Introduction to The Services Shift: Seizing the Ultimate Offshore Opportunity
If you’re an active manager in the first decade of the twenty-first century, you already know about the phenomenon of globalization in the manufacturing sector—although perhaps you don’t know the full scope of that phenomenon. But by any measure, it’s enormous. In 2006, the U.S. trade-to-GDP ratio was 28.0 percent, compared with 11.1 percent in 1970 and 20.4 percent in 1990.1 In 2006, U.S. companies committed $60 billion to new manufacturing foreign direct investment (FDI): a jump of 66 percent over the previous year.2
The reasons behind this phenomenon are well documented, and they are widely—often hotly—discussed. They include the low cost of labor overseas, fewer regulatory restrictions, proximity to emerging markets (facilitating sales in those markets), the ability to focus home country resources on product development and marketing, the commoditization of manufacturing technology, the rise of supplier clusters in different countries, and so on.
But there’s a parallel phenomenon occurring today—another kind of offshoring—that may soon overtake its manufacturing-based cousin in scale and scope: the globalization of services.
We call it “the services shift.”
This is a new and different phenomenon, and it’s one whose implications are poorly understood by most corporate managers. True, most of us have heard stories about large corporations moving call centers and basic business processes (for example, software development, payroll, billing) offshore. And on a basic level, most of us understand the compelling logic that lies behind these developments. To the customer phoning in to argue about an entry on his or her monthly credit card statement, it doesn’t matter much whether the contact center agent is sitting in Omaha, Nebraska, or Bangalore, India. If it’s cheaper to hire that agent in Bangalore than in Omaha, and if that offshore person is able to resolve the dispute successfully, then that service job is very likely to move offshore.
In fact, to a large extent, it already has.
But so far, it has been hard to get a clear picture of what’s going on—and where and why. Where are the jobs going? Who’s getting the benefits of the globalization of services? How big are those benefits? What companies benefit (or could benefit) from the offshoring of services? How, exactly, does it work? Who makes for a good partner in this realm? What are the public policy implications of this trend—and how can companies make long-term investments if the ground is shifting beneath their feet?
These are the questions we ask and answer in The Services Shift.
Outsourcing and Offshoring
First, some definitions, which we’ll return to and flesh out in subsequent chapters. Outsourcing means moving a particular task outside an organization’s boundaries. When a company decides to eliminate its in-house food service department and hire an outside contractor to run its cafeteria, it is “outsourcing” that function. For lots of “non-core” practical activities—such as staffing the cafeteria and cleaning the headquarters building—outsourcing means buying the service fairly close to home.
But many other activities aren’t necessarily rooted in geography. In theory, at least, you could outsource these tasks to a contractor anywhere in the world. When a task moves across a geographic boundary, we call this “offshoring.”
For example, recent years have seen the emergence of a phenomenon called the “electronic ICU (intensive care unit)”—a virtual ICU that uses video conferencing, remote bedside terminals, and image-acquisition technology to monitor critically ill patients remotely. With eICU, a team of critical-care specialists sits at a remote location and continuously tracks patients’ vital signs, and if something is amiss, the team contacts the onsite staff and recommends action.
One electronic ICU provider, VISICU, pitches its product as a way to cost-effectively improve medical care in hospitals that don’t have enough critical-care physicians:
- ICU patients require around-the-clock specialized care, however most ICUs don’t have the specially trained physicians available to provide this. With an eICU facility linked via telemedicine and computer monitors to their hospital ICU rooms, they now can.3
VISICU likens its eICU solution to the air traffic control function, in which a team of technical specialists relies on software and tracking technology to assist in airplane navigation without actually being in the cockpit. The company claims to have implemented some form of the eICU solution in 34 U.S. hospitals, and has recently inked a $25 million deal with Sutter Health, Northern California’s leading non-profit provider of health-care services.
Currently, eICU is only outsourced—that is, turned over to domestic contractors—rather than offshored. But in this activity, distance is irrelevant. In fact, other than some truly formidable regulatory barriers, nothing stands in the way of moving the eICUs offshore, and thereby substituting foreign health-care technicians for domestic ones.
The white-coated doctor in your local hospital might seem forever immune to offshoring, but as the eICU example illustrates, that’s not necessarily the case.
Offshoring, as the name implies, means moving a function and its associated jobs to another part of the world. Offshoring comprises a wide range of relationships between the “parent” company and remote service providers. Sometimes those providers stay within the corporate boundary, but operate at a geographic distance. Sometimes they are outside the corporate boundaries (they are “outsourced offshorers”). In this book, we focus mainly on the offshoring phenomenon, although certainly domestic outsourcing is another important kind of “services shift.”
The word “offshoring,” useful as it is, is something of a red herring. The globalization of services is not simply a story about jobs being moved offshore. It’s about a fundamental reorganization of work, in which different tasks are being carried out by different individuals in different locations. As new global sourcing options become available, forward-looking managers are actively evaluating tasks, processes, and functions inside their firms—from back-office support to leading-edge research—to determine the most cost-effective and highest quality location to carry out these activities. In other words, it’s not just about finding a low-cost location. It’s about gaining access to the best combination of talent, resources, and local markets.
Why is it happening now? Again, we’ll look into this question in greater depth in later chapters. But for now, we’ll simply point to five compelling forces:
- Technological innovations—These innovations include the spread of computer literacy, broadband Internet access, inexpensive international telephony, widespread digital records, and so on.
- Emerging market growth—Today, developing countries are working to “grow” their service sectors at least as aggressively as their manufacturing sectors. Countries around the world have witnessed India’s experience—with exports of software and IT-enabled services growing at a compounded annual growth rate of more than 43 percent, rising from $128 million in 1991 to $40.8 billion in 2007.4 These exports can be achieved with relatively low capital investment and environmental impact. Finally, the sector is attractive because it involves using a country’s brains, not its brawn.
- Global macroeconomic liberalization—Based on the standard measures of economic “openness,” more countries are able to engage in international trade and investment than ever before.
- The corporate imperative to both reduce costs and improve quality—Most business practitioners understand the concept of lower cost through offshoring; fewer understand that offshoring can lead to major productivity and quality improvements.
- A convergence of global business culture—This includes the global dissemination of Western management principles, the emergence of English as the global language of business, and so on.
Even this brief review of the factors pushing for the globalization of services should suggest, strongly, that this powerful trend is not a fad, but a huge, fundamental, and irreversible shift. According to McKinsey/NASSCOM, offshore IT and business process outsourcing (BPO) have only reached one-ninth and one-twelfth of their respective market potentials!5
What does this mean for your company? Business models and organizational structures will become more dynamic, more fluid, and more opportunistic. In fact, this transformation is already well underway.
What does this mean for you? Tomorrow’s managers also will have to become more flexible, more versatile, and more broad-gauge. The old ways of providing services—both in the traditional “service sector” and in the services-oriented activities of manufacturing firms—just won’t cut it in the face of the global services shift. You need to understand the offshoring options that are available to you, because—without a doubt!—your strongest competitors will certainly understand them, and exploit them.