Why India? Why Now? Where Is It All Leading?

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    Martin Kenney, a professor in the Department of Human and Community Development at the University of California in Davis, asked some of the most provocative questions of the day during the Stanford conference on globalization of services. (He also showed the most irritation when he wasn’t called on to ask his questions during the Q&A segments…)

    Along with Rafiq Dossani, Senior Research Scholar in the Asia/Pacific Research Center at Stanford University and host of the day’s events, Professor Kenney co-authored a paper titled, “India, China, the Philippines and Beyond: Understanding Service Globalization.” The focus is on understanding the phenomenon of offshoring services — particularly to India — and its future. I can’t find the paper online, though you can read another “working paper” on a similar topic by the same researchers here.

    You’ve heard about “creative destruction,” the theory that suggests more jobs are created in place of those destroyed as changes happen to the way we get work done. It’s often brought up to assure us that as things change, they’ll also mostly get better — that more jobs will get created to do some new, unspecified work.

    The research by Professors Kenney and Dossani questions whether that theory itself is no longer valid. As they write:

    …many of these jobs may now be located overseas. Thus the benefits of entrepreneurial growth may no longer accrue entirely to the US, or…the US alone. This may not be bad since many of the entrepreneurs are from other nations, and most often the very highest value-added jobs and much of the capital gains from building a successful firm stay in the US. And, yet, for policy-makers, this newly emerging division of labor could be very significant indeed.

    In other words, Mr. and Mrs. USA, 1) don’t be too optimistic that your next, newly evolving job is just around the corner; and 2) it’s time to share the work and the wealth with other parts of the world, folks.

    According to the paper, while low-value-added work (such as call center functions) has been the focus of much offshoring by American firms up until now, complex specialties are surfacing at offshore service providers that are truly high-value for their clients — product design, back office support for new marketing initiatives, radiology diagnosis, patent preparation…

    Cost savings are at the root of the movement, and the paper offers some amazing stats on that. A table compares operating costs for “IT-enabled services”:

    Annual per person cost

    G&A expense

    Telecom

    Property rental

    Depreciation

    Total

    US

    $42,927

    $8,571

    $1,500

    $2,600

    $3,000

    $58,598

    India

    $6,179

    $1,000

    $2,328

    $847

    $1,500

    $11,854

    But other drivers pushing services offshore include:

    • Ready bandwidth
    • Standards — in coding, in process, in the platforms companies use to get the work done.
    • The rise of multi-national corporations, which don’t view the job as a single-country endeavor
    • The rise of intermediaries
    • The experimentation that’s going on
    • Expatriation — people returning to their countries of birth.

    In India that totals about 697,000 jobs in the IT and BPO industries for 2005, according to NASCOMM numbers.

    The paper also gives a breakdown of the types of service provider structures there are — nine in this count.

    • Multi-national corporation subsidiaries with India experience (such as HP and GE)
    • Multi-national corporation subsidiaries with no India experience (AOL and Dell)
    • Multi-national corporation outsourcers (IBM and Accenture)
    • Multi-national corporation specialists: GIS, medical transcription, publishing (eBookers)
    • Non-resident Indian-promoted: general outsourcing, medical transcription, publishing (eFunds, Techbooks)
    • Indian independents (247 Customer)
    • Indian specialists: GIS, medical transcription, publishing, travel (ADS, Thomson Press)
    • Indian subsidiaries: IT industry (Wipro Spectramind, HCL BPO)
    • Indian subsidiaries: non-IT industry (Transworld)

    Like I said at the beginning, the professor is a great one for coming up with provocative questions. As a researcher, he makes an annual trek to India for several weeks — along with colleagues — to meet with the people there who are busy forging an ever bigger, more sophisticated Indian offshoring industry

    The questions he and the other academics at the event want to answer won’t be resolved for many years to come. Much of the information they’re working from comes in anecdotal form — parsed from conversations they have with those involved on the provider, client and worker sides. But as Professors Kenney and Dossani state:

    We are at the beginning of another major reorientation of the axes of the global economy, and the way work and value creation is distributed globally. At such moments, the turbulence makes it inherently impossible to predict the outcomes beyond saying that the world will be very different for our children and, given the current speed, even for ourselves.

    Tomorrow, I’ll share some insights from the conference on understanding business models — how outsourcing relationships can be structured.

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