The Future of Outsourcing

The Impact of Outsourcing Business, Jobs and Economies of Wealthy and Poor Nations.

The truth about the speed, scale and unstoppable momentum of business process outsourcing and offshoring. What will be the net impact on the American and European economies? How should company executives and union leaders respond to emerging markets? Can or should the offshoring process be reversed? Advantages and disadvantages of outsourcing? By Patrick Dixon, who was ranked as one of the 20 most influential business thinkers in the world in 2005 (Thinkers50).

Media interviews on outsourcing: +44 7768 511 390

Outsourcing is very controversial and affects every part of business from manufacturing through to design, software development, financial control, logistics management, customer support and sales. Outsourcing has been praised as cost-effective, efficient, productive and strategic - but also condemned as evil, money-grabbing, destructive, ruthless, exploiting the poor. See also Presentation for MBAs on Emerging Markets and contribution to Adeco's Offshoring Workshop at London Business School.

Outsourcing incentives are huge - and can lead to falls in service costs of 50-60%. Up to half of the $19 trillion spent every year by European companies on sales and administration could be outsourced, yet only 8% had moved by early 2005 according to IBM.

China is now seeing 100% salary inflation at top end and India is not far behind - acute shortage of experienced business leadership. Some companies are now thinking of moving operations to places like Pakistan (50% lower costs and over 200,000 IT graduates looking for work), Bangladesh or Vietnam. Changes are happening very quickly.

Outsourcing can generate weeks of hostile media coverage, widespread protests and industrial action. The issue is so sensitive that decisions are usually taken behind closed doors at the most senior levels in the organisation, and only announced after much careful research into how the proposals are likely to be received.

If handled badly, business process outsourcing can damage corporate image, weaken a brand, unsettle customers, and result in lower quality of products and services. But when handled well, the results can be good enough to save a failing corporation.

You have to show why outsourcing is right.

(extract from Building a Better Business - take the online $20,000 Challenge - relevant to outsourcing, change management, leadership, marketing and motivation)

If you want to save money fast and take everyone with you, you have to convince those involved that the world will be a better place as a result. Take the high moral ground.

A good example of this has been tensions over relocating call-centres and software support from countries like the UK and the US to India . More than 230,000 jobs are bring lost each year in America as a result of outsourcing - but many economists believe that a similar number of new jobs are being created at the same time.

Union members have protested that jobs are being destroyed in an immoral way, not only because communities are hit back home, but also because they argue the new jobs created in other countries pay very little and exploit the poor. They have often driven vigorous campaigns at work and in the media, designed to block the process.

This has happened because many of the corporations concerned have failed to tell a good news story in a convincing way, to explain why business process outsourcing will result in a better future in a broad sense - not just for shareholders.

So what is the good news story? First you have to tell the bad news, and prepare the ground for how you are going to save the day. Corporations may differ, but when it comes to outsourcing to a developing country, the "better world" promise is nearly always identical.

BAD NEWS

We need to take urgent action to reduce costs

If we don't run our business efficiently, everyone could lose their jobs

People who have entrusted their life-savings to us (mainly pensioners), will also lose their money

Customers will feel exploited by our high prices, and will go elsewhere

GOOD NEWS

We can easily save costs, save the company, save most people's jobs, keep prices down and offer great service - by relocating some jobs to other, less expensive parts of the world

Highly skilled people are available in some of the poorest nations

Their daily costs of living are lower, and we can pay them less while still enabling them to enjoy a good standard of living.

People in these countries really do need our support and investment

Every job we create in these countries can create many others as new money flows into the national economy, and is spent on local goods and services

By investing in these countries, we are also helping them develop into new markets for our own business, which is good for everyone

We are also doing our part to help tackle the greatest moral challenge of our time, which is the growing gap between richest and poorest nations, helping build international peace, prosperity and security for a better future

And so the message continues: In summary, if we continue as we are, the result will be disaster for everyone - customers, workers and the community. If we outsource, the future will be better for all, apart from a few who we deeply regret will lose their jobs for the sake of those who remain. We are deeply indebted to them for the contribution they have made and are committed to their future. We will do all we can to help them find employment elsewhere.

It matters how outsourcing is done

It is harder to argue for outsourcing if the corporation is making record profits, is not facing significant competitor pressures, and is making people redundant against their will.

On the other hand, few labor organisations consistently oppose outsourcing if the corporation is vulnerable, competitor pressures are severe, other companies have already led the way, and if existing workers are being offered voluntary redundancy on reasonably generous terms as well as retraining. And of course, people also want to see assurances that new workers in emerging countries will get an appropriate, fair wage and safe working conditions.

Facts about Outsourcing

Some say that it is wrong to pay people in India less than the same job would justify in somewhere like the US. However we need to compare not just salaries, but what those salary levels will actually buy in different countries. An IT professional in India may be far better off in terms of lifestyle, even though paid only a third of the US salary. It all depends on exchange rates. The pressures will continue to grow, not just for cost saving, but also for quality, service and speed.

* India produces more than 870,000 new IT graduates a year and produces more than a million engineering graduates a year, plus 16 million others with engineering diplomas. India is leading the way in new areas of pharmaceuticals, biotech, electrical and mechanical engineering. China also.

* One in 5 UK workers at risk from outsourcing have difficulties reading and writing. The UK struggles to turn out just 8,000 IT graduates a year.

* Most outsourcing is by large companies, yet small companies provide most jobs in America and Europe, and most of the economic growth. Big companies create headlines but the greatest impact is elsewhere and almost invisible. The UK has 3.3 million companies. If each one takes on just one more person on average, the result would be more than 3 million new jobs, and that is what has happened in the last few years, with unemployment at very low levels despite several million people added to the labour force. Yet 6,000 redundancies at a factory is mistakenly seen as a national crisis.

* Each outsourced job in India can generate work for more than 20 other people as the money flows around the national economy, usually at a far faster rate than in countries like the US.

* When a product is manufactured in China instead of the US or Europe, only a small part of the total retail price lands up in that country. Most is taken as before by the retailer, wholesaler, distribution system, research, design and development teams and company owners as profit. So the impact is less than you might expect.

* Research shows that some of the new economic activity generated in developing countries by oursourcing will generate new demand for goods and services in the country where the jobs have moved from (eg America). McKinsey Global Institute estimates that for every dollar US corporations spend on outsourcing to India, 33c gets 33c and the US economy benefits by $1.14. This is based on several assumptions: that 69% of displaced service workers will find new jobs within a year, and will end up earning 96% of their previous wages - backed up by 1979-1999 data. However older workers may be out of work far longe, especially if their education is poor.

* Outsourcing saves money for corporations which means lower costs for consumers, and higher dividends for pensioners who own 75% of US and UK wealth - that means more money to spend on other things such as local services (meals out, beauty treatments, gardening, decorating etc) and that produces new jobs.

* Outsourcing has meant for example that you can buy a DVD player for less than $100. It is one reason why retail costs of products has halved in many sectors over the last 20 years, allowing for inflation.

* Future economic growth depends on new generations of creative, dynamic entrepreneurs, with good access to venture capital, who will drive national economies through transition.

Making a stronger case for high performance

Too many business leaders talk about high performance as a general aim without making a powerful enough case for it. They assume that everyone will automatically sign up to deliver high performance because by definition it is a GOOD THING. But the reality is that for individual team members, demands for high(er) performance are often a BAD THING for team members who suffer longer hours, land up working even harder, chasing even more stressful targets. That's why we have to be convincing and passionate about the reasons why high performance is so important.

In many industries the answer is obvious: safety. For example, air crews hardly need lecturing on the consequences of poor plane maintenance. But many other kinds of business struggle to make as convincing a case.

"We want to reduce errors in the packages we send out because it is so annoying to be on the other end, and it takes us all ages to sort out."

"When the software crashes, it's a complete waste of time and very frustrating."

Sure, it matters, but not as much as a plane crashing, hardly a matter of life and death, but it must be a matter of life in some significant way if we are to engage passion.

Failing that, all we are left with is a GOOD NEWS / BAD NEWS story like the outsourcing example where the only reason we can give to get people's attention on performance is that without it, the entire corporation is at risk.

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