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Outsource magazine: thought-leadership and outsourcing strategy | August 18, 2017

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It’s an Offshore Thing

It’s an Offshore Thing
Outsource Magazine

Launched at Duke University’s influential Fuqua School of Business in 2004, the Offshoring Research Network (ORN) touts itself as ‘a community building transformational offshoring capabilities’. We quizzed the ORN’s executive director and lead principal investigator, Professor Arie Lewin, about the current state of the offshoring space – and got some pretty controversial responses…

Outsource: Professor Lewin, India has been leading the way for offshoring for so long now that it’s almost become synonymous with the activity – but there are plenty of other locations looking for ever-bigger slices of the pie. Is it reasonable to expect that those countries could even come close to emulating India’s success?

Arie Lewin: That’s a very good question. Our survey conducted in September 2009 identifies for the first time the emergence of the global provider outsourcing industry as well as the phenomenon of countries aspiring to emulate India and attract the outsourcing of services to their locations. We have to remember that India found itself in a fortunate situation as a result of decisions made back in the 1980s when they made significant investment in higher education, especially science and engineering, with the Y2K discovery of well-trained highly under-employed Indians. It was not that they anticipated that they would attract this industry. The industry grew up in an emergent fashion. The Chinese, however, are a good example of a country looking over at India and seeing the effect of two million people employed, creating an industry worth hundreds of billions of dollars, and believing that they could do the same thing. So now they have a base of highly trained engineers, computer scientists et cetera. Last year they announced an explicit national policy to attract this industry. They’ve designated 21 cities to be the hubs which will attract this industry, all the way from call centres and BPO to engineering and R&D. That’s a very important development. We have identified other countries which have similar aspirations (but maybe not as aggressively explicit as China) including Brazil, Chile, Argentina, Sri Lanka, Malaysia, Morocco, and Egypt – to name just a few.

O: Looking at China specifically: one thing that’s always been an issue is that while in IT they’re very strong, in terms of voicebased processes they haven’t been able toattract international business to a significant degree. Do you see that changing?

AL: All in all, the maturity level of Chinese providers does not match that of India. I also think that China doesn’t aspire to do much in the call centre arena. Two significant examples: the first is, there are at least 200,000 Japanese-speaking Chinese in the Dalian area, and when Japanese companies have tried to use these in call centre activities they found a strong negative resistance on the part of Japanese contacts. The Koreans had a similar experience: there are around five million Korean-speaking Chinese in the same area of northern China and they’ve had a similar failure. But: the numbers themselves tell you that there is a high number of Chinese doing work for Japanese and Korean companies, and we’ve not heard much of this before.

O: Is there a big move within Chinese businesses to embrace outsourcing? It has been viewed as a massive potential market…

AL: It is a relatively nascent market, no question about it – but the recent China Outsourcing Summit which took place in Hangzhou documented that there are over 9,000 outsourcers in China, most small and doing business within the domestic economy – but with over 50 that have already good international clients and in our database we’ve identified 30 of them doing BPO, R&D, animation…

O: On some of the other up-and-coming service-provider locations that you’ve identified: do you think there’s actually that much slack in terms of the amount of outsourcing from the US and Europe to support the amount of investment being done globally to set up provider markets?

AL: If I add up all the optimistic aspirations from all these countries, the capacity may well exceed demand. But we have to look at it a little differently: we have to recognise that there’s a new dimension, a new dynamic, which is that these countries are competing with each other – even within China the cities are competing aggressively with one another to get business – so we can predict that the rate of process commoditisation will increase; therefore costs will go down; therefore the attraction of outsourcing such processes will increase. But you can also predict that there’ll be competition via new service offerings – and we already see this – and so it’s difficult to take a static view that there won’t be enough work to outsource. Secondly you have to think about the growth in transaction volume. It more or less tracks the growth in worldwide GDP. As long as that’s growing there’ll still be more work to do. If you take it industry by industry, financial services has a long way to go to optimise the efficiency of its processes it can get by learning how to do BPO-type outsourcing. But it’s clear to me that the Chinese – and I don’t want to overdo this – are being very aggressive and at the same time they’re not close in maturity levels.

O: How do you think the development of the space has been affected by the financial crisis, in terms of a drive towards Tier 2 and even Tier 3 countries?

AL: I think there was a levelling-off of new contracts during 2009. But if you look at it again by industry: financial services had very aggressive plans to both expand what they were doing and a lot of new initiatives, and especially if they’re thinking of locating in the Singapore, Shanghai, New Zealand space to capture Asian services, a lot of this work will be supported in that region – largely around Shanghai because that’s where the talent is. Simultaneously they’ll take over processes back in Europe and the US. Financial services companies are just recently beginning to see huge potential: although they’ve been very advanced in the use of IT and some BPO activities, in recent roundtables we’ve held in the US and China we’ve seen that we’re just beginning to scratch the surface of what financial services companies think they could do if they were really very good at managing outsourcing of processes.

O: That’s funny, because financial services firms have always been considered to be right at the forefront of the development of the outsourcing space.

AL: That’s what we always said! But our cumulative data is quite surprising: the more they’ve increased the scope of what they’ve outsourced, the lower the average saving. Which is due to one simple thing: the management creating the organisation which they need to manage these things effectively. Three per cent of companies in our database have really figured out – through a tortuous journey – how to manage this effectively, and when outsourcing is actually a good solution and when it isn’t. To give a tiny example: we have a company that shared with us and other companies a new analysis of what happens at the teller – the person facing the customer at the bank. They said that at their company the teller has two functions. One is a customer-facing function and another one is a back-office function. They worked out how to separate the back-office function and outsourced it – and now they’re hiring completely different people for the customer-facing part, because they need people who are good at people-to- people skills, comfortable at cross-selling, knowing how to attract a person who maybe only has a minute in front of them. It’s a completely different view. The other companies [sharing the analysis], their jaws dropped at how sophisticated these guys had become. This company is way to the forefront of how to optimise where they do outsourcing, and understanding why they do it rather than operating a captive. Clearly there are a few companies like this – but three per cent of 175 companies tells you something…

O: So a real innovation breakdown then?

AL: Yes! Most companies are just now learning what are some of their organisational issues. In other companies the problem has been that they went the shared services route, and now they want to go further but it’s the in-house shared services organisations that are fighting outsourcing tooth and nail. It’s a big problem. How can we go to the next step when we always assumed that shared services was a step towards outsourcing, and yet afterwards turned out to be a step that’s become a resistance to outsourcing?

O: Why do you think this is?

AL: Because if you’re a director of shared services, for accounting or whatever, you’ll fight tooth and nail not to lose your job… and your empire. I can tell you that we’ve twice presented at national shared services conferences and as a matter of routine I’ve asked the audience – say about 400 people – “how many of you are also outsourcing?” and maybe five hands will go up. Out of 400. And then there’s a deep silence, and polite applause when we’re done when we finish presenting… We’re going to probe this much more carefully and deeply over the next six months, but all initial evidence suggests that one of the problems for financial services companies is that their extensive shared services activities have acted as a bottleneck for getting more benefits. The other big trend you want to think about is that increasingly companies are shifting their preference from a captive governance model to an outsourced governance model, and this is true across industries, across functions, and across nationalities – so German companies are now just as likely to prefer an outsourced relationship whereas in 2000-2005 they would have had a high preference for the captive model.

O: What do you think are likely to be the biggest influences on the development of offshoring over the next five years?

AL: To me, when I think about the next five years, I see that companies that are dependent on science, engineering, computer programming et cetera, are going to find themselves in a worldwide competition for talent.

What’s transpiring is a series of events coalescing: the first is that in the West – maybe with the exception of the Scandinavian countries – fewer and fewer young people select science and engineering careers. This is a trend we’ve already published a paper about. Secondly, in the US at least, companies have increasingly learnt how to source engineering talent on demand – in other words, decreasing their permanent employment of engineers and replacing them with contingent relationships. The third trend is that the real geniuses – the “nerd techies” – have been separated from organised employment maybe all the way back to 2004; from an R&D, software development point of view, gaming, all these functions, companies will increasingly have to source talent from around the world – and China is one of the areas where there’s still talent available. [But] I think people overestimate how much talent China produces. In 2009 they only produced 90,000 Masters and PhD degrees in engineering and computer science. That’s nowhere close to satisfying even the US shortage. So in the area of globalisation and innovation written broadly – so engineering, product development, R&D, software development, gaming and so forth – companies are going to have to learn how to do much more with less, and to do it globally and much more efficiently.

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