Media Blast -- India Addition

Have had a very busy few days in India.

First, lots of interactions with our MBA MAP teams.

• First team up is working in Noida, focusing on Drishtee's microenterprise lending strategy.
  
• Spend the weekend in Hyderabad working with a second team focusing on Acumen Fund's healthcare strategy.
  
• Next up is two days of Ross alumni events (Delhi then Mumbai/Bombay).
  
• Then back to Noida Wednesday Thursday for some work with the Perot Systems team, working on skills

The real news, however, is promoting the book. For those of you who've read it, you know that Perot and India play a large role. Anurag Jain, Perot's MD for Asia Pacific and Head of the firm's Business Process Solutions business, had his team organize an absolutely fantastic couple of days.

• I appeared on Power Lunch, the midday program on NDTV, India's version of CNBC to discuss the book and President Obama's comments re: offshoring (sorry, no video)
• Had one-on-one interviews with a series of financial publications (The Financial Express, The Economic Times, Global Services Magazine)
• Then a "Wine and Wisdom" event where Anurag and I spoke about offshoring with a group of Perot executives and another dozen or so journalists.
• In Hyderabad, three more interviews, with Business Line, The New India Express, and the Deccan Chronicle.

I was on cover of the Saturday Economic Times. The article was about Obama's offshoring comments in the town hall meeting and the quote from me were pretty minor. There was a huge picture of Obama on the front page, with a pull quote from me directly responding to him. Wish the book was already released here in India. You can't buy press like that.

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Interesting contrast with the US journalists I have been interacting with over the past few months. Not saying one is necessarily better than the other.

1. My experience is that most US journalists are focusing on the story of the day. They want provocative quotes and I have to push to get references to the book included in the writeups. Here, nearly all the dozen or journalists who interviewed me had spent time with the book. Many had read substantial portions. The focus was very much on the book -- why I wrote it, what was the target audience, engaging me on the key messages, etc.
2. I have the sense that the book will be huge here in India. Judging by the journalists, it seems to hit on a set of issues that are top of mind here. All wanted to stay in contact for future stories. They were happy to work with me and the PR firm on timing release to match the book launch (unfortunately, not for a couple more weeks here in India). Several forwarded requests from their editors about whether I could do guest, or regular columns in their publications. We're doing fairly well in the US, but this market feels ripe. We'll see.

All in all, a very productive few days on the book front. Several pieces coming out in the US next week as well. Look for something in Forbes.com, and a guest blog on Horses for Sources. Also have a piece accepted in Financial Executive Magazine that should be in the May edition.

Today's News

New Job and Cost Reduction Opportunities Emerge as Manufacturers Contemplate Migration Back to the U.S.
A report was issued in Smart Brief that shows a number of companies are contemplating the re-establishment of manufacturing domestically, amid rising costs and other strategic challenges within the off-shoring model. As companies reassess their manufacturing and supply chain strategies for today’s global economic environment, the trend may create significant job opportunities in the U.S., according to the recent study.

“For years, the concept of off-shoring, or moving production and/or sourcing operations to a foreign country, has been the mantra of any supply chain manager looking to cut costs,” said John Ferreira, Principal and Global Manufacturing Industry Practice Leader, Archstone Consulting. “Now, amid volatile oil prices and an uncertain global economic future, this analysis no longer is a certainty. Furthermore, companies that will commit to domestic manufacturing can spur much-needed improvements in customer service, innovation and job creation – especially when servicing the large domestic market.”

TCS to Absorb RR Donnelly Staff
Sify.com reported that approximately 80 employees working with the India unit of Chicago-based RR Donnelley & Sons will join the rolls of the country’s largest software exporter, Tata Consultancy Services, starting June 1. The reason: Both RR Donnelley and the back-office unit of TCS provide third party transaction processing services to a US-based financial services company. The US firm has embarked on a vendor consolidation drive, as a result of which it has decided to move some of the BPO assignments from RR Donnelley to TCS.

Generally whenever a client company moves work from one vendor to another, both vendors have to come together to ensure smooth transitioning of knowledge and processes from the incumbent vendor to the new vendor, say analysts. Whether a company is initiating a new off shoring activity or transferring work among vendors the key to a successful event is clear communication of the roles, responsibilities and expectations of all concerned parties. This point is brought home in chapter 3 of Bob's book.

Newsworthy Items

Two US Companies adjust to the changing market to offer outsourcing services.
A report in Smart Brief stated that OnForce and Autotask have expanded their collaboration making, and deploying local IT services quicker, easier and more cost ffficient. Autotask is extending its integration with the OnForce platform to make it easier for customers to outsource their service needs by tapping into a virtual nationwide network of service technicians and matching and deploying IT service projects from start to finish.

China's Neusoft Gained 18.2% Net Profit Growth and 29.6% Overseas Outsourcing Increase in 2008
Smart Brief reported this morning that Neusoft Corporation, a leading IT solutions & services provider as well as the largest offshore software & service outsourcing provider in China, published its 2008 Annual Report recently. The report indicates a continuously high-speed growth in its two core businesses, industry solutions and product engineering solutions, based upon its overall business strategy in both domestic and international markets. More evidence that India is not the only country with growth in the off shoring arena.

India inc. gets White House meeting on H-1B Visas
An article in Computer World.com reported that a delegation from one of India's largest business groups visited Washington to make a case for the H-1B visa program, among other political topics. Apparently it was a group with enough clout to meet with top White House officials. In India, these visas are seen as critical to that country's IT services industry. The Obama administration has yet to outline its plans for the H-1B program, but the White House has given some signals that it might support an increase in the annual visa cap — primarily via the appointment of officials who have advocated cap increases in the past, such as Janet Napolitano, the former governor of Arizona and now secretary of the U.S. Department of Homeland Security.

When Obama was a U.S. senator, he supported a comprehensive immigration reform bill that was proposed in 2007 but never voted on after its sponsors failed to get enough support for a procedural motion to end debate. That bill would have raised the annual H-1B cap from 65,000 regular visas to as many as 180,000, while also authorizing additional visas for foreigners with advanced degrees from U.S. universities beyond the 20,000 that currently can be issued each year. Since 2007, Obama has continued to urge support for comprehensive immigration reform, but without being specific on the issue of raising the H-1B cap.

The Need to Redefine Ourselves:

An article in the New York Times reported that in the past, Kettering University has "honed its reputation as the West Point of the automobile industry, offering valuable work experience for its students at car companies and parts suppliers, and then virtually assuring them lucrative jobs upon graduation." Now, however, the school's students "are finding this fast track to a career shut down because of the crisis in Detroit," with some being "laid off from their student jobs at places like General Motors." Other students "are quickly switching their minors to fields like medicine, the environment and aerospace," and "even those who are clinging to their dream of an automotive career find the atmosphere to be grim at employers, where they alternate six months of work with six months of studies." The school itself is working "with a broader range of employers," including the United Parcel Service, museums, and the US Central Intelligence Agency. Bob has been advising us that if the US workforce intends to survive we will need to reinvent who we are. This article clearly shows that changes in the global economy have affected our young students currently enrolled in programs at US universities.

"The Services Shift" is Reviewed by The Hindu Business Line.com

The Hindu Business Line.com web site reviewed Bob's book in its March 29, 2009 edition. The review references Bob's 7 predictions for offshoring which are covered in chapter 7 of the book. Two of the seven predictions are quoted in the article. The interviewer closes the piece with the following comment: "A book with insights that can make you shift in your seat". Please use the above link to read the complete review.

Obama Town Hall: Partial Sanity on Offshoring

I'm still traveling in India (more on that in another post), so I'm running a bit behind.

An interesting development in President Obama's on-line townhall meeting. A woman named Harriet, from Georgia, asked the following question (all quotes from the NYT transcript ):

When can we expect that jobs that have been outsourced to other countries to come back and be made available to the unemployed workers here in the United States?

The president gave a surprisingly coherent response -- at least for a liberal democrat. Here it is:

Now, a lot of the outsourcing that was referred to in the question really has to do with the fact that our economy -- if it's dependent on low-wage, low-skill labor, it's very hard to hang on to those jobs because there's always a country out there that pays lower wages than the U.S. And so we've got to go after the high-skill, high-wage jobs of the future. That's why it's so important to train our folks more effectively and that's why it's so important for us to find new industries -- building solar panels or wind turbines or the new biofuel -- that involve these higher-value, higher-skill, higher-paying jobs.

So I guess the answer to the question is, not all of these jobs are going to come back. And it probably wouldn't be good for our economy for a bunch of these jobs to come back because, frankly, there's no way that people could be getting paid a living wage on some of these jobs -- at least in order to be competitive in an international setting.

So what we've got to do is create new jobs that can't be outsourced.

[He then went on to talk about "Green jobs" and having union workers building a smart grid, making $80,000-90,ooo. In the interest of space, I am leaving that out because it's very long and kind of wandering]

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I offer a few thoughts:

1. First, he didn't take the bait and make references to "our jobs" or "American jobs." That's progress.



2. He didn't roll out the "no tax breaks for companies that export jobs" line that nativists seem to like so much. There are no such tax breaks for "exporting jobs," and if the people who use such lines think they can take away other breaks for companies they don't like, they will run into the problem of identification and designing a program that actually works (discussed below Offshoring and Public Policy -- a Conundrum )



3. He seems to be somewhat mistaken about the nature of the work going offshore. From 10 to 5 years ago (as BPO gained steam) much of work was medium skilled -- things like call center jobs, accounting and finance, and claims processing.

What the president misses is that software jobs (in India, a bit more than half the total) are fairly high skill, certainly much more so than the union construction and electrical positions he talks about. Furthermore, the fastest growth today is in high skilled KPO (knowledge sector offshoring) work. Things like engineering services, business analytics, product design, teleradiology, and others.

My overall position is that, while disruptive in the short run, this is ultimately beneficial in the long run.

Bottom line: The president gets a B+. He didn't fall into the typical political trap of mischaracterizing the trade as win-lose (or zero sum). That puts him ahead of 75% of politicians, and 95% of democrats in Congress.

On the other hand, he doesn't understand (or at least communicate) the real nature of what's going on. It will be interesting to see what actions he takes going forward. One of the first tests will be how his administration treats the auto companies. Will they force them to cut back on software offshore outsourcing (GM does huge amounts of work offshore), or on back office stuff (Ford is ramping up its business analytics unit in India). Time will tell.

Offshoring News Today

BPO puts Sri Lanka on the Global Sourcing Map
A recent posting in the outsourcingbpo.cbronline.com stated that although Sri Lanka is some way down the list of global sourcing locations its newly created outsourcing trade association believes that the country has the necessary attributes to become a leading center for business process outsourcing.

Sri Lanka’s budding offshore industry has inevitably been overshadowed by its larger Indian neighbor, which has been the world’s leading sourcing hub for the last decade. However, the market situation is now more favorable, as vendors are increasingly looking to offer services from multiple locations, often using India as a central hub while also delivering services from satellite facilities in Eastern Europe, Latin America and Asia. The entire article can be read via the above link.

Offshoring Curbs to Hurt US Badly
Infotech.Indiatimes.com posted a story regarding how protectionist measures will seriously hurt the US. A Duke University professor and Harvard researcher Vivek Wadhwa was interviewed in the piece and made the following comments:
"The US will see many times more job losses if it raises protectionist barriers as most of its top companies derive a major chunk of their revenues from foreign markets. As far as the issue of lawmakers trying to stop TARP-assisted companies from outsourcing, they will simply have to give these companies more. After all, the reason companies like JP Morgan are sending work abroad is because it is cheaper,”
“The protectionist measures will backfire if they get out of control. Right now, this is just noise. The last time the US did this was in 1920 and this led to the depression,”

The article also delved into the fact that the US is not alone in making anti-outsourcing noises. The economic slowdown has led to concerns over job losses in other markets and any move to outsource jobs is being met with resistance and paranoia. The complete article can be read by using the link above.

Newsworthy Items

IBM and the Rebirth of Offshoring
Time.com Business & Tech ran an article that parallels the discussion Bob had with the WSJ today. The article explains that offshoring may be making a big comeback as word leaked that IBM would cut about 5,000 jobs in the U.S. and move the work to India. This may be the beginning of a new wave of moving work to developing countries which have large pools of well-educated workers.

India's GDP grew at a rate of 7% or better the last two years. The IBM news is troubling because labor costs in the U.S., even among highly educated adults, are falling. American workers should be available for employment at salaries much lower than they were two years ago. It appears that IBM has elected to move jobs offshore rather than keep them in the U.S. despite the trend of more tech workers losing their jobs here. But, the cost of labor in India, which was already below that in the U.S., is likely to be falling even faster than it is in the U.S. While labor prices drop in the U.S., they are probably dropping faster in countries like India and China. India's official unemployment rate is 8.2%, but is expected to rise throughout the balance of the year.

IBM clearly arbitraged the joblessness in the U.S. and India as it made its decision about where to employ several thousand people. To put it crassly, IBM is looking for the equivalent of the lowest cost bidder.

Bob has been saying for a long time that the US workforce will need to redefine themselves in order to compete in the global economy. It is a tough realization to come to grips with but it is a fact of life today.

Offshoring Outlook: Latin America
A story posted in CIO.com discusses the growth of outsourcing to Latin American companies. The author states: "With an estimated population of 559 million, a growing percentage of which is multi-lingual and well-educated, Latin America has become increasingly attractive for all types of business. Its IT services sector has grown rapidly—nearly doubling in the past five years. In Brazil alone, IT has become a more than $9 billion per year market. While such growth rates may not be sustainable during the current global economic crisis, Latin America is a logical place for IT to flourish, especially as the services industry scrambles to recover and regroup following the disastrous terrorist attacks and financial scandals in India.

The author does caution the decision makers with the comment: " Now, in all fairness, when it comes to global services outsourcing, Latin America should be considered as playing a complementary—not replacement—role to mitigate what a leading analyst calls "India fatigue." Each Latin-American country presents different opportunities for buyers, and none can meet all needs". As Bob has stated in the past. The right match needs to be made between service providers and the company needing the outsourcing services. We welcome comments on this posting.

Maylasia Promotes Offshoring from Singapore

Berhama.com reported today that approximately 20 Malaysian outsourcing companies are looking to "Turn bad situation into better opportunity!". This is probably the most quoted phrase now among many during the current global economic recession that it has almost become a cliche. The phrase has become a good strategy for them to look for new businesses in the current dimmed business climate.

Outsourcing Malaysia chairman, David Wong Nan Fay, said this was the first and right timing for companies to enter the Singapore market which was much affected by the economic slowdown, and promote their outsourcing businesses.Wong told Bernama the companies were offering IT help desk, software development, data, banking and payroll processing services, multi-lingual contact and disaster recovery centres. The goal is for these companies to reduce their operation expenditure to 30 percent if they outsource their operation to Malaysia.He stressed that by venturing into Malaysia, the Singapore companies would not only cut their business costs but could also access to talents that Malaysia had.He said the outlook of the outsourcing business in Malaysia was positive and he expected it to grow by 15 percent during the economic crisis this year.

Bob expresses the same belief in his book that the global economy is driving companies to look for way to become more competitive. Offshoring and outsourcing allow them to find expertise they are missing and reduce costs.

Offshoring and Public Policy -- a Conundrum

Big news from IBM. Multiple sources are reporting that IBM will lay off about 5,000 positions in the United States, while expanding hiring overseas (Reuters story). Also did an interview with the WSJ, but they story is behind a subscription wall.

This story illustrates several of the challenges facing firms and policymakers as they grapple with the Services Shift.

First, the advantage that developing countries have in services for medium skilled positions is much larger than the advantage they enjoy in manufacturing. This is primarily because services are so labor intensive. If you save 60% on labor, but labor is only 20% of your cost base (as in auto parts) that gives you a 10-12% advantage. If labor is 75% of your cost base, a 60% savings gets you a 45% advantage.

Second, unlike with manufacturing, it is very difficult to match jobs lost in the US to jobs gained elsewhere. If Delphi closes a plant in Michigan and opens on in Mexico, you have about the same number of people doing the same tasks. It's easy to say "these jobs replaced those jobs." With services, however, it's rarely so simple. Say IBM hires lots of SAP and networking specialists in India in 2007-08. These people service many markets, including the US. Now in the midst of the financial crisis, they lay off systems engineers and COBOL programmers in the US. Is it really accurate to say "the SAP people replaced the COBOL programmers."?

The positions are not matched up in either time or function. So is one really replacing the other?

I'm sure the anti-trade, nativist zealots would respond that "there is a US programmer 'willing' to do the job," but that's a far cry from saying that person is qualified. Is it reasonable to ask IBM to spend tens of thousands of dollars retraining an expensive and under qualified US worker? Does this make sense even if the person will be serving global markets (including India)? Does it make sense if doing so will cause IBM to become uncompetitive with rivals who do not follow a policy of giving preference to US workers?

Third, services offshoring is much more disruptive than trade in manufactured goods. Why? Because the advantage that developing countries have is much larger in services (see above). Also, many more people are affected by globalization of services. Manufacturing accounts for approximately 15% of US employment. Services for about 70%. Tens of millions of people who thought they were safe from global competition are finding out that they are not. They want the government to do "something," but no one is exactly clear on what.

Fourth, what can the government do? Actually, very little. As mentioned above, it is very difficult to identify which jobs are displacing which other jobs. Foreign workers account for 71% of IBM's global workforce. Foreign sales account for just over 2/3 of IBM's sales. So, the workforce and sales distribution are roughly in alignment.

But say your congressman wanted to do "something." What would this be? It is unlikely that Congress is willing to cut IBM off from the Internet or satellite communication? Does anyone think congress can micromanage IBM's (or any other firm's) global resource allocation. Beyond making a fuss, there is little that policymakers can do without crippling the very firms that prop up their home economies.

Bottom line, Congress is impotent.

There are really two issues at play here.

1. In the long run, does the globalization of services raise of lower living standards in the rich countries? Almost everyone agrees that it is disruptive and inconvenient in the short run. I believe that the long run benefits outweigh the short run costs (as do most economists, the McKinsey Global Institute, and many others). But intelligent people can disagree on this.

2. What policies can the government put in place to slow of stop services offshoring? Even if you believe offshoring harms the United States, the onus is on the opponents to suggest a policy that would be effective. I can't think of one. Sputtering and whining won't cut it. Most policies (such as the Grassley-Sanders fiasco on H-1B visas) cause more harm than good.
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So, it's a tough problem. Everyone wants to focus on question #1. But without addressing question #2, it's just whining. Still waiting for an answer on that.