Firms may choose to outsource work when they move it abroad, and they may not. But actually moving particular operations abroad is more akin to introducing labor-saving machinery than to outsourcing in the sense of improving the management of complexity. It brings down the cost of production, mostly by making use of cheaper employees.
Sometimes companies even change their technology when they move abroad, making their production less automated so they capture more benefits from lower labor costs. For example, some big carmakers are reconfiguring their production to use more manual work in their Chinese factories than they do elsewhere, says Hal Sirkin of the Boston Consulting Group. Wipro Spectramind, an Indian firm, recently moved work for an American company to India. This work involved 100 people, each of whom cost the firm $6,000 in software-license fees. The American company had been trying to write software to automate some of this work and reduce its license-fee payments. Wipro scrapped the software project, hired 110 Indians and still did the work more cheaply.
Once work has moved abroad, however, it joins the same cycle of automation and innovation that pushes technology forward everywhere. Optical-character-recognition software is automating the work of Indian data-entry workers. Electronic airline tickets are eliminating some of the ticket-reconciliation work airlines carry out in India. Eventually, natural-language speech recognition is likely to automate some of the call-centre work that is currently going to India, says Steve Rolls, the heir apparent at Convergys, the world’s largest call-centre operator.
All this helps to promote outsourcing and the building of production platforms in India. GE is selling GECIS, its Indian financial-services administrator, and Citibank, Deutsche Bank and others have disposed of some of their Indian IT operations. Thanks to the growth of these newly independent firms, along with the rapid development of domestic Indian competitors, such as Wipro and Infosys, companies will increasingly be able to outsource work when they move it.
Dashing White Collars
Manufacturing has already gone a long way down the road of outsourcing and globalization, but there are now fears that white-collar work will be reorganized much more quickly and disruptively, thanks to the spread of the internet, plummeting telecommunications costs and the realization that the machines used by millions of expensive white-collar workers in the West could be plugged in anywhere.
Manufacturers’ shipping costs have declined more slowly than the telecommunications costs of providers of remote services. The logistics of shipping goods over long distances remain complicated and inexact. For example, the V6 car engines that Toyota sends from Nagoya in Japan to Chicago take anywhere between 25 and 37 days to arrive, forcing the car company to hold costly stocks. The movement of white-collar work, on the other hand, is subject to no physical constraints. Communications are instant and their cost is declining rapidly towards becoming free.
Yet powerful barriers to moving white-collar work remain. When work moves out of a company, the firm negotiates a commercial agreement to buy it from a supplier. For manufacturers, this is straightforward: they take delivery, inspect the goods and pay their suppliers. Supplying a service, by contrast, is a continuous process. The outsourcing industry has evolved legal contracts in which suppliers bind themselves to deliver promised levels of service. There has been much legal innovation around these contracts, not all of which has been satisfactory. The upshot is that it still takes trust and cross-cultural understanding to achieve a good working relationship. Moving a company’s IT department to India is likely to put such understanding to the test.
The other big barrier is that, despite the spread of business machines, white-collar work still tends to be much less structured and rule-bound than work done on the shop floor. Unstructured work is hard to perform over long distances: without guidance, workers are apt to lose their way. The most likely outcome is that would-be outsourcers will proceed in two steps. First they will hand IT services, administrative tasks and other white-collar work to trusted specialist suppliers close to home. But once those suppliers have added structure, rules and standards, the outsourcers will move the work abroad.