Monday, June 25, 2007

Outsourcing targets core jobs


Offshore firms aiming to offer work that isn't just cheaper, but better

Businessmen's collective memory doesn't go that far back. When chief executives decide to move jobs to India, they draw intellectual sustenance from something more recent. When you apply the model of core competence to business processes, outsourcing 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 help desk. If you are an airline, you mustn't waste your time juggling cash collected in different 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 staff in India, Latin America or eastern Europe.

This offloading of noncore 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.

As these services add depth to their own organizations by hiring engineers, doctors and statisticians, they are now able to do things that a client company has always considered to be integral to its main business.

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

Most economists believe that 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 being lost.

What this argument misses is that the third-party services that are winning ownership of business processes will move them from one developing country to another. Profits will be repatriated to developed-nation companies by the truckload. But the jobs won't go back. Not for a long time.

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 issue for decades to come.