opportunities, but they are also way more relevant. It makes me a better investor."

I think blogs play an equally important role in research as much as they do in practice. I was recently reading an article in the Academy of Management journal (a leading academic journal in strategy) that the relational foundation of research, i.e. the set of interaction partners whom one encounters during the course of doing research, is an oft unappreciated dimension. Truth. The quality of relational interactions is key to developing and sustaining interesting research. I speak from my own blogging experience. My research on outsourcing has benefited a lot in the recent past from opinions, insights and feedback from my blog readers.

And it is my objective to increase the frequency of my posts and overall commitment levels to BPO Journal. Inspired by Wilson. After all, the blog does make me a better researcher.

My DNA Report

2006-11-08T12:33:00.000-08:00

Considerate Creator

You too can get yours here. Cool stuff!

In Defense of Swaminomics

2006-10-28T09:39:00.000-07:00

Atanu Dey writes about “Demographic Cognitive Dissonance” in this post, where he jabs at Swaminathan Aiyar’s article in the Times of India on probable demographic dividends that India may reap in the years to come compared to that green, fire-breathing neighbor, China. I like Aiyar but this is not about that.

I am in agreement with the core argument in the post but am unclear about how it’s in conflict with Aiyar’s viewpoint. But, before I get to that, I must express some issues that I had with the basic framework of Atanu’s arguments:

First, Atanu uses the terms cognitive dissonance and stupidity synonymously. Oh, the error in judgment! Cognitive dissonance refers to the incompatibility between two sets of beliefs or actions, between what you already know and new information or interpretation. For example, in the case of someone who buys an expensive car and later discovers that it is not comfortable on long drives, dissonance exists between the individual’s beliefs that he/ she has bought a good car and that a good car should be comfortable. Stupidity? I think not. Again, in the case of Bush, Atanu assumes cognitive dissonance by assuming knowledge of Bush’s original intent, revision of his beliefs and the conflict between these two. He then takes a leap and labels this dissonance stupidity. Unscientific, wrong and even politically incorrect. Atanu rejects the use of hypocrisy at the start of his article but that’s exactly what he means, not cognitive dissonance.

Second, I did want to point out that Aiyar is an economist. The sort that has a master’s degree, consults for the World Bank, is a correspondent with the Economist and works as the Chief Editor of the Economic Times. Since the article expresses some lack of clarity on why Aiyar’s column is called Swaminomics ( as well as whether Aiyar is in actual fact, an economist), I thought it necessary to point out.

And yes, Reaganomics:

“One cannot be sure, of course, since there was “Reaganomics” and Mr. Reagan, a minor actor and later a major POTUS, did not even act as an economist in movies, leave aside be one. Just adding “-nomics” to your name therefore does not reveal what your day job is”.

When Reagan came into office, the Fed stepped on the money supply leading to a temporary recession. Reagan knew what was happening, understood that the only way to curb inflation was to accept a temporary recession. He supported Volcker and did not try to intervene. I don’t think any other president in the postwar period would have stood by without trying to interfere, to intervene with the Federal Reserve. Remember those famous words that Shultz often mouths – If not now, when? If not us, who? The number of pages in the Federal register halved during Reagan’s time, a stark symbol of Reaganomics - the small government belief that emerged as an economic imperative and political ideology. Reaganomics itself may be up for debate, but its legacy can be traced throughout economic policy in the U.S. Thus, to dismiss it as a trivial suffix is ludicrous, almost bizarre.

And oh lord, this notion that you need economists to implement an economic policy defeats the function of CEOs, economic aides and…even Reaganomics. But, lack of specialized knowledge might explain the confusion on cognitive dissonance (OK, I’ll let it go!).

And finally, the article spews –

“Crediting Lalu with improving the railways is silly at best”.

Doesn’t that Lalu has boosted revenues by 15.5% without raising fares or turned around and made an estimated profit of $2.5 billion in 2005-06 count for anything? Low hanging fruit perhaps. But, nobody was picking until now.

Anyway, as Atanu says, enough about Lalu.

First off, I completely agree with the arguments in the article -

"…what matters is the per capita GDP (which is another way of stating the income of the average person) and to some extent the per capita GDP growth rate, not the GDP nor the GDP growth rate…"

What I am in disagreement with is that Aiyar’s article is in conflict with the key arguments in the post. It’s not. Aiyar offers a description and a description alone of how increased population levels may benefit the Indian economy in the long run. Atanu offers numbers to support this argument – clearly, a complementary one, not a substitute.

Aiyar does not propagate procreation for the demographic dividends that it yields and he definitely does not propagate it amongst India’s resource-constrained or indigent (Lalu’s not middle class and I can’t discern which part of the article manifests this sentiment). The human argument is that Aiyar’s too much of a believer in human rights and choice to support such propaganda one way or the other. The economic argument, of course, is that he states that demographic dividends are realized post a fall in population growth rates. He merely offers that although the overall population rates in India have declined, the rate of such decline is relatively low compared to China because “fertility rates remain high in the backward states of Bihar and Uttar Pradesh”. Therefore, we could reap demographic dividends for a longer period of time:

“In many countries, the demographic dividend lasted four or five decades. In India's case it could last much longer, maybe a century.”

And Atanu’s calculations of 25 years (I used the CIA factbook figures for India and China's per capita GDP (PPP) as USD3300 and USD 6800 respectively and obtained a lower estimate but that’s close to nitpicking) is well within this time frame. So, not sure how the arguments are in conflict.

Most important, I am shocked that Atanu has such a bleak view of human life. To state that the rich enjoy that “the higher the numbers of the poor, the lower their wages, and consequently the higher the standard living for the non-poor” is offensive writing that alienates rather than includes. It’s worse if this is a jab at Aiyar – his columns on the Uttar Pradesh Sodic Soils project and the use of community empowerment to reduce poverty in general are a far cry from this base view of human life, living and longing.

As an academician, I could never subscribe or espouse this rule of “keeping your mouth shut and be suspected a fool, rather than open it and remove all doubts”. Self-expression is integral to sound pedagogy and although I recognize that there’s a thing as responsible journalism, I am not sure expressions as these argue the case very effectively.

But, then again, I am no economist. So perhaps this whole post is moot.

Got Mail?

2006-10-04T11:06:00.000-07:00

Just yesterday, my husband and I were discussing medium risk business ventures likely to be most profitable in the sub-continent. My husband, quoting the ills of the Indian postal system which is not only one of the largest networks in the world, but also one of the most inefficient, fervently supported the idea of turning franchisee for one of the private-sector couriers such as FedEx Corp. or United Parcel Service Inc. And it seems people have fast caught on to this idea. Today, private-sector couriers such as FedEx Corp. and United Parcel Service Inc. have grabbed more than half the delivery business nationwide in India.

And the inefficiency of India Post only helps. To illustrate, the average employee in the U.S. Postal Service handles more than 15 times as many pieces of mail a year as the average Indian postal worker. Further, the U.S. postal service is profitable, reporting an operating profit of more than $1.5 billion last year, while India Post lost $300 million.

What is of note is that India Post is not alone. An article in today's Wall Street Journal, "Snail Mail: As Economy Zooms, India's Postmen Struggle to Adapt - Beaten by Private Couriers, And Unable to Downsize, State Tries to Diversify - Selling Cashews and Aloe Vera," notes:

State-owned phone company Mahanagar Telephone Nigam Ltd. used to have a monopoly on much of the phone service in India. Today it is battling with an onslaught of internationally financed competitors that have driven the quality of service up and rates down on everything from local to long-distance to cellular service to Internet connections. State-run airlines Air India and Indian Airlines have been under attack for more than a decade and the industry has just become more competitive with six new carriers starting operations in the past two years. The banking sector is still dominated by the giant State Bank of India but the country's growing middle class is taking most of its business to the high-tech private banks, such as HDFC Bank Ltd. and ICICI Bank Ltd. leaving the state banks with the least-profitable businesses and worst borrowers.

And these are important constraints in India's growth maximization problem. Even as outsourcing dollars help to change the face of the Indian economy and its consumers, such change is moderated by political realities, chief among which is a succession of unstable coalition governments that oppose layoffs and privatizations. For example, when the current Congress led coalition first came to power in 2004, one of the first things it did was close the Disinvestment Ministry which oversaw privatizations. Contrast this to the closing down of unprofitable organizations and auctioning off of many of the U.K.'s largest state-owned companies in the 1980s despite violent strikes and opposition from the left.

These convoluted politics explain why India Post is forced to maintain its 550,000 employees with full benefits and run a vast network of post offices, most of them unprofitable. What's more, politicians keep India Post from raising postal rates, so it loses money on almost every postcard and package it handles (see the figure above reproduced from the WSJ article).

Moving forward, India needs to figure out a clear role or exit strategy for its state owned institutions that are clearly inconsistent with its model of economic growth. Me, I am considering investing in that UPS franchise in Hyderabad.

Outsourcing Your Homework?

2006-09-20T22:16:00.000-07:00

Bangalore based TutorVista can help. At $99.99 a month for unlimited one-on-one tutoring, online tutoring from this Indian firm is less expensive than American private tutors charging $50 an hour or more. Available 24 hours a day in most subjects and levels of education, it is also more accessible.

One problem with the No Child Left Behind Act is that 80% of the kids entitled to after-school tutoring - at taxpayers' expense - are not getting it, according to a new government report. And some rural districts offer no tutoring at all. The potential spend of the federal government on private tutoring involves tens of millions nationwide, and TutorVista has its sights set on these federal tutoring dollars funneling to states, starting with Florida. If TutorVista can qualify to tap into that money, it would be competing with tutoring giants such as Sylvan and Kaplan, with tutors in India paid the equivalent of $275 to $300 a month. This TIME article reports that in an important step in this direction, the company announced in early August that its service would be free to children in the 10 poorest rural counties in the U.S.:

The Bangalore-based TutorVista, which last fall began providing online tutoring to U.S. students in everything from grammar to geometry, last week announced it will provide a year of free tutoring to kids in the 10 poorest rural counties in the U.S.
That means all students in, say, Texas' Zavala County or South Dakota's Ziebach County can get first-rate help--which ordinarily would cost $20 an hour -regardless of whether their school is performing poorly enough to be on the NCLB's watch list. (The only catch for kids in impoverished, remote areas: they must have access to a high-speed modem.)

The company blends today's hottest topics which are also the fastest growing areas in India: outsourcing, technology enabled services and the internet, free enterprise, and education. Weave into this fabric the thread of social responsibility, and you have a sure recipe for success which, in this case, is spelled TutorVista.

Supply chain anorexia

2006-09-06T13:21:00.000-07:00

Businesses are fast embracing new outsourcing paradigms which emphasize that every activity in the value chain can and must be externalized. These new paradigms, such as capability sourcing, recommend that the firm focus on a set of core capabilities alone that drive competitive advantage in its industry, and execute remainder activities through contractual arrangements and partnerships that represent best of breed solutions. However, in their relentless drive to reduce costs and improve efficiency, some companies are discovering a fine line between lean supply chains and anorexic ones. The perils of such interdependence are evident in the following examples drawn from a series of logistics surveys in the Economist which discuss the complex, interdependent nature of modern supply chains:

If one link of a company's supply chain snaps, the consequences can be grave. Ericsson and Nokia found this out when they both relied on the same supplier for a special chip in their mobile phones. After the chipmaker's factory was hit by lightning, Nokia swiftly locked up all the alternative supplies whereas Ericsson suffered a severe parts shortage and later quit making handsets on its own.

A company's best protection from its own supply chain is to expect failure, not to hide from it. Toyota last year narrowly escaped a parts shortage when an American supplier went bankrupt. The carmaker has now introduced an early-warning system in Europe to try to detect any looming problems with suppliers before they bring production lines to a halt.
Sometimes it can be worth paying more to make some things closer to the big consumer markets of America and Europe. Zara, a fast-fashion chain that produces clothes in small batches mostly around its Spanish base, can take just five weeks to get a garment into one of its stores. Stores sourcing from Asia can expect lead times of six months or so, by which time fashions can change. Not surprisingly, Zara ends up discounting fewer of its garments in clearance sales.

I don't think the above examples emphasize a vertically integrated business model as much as they do smart outsourcing. This, in turn, is reflected in the ability of the user or client firm to:

Identify and proactively respond to weak links in the supply chain,
Diversify the risk of interdependence through multiple preferred supplier relationships,
Recognize that each outsourcing arrangement is different so that the coordination and control structures inherent to the arrangement reflect the unique nature of the outsourced value chain function, and
Encourage information sharing between firms to enhance transparency in the value chain and better manage contingencies

Therefore, as supply chains get lean and leaner, the management of ensuing complexity may well dictate the rule of competition and engagement in industries. More important, the above capabilities may well define the limits to outsourcing in the firm, and on a broader level, to globalization as well.

High Productivity, Low Wages

2006-08-30T10:44:00.000-07:00

The New York Times reports that the current economic expansion is the first sustained period of economic growth since World War II that fails to offer a prolonged increase in real wages for most workers:

The median hourly wage for American workers has declined 2 percent since 2003, after factoring in inflation. The drop has been especially notable, economists say, because productivity — the amount that an average worker produces in an hour and the basic wellspring of a nation’s living standards — has risen steadily over the same period.

This causal linkage between productivity and wages may seem paradoxical at first, but is perfectly logical given the path to such productivity increase. As economists at Goldman Sachs point out, the most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income. Permeable national boundaries, technological advances and the declining cost of capital goods have reduced the value of the denominator in the productivity equation, thereby enhancing productivity levels. However, outsourcing and technological advances have also increased job insecurities, resulting in an erosion of workers' bargaining power and yielding a downward pressure on wages.

In addition, wage increases (or lack of) have also been influenced by high energy prices and rising health care costs, among others. Therefore, firms are spending more on benefits at the expense of wages. This is evidenced in the marginally better performance of total employee compensation - wages plus benefits:

Total employee compensation — wages plus benefits — has fared a little better. Its share was briefly lower than its current level of 56.1 percent in the mid-1990’s and otherwise has not been so low since 1966.

I think this is an interesting turn in the century to mark. Moving forward, as the benefits of globalization evidence themselves in economic performance, companies must develop means of redistributing income and providing employees with their fair share of growth.

A short break!

2006-08-12T07:38:00.000-07:00

Out of (the blogging) office next week. Will hit the idle button, so no posts for the next week or so.

Operating Acrobatics and Accounting Games

2006-08-08T08:20:00.000-07:00

Warren Buffet will have you believe that’s the stuff earnings guidance or companies’ performance forecasts are made of. A recent Financial Times article (subscription required) concurs. It points out that what started out as a practice to make companies more accountable and focuses achieving tangible results for shareholders has now turned into a myopic vision that’s grounded in short-termism and indifferent to the long-term interest of shareholders.

And I am inclined to agree. I was recently reading an article in the Harvard Business Review on capability sourcing at 7-Eleven. The article traces the organizational form of the company over the past decade, ultimately relating it to firm performance. 7-Eleven began as a traditional, vertically integrated company. However, in 1991, toward addressing issues of declining profits and market share, the company did a volte-face on its operations strategy. In a deliberate break from the vertically integrated business model, 7-Eleven decided to outsource every operation that was not mission critical. The company relinquished ownership of many parts of its business and used creative partnerships to pioneer entirely new capabilities, all while retaining control over critical operations and decision processes.

How does this relate to the anti-earnings guidance camp? Well, it emphasizes the importance of a long-term vision for a company and the allied need to lengthen the investment horizon of fund managers. 7-Eleven has phased its organization change over the past decade and the results too, although sure, have been slow to surface. The time (italicized) taken to realize benefits are evident:

“It (7-Eleven) reduced head count 28% from 43,000 in 1991 to 31,000 in 2003 and flattened its organizational structure, cutting managerial levels in half from 12 to six.

Today (as of 2004), 7-Eleven consistently outperforms competitors. Same-store sales have grown in four out of the last five years. In the past two years, it has dominated the industry's vital statistics, with same-store merchandise growth at almost twice the industry average, revenue per employee at just about two-and-a-half times higher, and inventory turns at 72% more than the industry average...
...7-Eleven's stock appreciation over the past five years has outpaced all major competitors, including Casey's General Stores, the Pantry, and Uni-Mart.”

One can only wonder if Jim Keyes, who spearheaded 7-Eleven’s outsourcing strategy, was compelled to focus on making it by a cent, whether the company would have pursued a long-term divestment strategy aimed at tightening operations. However, one can make an educated guess. The Financial Times article points out that:

“More than 80 per cent of some 400 executives questioned by the academics John Graham, Campbell R. Harvey and Shivaram Rajgopal admitted they would reduce spending in important areas such as research and development, maintenance and hiring in order to meet earnings targets. More than half said they would delay new projects even if it meant sacrificing long-term value."

Perhaps, smaller companies need to communicate their earnings potential as their funding rests on repeated contacts with the market. Perhaps, it’s part of the marketing process of established public companies. But, as the article points out, these are not the obstacles:

“For a start the salaries, and even the jobs, of both analysts and fund managers are heavily dependent on quarterly performance. And with trading volumes rising sharply in recent years, the average time investors hold a stock is down to a mere nine and half months, heightening the market's need for rapidly delivered information on the short-term outlook…(A short investment horizon) is true for America's business leaders. With the typical chief executive of a large US company expected to last no more than five years, few can be expected to set their sights on the long term.”

It’s only fitting that I mention Dell. In earlier posts, I talked about how the company has its offshoring and outsourcing strategies right. But, clearly, it takes time for these investments to pay off. And until then, the company must pay the price for breaking all links in the short-termism chain. And we must hope desperation does not spin more Apples.

Market ripples

2006-07-27T07:09:00.000-07:00

Motorola is to form two two separate joint ventures with Indian IT outsourcing groups, Tech Mahindra and Wipro respectively, to create mobile phone software and telecoms networks for other companies.

The move emphasizes both the transition in the role of the Indian firms from low cost service providers to partners in sophisticated ventures that requires complex industry expertise as well as the burgeoning growth in India's domestic IT market (Motorola's venture with Tech Mahindra, which will be called Canvas M, will serve Indian telecoms companies that want to outsource development of mobile phone software ).

In support of the Dell model

2006-07-22T09:28:00.000-07:00

Another earnings disappointment from Dell. Clearly, as technology advances and falling component prices render lean supply chains and falling PC prices a pervasive reality in the PC world, the strategy of cutting prices and daring other market players to follow does not seem to be working too well for Dell. Competitors like HP have been able to cut their costs in the last year, thereby diminishing the traditional cost and price advantage that Dell used to enjoy.

Industry analysts also point to Dell's falling customer service that is affecting sales, and the higher costs that the company faces as it expands customer service centers in the United States and Canada. The direct sales model, they warn, precludes the outsourcing of customer service and support costs to retailers and other front-end supply chain partners, resulting in a cost disadvantage with regard to customer support.

However, as the support function turns from being a necessary overhead to being a strategic lever that contributes to competitive advantage, I think organizational ownership of the customer support function presents potentially significant opportunities. Several companies are realizing the significant business potential of the function and increasingly subjecting it to management discipline and process improvement initiatives. The service organization not only delivers customer value but also feeds into other business functions such as product design and marketing to provide valuable insights and increase overall earnings. For example, analyses by Bain Consulting suggest that:

Some companies have turned their support divisions into profitable businesses, increasing earnings by as much as 10 to 30 per cent
An increase in customer renewal rates of between 1 to 2 per cent can engender a 10 to 12 per cent increase in revenue.
In one instance at Cisco, customer feedback on a new voice over IP product was fast delivered to the product design team, who implemented five critical changes to the next generation product, resulting in a 17 per cent decrease in support calls and a sharp increase in sales.

So, it seems the problem at Dell is not the high costs of customer service; it is the inability to embrace the challenges of customer service and deliver business benefits that make such investments worthwhile. Perhaps, low-end support functions may be outsourced but largely, the flexible and adaptive nature of the function, as it turns into a strategic customer touchpoint, may be best served in-house. More important, as customer service agents become increasingly involved in mining data, proactively solving customer problems, and translating customer data into actionable information and innovation directions for other organizational departments and business groups, they must be acutely tuned to business needs and strategies. This too renders the in-house servicing of the function advantageous. Especially as new product lines are added and scale economies are asked of.

The road ahead? Dell needs to check communication lines between customer support and the executive order. If they don't exist, segments of support must be identified followed by analyses of drivers of profitability for each segment. The firm must then invest (yes!) in training, diagnostics and process improvements for the strategic support functions. And then somewhere before the end of the fourth quarter, it must check communication lines between customer support and the executive order again. It may well find its direct sales model somewhat of an advantage.

More on outsourcing and wage inflation

2006-07-18T12:34:00.000-07:00

An article in today's Financial Times, "Are India and China up to the job?", emphasizes the point in my earlier post - although only 10% of the $300bn market for global offshoring is currently being tapped, labor shortages in India and China are kicking in. With the industry struggling with annual employee turnover rates approaching 40 per cent, wage inflation is rising. Wage increases in India were the highest among Asia-Pacific countries. In the IT sector, pay inflation this year is expected to reach nearly 20 per cent.

The result is more expensive managers, a phenomenon that has put paid to the localisation strategies of many multinationals. Localisation was meant to save money by replacing expatriates on large packages with cheaper locals, but good
Chinese managers now command a similar premium. "There are some very alented Chinese leaders coming through," says Mr Mullinjer. "I have done a number of management searches where these guys are getting paid no differently to western expats. In some cases they're making more. It is a huge jump over what we saw five to six years ago."

With India and China both still enjoying spectacular growth, their shallow talent pools have yet to cut into headline GDP numbers. But such shortages are chipping away at their emerging economic strengths. The talent crunch will threaten India's knowledge-based and services-driven growth story. In China's case, it undermines Beijing's aim to re-tool its economic model to build the domestic service sector and wean itself off reliance on manufacturing exports. For both, capturing the demographic dividend may prove far harder than they expected.

India has over a billion people and will soon have the world's largest number of young people. However, many of the country's population is still engaged in low-income activities. It is imperative that the country work toward providing education to its young people and invest in their capabilities. It must also extend its position as a skilled service provider to develop a more broad-based employment model that effectively leverages the education and skills of the majority of its population.

Of Wage Inflation and Outsourced Jobs

2006-07-13T13:34:00.000-07:00

Information Week attempts to explain why India's wage inflation won't bring outsourced tech jobs back to the U.S. in this article. Example, Cognizant Technologies. Like many Indian outsourcers, Cognizant is growing fast and hiring aggressively. Its revenues in the most recent quarter jumped 57%, and the firm increased its head count last year by 49% to house more than 28,000 employees. Narayanan, CEO of Cognizant, offers perspective:

Seventy-five percent of Cognizant's workers are based in India, but those workers account for only 20% of its labor costs. Conversely, Cognizant workers based in the West, mostly in the U.S., account for 80% of the company's wage expenses even though they're just one-quarter of its total staff.

Because wages paid to workers in India represent such a small percentage of total costs for companies that operate there, a 15% increase in salaries results in no more than a 2% rise in prices charged for IT services, says Narayanan.

And that's precisely the problem. Given that supply is limited, wage inflation represents a growing concern (no pun intended). Narayanan describes the scenario over the next year. So, an annual wage inflation of 15% translates into an average annual increase of 2% in prices. Ceteris paribus, of course. Given that the supply of skilled labor to sustain the torrid growth of the outsourcing firms remains limited, the estimate for wage inflation can only rise over time, engendering further price inflation.

For example, this article in yesterday's Financial Times (subscription required) discusses how Chinese exporters, in the face of rising input costs, including growth in manufacturing wages, and raw material and intermediate costs, are increasingly confronted with the choice to either accept lower margins or raise prices. Export data points to evidence of both. Goldman Sachs expects Chinese annual consumer price inflation, currently 1.4 per cent, to reach 3 per cent by the end of 2006. If this increase were replicated in import prices from China, Goldman estimates the impact on US inflation could be 25 basis points.

Indian service providers are not immune to similar inflationary risks. Clothes and consumer durables account for only 15 per cent of US consumer price inflation; 60 per cent is from services. However, globalization is not widespread in services and this should help the Indian service providers offset inflationary impacts of higher priced services. The (new) services that they replace will still be cheaper than the American counterparts. Increased volume of business will help preserve margins and prices. Of course, both these solutions assume a constant supply of quality labor, which is clearly not the case. Perhaps, the Indian firms could leverage their expertise in service provision to transition into a skilled systems integrator that coordinates service providers in other emerging low cost countries. Coordinating work across firm and national boundaries is a distinct competitive advantage that the Indian firms have come to acquire over the past decade.

Finally, the Indian service providers will have to invest in innovation and providing more value-add services. Innovation is the latest management mantra, especially in a growing number of large, established firms that have long focused on reducing costs and budgets. Executives are working on becoming more creative to capture customers in the global market. As mentioned in my previous post, firms will look to offshore providers who can transition from being a strategic service provider to being a business unit that develops and delivers products to the firm's customer in the region where it is located. This calls for increased flexibility, responsiveness and vision.

And if the providers fail to deliver, Narayanan may well need his U.S. workforce to cover. So, India's wage inflation may not bring outsourced tech jobs back to the U.S. but it might just engender a cross border war for managerial talent which brings forward U.S. workers to India and at the forefront of new international paystakes.

Tapping the Brakes

2006-07-10T09:51:00.000-07:00

An article in today's Wall Street Journal reports on the results of a recent offshoring survey conducted by DiamondCluster International Inc. DiamondCluster interviewed 153 buyers of outsourcing services in the U.S. and U.K. and 188 providers in about 10 countries. The survey focused on information technology, because it is one of the most popular services that is outsourced. Key findings:

64% of the buyers of offshore outsourcing services and 50% of buyers of onshore services planned to increase their use of such services in the next 12 months, a much lower figure than in previous years. Last year, 74% of the survey respondents said they planned to increase their outsourcing overall.
About 8% of the buyers of offshore services and 9% of the onshore buyers said in the latest survey they planned to decrease their use of outsourcing in 2006. In last year's survey, 5% of offshore-service users and 7% of onshore-service users said they were poised to terminate contracts.
U.S.-based companies are increasingly looking into Canada for outsourcing needs. While the cost isn't low, buyers are comfortable with "near-shoring" because of the proximity and common language.

Last week, I had blogged about how boundaries between various forms of outsourcing - nearshoring, offshoring, onshoring, etc. - are blurring as is the erstwhile distinctive role that each had in the manager's toolkit. The survey findings are further evidence of blurring boundaries and point to some interesting directions in the field.

As the Journal points out, there will be fewer successful new entrants. Further, slower growth rates raise the likelihood of consolidation amongst the service providers. U.S. based service providers, who are looking to be part of the vision of a "globally integrated enterprise," will likely leverage such consolidation to integrate offshore resources and cut costs.

Further, if the decrease in outsourcing to third party service providers is accompanied by a concomitant increase in the establishment of captive offshore centers, the findings might well point to the role of outsourcing and offshoring as organization design strategies that play an important role in catering to international markets. For example, in this article in the McGill International Review, the authors point out that very few of the Fortune 500 firms have the ability to sell products and services around the world. They urge companies to think global but act and strategize regional, implying that a focus on regional strategies should become central to strategic planning. Captive offshore centers might well have a better understanding of the focal firm's operational and strategic contexts and customers. Therefore, as companies turn to fast growing international markets as an important source of revenue, their offshore centers can transition from being a strategic service provider to being a business unit that develops and delivers products to the firm's customer in the region where it is located. A.k.a Dell?

So, this is not tapping the brakes in the race to outsource. This is a whole new race.

Debunking Myths

2006-07-06T19:24:00.000-07:00

I like this article by Pankaj Mishra in today's New York Times on "The Myth of the New India".

A Theory of Evolution

2006-07-04T07:22:00.000-07:00

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.

An Indian Hangover - Outsourcing Efficiency or Corruption

2006-06-27T08:18:00.000-07:00

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

2006-06-24T22:24:00.000-07:00

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

2006-06-21T04:07:00.000-07:00

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

2006-06-02T11:36:00.000-07:00

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.

India - Week in perspective

2006-05-25T06:51:00.000-07:00

Am visiting India after a good three years, and the difference in the country's levels of confidence and optimism is striking.

And it wasn't just about the cab driver who discussed the possibility of setting up a website or the maid's curiosity about Amway.

The Indian Railways, one of the many government-owned businesses that dominate the landscape, made an estimated profit of $2.5 bn in 2005-2006. Poor quality of service, tobacco stained platforms and long queues to book tickets are a thing of the past. Clean platforms, online reservation systems, mobile booking, frequent miles, privatization of freight carriage and a host of revolutionary ideas in the offing now mark the new Indian Railways which is galloping to keep with India's growing international image.

And India's host of technology workers, who contribute to that image, do not think of themselves as the labor force in a low-cost destination. Heck, they're the outsourcers, not the outsourcees! For example, Satyam, which is one of India's top technology service providers, has just started outsourcing some of its American work to Indian villages. There is enough bandwidth to go around, the eager, committed and educated villagers have an opportunity to stay in their village. Not only does this breathe life into the rural economy but also, there's less pressure on the urban infrastructure.

The Indian companies are increasingly becoming part of new collaborative business models that are byond the mere externalization of business processes to low-cost destinations. This best described in a recent article in the Financial Times by Tom Friedman. Friedman writes:

I was interviewing Katie Jacobs Stanton, a senior product manager at Google, and Krishna Bharat, founder of Google's India lab. They told me that Google had just launched Google Finance, but what was interesting was that Google Finance was entirely conceived by the Google team in India and then Google engineers from around the world fed into that team - rather than the project's being driven by Google headquarters in Silicon Valley.

It's called ''around sourcing'' instead of outsourcing, because there is no more ''out'' anymore. Out is over.

''We don't have the idea of two kinds of engineers - ones who think of things and others who implement them,'' Ms. Stanton said. ''We just told the team in India to think big, and what they came back with was Google Finance.'' Mr. Bharat added: ''We have entered the generation of the virtual office. Product development happens across the global campus now.''

So, that's my understanding of the country as of now - confident and hopeful. And news just in as I write - India's technology and outsourcing sector grew faster than expected in the year ending March 31, expanding by 31.4 per cent to Dollars 29.6bn - well ahead of the 26 to 27 per cent projected by Nasscom, the country's software employers' association. Exports grew by more than 33 per cent, while domestic revenues increased by 24 per cent. Jobs in the sector grew 250,000 to 1.3m.

Did I mention optimistic?

An Indian Summer

2006-05-19T22:52:00.000-07:00

Am off to India tomorrow and will be back end of June. Will resume blogging sometime later next week post recovery from a seventeen hour flight, jet lags et al.

I digress

2006-05-14T22:33:00.000-07:00

Find here the text of Tim O'Reilly's commencement speech for the UC Berkeley School of Information. He talks about Web 2.0 - the significant opportunity that it presents as well as the dark side of the technology:

I urge you to think hard about the consequences of new technology. Don't just take for granted that technology will bring us a better world. We must engage strenuously with the future, thinking through the dark side of each opportunity, and working to maximize the good that we create while minimizing the harm.

The speech appositely informs and inspires.

Hear hear.

Belated Birthday

2006-05-13T07:27:00.000-07:00

Missed marking one year in the sphere on May 8th.

Oh well, BPO Journal is a year old now, and with no lies, damned lies and statistics to back it up, you'll just have to take my word that it's been a good year. To the near sixty regulars and oft first-timers who frequent the site everyday, thanks for your comments and feedback.

No small fry

2006-05-09T20:20:00.000-07:00

An article in the theory and practice section - a weekly look at people and ideas influencing managers - of yesterday's Wall Street Journal discusses how smaller companies are increasingly tapping offshore labor markets, as larger companies have for years. A summary of tips for managers at small firms thinking of expanding overseas:

Locate overseas offices in regions that are home to bigger, multinational companies
Monitor quality closely; errors can really hurt a small business
Ensure that key executives visit frequently, and plan for the travel costs
Offer consistent company-wide training so all workers use similar processes
Track retention of overseas workers, as a few key departures could be crippling

Outbound flight

2006-05-06T09:55:00.000-07:00

Interesting article in the Wall Street Journal about the newest twist in global outsourcing - U.S. pilots fleeing the depressed North American airline industry to work in far reaches of the world where aviation is booming. The Journal points out:

After the 2001 terrorist attacks stifled air travel and sent the U.S. industry into its deepest decline ever, more than 10,000 U.S. pilots were laid off, and many more took early retirement. Despite subsequent hiring by a few healthy carriers, including Southwest Airlines, thousands haven't been able to find new flying jobs at their old pay grades.

Not until now. The airline industry is expanding rapidly in China, India, Southeast Asia and the Middle East. As these regions grow more affluent and loosen aviation restrictions, the demand for travel is soaring. Existing carriers are adding routes, and several new airlines are in order. So, like British and Australian pilots who have long taken their skills offshore, more Americans are plying their trade wherever they find work. Apparently, U.S. pilots are working as far afield as Bolivia, China, Qatar and Vietnam. Hong Kong-based Cathay Pacific Airways and Singapore Airlines are hiring more Americans, as are carriers in Taiwan and South Korea, and increasingly, in India.

The trend is symbolic of a growing global shortage of well-trained commercial pilots. The Journal points out:

Aerospace giant Boeing Co. estimates the global jet fleet will grow to more than 35,000 airplanes in 2024, from fewer than 17,000 in 2004. Boeing pegs demand for new pilots at nearly 18,000 a year through 2024. China alone will need more than 35,000 new pilots over 20 years, and the rest of Asia will need 56,500, the company estimates. Many countries are currently unable to train enough pilots at home. The result: a global bazaar where experienced pilots go to the highest bidder.

Norwegians and Venezuelans are flying in China, Egyptians and Russians in India, Jamaicans and Iranians for a Japanese carrier. And as the airlines face challenges of training enough "mature captains" quickly, they're responding by filling in with expatriates. Four out of five pilots at Qatar Airways are foreign. There are 120 to 150 foreign pilots in mainland China. And India counts more than ever. Deregulation has spawned startup airlines, an influx of international flights, and 20% annual passenger growth. India's potential demand is over 2,500 new pilots by 2010. At Jet Airways, the nation's largest private carrier, 111 of its 685 pilots are foreign. Air Deccan has 75 foreigners among its 250 pilots, and is setting up its own flight school in Bangalore.

The incentives are strong too. India's Air Deccan is offering $8,000 to $15,000 a month to foreign captains, according to Mr. Gopinath, the managing director. A captain in the U.S. on Northwest's smallest jet earns about $9,000 a month, while a captain on United Airlines' largest plane earns about $15,000, according to a recent survey by Air Inc. William Goodwin left the U.S. in 1994 after working for two airlines that went under and a third that was acquired. He jumped to Korean Air in 2000, where as a captain of 747s he earns $152,000 a year after Korean taxes. The 54-year-old pilot says he hopes to stay until he retires at 60. Mr. Baedke, the former Northwest pilot who now flies out of Honolulu for Jalways under a crew-leasing contract, earns $100 an hour, or $105,000 last year. He expects to begin training next month to become a captain, a process he says could take 2 1/2 years. If he succeeds, his pay will climb to $150 an hour for the first 50 hours flown each month, and $180 an hour for anything exceeding that.

This flight has all the signs of a permanent structural shift. Perhaps, the foreign carriers are employing U.S. pilots only temporarily until they can staff up with their own citizens. But the pilots are warming up to it while the Airline Pilots Association back home worries about brain drain and much the same issues that India munched while its software engineers explored and continue to explore US horizons. Friedman forgot to write about this one in the flat world.

Successfully Governing Business Process Outsourcing Relationships

2006-04-27T20:02:00.000-07:00

The March 2006 issue of MIS Quarterly Executive has an article by me on the successful governance of BPO relationships. Let me know your thoughts - it'll be useful in evaluating the range of circumstances that circumscribe the research and will help set directions for future research on BPO.

Don't dismiss power

2006-04-24T15:32:00.000-07:00

Attended this interesting presentation by Ranjay Gulati, a professor of management at Northwestern's Kellogg School of Business. He talks about how interdependence in a sourcing relationship can impact the performance of the relationship, where interdependence is defined as the criticality of the exchange to participant firms. Such interdependence is manifested in both the power dimension of interdependence as well as the degree of collaboration between the firms. Gulati argues that the latter effect is dominant and positively impacts performance of the relationship.

However, I think the power dimension of the exchange would most definitely determine important attributes of the relationship such as price points and payment structures that are not an explicit element of performance. In addition, in the context of more information-intensive outsourcing such as BPO, power asymmetry will determine who owns the outsourced process and is responsible for process improvement and innovation. This is not an important factor in Gulati's study which looks at component sourcing in the automobile industry. However, it's extremely pertinent to BPO. This is especially true of strategic outsourcing initiatives, where the outsourced process is complex, impacts competitiveness and shares interdependencies with other organizational processes. Contracts are relatively incomplete for these initiatives - it's difficult to predict contingencies at the outset - and the power equation might well serve as a safeguard against incomplete contracts.

So, although we'd like to believe that the incentive to create value will supersede the threat of misusing power and appropriating value, I don't think that's completely accurate. Firms are not ready to be a part of that benign picture yet.

Don't dismiss power.

Enterprise 2.0

2006-04-15T09:45:00.000-07:00

I digress a trifle. Well, Web 2.0 really is about commons based peer production and the outsourcing of production, particularly information production, to the social commons. So, not too much of a transgression here.

An article in the recent issue of Sloan Management Review by Andrew McAfee, a professor at Harvard Business School, points to interesting applications of communication tools of Web 2.0 - blogs, wikis and group messaging software — in modern enterprises. In particular, McAfee states that these tools allow for spontaneous, knowledge-based collaboration and enable efficient organization of knowledge. For example,

It has historically been the case that as organizations grow it becomes more and more difficult for people within them to find a particular information resource - a person, a fact, a piece of knowledge or expertise. Enterprise 2.0 technologies, however, can be a force in the opposite direction. They can make large organizations in some ways more searchable, analyzable and navigable than smaller ones, and make it easier for people to find precisely what they're looking for. The new technologies certainly don't overcome all the dysfunctions of corporate scale, but they might be able to address some of them.

It's interesting that while these characteristics of Enterprise 2.0 technologies - scalability, ease of use, memory and low start-up costs - enable a cumulative approach to knowledge building and efficient organization of knowledge, they also introduce problems of quality control and noise. An integral part of incentives to contribute in Enterprise 2.0 technologies is democratization marked by a lack of unilateral control. The limited ability to control the information that employees generate in the system requires searching through a lot of useless information to retrieve required knowledge. and this, in effect, increases search costs.

McAfee does point to other challenges that these new technologies bring with them. "Busy knowledge workers won't use the new technologies, despite training and prodding," and "most people who use the Internet today aren't bloggers, wikipedians or taggers. They don't help produce the platform - they just use it."

All of which seems to suggest that enterprise 2.0 is not really a knowledge management platform. It's more a means to collect, describe and even organize pertinent knowledge. The extant challenges of knowledge management - retrieval, transfer and context sensitive interpretation still remain.

The search for outsourcing truths

2006-04-09T21:22:00.000-07:00

A recent article in the March 2006 issue of Economists' Voice by Diana Farrell, director of the McKinsey Global Institute, describes, at length, the macro benefits that accrue to the US economy on account of offshoring. The study points out that offshoring gives firms access to distinctive skills abroad making them more competitive. In essence, offshoring represents an opportunity to improve operational efficiency and productivity that modern firms cannot afford to pass up on. For example, Farrell quotes past MGI research in support - for every $1 of cost on services that U.S. companies move offshore, the U.S. economy gains at least $1.14. The client reaps 56 cents of these gains, giving them the scope to invest in new opportunities that create jobs both at home and abroad.

However, this statement of benefits is credible only when firms do offshoring right. In the last year, there has been a plethora of studies which suggests otherwise. For example,

70% of the participants in a survey (April, 2005) by Deloitte Consulting cited significant negative experiences with outsourcing projects. The survey found that although BPO is largely driven by cost-related objectives, firms experienced hidden costs related to contract administration, profit margins, and in-house management.
According to a Bain survey (2005), 82% of large firms in Europe, Asia and North America use outsourcing to service one or more business processes. However, almost half the respondents stated that their outsourcing programs fell short of expectations.
In a study (June 2005) of 200 BPO customers by Information Week and Equa Terra, close to 60% of the respondents expressed moderate to low levels of satisfaction with their BPO arrangements.

So, if these studies be believed, all is not well in the world of offshoring. The benefits reflect a self-selection problem - they're not reflective of all firms but only of firms that ARE IN ACTUAL FACT successful at offshoring.

Understanding the truths behind these paradoxes in offshoring is critical because not only is the use of BPO rising across industries, but also firms’ boundary choices are increasingly shaping their competitive positions. If the value proposition of BPO is relatively difficult to attain, a large number of firms that have restructured their value chains to take advantage of BPO must question their investments and rethink their outsourcing strategies.

Flying high with outsourcing

2006-04-05T22:42:00.000-07:00

The stakes are big with the Boeing 787. An article in the recent issue of Forbes magazine points out that for the first time, Boeing is outsourcing more than half the structure of the plane, pieces of which will be manufactured in six different countries. The Chicago aerospace company is billing itself as a systems integrator, the way Dell Computer integrates components into a mail-order computer. Except that an airplane is trickier to put together. Not to scare you, but here's why:

Vertical tail
USA
Boeing Frederickson

Horizontal stabilizer
Italy/USA
Alenia/Vought

Fixed trailing edge
Japan
Kawasaki

Movable trailing edge
Australia
Hawker de Havilland

Center fuselage, aft fuselage
Italy/USA
Alenia/Vought

Wingtips
South Korea
Korean Air Lines

Wing-to-body fairing
Canada
Boeing Winnipeg

Cargo doors, access doors
Sweden
Saab

Leading edge
USA
Spirit AeroSystems

Wing box
Japan
Mitsubishi

Center wing box
Japan
Fuji

Nacelles
USA
Goodrich

Engine pylons
USA
Spirit AeroSystems

Passenger doors
France
Latecoere

Engines
USA
GE

Engines
UK
Rolls-Royce

Fuselage, wheel well
Japan
Kawasaki

Forward fuselage
USA
Spirit AeroSystems

Landing gear
France
Messier-Dowty

IS Education - The Competitive Advantage of Nations

2006-04-01T15:03:00.000-08:00

So, I am at Baylor University for an annual conference in Information Systems (IS). One of the panels in the conference today was titled "Declining Enrollment in MIS Programs and Implications for New PhD’s". The panel discussion was less pessimistic than its title. Many department Chairs said that enrollments were picking up and that the paranoia in the field was akin to the Gauls' fear of the sky falling on their heads. However, even the optimists expressed caution and the need to do more.

First, the decline in enrollments is paradoxical because of the growing strategic importance and ubiquity of IT. The panelists also pointed out that the IT sector is booming with several firms contacting the universities with a strong desire to potentially hire graduates. Therefore, there is a need to educate students and the population at large regarding the new opportunities for IT-based jobs in the marketplace. This includes allaying fears about outsourcing and highlighting its broader benefits to the economy. Irving Wladawsky does a great job at addressing dimensions of fear vs. reality in this post. To quote,

For every chip and semiconductor engineer out there, we need, say, five times the number of engineers designing products based on those chips, including hardware and systems software. We then need to design and build the many applications in a variety of industries that take advantage of these new products. And that results in another large multiplier for application engineers, perhaps another factor of five. Finally, we need another large number, say another factor of five in new jobs working with every business and institution to help them integrate IT into everything they do -- designing, building, operating and supporting their IT and business infrastructures. While the exact "multiplier" at each level varies, the number of marketplace-oriented jobs in the last two categories is probably one or two orders of magnitude higher than the number of lab-based jobs in the first two
categories. That is where the jobs growth lies.

In this post, I refer to an ACM study which emphasizes that to stay competitive in a global IT environment and industry, countries must adopt policies that foster innovation. To this end, policies that improve a country's ability to attract, educate, and retain the best IT talent are critical.

Therefore, not only must we work on allaying fears and concerns about the future of IT (jobs) to draw more people in the workforce, we must also work to increase incentives for talented professionals to contribute to technology initiatives and eliminate barriers to the free flow of talent. As Wladawsky says,

Young people in the developing world, in countries like China, India, Brazil and Russia do not seem to share the same views and are rapidly embracing the opportunities IT presents. Universities, businesses and governments, especially those in the developed world that aspire to leadership in the 21st century must do everything possible to address this challenge of perceptions and turn them around.

We have nothing to fear but the fear of competing itself. Can you believe the New York Times said that?

Service Infrastructure and BPO

2006-03-29T20:13:00.000-08:00

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

2006-03-27T20:37:00.000-08:00

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

2006-03-23T21:53:00.000-08:00

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

2006-03-20T22:26:00.000-08:00

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?

2006-03-15T18:14:00.000-08:00

"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

2006-03-12T22:00:00.000-08:00

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

2006-03-06T21:24:00.000-08:00

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

2006-03-04T11:22:00.000-08:00

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.

The Growth Allure

2006-02-27T22:42:00.000-08:00

Lewin and Peters, researchers at Duke University, in their annual offshoring survey, found that offshoring is increasingly motivating firms to seek opportunities for growth. In an article in the March 2006 issue of the Harvard Business Review, the researchers point out that the realization that a large and very able talent bank resides overseas is informing more decisions about what to do there: Seventy percent of respondents cited access to qualied personnel as a major driver of their initiatives, up from 54% a year ago. So, although a firm may initially use overseas talent to save costs and free up high-cost U.S. talent to pursue growth, it is not long before the overseas talent come up with better ways of working and ideas for process improvement. As the company gains confidence in their performance and becomes comfortable managing the relationship, it gives them increasingly complex jobs. Ultimately, the offshore talent is empowered to develop ideas and growth strategies for the local market.

The article offers some interesting statistics to support its case:
During the first wave of offshoring, which centered on contact centers and IT, the ratio of jobs created offshore to jobs eliminated in the United States was 1:1 – consistent with a strategy of taking out cost. In the current wave of offshoring, which includes far more innovation and product development than the first wave did, the ratio of jobs created offshore to jobs eliminated in the United States is 13:1 – consistent with growth. Follow-up interviews and several case studies suggest that offshoring allows companies to increase the number of engineers and researchers while keeping constant the cost of product development as a percentage of sales.
So, companies must not view offshoring as a narrow palliative for the bottom line. As the offshore workforce becomes more skilled, companies that leverage it to increase growth will find it an integral component of firm competitiveness.

So, is this also a shift from third party service providers to captive outsourcing? That's the subject of another post.

The Truth on Offshoring

2006-02-24T22:20:00.000-08:00

In a study released yesterday by the Association for Computing Machinery, a task force of computer scientists, social scientists, and labor economists from around the world took a hard look at the forces shaping the migration of jobs worldwide in the computing and information technology fields. Prior to this effort, no study has looked at offshoring on a global scale.

Myths were debunked. While you can read the study in its entirety at the ACM website, here's a quick look at the key findings and recommendations - each of these areas is explored in detail in a chapter of the report:

Globalization of, and offshoring within, the software industry are deeply connected and both will continue to grow. Key enablers of this growth are information technology itself, the evolution of work and business processes, education, and national policies.
Both anecdotal evidence and economic theory indicate that offshoring between developed and developing countries can, as a whole, benefit both, but competition is intensifying.
While offshoring will increase, determining the specifics of this increase are difficult given the current quantity, quality, and objectivity of data available. Skepticism is warranted regarding claims about the number of jobs to be offshored and the projected growth of software industries in developing nations.
Standardized jobs are more easily moved from developed to developing countries than are higher-skill jobs. These standardized jobs were the initial focus of offshoring. Today, global competition in higher-end skills, such as research, is increasing. These trends have implications for individuals, companies, and countries.
Offshoring magnifies existing risks and creates new and often poorly understood or addressed threats to national security, business property and processes, and individuals' privacy. While it is unlikely these risks will deter the growth of offshoring, businesses and nations should employ strategies to mitigate them.
To stay competitive in a global IT environment and industry, countries must adopt policies that foster innovation. To this end, policies that improve a country's ability to attract, educate, and retain the best IT talent are critical. Educational policy and investment is at the core.

In essence, globalization and offshoring are inevitable. They're not the threat they're made out to be. However, leveraging this global information technology field will require deep grounding in the fundamentals of computing, new knowledge surrounding business processes and platforms, and a deeper understanding of the global community in which work will be done. The educational systems that underpin our profession will need to change.

Like the study concludes, "the future of IT is exciting, but it is a future very different from the past, and even from the present".

Risk Management in BPO

2006-02-21T11:14:00.000-08:00

An important finding in my research on governance of BPO relationships was that when firms outsource a business process, they also tend to outsource the risk associated with the execution and management of the process. Not surprisingly, these relationships are marked by high levels of dissatisfaction.

Protiviti, an independent provider of internal audit and business and technology risk consulting services, has a good article on the risks involved in outsourcing and the management of such risks. The risks described in the article are firm- or relationship-level risks. No macro risks such as political or economic risks are outlined here. The risks are broadly classified as project planning and management risks, supplier selection risks, contracting and negotiation risks, transition and start-up risks, and contract and supplier performance risks. While the article does not offer a recipe for risk management, it does provide a thought framework to analyze the risks involved in outsourcing.

Risk management, according to my empirical analyses of survey data on more than 140 companies, boils down to the following processes:

Know thy outsourced process - Firms often outsource complex processes that are not executed or managed efficiently in-house. This is a recipe for dissatisfaction. Firms must attempt to untangle complexity and outsource processes whose requirements can be efficiently communicated to the service provider.

Analyze the outsourced process - Examine complexity, strategic importance, and interdependencies of the outsourced process to clearly define outsourcing objectives and functional requirements.

Govern well - The governance structure must reflect the unique nature of the outsourced process. The article focuses on the contract as the governance solution, which is also the mistake that most firms make. The contract must be complemented by investments in processes and technologies that execute the contract to realize efficiency gains in outsourcing.

Think

2006-02-18T18:06:00.000-08:00

Here're some interesting statistics culled from the McKinsey Quarterly website. For a complete list of statistics, check the Quarterly's website:

Total world cross-border trade as a percentage of global GDP
1990: 18%
2015 (estimated): 30%

Number of regional trade agreements
1990: 50
2005: 250

Change in Germany's population over the age of 75 from 2005 to 2015: 33%

Increase in tax burden needed to maintain current benefit levels for Germany's future generation: 90%

Change in Japan's population over the age of 75 from 2005 to 2015: 36%

Change in Japan's population under the age of 5 from 2005 to 2015: -13%

Increase in tax burden needed to maintain current benefit levels for Japan's future generation: 175%

Number of US tax returns prepared in India
2003: 25,000
2005: 400,000

Growth rate of the total wealth controlled by millionaires in China from 1986 to 2001: 600%

Estimated number of Chinese households to achieve European income levels by 2020 (assuming real income grows at 8 percent annually): 100 million

Total number of workers in China: 750 million

Number employed in China's state-owned companies: 375 million

Year when the income gap in the United States between the wealthiest 5% and the bottom 10% was the widest ever recorded: 2004

Number of coal-fired power plants China plans to build by 2012: 562

Estimated year China will overtake the United States as the number-one carbon emitter: 2025
Estimated year CO2 levels will hit 500 parts per million: 2050

Years since CO2 levels last hit 500 parts per million: 50 million

Global CEOs who think overregulation is a threat to growth: 61%

Probability that a company in an industry's top revenue quartile will not be there in five years: 30 percent

Complementarities between Internal and External Collaboration

2006-02-15T06:16:00.000-08:00

I was reading an article in the Financial Times - "Why in-house collaboration is so difficult" on how managers often lament the lack of collaboration among internal business units and the loss of synergies that results.

The article points out that most research in this area presumes that collaboration is necessary. However, in some cases, presumed synergies are a mirage or the opportunity costs of developing synergies are too large. Problems may also arise if there are operating skill issues (when no manager has sufficient expertise to judge which unit has best practice), chemistry issues (when bad past experiences have poisoned relationships) or systems issues (when the IT system cannot provide the data needed for a collaboration).

In light of these reasons, the article suggests four steps to take when approaching problems in collaboration:

First, managers should put more effort into calculating the size of the prize, a cost-benefit analysis of a tightly defined synergy opportunity. Unless the benefits are a multiple of the costs, the collaboration is probably not worth the effort.
Second, once the prize is clear, managers can investigate why collaboration is not already happening. Typically, there are precise reasons connected with relationships, competing priorities, resource constraints, insufficient skills of a particular kind or other operational issues.
Third, once the reason for inaction is clear, managers can assess whether they have the skill and will to unblock the problem. Sometimes it requires hard choices in terms of restructuring or personnel changes, sometimes hands-on expertise on the part of managers.
The fourth step is to look out for the downside - distraction costs, contamination risks, loss of accountability, initiative and motivation. There is a dark side to collaboration that is all too apparent in some companies. In these organizations, it is politically correct to collaborate, regardless of the cost.

The above suggestions imply that internal collaboration involves attention to much the same issues as external collaboration. I had earlier posted results of my research on governance of BPO relationships - they emphasized that a one-size-fits-all approach to governance fails to establish appropriate baselines for governance, does not adequately prepare managers for the transition, and limits ways to create value and improve performance in the relationship. In other words, the governance solution must reflect the unique nature of the outsourced process to realize efficiency and service satisfaction gains in BPO.

So, if the outsourced process or function is complex, strategically important, and shares strong interdependencies with other business processes, the client firm might adopt a partnership approach to governance and make the shift from control to coordination and penalties to shared risks and rewards. If not, the shift may not merit the additional complexity of relationship management. An arms length contract that emphasizes penalties and control may be the most efficient means to leverage scale efficiencies and skill of the service provider.

Notably, this points to complementarities between internal and external collaboration. If an organization develops the capabilities that facilitate synergy and collaboration between business units, it can leverage such knowledge and capabilities to collaborate successfully with its external partners as well.

How clean is your house?

US growth pegged to the yuan

2006-02-09T16:25:00.000-08:00

According to the Bureau of Economic Analysis, U.S.-affiliated companies in China - companies in which U.S. firms have at least a 10% stake - earned $3 billion in 2004. That's up from zero in 1990. The Wall Street Journal reports that Joseph Quinlan, chief market strategist for Bank of America, says that figure is a good reflection of how U.S. companies are making out in the world's fourth-largest economy. He estimates earnings reached a record $3.2 billion in 2005.

Earlier impressions of China as a black hole for investment are fast disappearing. The country is fast becoming an attractive market for U.S. companies, even in most competitive industries. Even as it piled up losses in the U.S., General Motors Corp. reported income from China of $218 million for the first nine months of 2005. China accounts for 12% of Motorola Inc.'s global sales and is by far the biggest market for the company outside the U.S. General Electric Co. said top-line revenue in China hit $5 billion last year, and the company is aiming to double that by 2010.

So, contrary to popular belief, a majority of the U.S. investment in China ($4 billion last year)is aimed at the domestic market. And this seems a fairly natural progression. More so in the case of service economies like India where in addition to costs, skills and expertise are actively considered in the decision to outsource. Companies vie to attract such talent with the promise of lucrative careers and growth paths. This triggers relatively sustainable growth in the economy and when exports are broad-based (such as manufacturing in China), the extent of such growth is higher. Therefore, the U.S. firms have a growing market to cater to and when that market is 1 billion people strong, even garnering a fraction of it is a win strategy. Firms that offshore are the ones which will reap the highest profits in the economy.

However, it's necessary that firms talk more about their profits from these quarters. Legislation proposed by Sen. Charles Schumer, a New York Democrat, would impose a 27.5% tariff on Chinese goods unless Beijing lets its currency rise faster against the dollar. After hearing Friday that the U.S. trade deficit with China ballooned to a record $201.62 billion last year, Sen. Schumer said he may push for a Senate vote on the bill next month. In addition to explaining that the US will lose in this move, Schumer must be convinced that not all firms will lose equally.

A new bottle for old wine

2006-02-07T20:30:00.000-08:00

I attended a seminar by Leslie Young last week, which examines the much debated India-China dichotomy through a new lens. Among other things, Young talks about long-term economic relations, environmental sustainability, and social stability of these growing economies. I found a downloadable copy of the presentation here:

http://www.iscr.org.nz/worksinprogress/work_74.pdf

Offshoring and Open Source

2006-02-05T21:42:00.000-08:00

Deloitte, in the 2006 edition of its predictions for the global technology sector, points out that offshoring will evolve from an option to obligation, and that open source will move mainstream:

...Technology companies should consider taking offshoring seriously, if they are not already doing so. The cost advantage derived from exploiting low labor costs and overheads in emerging markets will likely evolve from being a bonus to a necessity...

...2006 will likely see open source ramp up its challenge to the established software business model, impacting both established software providers as well as end-users. 2006 may well see open-source challenge long-established and credible products and services in CRM, ERP and other enterprise software infrastructure functions, in addition to its growing strength in server management, operating systems and office productivity software...

It's interesting how these two trends share a mutually reinforcing relationship and are essentially two faces of the same coin. First, they are both, enabled by increased technological sophistication, which has amplified the cognitive and social capabilities of the population, and the architecture of the Internet, which has enabled networking of these capabilities. Increased networking facilitates a participatory economy and increased supply and decreased acquisition costs of pertinent capabilities drives down the compensation of the population.

In addition to increased connectivity, both these trends are driven by low costs of such connectivity, including capital and information access. Over the past few years, there has been a significant decline in the price of computing, storage, and communications technologies, for a given level of performance. Enabled by inexpensive computing technologies, information search and creation capabilities have rapidly matured to become more sophisticated and pervasive. Sophisticated search technologies have helped to address the classic tension between recall and precision, not by increasing the volume of information retrieved but by improving the quality of retrieved information through significant mitigation of unrelated and unusable information sources. And all of these have been ably supported by the spread of broadband access. So, open source as well as offshore teams are rapidly scalable and can produce value at relatively lower costs of ownership.

Finally, they both require of the project high modularity and low complexity which enables disaggregation of project components. The characteristic of software projects that allows them to be modified in distributed teams is also one that drives their design and development across geographical and temporal boundaries.

The mutually reinforcing relationship is evidenced by what Irving Wladawsky calls the "outside-in" paradigm. This emphasizes that businesses, governments and other institutions embrace open standards internally, driving down the transaction costs of communicating and collaborating with service providers. Reduced integration costs increase adoption of offshoring. In an allied fashion, as offshoring increases, the greater the need for the supporting technology and infrastructure, and the greater the levels of open-source development.

It would be interesting to dwell on how these two trends work as substitutes instead of complements. That's the subject of another post.

Meanwhile, let's just get used to global integration. It's inevitable.

From Penalties to Rewards - A Rational Shift?

2006-02-01T04:55:00.000-08:00

In its 2005 Global IT Outsourcing Study, consulting firm DiamondCluster International Inc. found that 27% of buyers responding to the survey said they were issuing rewards last year, and most coupled them with penalties. An additional 48% administered only penalties yet are coming under increasing pressure from providers, 44% of which include rewards in their typical outsourcing deals, the study found.

The Wall Street Journal highlights how clients of outsourced services are shifting emphasis from penalties for non-performance to incentive structures that drive the provider to push the service envelope. While the structure of incentives varies widely, many focus on sharing the savings from cost reductions and the spoils from greater performance.

This shift from penalties to a shared reward system is reflective of a larger shift in the nature of the outsourcing relationship from an arm's length contractual arrangement that focuses on the specific terms of work to a partnership model that is sustained by the future value of the relationship. Therefore, negotiation and execution of incentive structures require more planning, attention and resources relative to a penalty system. Given the complexity involved in executing an incentive structure, one must ask - is this shift from penalties to rewards really required? What is the marginal increase in performance that will accrue on account of this shift?

The shift is not for all. If the process or function outsourced is complex, strategically important, and shares strong interdependencies with other business processes, the client firm might find the shift well worth the additional effort required to shift from control to coordination. If not, the shift may not merit the additional complexity of relationship management. An arms length contract that emphasizes penalties and control may be the most efficient means to leverage scale efficiencies and skill of the service provider.

A global quest for talent

2006-01-27T23:04:00.000-08:00

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

2006-01-25T07:07:00.000-08:00

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

2006-01-18T20:58:00.000-08:00

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

2006-01-15T22:36:00.000-08:00

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

2006-01-12T22:17:00.000-08:00

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

2006-01-11T21:25:00.000-08:00

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

2006-01-07T08:22:00.000-08:00

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

2006-01-04T22:10:00.000-08:00

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

2006-01-01T09:43:00.000-08:00

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?

Back to blogging!

2005-12-15T22:55:00.000-08:00

I was away on a conference last week sans time to blog. And now, am off to the Gold Coast sans microchips and the Internet. Will be back on December 28th. Back to blogging then with the promise of more frequent posts in the new year.

BPO moves closer to the core

2005-12-05T19:43:00.000-08:00

The Financial Times reported today that JP Morgan Chase is planning to hire 4,500 graduates in India during the next two years with the aim of moving 30 per cent of its back office and support staff at its investment bank offshore by the end of 2007. And it seems the rest of Wall Street is not far behind. Goldman Sachs has about 700 staff in India - out of a total workforce of 22,000 - with about 300 in operations, including clearing and settlement, and 30 in research.

The article purports that reduced costs of process ownership through Indian operations are not the sole benefit of captive centers. Veronique Weill, head of operations for JP Morgan, states that the bank will benefit by ensuring that the Indian operations are firmly integrated with the rest of the group. However, I think that such integration may be the downside to offshoring via a captive unit. The alignment of a firm's captive unit with broader organizational principles and structure requires investment in standards, processes and technologies that, in turn, result in high transaction costs for the BPO relationship. In the recent past, this has resulted in organizations such as GE and Citigroup spinning off their captive units to take on third-party customers. Other factors that weigh in on the decision to go captive versus third party solutions are the need to extract value from an asset, a volatile labor movement that disrupts captive operations, and pressure from local managers seeking independence, allied with the frustration felt by headquarters about running a distant unit.

The primary factors that propel firms to adopt a vertically integrated structure such as a captive BPO center are the risk of information loss associated with knowledge-intensive business processes, the increased investment required in knowledge process outsourcing and the resultant loss of scale economies to traditional BPO vendors, and the costly incentives required to motivate the vendor to invest in process technologies and capabilities. However, some firms are successfully using a potent mix of contracts, processes and technologies to mitigate these risks and deliver value through their party solutions.

My favorite example in this regard is that of Merrill Lynch's largest outsourcing initiatives, the complex restructuring of its wealth management workstation platform. Executives at Merrill argued that outsourcing the process would reduce the cost of empowering financial advisers with better, faster information, and raise the cost of entry of being a financial advisory firm, thereby generating competitive advantage. Therefore, the outsourced process was strategically important and marked by strong interdependencies with other organizational processes. There also existed interdependencies between components of the outsourced process - market data, financial planning tools and CRM capabilities. Merrill adopted a partnership approach to governance. The contract with its solution partner, Thomson Financial, provides for flexibility to adapt to changing process and user needs. Also, the contract, in addition to specifying SLAs and performance bonuses, links compensation to measures of customer satisfaction. It is supplemented by a tight relational association between Merrill and Thomson. The project involves frequent interaction and communication between the firms, and is marked by the sponsorship of senior management at both firms. The process is jointly owned, and employees work in tandem under the guidance of Merrill's managers. Senior management asserts that this governance model, involving shared responsibility for the success of the platform, is central to realizing expected benefits from the project.

Nevertheless, as BPO becomes more knowledge-intensive and moves closer to the core competence of the firm, managers will be confronted with significant complexity and ambiguity in the decision process. For now, there's a pattern. First, GE, then Citigroup. Is JP Morgan next?

Paradox Revisited

2005-12-03T16:08:00.000-08:00

A few months ago, I had posted on the nature of the "outsourcing paradox" - the growth in outsourcing investments despite the increased failure of these investments to deliver value. Several studies, including surveys by consulting firms (of course, one might point to a hidden agenda in such studies) such as Deloitte and Bain point to dissatisfaction of firms with their outsourcing arrangements.

In response to that post, owners of outsourcing relationships wrote in saying that firms were not off-base in the value that they expected to realize from outsourcing; the dissatisfaction arose from a failure to capture that value. They suggested that while firms devote significant attention to whether to outsource, concomitant attention is not paid to how to outsource. Yet, there were others who said that their firms displayed herd behavior and followed the competition when it came to outsourcing. This failure to evaluate the applicability of outsourcing to their unique business context resulted in . In either case, it seemed that firms were unprepared for the transformation that outsourcing entailed. One reader also pointed out that his firm did not have a plan to backsource the outsourced process when the outsourcing arrangement failed. Although the contract specified exit conditions, the firm did not have a plan that specified routines and procedures to transfer the process in-house, exacerbating failure.

While I am researching these independent effects on outsourcing efficiency, I'd like to gain more insights into the decision process that is followed in outsourcing firms. Why does your firm outsource? In your experience, what are some of the reasons that outsourcing relationships fail?

More Dilbert

2005-11-27T21:22:00.000-08:00

Dilbert!

2005-11-23T19:56:00.000-08:00