Business Week: The future of outsourcing

The Future of Outsourcing is cover story for the 30 January 2006 issue of Business Week:

As companies shift work overseas, outsourcing is portrayed as a killer of good-paying U.S. jobs. But now executives are discovering how outsourcing can not only cut costs, but also boost quality and even create new types of jobs at home.

Pete Engardio's feature story agrees there is some basis for worker's fears:

Ever since the offshore shift of skilled work sparked widespread debate and a political firestorm three years ago, it has been portrayed as the killer of good-paying American jobs. "Benedict Arnold CEOs" hire software engineers, computer help staff, and credit-card bill collectors to exploit the low wages of poor nations. U.S. workers suddenly face a grave new threat, with even highly educated tech and service professionals having to compete against legions of hungry college grads in India, China, and the Philippines willing to work twice as hard for one-fifth the pay.

Workers' fears have some grounding in fact. The prime motive of most corporate bean counters jumping on the offshoring bandwagon has been to take advantage of such "labor arbitrage" -- the huge wage gap between industrialized and developing nations. And without doubt, big layoffs often accompany big outsourcing deals.

But it can also transform ailing industries and speed innovation:

The changes can be harsh and deep. But a more enlightened, strategic view of global sourcing is starting to emerge as managers get a better fix on its potential. The new buzzword is "transformational outsourcing." Many executives are discovering offshoring is really about corporate growth, making better use of skilled U.S. staff, and even job creation in the U.S., not just cheap wages abroad. True, the labor savings from global sourcing can still be substantial. But it's peanuts compared to the enormous gains in efficiency, productivity, quality, and revenues that can be achieved by fully leveraging offshore talent.

Thus entrepreneurs such as Chapman see a chance to turn around dying businesses, speed up their pace of innovation, or fund development projects that otherwise would have been unaffordable. More aggressive outsourcers are aiming to create radical business models that can give them an edge and change the game in their industries. Old-line multinationals see offshoring as a catalyst for a broader plan to overhaul outdated office operations and prepare for new competitive battles. And while some want to downsize, others are keen to liberate expensive analysts, engineers, and salesmen from routine tasks so they can spend more time innovating and dealing with customers. "This isn't about labor cost," says Daniel Marovitz, technology managing director for Deutsche Bank's global businesses. "The issue is that if you don't do it, you won't survive."

The new attitude is emerging in corporations across the U.S. and Europe in virtually every industry. Ask executives at Penske Truck Leasing why the company outsources dozens of business processes to Mexico and India, and they cite greater efficiency and customer service. Ask managers at U.S.-Dutch professional publishing giant Wolters Kluwer why they're racing to shift software development and editorial work to India and the Philippines, and they will say it's about being able to pump out a greater variety of books, journals, and Web-based content more rapidly. Ask Wachovia Corp., the Charlotte N.C.-based bank, why it just inked a $1.1 billion deal with India's Genpact to outsource finance and accounting jobs and why it handed over administration of its human-resources programs to Lincolnshire (Ill.)-based Hewitt Associates. It's "what we need to do to become a great customer-relationship company," says Director of Corporate Development Peter J. Sidebottom. Wachovia aims to reinvest up to 40% of the $600 million to $1 billion it hopes to take out in costs over three years into branches, ATMs, and personnel to boost its core business.

Here's what such transformations typically entail: Genpact, Accenture, IBM Services, or another big outsourcing specialist dispatches teams to meticulously dissect the workflow of an entire human resources, finance, or info tech department. The team then helps build a new IT platform, redesigns all processes, and administers programs, acting as a virtual subsidiary. The contractor then disperses work among global networks of staff ranging from the U.S. to Asia to Eastern Europe.

In recent years, Procter & Gamble, DuPont, Cisco Systems, ABN Amro, Unilever, Rockwell Collins, and Marriott were among those that signed such megadeals, worth billions.

Of course there are also side stories and online features:

Slide Show: Five Offshore Practices That Pay Off

Angling To Be The Next Bangalore
Developing countries from Argentina to Vietnam are scrambling to lure services work from the U.S., Europe, and Japan.

Online Extra: Emerging Outsourcing Players
A table listing companies who are emering as outsourcing players.

Online Extra: Major Players in Outsourcing
An expanded look at Gartner Inc.'s  analysis of the who, what, where, and how much of  offshore outsourcers

Online Extra: How BofA Banks on Offshoring
Having grown via acquisition, it's used to having far-flung operations. Now with centers in Asia, it's able to keep projects moving 24 hours a day

Online Extra: Penske's Offshore Partner in India
The truck-leasing outfit works with Genpact in India and Mexico to improve efficiency and customer service

Online Extra: Worldly Lessons for Wolters Kluwer
At first, the publisher micromanaged offshore work. But stronger partnerships are now helping it trim costs and expand product offerings

Online Extra: Lilly's Labs Go Global
To cut costs and speed development, the drugmaker steps up R&D outsourcing -- including clinical trials -- to countries such as India and China.

Comments

[Lord]

It would be a lot more convincing if we actually saw much corporate growth. Profits have been excellent while revenue growth has been poor. While it can be used for innovation, there is little indication it has been used for that up to now.

[Dan Harris]

This is an excellent article as it actually presents a nuanced view of outsourcing. It is refreshing to see an article in a mainstream publication that does more than simply present outsourcing as either the end of employment as we know it or as the be all end all for every single company. ChinaLawBlog.com

[NinjaPlease]

The future, as I predict it,

Artificial Deflation:

many people vieing for jobs at Burger King for minimumwage, while those who have the jobs must compete with illegal aliens, all to spend their money at walmart on goods made in other parts of the world, b ut are VERY cheap.

very soon, none of us will be landowners.

Thank you Merchant of Venice, you have returned in the cloak of "global sourcing"

[Joel]

who is the authur of this work ?

[999]

In Communist countries there was a lot of secret construction projects. When these construction projects were completed, the workers who built them magically disappeared. It is not surprising that the IT workers in the US who build the current infrastructure are being disposed of first at alarming rates. How, by being ignored and replaced, making keeping abreast on technology worthless. Almost funny, many articles are claiming that only low unskilled work is shifted abroad, but it is ALL levels of IT! Oh and yes, 5% unemployment, should be much higher 'technically speaking' those who do not find work within a specified period of time are no longer 'qualified' for unemployment, therefore they are no longer unemployed!

[r4 ds]

I don't get how these imbeciles (Tmap) equate any of this with socialism. Outsourcing to private companies is capitalism. And when they demand extra subsidies - railways etc - it's like the Banks, privatising profits and socialising losses. I only wish the giants of capitalism had the true courage of their convictions in their hostility to socialism and would honestly have nothing to do with it. As it is, as events have proven, they are happy to cherrypick their disavowal.