Friday, June 10, 2005

Wall Street Journal: CK Prahalad on outsourcing

june 10th

i am impressed by ck prahalad's ideas. his ideas on strategic intent have been compelling. and lately his concept of 'the bottom of the pyramid' makes intuitive sense especially in india where there is a large amount of purchasing power even with less-affluent individuals, if only it is tapped carefully.

this article was forwarded to me by somebody, and i am forwarding it on to you.


The Art of Outsourcing

June 8, 2005; Page A14

In the very partisan political climate in Washington, what is the one issue
that is likely to bring Democrats and Republicans together? The fact that Sens.
Charles Schumer (D., N.Y.) and Lindsey Graham (R., S.C.) will co-sponsor a
China Currency Act is quite extraordinary. Their concerns and their solutions
to the growth of imports from China -- be it textiles or consumer electronics
-- are leading the U.S. to a more protectionist posture.

Export of service jobs to India is also a cause for politicians' concern, and
the "Exporting of America" theme is never short of congressional attention. The
assumption behind this fearful perspective is simple: Greedy managers in global
firms are exporting jobs to cheaper locations without regard to the harm this
causes to displaced U.S. workers.

I suggest that we look at this phenomenon with a different set of lenses,
highlighting the emerging pattern of globalization and the new demands it
imposes on global firms. If American firms are to maintain their competitive
edge now and in the future, they need to get in front of these changes and
direct them, not become isolationists.

The outsourcing of lucrative information technology and high-end manufacturing
work is not new, at least between U.S. companies. EDS, IBM, CSC and Accenture
built their businesses on outsourcing. Kodak outsourced all IT work to IBM in
1989. Xerox outsourced it to EDS in 1994. The government has been outsourcing
work to CSC from the early 1980s. The motivation for outsourcers was always the
same -- reducing capital expenditures and operating costs, accessing
competence, and focusing on their core activities. Off-shoring of work to an
overseas manufacturing facility is also not new. For over 30 years, U.S.
multinationals have "off-shored" their manufacturing and R&D facilities in
semiconductors, computing, chemicals and pharmaceuticals to the U.K., Germany,
France, Ireland and, more recently, to China and India. Flextronics and
Solectron built their business on outsourcing of high-volume electronics
manufacturing by U.S. firms. So outsourcing to specialized vendors and
off-shoring (internally or to an outside vendor) is accepted practice. Why
then, is this debate happening now?
* * *

The current outsourcing of knowledge work is a new variant of the long history
of outsourcing. Traditionally, EDS took over the entire IT work of a firm
including most of the employees. In the current variation of outsourcing,
driven by digitization and inexpensive telecommunications and ubiquitous
connectivity, parts of work can be parceled out for remote delivery to a
vendor. Key management processes can be fragmented. For example,
sales-transaction processing and call centers can be separated from the entire
sales and customer service activity and outsourced. Investment bankers can
isolate routine analysis of a firm's performance from their overall investment
recommendation. So, too, can patent search from patent application, making of
slides from a customer presentation, developing CAD drawings from purchasing
decisions, or market research from product development.

It is this ability to fragment complex processes into their components -- as
well as the search for the best and lowest-cost talent to perform it -- that is
changing the nature of competitiveness. Also new is the fact that the work can
be done almost in "real time" remotely. While work is done 10,000 miles away,
Office Tiger, an investments analysis firm in Chennai, India, claims that it
can deliver a routine performance analysis of a firm in less than three hours.
It is the granularity of the effort that can be outsourced that allows
customers to be more willing to experiment. Today, outsourcing is not a
complex, board-level decision, unlike the outsourcing of all IT work during the
'80s and early '90s.

The current phase of outsourcing will lead to multiple streams of competitive
advantage for U.S. companies. Cost is one of them, and will remain at the core
of the phenomenon. Quality is another. India has more than 40 software houses
with a quality ranking of CMM 4 or 5. There are other benefits to outsourcing,
too. Because remote development and delivery demands clear documentation, the
process capabilities of both the customer and the vendor improve. Most often,
for outsourcing to work, the U.S. customers have to get their legacy processes
cleaned up. Many firms have found that outsourcing helps in better
documentation of internal processes. Speed of reaction is yet another source of
advantage. As vendors and customers work in time zones with a nine- to 12-hour
difference, rapid response is possible. Finally, outsourcing allows firms to
access a higher quality of skilled people for developing analytics. In just two
years (2002-2003), U.S. firms conducting R&D in India have filed for over 900
* * *

The real debate ought to center around the best way for U.S. firms to import
competitiveness -- not "export jobs." Firms compete across the globe --
Motorola against Nokia and Samsung, GE against Siemens, GM against Toyota, and
Intel against AMD and TI. Global competition is primarily about inter-firm, not
inter-country, rivalry.

Global firms are not just looking for the next source of competitiveness. They
are also looking for new markets to grow. The largest markets for cellphones
today are in China and India. India is adding nearly two million phones per
month. China is one of the largest markets for Caterpillar and is emerging as a
large market for cars. Yes, India can be a source of competition for
"well-paying jobs." But it is also a growing market for Dell computers,
Microsoft software, Motorola cellphones, Whirlpool appliances, and Oracle
databases. For example, while technicians work at these remote call centers and
other "outsourced" operations, the hardware and software tools they use are
made by U.S. firms. Globalization is creating a new form of interdependence. To
focus on "independence" and "self-sufficiency" in this era is foolhardy.

The crux of the debate needs to be reframed. If global firms have to compete
effectively for global markets as well as retain their position in established
markets, they must have the ability to improve their cost, quality,
time-to-market and capacity to innovate. This requires a continual search for
talent and a willingness to change the internal processes of managing to keep
ahead of competition. The current wave of outsourcing is motivated by this
desire to innovate ahead of competition.

The longer-term prognosis for the developed world demands that global firms
learn to source talent from developing countries such as China and India. Given
the demographics, it is estimated that the U.S. will be unable to fill more
than a million jobs by 2010. Aging populations and worker shortage are likely
to be major problems in Germany, France, the U.K. and Japan. Either one allows
for more immigration to fill jobs or rapidly learns to outsource work and have
it done remotely in India, China, Eastern Europe, Russia or the Philippines.
The firms that learn to innovate quickly by managing differently -- with
granular partitioning of workflow and efficient coordination of the fragmented
parts -- will retain competitive advantage.

There was a time in the 1980s when Americans fretted about Japanese competitors
and how they would take over all the key industries in the U.S. As we look
back, the firms and industries which were willing to adapt and innovate have
done very well: IBM, Intel, H-P, GE, Dell and Motorola have not disappeared.
They are still leaders in their fields. All of them access global talent to
retain their competitiveness. Consequently, the key question for U.S. firms
should be: How are we going to leverage the talent and markets in China and
India to enhance our competitive advantage world-wide?

The current outsourcing phenomenon is the start of a new pattern of innovation
in the way we manage. The ability to fragment complex management processes and
reintegrate them into the whole is a new capability. It allows us, in the short
term, to take advantage of the talent outside the U.S. In the longer term, it
allows us to cope creatively with the emerging labor shortage caused by an
aging population in developed markets. The time to learn to manage with a
global system of knowledge, products, services and component vendors is now. We
should celebrate the process that imports competitiveness and creates new jobs.
Fear is for losers -- and for Lou Dobbs.

Mr. Prahalad is the Harvey C. Fruehauf professor of Corporate Strategy at the
Ross School of Business at the University of Michigan. He is also chairman of
The Next Practice, and the author, most recently, of "The Fortune at the Bottom
of the Pyramid: Eradicating Poverty Through Profits" (Wharton, 2004).


san said...

Bleh, Lou Dobbs is just a fakir who is bent on promoting himself and his book by having latched onto people's fears.

Here's my argument on outsourcing:

If someone waved a magic wand and suddenly made half the US population disappear, would that suddenly mean a huge windfall in job vacancies for American job-seekers, since half the people are no longer showing up for work?

No, of course not. Cutting the US population in half would also be cutting the consumer pool in half. So the economy would effectively be cut by half.

Taking this point in the other direction, by having more people overseas entering into the global market economy, there is a corresponding increase in the consumer pool. This means more people for US companies to sell to.

The thing is that a larger global labor pool means more people working on market improvements, such as advancements in technology and in business practices.

For example, the higher price of oil may be linked to Indian and Chinese consumers' increased consumption as part of their increasing economic activity. This is then pushing the long-moribund energy industry into developing new alternatives such as fuel cells, nuclear, solar and wind power. With more competitors participating in the energy demand market, there is more incentive to do this. Environmentalists who were just a few years ago fretting haplessly at rejection of Kyoto, are now triumphantly pointing out that market demand is bringing about efficiency changes that politicians themselves failed to do.

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