Outsourcing and Globalization –A review...

High school social science’s and economics books mention how goods and services are exchanged between various cultures/societies/countries. We read about how the exchange empowers different locations to tackle with the problems that are locally not possible (or inefficient)—Globalization, it is more of a realization, when we come out of the textbooks and enter the actual phenomenon. Globalization is finally living up to its meaning with outsourcing giving the required shot in the arm.

“Globalization has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital – the world’s best talents and greatest ideas.”

—Jack Welch

Outsourcing is unparalleled for its contribution to globalization. Outsourcing has been successful in merging trade boundaries, in a way never seen before; it’s not uncommon now, when a person sitting in Hyderabad talks about a new product that has been released by a company in Texas.

The previously cautious economies of developing countries are now breaking “shells” because companies and people are more fearless now. Not only has outsourcing generated knowledge and wealth in the developing countries, we now see organizations from emerging countries moving out to U.S, Europe and Japan for business development.

Outsourcing –> Globalization–> is leading to:

• World becoming a big single-market place
• More awareness among individuals, which is a direct result of exposure that people gain from working in different market environments.
• Narrowing of gap among the regional labor rates (across all the countries)
• Proactive approaches being followed for innovating existing models of doing business.

India is a key player in outsourcing (ITO and BPO). The cheap Internet and Human resources will enable India to continuously thrive in a Global and “ever-looking-to-make-profit” market. But Indian companies need to take a step further in order to call themselves global; Indian companies have to change their hiring model by becoming fully engaged local citizens in local markets, rather than becoming all-Indian companies that employ predominantly Indian staffs. Such a practice will not only be helpful to the “parent” country economy, but it will also sow seeds for further globalization when people from such countries bring more knowledge and skill-sets into India (and similar developing countries in other contexts).

Something that will need constant eyeballing:

As global competition will intensify, emerging-market businesses will fight aggressively for talent and would want to extract more effort out of every person, causing a degree of parity in compensation and improvements in workplace conditions globally, but a decline in the work-life balance. One would want to keep a check on such a thing.

Service globalization is truly a bringing-us-closer phenomenon, not only professionally but also in binding various cultures. There will be a time when the cost benefits gained due to outsourcing will attain “homeostasis”. As the global market space will expand, businesses will see how well they can adapt to various cultural changes [1]. Globalization is crossing the usual business borders, so where are you right now?

I remember reading in a social science textbook about how gypsies used to roam around the Europe in medieval times and parade “inventions” from time to time. I think the process started long time back, the various cultures exposed to outsourcing used to build upon the inventions that were brought to them by the gypsies. Gypsies, Outsourcing, globalization…I am confused—do u see where I am coming from?

Notes:

From BPO to KPO—The road ahead…...

Some “Number-facts”:

Indian KPO Market size in 2006-2007:  $3 billion approx.

Estimated KPO Market size in 2010-2011:  $11.2 billion approx.

Employing: from 75K in 2006-2007 to 255 K in 2011. [1]

Indian BPO industry estimates are here

Just in case we missed it:

Knowledge process outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. [2]

KPO is many times thought of as an extension to BPO, definition is worth advocating if the differences are retained well. “K” is the key in KPO. That is where KPO is so different from BPO. The level of complexity involved in KPO is immense; one would assume that it is for the same reason that KPO is taking rapid but small strides.

“So what makes KPO very different from BPO?” If somebody asks this, our obvious response would be– “Knowledge of course”. KPO demands:

• Very high technical and analytical skills from clients
• Intensive knowledge of domains of the client
• Ability to research and take business decisions on behalf of the client.

As Dr Richard Sykes puts it:

“KPO is merely a continuation of BPO, though with rather more business complexity. The defining difference is that KPO is usually focused on knowledge-intensive business processes that require significant domain expertise. The offshore team servicing a KPO contract cannot be easily hired overnight as they will be highly educated and trained, and trusted to take decisions on behalf of the client.” [2]

So KPO might mean delegating “power” and responsibility to the vendor. BPO generally involves hiring people at the lower stratum of a clients business to reduce costs by off-shoring. But KPO seeks to delegate “high-business-competence” activities to the vendor and gain cost benefits that are otherwise not possible. For e.g. a highly reputed U.S firm requires an R&D department for its new product. Setting up such an office in Bangalore would be called as KPO. Again, to maintain the patents and consistency in laws that accompany production in India have to be taken care by a LLB, and yes that would have to be another expert from India. So the whole process aims to set up an independent process through a vendor, which can coordinate with the client.

Of course, to achieve the required, vendors need to maintain high quality service levels by employing and training specialized professionals in various knowledge-intensive high-skill sectors. Unlike the BPO, which is process-centric, KPO concentrates more on knowledge expertise and requires service providers to possess very high technical and analytical skills.

KPO isn’t only about “arbitrage”, it intends to provide highest quality business expertise by improving clients time to market, absorbing pressure and by enhancing overall efficiency. In doing so, KPO invents seeds for new business models, since vendors have huge knowledge base in their own country, which can lead to further emergence of new players in the industry. “New players” means varied expertise, which means further expansion.

All said and done, it is not easy to set up KPO unit, because unlike the BPO, wrong hiring in BPO can lead to quality compromise. The recruitment for KPO has to be of highest quality, and should ensure that people have very high domain experience on the road reaching to this “job”. Of course, such an industry would thrive only if the experts are retained.

KPO is to outsourcing industry, what a joker is to game of poker, but if not used properly, “risks” are high. But lots of highly specialized vendors have come to spread the awareness of KPO that will prompt  SMEs to take a step towards “BPO—KPO” integration [3].

U.S outsourcing policy and its implications...

Follow up to what happens to my IT department, Outsourcing ethics

Individual business policies adopted by the governments can impact the way businesses are done. In the previous post, there was a mention about how government can have a control over the outsourcing policies, so that jobs are not outsourced indiscriminately.

Well that is true, a recent bill proposed by President Obama does deal with the outsourcing issue.

The proposed policy suggests increasing the tax on the benefits gained from outsourcing the jobs from U.S. Basically, the policy will succeed in achieving its target if there are fewer incentives for the U.S companies to outsource their operations. Although the policy aims at a beginning to create and conserve more jobs in U.S, it’s worth to look at the implications of the policies, especially, to see how that affects Indian outsourcing market.

The policy will definitely affect the foreign companies that are operating in U.S. The policy will mean that the foreign companies will have to pay lot of tax on the labor imported by them. WSJ and LA estimate a tax rate of 55% on foreign companies. That will be a setback for countries like India, which is the biggest player in outsourcing industry. A present slump in number of H1B visas taken up is anything but a reflection of the same.

Foreign companies might savor the advantage due to lack of competitiveness from U.S companies (owing to a high cost). But, in the long term, it will hurt all the economies, since U.S investment is a big factor and reduced investment from U.S means reduced money in all the markets, especially India.

But the policy will not lead to automatically stop the U.S companies from outsourcing work from home to India. Chances are that comparative cost advantages that countries like India might still provide, would outweigh the loss incurred by the tax loss companies will face in the US.

Indian third party companies who outsource work will still continue to rise, because these companies operate within the supplier country and may not be affected by the tax policy.

A rise in domestic BPO sector is an indicator of that. It is possible that some third party companies will be affected because of regulations on the US counterparts, but that is yet to be seen.

The world market is highly competitive and one has to compete in a free market, “closing doors” and “protectionism” is not a solution. The policy makers will have to realize that and instead concentrate on stronger ways of tackling the situation, for e.g. by investing in education, science and technology, renewable energy sources, etc.

Ensuring a stable economic environment is prerogative of every government. But the world economy cannot be put on balance to attain such a balance. Outsourcing has been number one player in world economy globalization, economic growth, and generating employment. So one would need to think about policies that are mutually exclusive of the benefits they provide by retaining jobs in home country as well as overall growth.

Outsourcing ethics– a case for retrospection...

Outsourcing is now a huge hit. It is probably like a direction style in the movie “pulp fiction”, which has been adopted widely ever since. The details are worked out, every business that can take benefit from the strategy is going for it. Why not? Isn’t business about surviving? If a business is a family, the heads must ensure that the family is doing good, whatever be the means to achieve the end. Really?

Outsourcing is nothing new (more about this later), IT outsourcing probably stands out because of the reason that outsourcing in this area has crossed-boundaries with respect to traditional ways of outsourcing; no longer outsourcing is restricted to “parts” of business being outsourced; many businesses now believe in outsourcing to get “finished products”.

But, there is something larger (is it?) than just the business, which might have to be dealt with. “Where’s my job?” “What happens to my IT department?” “Is my future a function of outsourcing?” and above all, “Do the ends justify the means?” These are the few questions that have to be answered, not at the business level per say, but certainly at a level closely related to it—“business ethics”.

At a macroscopic level, outsourcing means lesser jobs in the native country or the provider company!! Nobody can probably deny that. That is obviously disappointing for the native country citizens as well as the aspiring “job holders”, and the job seekers.

Economic benefit of outsourcing is lower costs. Lower cost is attributed to greater efficiency and competition. Lower cost is a result of greater competition among the “in-house” workers, which ultimately leads to driving down salaries and benefits. So the economic benefits of outsourcing are mostly to do with the pockets of the employees.

The above scenario takes us back to the Karl Max days, where high value was given to “economic justice”. Businesses increasing profits at the cost of employees will lead to social economic imbalance and to social injustice in the end. Business or no business, everybody wants a means to survive, a job to support him or her. These are the bare minimums that are expected by a social human being.

Outsourcing definitely has put a question mark over the future of graduates who want to pursue an IT career. Already existing employees in the organizations also face the danger of being replaced. The benefits of low cost seem to be available to only few. After all, a corporation has a legitimate interest in self-preservation, which it does by offering competitive prices to the customers and providing monetary rewards to top managers and those who assume risk by buying the company’s stock.

Although, there are “Bill of rights” and a legal system in place to tackle such situations, corporate world is certainly a place where “cost as end is used to justify the many decisions” (more on the recent outsourcing policies in later post).

Those familiar with ethics would probably know that there isn’t a single definite answer that will prove to be a “cure for all”. The actions taken by a government or state to ensure the social prosperity of the locals will vary from country to country, place to place.

Saying that however, outsourcing has obvious benefits and it raises the economy and the standard of living for the society as a whole. So the “ends” definitely are good, but the question remains about how well the benefits are distributed and do the society good at a more practical and individual levels. Questions have to be asked if the policies and resulting gains should come at the expense of hapless commoners’.

So where does all this discussion lead us to? As already pointed out, discussions such as these have no single answer, but the discussions are [means] and important to effect the results. Thought has to be given if alternative policies can do better than the existing ones. Necessary “win-win” policies have to be in place, which challenge us to outsource only when the displaced employees also benefit in the process.  As they say—“Only that good is good which is good for larger group”. Time has come that the problem is actively addressed and tackled “ethically”.

“What happens to my IT department?”...

If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.  –Once quoted by former Singapore prime minister.

“If you don’t adapt, you will not survive” or “If you will see outsourcing as a bane, you will perish”. Not trying to sound dramatic, but an American IT graduate would question the above “hyperboles”. “IT outsourcing will mean I have fewer options to choose from or I may end up jobless”. To this, one would respond—“so u think competence and business strategies should give way for Americans, just because the jobs happen to be in America?”

From a young American perspective, one would say that asking the questions like those is valid and very human. It’s about Darwinian survival, people and businesses both need to survive (more on those emotional aspects in a later post). We have already witnessed great dynamics in IT outsourcing world, esp. with respect to American IT outsourcing.

A source (link at the end) quotes that there are more than 14 million jobs in America, which are vulnerable to offshore outsourcing. An obvious question an IT employee in America would ask—“What happens to my IT department”.

Many big IT companies that currently have huge in-house IT departments also raise the question.

“Outsourcing a part or complete IT department frees up a company’s valued IT personnel so they can support their mission critical business processes. In addition many companies today are finding that they cannot take the risk or endure the financial burden of running their whole IT department in-house.”

So whether to outsource or not is no longer an option anymore. How to strategically outsource so that the whole exercise is dealt without any derived problems? Yes, that is something more of a practical question and needs to be thought upon.

The answer to the question lies somewhere in the middle of going for a complete IT department outsourcing and not doing it at all. One has to carefully plan and cut the IT department gradually, increase outsourcing, while still retaining best of both worlds. The best way to start can be waiting until one finds a suitable supplier, which suits the business needs, the best.

After one is convinced that the work can be outsourced, next step should be planning the activities leading to cut down of IT department. And even after that, one should consider retaining experienced employees who can manage the outsourcing exercise.

But wait! The question is still unanswered- “I am an IT graduate, what happens to me?” Well, the Obama government has already proposed few restrictions on outsourcing, some of which have been already implemented (more on this later).

McKinsey quotes- “This may sound obvious, but probably the biggest stumbling block to offshore outsourcing is that after all the contracts have been signed, companies abdicate responsibility for projects to the provider…”

The above quote just corroborates the point about retaining the experienced employees of the IT department in the provider company

All sounds good, but there is a problem which most of the IT clients’ neglect. Many a times the suppliers internalize the operations of the client and lose the fresh ideas, which, they would have otherwise brought about had they been still working for the client, instead of becoming a “part” of the client. Of course, that does help by giving supplier deeper insights into the client’s business. But again, a finer balance and following a median path might do the trick. Which essentially means that companies should opt for right mix of experienced employees and some people from the outsourcing department.

Outsourcing is there to help existing IT departments, not to replace them. So the hue and cry about “Where’s my Job” or “What happens to my IT department?” are not as valid as people make them sound. The providers and suppliers need to sit down and work out the best possible solution to handle the situation. Sounds like a nice coffee topic? (We know it more serious than that).