In the news: Satyam

Business Week reports on Satyam Scandal (link: India's Madoff? Satyam Scandal Rocks Outsourcing Industry.

What happened here? It appears to be primarily a governance and accounting scandal although, as the article notes, there have been recent warning signs on the operation front.

But, as the article asks, will this tar the whole Indian sector? I doubt it. There will be two, somewhat offsetting effects.

1. Customers will come to realize that they are taking country and governance risk when they go offshore. This risk has always been there, it’s just that many customers ignored it. This will lead to a slowdown in new contract announcements in the next quarter or two. But then the announcements will pick up again and the Satyam scandal will seem like a minor blip. A good analogy would be the nuclear tests that India and Pakistan made in May 1998. This shook everyone for a few months, then the contracts started flowing again—but with a renewed emphasis on geographic diversification and seamless disaster recovery capability.
2. What are the competitive effects? As of today, Satyam is making a big deal that only one customer has left. But this will not last. My friends in the industry tell me that all of Satyam’s large customers are looking around. Some activities can be shifted to new suppliers quickly (call centers, standard platform financial systems). Others take more time (claims processing, custom systems, application development). Expect a torrent of defections to unfold over the next 3-12 months.

What next? Beyond the effects described above, I expect two major outcomes.

1. Expect a rush to strongly branded global firms (IBM, Accenture, TCS, Wipro, INFY, etc.) and away from the mid-tier suppliers. The economics of offshoring are too compelling to bring the work back home. But customers also want to feel comfortable. Like the 1960s saying “no one every got fired for buying IBM.”
2. Expect to see a rush of offshoring firm announcing listings in the US and EU. It’s a simple way for a developing country firm to “import” the US/EU regulatory framework. To be listed (in the US), a firm must issue GAAP financial statements, meet Sarbox requirements, and adhere to the Foreign Corrupt Practices Act. None of these regs are a guarantee, but they are a very visible 9and expensive) signal of quality.

What do you think? Am I too optimistic? Will multinationals really pull back because of the scandal?

In the news: IBM

IBM Announcement in Lansing State Journal - A Global Delivery Center. . .in Lansing Michigan.

What does this tell us about the Services shift? Quite a lot, actually. While the polemicists Lou Dobbs and Clyde Prestowitz think that globalization of services sourcing will doom us, that’s not the case.

The Services Shift is really about matching activities to the locations where they can be delivered at the best cost and quality. In many cases, that remains close to customers and/or the home office. For some activities, that may be in a remote geography. If a task is amenable to offshoring (or remote sourcing; see Ch 3 of the book), there are two basic reasons to source abroad:

• It is a low-skill, commodity-type activity, where most firms compete on cost and strive for acceptable quality. Examples include first line call center support, medical transcription, geographic information systems mapping, and insurance claims processing, or
  
  
  
• The firm must go abroad to find the talent it needs. Examples include genomics research, nighthawk radiology services, and some types of engineering services.

How to configure the services value chain is a complex problem. Many firms overshoot—sending too many activities offshore and then finding that coordination costs explode and outweigh labor cost savings. When the pendulum swings too far, firms often pull back a few positions (e.g. Dell, Apple, and American Express), but this is not a reversal of the trend. It is merely a mid-course correction.

So, IBM’s announcement is good news for the Lansing economy and Michigan State. But this is a move to optimize IBM’s global delivery model. Not a reversal of the Services Shift.

So-called Backshoring or Boomerang Outsourcing is a story that journalists REALLY want to write. Even when it’s just a small crosscurrent in a large wave the other way?

What do you think? Is the IBM announcement the beginning of a trend? Or merely a blip in the larger trend line? I'd like to hear from you.

Services Shift - Book Overview

The book, "Services Shift" is organized into eight sections , an introduction and seven chapters:

Introduction – provides motivation for the book (hey!!! this is a big deal), some definitional things like the difference between outsourcing and offshoring, introduces the authors, and provides an overview of the book.

Chapter 1: Globalization of Services
What, Why, and When – this chapter digs deeper into the “services shift” phenomenon and raises some issue most readers will not have thought of. We explore the shift at two levels – industries and companies.

Chapter 2: The Economics and Drivers of Offshoring
Provides a framework for analyzing and understanding offshoring opportunities and discusses why the globalization of services is happening now.

Chapter 3: Making It Real
Presents a framework to help managers establish realistic sourcing goals and the difference between offshoring “tasks” vs. offshoring “processes.” The core of the chapter is taking the reader through a detailed, eight step process that firms must go through to move activities offshore.

Chapter 4: The Supply Side
Discusses what is out there. It begins with an overview of the outsourcing universe (size, growth rates, types of firms), provides a brief history of the sector, and then presents a typology of business models.

This chapter is complemented by three detailed appendices that profile various services exporting countries. One big lesson is that offshoring is truly becoming a global phenomenon, not just an India phenomenon.

Chapter 5: Shifting Skill Sets
Explores what all this means for how you manage and organize your firm. A move to offshoring requires very different skill sets than the traditional, all-in-one-place firm. The chapter draws heavily on a series of interviews we did with leading firms that have pursued offshoring.

Chapter 6: Policy Implications
While most of the book takes a firm-level, managerial view, Chapter 6 adopts a public policy perspective. We first explore what developing countries are doing to promote services exports. The second half of the chapter looks at policy issues for developed countries. Should rich countries work to slow the services shift, allow it to happen while working to mitigate the effects on those displaced, or allow it to happen with no particular policy response.

Chapter 7: Looking Ahead
Lays out seven predictions for how the services shift will unfold over the next decade.

=== === ===

So, a question for the readers. This post lays out the structure of the book. Have I missed any important items? Have I overemphasized any? Let me know what you think in the comments. The services shift is a huge and important trend. We couldn't tackle every issue, but let’s get some more on the table.

Why I started this Blog

As you have likely figured out, I started this blog to initiate a discussion around offshoring issues. While I have long been interested in the issue, the immediate catalyst was the publication of my book The Services Shift,


How did I get interested in offshoring of service activities?

I had been to India several times early in my career, but generally focused on traditional strategy topics, like market entry, establishing and managing distribution channels, etc. In the late 1990s, I became fascinated by the Indian software industry (“high tech in a low-income country!!) which, at that point, had grown its exports by around 50% per year for over a decade—while maintaining 30% + operating margins. I really thought this was something special—a developing country exporting brainpower rather than minerals or manufactured goods.

I started working on a case about how the industry developed and the challenges it faced at the turn of the millennium, as viewed through the experience of Tata Consultancy Services. What amazed me was, when I got there, pretty much everyone said something like “well, software is a pretty good business, but it’s not that interesting. What we’re really excited about is IT-enabled services” (which later came to be known as Business Process Outsourcing or BPO). I figured that, if they thought the business was that much better than software, it must really be something.

This led to a major effort to understand and document the services offshoring phenomenon over the next few years. Most of this effort was aimed at my advisory and teaching work. As I gave presentations to business groups and alumni gatherings, I realized that managers—even sophisticated managers—were struggling with what this all meant. They knew something important was going on, but they were groping for a framework that would help them understand it on their own.

This book is aimed at those managers.

I wrote the book primarily for three groups of people, although anyone could learn from it:

1) Middle and senior managers/executives in large firms. These people know something important is happening, but don’t have a framework for understanding the opportunities and risks created.

2) Entrepreneurs. The offshoring trend creates tremendous opportunities for value creation. The book provides a framework and sketches the landscape of what is happening and where we are going. I believe that entrepreneurs will find it to be a useful guide.

3) Managers in the offshoring sector. Those in the industry often take a defensive posture. While the topic is controversial, it is also inevitable. I hope to provide a perspective that allows them to understand the value they are creating and to speak openly and candidly against the (sometimes) hysterical political posturing that occurs every time we have an election.



Future posts will provide an overview of the book which is organized into 8 sections.

Welcome to the Services Shift Blog

Welcome to the Services-Shift blog. I started this initiative in January 2009 as a forum to discuss business, strategy, and economic issues surrounding the topic of offshoring (sometimes referred to as “offshore outsourcing,” the “globalization of services” etc.).

I will use this first posting to introduce myself. The next few postings will focus on the book I have been working on for the past year – The Services Shift: Seizing the Ultimate Offshore Opportunity

NOW AVAILABLE: The Services Shift: Seizing the Ultimate Offshore Opportunity

I am a Professor of Business Administration at Michigan’s Ross School of Business (www.bus.umich.edu). I teach in the MBA, Executive MBA programs and serve as Director of the School’s Global Initiative—meaning lots of international things land on my desk. The majority of my time is absorbed with running the William Davidson Institute (generally referred to as “WDI,” http://www.wdi.umich.edu/), where I am Executive Director. WDI focuses on business and policy issues in developing countries and is an amazing place. Bill Davidson has been quite generous and encourages us to think big. We have substantial initiatives in five areas:

1. Research, where we act as a bridge between pure academics doing theory and empirical work, and leading edge organizations operating in the field. Our research initiatives focus on:

• Base of the Pyramid - operating at the base of the economic pyramid;
• Globalization - the globalization of services, the initiative that has led to the publication of this book;
• Green Leap- Leap Frog Technologies for sustainable development;
• Business Health Care- the business of health care;

2. Executive Education– the Institute runs about 40 programs each year in around 20 countries. Most programs involve sending faculty from Michigan and other leading business schools to deliver programs in developing countries;

3. Development and Consulting Services – the Institute delivers capacity building programs in developing countries. Core competencies include: higher education development (particularly business schools), monitoring and evaluation, policy, and private sector development;

4. Educators Outreach and Faculty Research – the Institute has established a case writing operation. We have developed about 90 cases distributed on two sites. We have a staff of six, with four full time case writers, an operations person, and a director. Cases developed with faculty are available from the Ross School.

GlobaLens - All international cases (from Ross and other sources) are available on GlobaLens, a site that focuses on “Cases, Courses, and Community” for International Business Educators.

5. Supporting International Activities at the University of Michigan – this is a catch all category for generalized support. WDI supports research, travel study courses for MBAs, summer internships, international research at Michigan’s Schools of Medicine and Public Health, a speakers’ series, and many other events.

I have been studying this offshoring phenomenon for about 10 years. More on that in my next post.