CTO Blog
Once again I read several things at once on the same topic, which caused me to think again and maybe to question circumstances. It could be the case that after reading the first piece, I started looking for more on the same topic, or is it that in this ‘online’ world, a first question creates a series of responses? Maybe I am just adding to it, but let’s see if I can add something new to an argument that started on cost, has become political, and even now gets used occasionally as a sales differentiator – as in ‘our call centres are all in your country and not someplace else in the world’.
The starting point was John Jordan in his excellent blog called ‘early indications’, which re-examined the case for offshoring work from the USA. He argued that the original case had been purely financial, but with time and scale it seemed that the original calculations were incomplete. John started with the base financial calculation, which assumes a savings of $400,000 per job, per year, and points out that for 3,000 workers, that means over $1 billion a year in cost savings – a point at which the case would seem to be irresistible to any hard pressed enterprise with active shareholders.
However, he then identifies eight further factors, with a reason for each as to why they can impact the actual cost savings. He concludes by saying the financial case for offshoring remains good even with these factors, but a lot depends on whether these factors are included, and that at least some of the factors have become highly dynamic and could change the whole justification for offshoring. I will list the eight factors, but I urge you to read the full blog and John’s reasoning at http://earlyindications.blogspot.com/. The eight factors are: Inflation, Loyalty, Coordination, Technology, Perception, Currency, Corruption and Risk.
The second piece was again from a good and consistent source on this topic namely Bob Kennedy, author of the book ‘The Services Shift’, who has maintained a kind of running commentary on the whole topic, but chose to make his end of April piece around the political consequences of offshoring, something not in John’s eight factors. Bob again identifies that with time and the global downturn, the topic of offshoring jobs has become a hot political subject, but concludes that, in spite of the pressure from workers and unions, nothing has happened yet. Bob states this is because of the simple reason that politicians find it nearly impossible to regulate global trade without harming their own economies, and in particular, find it very had to define the ‘services’ element of trade.
The third new piece on the topic is about manufacturing rather than services, but it introduces the key question in the light of the changing set of circumstances already identified. The piece that I am quoting from is a detailed paper examining the issues of ‘far shore’, and again I urge you to visit http://www.logisticsmgmt.com/article/CA6649196.html and read the full paper as it takes all of the arguments and puts them together. So what is it that caught my eye? Quote: Are we implying that far-shoring is no longer a viable strategy? Not at all. The point is that worldwide economic problems and changes have drastically altered the cost dynamics associated with manufacturing and distribution network strategies. So much so, in fact, that companies may no longer assume that far-shore operations are less expensive in the long term.
So new factors are in play that didn’t affect the first wave of offshoring and might now take some of the appeal out of continued offshoring, but at the same time, they all seem to agree that overall the trend will continue. But does it have to be all or nothing in this question of where to place work? There is a hidden thread in all three pieces, and that is the technology shift, meaning that increasingly you can coordinate pretty complex elements into a cohesive outcome, and that’s the argument for ‘right shoring’. When you buy from IKEA and get several packages that together make up the product, this is a kind of ‘right shoring’, as each package comes from a different company with the expertise on that particular part (okay, no jokes about IKEA and flat pack at this stage, as it clearly works well given their growth around the world).
In the services industries, we have few of the limitations, and we should take a long look at how to move to phase 2 of the requirement to find the right place to do the work. We can use all of the factors identified, plus some new ones around localised markets with their own differentiations, to be accommodated with the mainstream work. With the rise of ‘services’ and ‘clouds’, the delivery shift towards ‘everything as a service’, XaaS, to say nothing of new pressures on economies and costs, now does seem to be the right time to revisit the topic.
About the author
Capgemini Global Chief Technology Officer, Andy is a member of the Capgemini Group management board and advises on all aspects of technology-driven market changes, together with being a member of the Policy Board for the British Computer Society. Andy is the author of many white papers, and the co-author three books that have charted the current changes in technology and its use by business starting in 2006 with ‘Mashup Corporations’ detailing how enterprises could make use of Web 2.0 to develop new go to market propositions. This was followed in May 2008 by Mesh Collaboration focussing on the impact of Web 2.0 on the enterprise front office and its working techniques, then in 2010 “Enterprise Cloud Computing: A Strategy Guide for Business and Technology leaders” co-authored with well-known academic Peter Fingar and one of the leading authorities on business process, John Pyke. The book describes the wider business implications of Cloud Computing with the promise of on-demand business innovation. It looks at how businesses trade differently on the web using mash-ups but also the challenges in managing more frequent change through social tools, and what happens when cloud comes into play in fully fledged operations. Andy was voted one of the top 25 most influential CTOs in the world in 2009 by InfoWorld and is grateful to readers of Computing Weekly who voted the Capgemini CTOblog the best Blog for Business Managers and CIOs each year for the last three years.
Hi Andy,
Great points made here and, indeed, by John Jordan. However, John’s 8 factors and his look at numbers mask other significant facts. The sheer numbers in India of the emerging youthful workforce – English-savvy in one way or another – and the still unproven promise of China in this regard will continue to keep India attractive for a while. Innovation comes at a cost and this cost is still lower in India — and we know that continuous business process innovation is the way to competitive advantage. While the future argument is not one of labor arbitrage, it certainly is one of tapping into talent that just cannot be captured by immigration to the countries from where work is being offshored. What gets offshored will change because it will not be about cost alone; but the increasingly global economy will not be doing away with offshoring anytime soon!
Hi Puneet
I think it is IDC who wrote a paper called ‘Flat like a Pancake’ which picks up on the argument that globalization will be the force that ends the idea of ‘on shore’ or ‘offshore’. The also added the comment that the BRIC (Brazil, Russia, India, China)economies growth would make for high value local markets and further erode the idea that there was an onshore and offshore world. I agree with all of these trends just dont know about the speed of them affecting the decisions that will be made this year!
best andy
Andy,
I see the whole debate as a political one and not technology/business-oriented. I think it is essential to make this distinction right at the beginning to have clarity in this debate.
By this I mean, it’s difficult to believe that companies from the US were on a charity spree for over a decade or so, by offshoring…. clearly, there was a business logic and purpose which were being met with the outsourcing model all these years… every company’s case is different and I will give the benefit of doubt that wise men running most companies would have seen the benefits to agree for outsourcing….those who didnt outsource simply didnt see any…
fast-forward to today….. these companies have every right to review their business goals and shift course if that doesnt fit their business, taking the new business realities into consideration… Business models and delivery models are no exception….but I am not sure if this current debate of “to be or not to be” outsourced are driven by the managements… Its more political by nature and therefore, perhaps have to be debated and addressed at the same level…. we can of course come up with many cases and arguments to support our political interests… and as we all know…. in such debates, only a nation’s interest is supreme (or whoever lobbys harder)….
So,politically speaking, shall India or China also suggest that Google, for instance, develop all its products for the local market locally? time to shift its HQ from Silicon Valley perhaps?
I think its fair to say that in the era of “clouds” and “multi-national corporations”, its difficult to say where the shore is, if we define the shore from a supply-side perspective…. so why not define it from the demand-side perspective to bring clarity to the whole debate? let the market location be the shore’s point of reference and not the production site….?
As an engineer i try to stay out of politics as its all too subjective for me! My purpose in picking up on John Jordan’s piece was for the objective view he took in which updated what at one time was a pretty basic argument about low cost economies.
As i hope i made clear, today location selection is a much wider consideration which includes a not insignificant number of changes since the first moves in ‘off shoring’ were made. Skills and Markets, Regulation and Economies are all big factors now.
BUT i suspect you are also right, who gets what work and where will always have a political and subjective element too.
I have been managing many projects for US & Europe, I think in addition to factors mentioned above two other factors that impact offshore / rightshore leverage are 1) availability of skilled resources 2) Maturity of Technology COEs and Competencies at offshore location. Having large number of skilled resources in single location works out to be great advantage for the offshore project delivery.
Earlier it was only US, where high offshore was more of traditional model, but I see more of UK and selected parts of Europe also jumping on this model.
Its is an interesting point that the ‘offshore’ moves have produced the opportunity to have a ‘green field’ approach to building ‘campus’ style centres of excellent that allow leverage of more and wider skills in one location. The historical onshore locations are usually smaller and hampered by planing laws and cost from being expanded to provide the same operating advantage.
Given the whole globalisation issue i can t see how any country long term will not be part of a ‘flat earth’ in terms of competing with others, and working with others, to get the optimum balance.