The Services Shift by Robert E Kennedy (with Ajay Sharma) reached me a little while ago and now I've read it I can recommend it as an excellent and concise overview of the offshoring of services. It combines very well the economics of global supply chains with a business perspective, which is quite a hard trick to pull off – I think it will be useful to both audiences.
Quite a lot of the book is retrospective but there is also a foward-looking section on business strategies and policy, with the firm conclusion that outsourcing in services will continue to grow, as it has in manufacturing. On balance I think this is right. Although world trade has plunged during the winter, pointing to a 30s-style retreat from globalization, I find it hard to see how 25 years worth of the building of supply chains across borders could easily be unpicked and restitched on a national basis. It doesn't seem plausible that the US or UK will rebuild from the ground up the kind of basic manufacturing that has been outsourced.
When it comes to services, however, it does seem likely there will be a long pause in the outsourcing/offshoring process, especially as much of it had occurred in financial services. Call centres are exactly the kinds of jobs that will surely stay onshore until after the recession? Beyond that, the economic and business logic set out in the book will kick back in. But I'd be interested to get Bob's update on how he sees the situation if he's reading this.
First of all, thanks for the nice words about the book.
I disagree with your final thoughts — that the offshoring of services will slow down because of the financial crisis. That is certainly the direction in which the political class is pushing. Examples include the ill-advised “buy American” parts of the stimulus package, and the restrictions on the use of H-1B visa workers in the TARP renewal (H-1B visas are the way in which high skilled foreign workers can take temporary positions in the US). So the politicians would like to slow this all down, but then again, they are almost always resistant to free trade.
But many firms are moving to accelerate their offshore initiatives. These firms are now under tremendous margin pressure and are desperate to cut costs and position themselves for the upturn–with better systems, less deadwood, etc. The financial crisis provides an excuse to let the home office deadwood go and move toward the goal of “global delivery.”
I work with several of the offshoring providers and quite a few US and EU firms that are considering offshore initiatives. (I'm a Prof at the University of Michigan, but do some advisory work). These providers are fielding lots and lots of calls — all aimed at doing things as fast as possible.
The customer firms want to pursue offshoring under the radar, which is generally not too much of a problem. Offshore initiatives for most firms involve a few dozen positions at a time. It's not like shutting down an auto parts factory and opening a replacement plant in Mexico or China. In that case, it's obvious that the 400 new jobs in Mexico replaced the 400 in Michigan.
With services offshoring, firms hire abroad in good times (i.e. the past 5 years) and let people go in bad times (i.e. now). The shifts are not matched up in time and, in many cases, not in function — lay off accounts payables clerks, hire purchasing people abroad. So tracking this is really difficult.
I see actual services offshoring accelerating over the next 2-3 years, not slowing down. Firms are incredibly reluctant to talk about this, but that's what I'm seeing these past few months.
Happy to keep the discussion going — either here or on my (relatively new) blog: www. services-shift.com.
Thanks again for the review.
Certainly the commercial and strategic logic that you set out eg in Chapter 3 is at least as strong as pre-crisis – not to mention the extra incentives for people to undertake medical tourism in cash-strapped times.! Like you, I've come across some examples of businesses looking to outsource, including areas of publishing. And I agree that in services it is much easier to stay below the radar.
I am basically an optimist, if that's the right word, about this (see this article in yesterday's Independent: http://www.independent.co.uk/news/business/sustainit/diane-coyle-for-new-networking-technologies-there-are-boom-times-ahead-1640430.html
As an additional note, this morning I came across this interesting article on the challenge for China in moving up the value chain into service activities: http://www.newstatesman.com/asia/2009/03/china-brands-world-economic
But I would still see countervailing forces, Bob. One is that re-organisation is costly in money and management time, so this is not a good time to undertake it. The other is indeed the politics – the “Buy American” sentiment, the “British jobs for British workers” equivalent here. Surely companies that want to offshore will hesitate to introduce change on any scale in this climate.
Diane: I think we largely agree on the choice firms face. We just come slightly differently on how they balance out.
Pushing in one direction, changes in technological, policy, and global business culture create new options for moving activities around the world. There is no doubt that the run rate savings of such initiatives are large (often after some initial investment in time and money to move the work).
The financial crisis creates greater margin pressure on firms, so they may have more incentive to undertake offshoring.
Pushing in the other direction are two factors. First, the political environment has moved strongly against globalization (in all its forms). This is normal during downturns, but I have been surprised at the ferocity of the response these past few months. This ties in closely with the PR issues mentioned above. Firms really don't want to be seen as poor citizens (although I have issues with the idea that firms owe loyalty to particular countries).
The second factor indicating a slowdown is the up-front costs of going offshore. While this is a consideration, my experience is that it is a small one. The upfront investment costs aren't generally large, and many firms see payback in 6-12 months. It's a consideration, but the firms I work with are much more concerned with bad PR than with the investment to move abroad.
So, I don't want to put words in your mouth. But I think our analysis is generally aligned. technological changes and margin pressures push firms to go offshore, PR concerns and the investment costs hold them back.
I think the first prevails for most firms. You put more emphasis on the second.
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One last thing. I absolutely agree with your thoughts in the Independent piece. I spend 30-40% of my time abroad –generally in developing countries. ICT technologies continue to proliferate very rapidly, and change people's lives in ways that most of us in the US or EU can scarcely imagine. The really are transformative, and uptake and innovation is astonishing.
Looking forward to continuing the conversation, on this and other issues. Take care.
I'll follow the debate with interest on your blog!
This is interesting – what in particular grabs my attention is that the ICT innovation is making a big direct difference to places not in the US and EU. Can you say more about this?
This is really Diane's area of expertise, much moreso than mine. You might want to check out some of the reports she has been involved in (from her main page):
On mobiles in Africa:
http://www.enlightenmenteconomics.com/africamobile.pdf
On mobile transactions in developing countries:
http://www.vodafone.com/etc/medialib/attachments/cr_downloads.Par.3477.File.tmp/VOD833%20Policy%20Paper%20Series%20FINAL.pdf
On the use of mobiles in Lebanon:
http://www.mtctelecom.com/mobility/LebanonWarMobileReport.pdf
Finally, there was an interesting white paper, Dialing for Development, by David Lehr of the Acumen Fund (it later came out in the Stanford Social Science Review, but that requires a subscription). The Acumen Fund working paper is at:
http://www.acumenfund.org/uploads/assets/documents/Dialing%20for%20Development_Working%20Paper_jG2w63Q2.pdf
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I agree that mobile use is a catalyst for development, but my observations are much more casual.
Happy reading.
If the economy doesn't change its direction soon and I'm talking about a positive change, we will probably have to invent cryogenic pods and come back in a few thousand years when things would have changed.