Thursday, June 14, 2007

Outsourcing Is Now Targeting Core Jobs in West


Outsourcing, when you apply the model of core competence to business processes, is all about companies parceling out activities that they aren't best equipped to undertake.

If you sell computers, you shouldn't run your own helpdesk. If you are an airline, you mustn't waste your time juggling cash collected in different countries and currencies.

No company needs to tie up resources in managing accounts receivable, or preparing payroll, in-house.

You can buy all these services from third parties, which will either automate them or manage them with cheaper manpower in India, Latin America or eastern Europe.

This offloading of non-core work to specialists has been the main driver for the business-process outsourcing industry, projected to grow 10 percent a year to $618 billion by 2010.

Now outsourcing companies are pushing the frontier, forcing global CEOs to define their core competence more sharply. It's difficult to predict how it will all pan out, though it looks like Western companies may finally be left with processes with minimal labor content. And that will be one of the biggest political challenges developed-country governments will face.

Nipuna Services Ltd., a Hyderabad, India-based business- process outsourcing company, manages the shop-floor inventory for an automaker in Detroit, creates graphics for an animation studio in the U.K., and handles artwork changes on labels and cartons of GlaxoSmithKline Plc medicines so as to satisfy regulators in various countries.

Most economists believe that services outsourcing is only about getting things done ``cheaper.'' They think it is transient and self-adjusting: A rise in the inflation-adjusted exchange rate of the exporting nation will make its cost advantage disappear; the same relative-price mechanism will also increase developed-country exports to places such as India and China. New jobs will be created to replace the ones that are now being lost.

Nascent Industry

From contacting a potential customer to making him sign the outsourcing agreement takes 18 months to two years. The rarity value of the companies that provide such services is evident in their valuations.

Answering questions such as these for Fortune 100 companies recently fetched investors in Marketics Technologies, a Bangalore-based analytics company started by former Procter & Gamble Co. employees, about $65 million in payouts from acquirer WNS (Holdings) Ltd. That translates into $325,000 per employee, more than double the going rate, according to a report by J.P. Morgan Securities Inc. analyst Christine Pezino.

Wages Versus Profits

The manufacturing economy may serve as an example. Apple Inc. had fewer than 18,000 employees as of Sept. 30, 2006. Revenue per worker was in excess of $1 million. That's 10 times the value an average worker produced last year at Taiwan's Hon Hai Precision Industry Co., a contract manufacturer -- among other things -- of Apple iPod music players.

If outsourcing becomes as widespread in services as it already is in manufacturing, Western economies may still grow strongly, thanks to surging corporate profits. However, the falling share of wages in economies across the developed world will keep offshoring a hot political issue for decades to come.