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    From Outsourcing to Worldsourcing


    © International Trade Centre, International Trade Forum - Issue 1/2004

    "Worldsourcing" - global outsourcing - is benefiting a number of developing and transition economies. It is also fundamentally changing the structure of firms.

    Some developing and transition economies have recorded local

    improvements in living standards by supplying the industrial world with products and ser-vices that are no longer profitable in high-cost labour economies. Current trends are for firms in industrial countries to move from outsourcing to "offshoring", even to "worldsourcing".

    Outsourcing refers to the transfer of in-house jobs to an outside firm to reduce costs, take advantage of others' expertise and focus on what the contracting company does best. It is not new and takes place all over the world. Offshoring is the new term for closing operations in one country and transferring them to another. Offshoring has typically been seen as a strategy to reduce labour costs, but is now being used by companies to get a foothold in emerging markets or take advantage of expertise centres, such as software development in India. Japan, for example, has regularly used offshoring to get into tight United States and European markets.

    The business functions that can be taken offshore today range from call centres to back-office functions such as accounts and tax processing. They even include research and development. So far it's been a gradual process. But enabled by technology, both outsourcing and offshoring are expected to move at a faster pace in the future.

    This trend is moving up the skill scale, from unskilled labourers to professional services.

    Become an innovation "producer"

    Don't count on worldsourcing being a permanent gain for a developing economy, unless your country gets on to the path of innovation for itself, say leading specialists and global business executives.

    "What is being outsourced today will be replaced by technology tomorrow," predicts Michael Fleisher of the US-based consultancy, Gartner Inc.

    His counterpart John Adams of Exult thinks that call centres - one of the major fields for high-tech outsourcing - may be displaced in a few years by "learning voice technology" currently in development. Soumitra Dutta, Professor and Dean of Executive Education at the Paris-based European Institute of Business Administration (INSEAD) says the question for the Indian software industry - one of the vaunted success stories in developing country competition at the high-tech level - is whether it can follow the lead of Japan's car industry and graduate from being simply a supplier of high-quality products to a producer of innovations in its own right.

    Mixed views

    Meanwhile, the growing shift of white-collar jobs to developing countries breeds insecurity. Some Western business leaders call it "a turning point in history", or even the "redistribution of the middle class" from the rich world to the poor. Others think fears are overblown. Stephen Kobrin, Professor of Multinational Management at the University of Pennsylvania (United States), quips: "The subject gets more attention when it starts affecting jobs for graduates of the Wharton School" - which is where he teaches. Nandan Nilekani of Infosys Technologies in India points out that the technology and processes used by Indian software firms all come from the West - this offshoring is the result of decisions in the West. For the Indian economy, the benefits are not just jobs and contracts for the lucky companies: "India was goaded by the West into becoming a free market," he jokes. Home-grown benefits can thus eventually lead to competitive products and services developed completely within India.

    French Finance Minister Francis Mer sees the anti-poverty, pro-development angle to outsourcing and offshoring. "Either we (in the international community) agree the new game implies movement for the benefit of others, or we find countries will refuse to play the game," he says.

    In the end, however, as Jeffrey Joerres of Manpower notes, the economic principle remains: if a business can save itself by outsourcing some jobs, it's worth doing.

    Rethinking the corporation: kinder, leaner

    Worldsourcing is certainly expected to change the nature of corporations. As technology renders more processes digital, mobile and virtual, corporations will restructure, predicts Carly Fiorina, Hewlett-Packard's Chairman and Chief Executive Officer. There will be a shift from firms with vertical chains of command to horizontally-oriented organizations based on partnerships. Companies will also be held to new standards of behaviour. "The floor of what is an acceptable character is rising every day," she observes. Enlightened self-interest will compel companies to engage their communities more deeply, a move that will help develop markets, employees and partnerships.

    Michael Porter of the Harvard Business School sees a wider context of major trends catalysing the evolution of the corporation. The first trend is the shift in global demand to the developing world; the second is technological progress; and the third is demographics that are creating labour shortages, especially among highly trained workers.

    How will corporations change? Porter identifies four major areas:

    • First, companies will strive for distinction in innovation instead of size or diversification.

    • Second, companies will spread their value chains, but will invest more deeply and meaningfully in fewer locations.
    • Third, the scarcity of skilled workers will force companies to pay greater attention to retaining and motivating employees.
    • Fourth, as Fiorina argues, corporations will have to respond more effectively to the community in which they operate.

    ITC identifies outsourcing opportunities

    • Offshore Back Office Operations, an ITC publication, explains how business service providers in developing countries can tap into new business opportunities flowing from the trend for outsourcing and technological advances that make "offshoring" these services possible. The book is intended for economic development officers, investment agencies and suppliers of support services who can develop or expand their back office operations.

    Contact Doreen Conrad, Head of ITC's Trade in Services Unit, at conrad@intracen.org

    • ITC and its national project partner, ASAFE (Support association for women entrepreneurs), deliver training on back office

      operations to help women entrepreneurs in Cameroon understand the new business opportunities in this field.

    Contact Lilia Naas, ITC Senior Trade Promotion Officer, at naas@intracen.org

    Related Forum articles

    • Back Office Operations

    • How Service Exporters Innovate
    • A Country's Competitive Advantage

    These articles and more are available on the Forum web site (http://www.tradeforum.org).

    Prema de Sousa, Forum's Contributing Editor, wrote this box.

    Wayne Ellis is a Sales Manager at Rain Bird Corporation in New Jersey, USA. Since 1999, he has been a summary writer for the World Economic Forum's Annual Meeting.