IT Strategy: OODA SA IT! What??? - Draft -

“Evolution of tactics did not keep pace with increased weapons lethality developed and produced by 19^th century technology. Why were the 19^th century and early 20^th century commanders unable to evolve better tactics to avoid over a half century of debilitating casualties?” [1]

Despite huge technological advances over the last thirty years, businesses have yet to implement strategies that will fully harness the power of IT to achieve and maintain competitive advantage and superior strategic positioning. Businesses will continue to suffer huge economic casualties with annual spending exceeding $2 trillion dollars worldwide.[1] Overpowered servers, applications, and computers filled with useless, irrelevant, productivity-sapping emails and downloads will continue to populate work desks. Not only do these computers have far more computing power than the average users will need much less use, but also, they are loaded with applications that pose a serious security risk via open ports to the internet – backdoors for hackers to exploit and infiltrate not only computers but entire networks!

Where having cutting-edge IT once conferred competitive advantage and strategic security, particularly in “first-to-market” instances, IT now has become an energy vampire draining businesses of profits, productivity and people, all the while impeding processes and progress. IT is not an explosive that is going to blow the competition out of the water. IT is a double edged sword equally capable of cutting down competition and the business wielding it.

Defying conventional wisdom, IT isn’t “the primary factor in the productivity surge … Intensifying competition led to productivity-boosting innovations.”[2] Given this premise, how do businesses pull ahead and stay ahead in a fiercely competitive –digital- market? Getting inside the competitors’ OODA Loops (Observe-Orient-Decide-Act)[1] via SA (Situation Awareness) and disrupting and exploiting competitors’ OODA Loops to create confusion and disorder.

Getting inside the competitor’s OODA loop entails removing oneself from the comfort of his/her contexts and experiences and stepping into those of the competitors (i.e., having SA – situation awareness). There are a fortunate few to whom this is an innate and intrinsic ability (seemingly automatic); however, with practice this will become second nature to most. Getting inside the competitor’s OODA loop demands a very high degree of sensory processing, objectivity and attention to details in a fluid and fast paced environment. In order to get into the competitor’s OODA loop, situation awareness is absolutely critical, essential.

Digressing, before you can get into someone else’s OODA Loop, you have to understand your own OODA Loop, your own ability to have SA (situation awareness).

What is SA? Situation awareness “refers to the degree of accuracy by which one's perception of his current environment mirrors reality.”[3] It is important to understand there is a distinct difference between having SA and being intuitive, as well as having foresight and being “psychic”. SA is based on thinking, on rationale and objective judgments whereas intuition is based on feelings, on something that is neither evident nor deducible.[4] Similarly so, foresight is simply SA playing itself out in one’s mind and coming to plausible conclusions whereas psychic predictions are an outward manifestation of intuition. There are many “lucky bastards” out there who run businesses by gut feelings (intuition) and do quite well, but there are far more who run businesses into the ground this way. Not to mention that since intuition is not reproducible, transition, whether natural (through retirement) or catastrophic (through death, scandal, etc.) is very difficult if not impossible. Note that having SA and foresight require and are dependent on external information and are abilities possessed whereas intuition and psychic predictions do not require and are not dependent on external information and are personal characteristics, traits. SA is predominantly objective. Intuition is predominantly subjective. The singularly most difficult task of SA is to tease apart the objective from the subjective, to operate in an objective mode in a subjective world. It is vital not to mistake intuition for critical non-verbal cues or to allow personal biases, stereotypes, categorizations, labels and experiences to distort the reality of the situation. Having said this, the next most difficult task is being able to take in the whole situation unfettered.

All too often, the focus is placed on the end product/service, when, in reality, the key competitive advantage lies in the process of making/delivering the products/services, the people involved in the processes, and the practices that govern the processes. It is far easier to focus and act on a single item (product) or time (service); but, the information gleaned from this is insignificant compared to that gleaned from observing and orienting oneself to the competitors’ strategies.

Other times, businesses and managers are so entrenched in, bogged down by internal situations and issues that they are unwilling and/or incapable of stepping out of their own perspectives to see situations, particularly external, in other perspectives and contexts and resolve issues in innovative ways. So often people are told “to think outside the box” yet are still stymied because, truth be told, they need “to throw the box away”. Over time the box has come to symbolize the situation or issue at hand; however, in this context, it is the biases, stereotypes and subjectivity (to name a few) that confine the thinking and innovative processes.

To step into a competitor’s OODA loop is not necessarily to “become” the competitor but to be the proverbial “fly on the wall”.[3] To observe not just the present, but the past and how it ties into the present and future (if at all) and the future and how it is anchored to the past and present (if at all). Ultimately, the goal is to have a panoramic view of the situation and, additionally, all possible scenarios evolving from the situation, to orient oneself to and anticipate the competitor’s way of thinking and behavioural responses (actions).

Many businesses (and people) operate (decide and act) in a given (and frequently fairly static and predictable) egocentric context. Meaning they look to their direct competitors, sometimes hopelessly shortsighted, incapable of teasing apart the objective and subjective parts of situations, incapable of taking and understanding other perspectives in order to anticipate and strike first. In all too many businesses, managers are too busy trying to understand how to build a “stereo system” (IT) when, in fact, they should be trying to figure out how to use it. Expanding this analogy, many businesses and managers will try to compete head-to-head in a fierce battle of one-up-manship, of making a better “stereo system” which long-term is a no-win strategy for all involved, except for the consumer (sometimes) because, in essence, they are re-inventing the same thing over and over instead of offering innovative products/services.

Frequently, businesses rely heavily on the end-users, consumers, clients and information derived from and on them for solutions (decide and act) as well as look to see what their competitors are doing, what they are doing right, what they are doing wrong. There is one last piece that many businesses overlook. They often don’t take a good look at themselves.

What?!?

The unique value proposition of a business is how its organizational structure, management style, team structure and individual investment and empowerment are balanced and bound within the unique corporate culture to deliver services and/or products in a proactive, efficient, timely and cost effective manner to not only attain and maintain competitive advantage but also to achieve and maintain superior strategic position over the long-term.

What?!?

It would not be far-fetched to say a business’ Achilles heel is its organization and ability to respond and act as a group and as individuals. Hence, here is where having SA to infiltrate, disrupt and exploit a competitor’s OODA Loop pays off. The goal for businesses is to exercise situation awareness to understand and anticipate competitors’ strategies, to out-maneuver, outflank, out-pace, and outgun their competitors, to speed up their innovation cycles through SA and fine-tuning their OODA Loop. The goal is not to build a better car than they now have, but to build a better car than the one they haven’t even thought of yet but will, or better yet, inventing a product and/or service they would have never thought of before[4] – a modern day dogfight. A business cannot successfully speed up its innovation cycle much less maintain the momentum unless it has high-performance individuals in high-performance teams within an efficient and effective organizational structure bound by a common corporate culture.

Once businesses have the “whole” picture, then can they formulate an effective and innovative strategy that will yield successful results (profits) both up front and over time. Without SA it is impossible for a business to identify its own OODA Loop or those of its competitors, much less utilize this information in any productive and profitable manner.

Having SA is not solely an ability exercised by an individual but may be exercised at a corporate level. The same principles that apply to individuals can be transferred to a corporate level but only if there is cohesive and high-performance leadership and teams.

It doesn’t take brute strength (e.g., fiscal advantage, resource advantage, etc.) to counter attack competitors’ bids for superiority and market share. Often individuals and businesses fail because they cannot get out of their own way. They are often limited not by others but by themselves, their lack of insight and imagination, their fear of change (innovation), their dependency on others whose best interest are not theirs (the individuals and businesses). They run like rats on a wheel, running … running … running … but never getting anywhere. As the old saying goes, “Work smarter, not harder.”

There are – and will always be - consulting firms (and people within a business) out there ready to rape and pillage businesses that are mired in a muck of misaligned and entangled strategies offering salvation at the cost of businesses’ bottom lines and reputations. Just as globalization and outsourcing have proven to be huge levelers in the digital marketplace giving smaller businesses the strength to compete effectively against larger competitors, exploiting the competitors’ OODA Loops through SA may very well be all the savvy executive needs to trounce his competitors, time and time again! So back to the beginning quote:

“Evolution of tactics did not keep pace with increased weapons lethality developed and produced by 19^th century technology. Why were the 19^th century and early 20^th century commanders unable to evolve better tactics to avoid over a half century of debilitating casualties?” [1]

What is the significance of this in relation to OODA, SA and IT? Drawing parallels to what Boyd was referencing (i.e., the American Civil War through WWI), the contemporary digital marketplace and associated strategies are vast minefields of very advanced IT applications that many businesses suffer heavy casualties on. Many businesses treat IT as either a passive weapon (to streamline processes and improve the bottom line) or, worse yet, afford it the rank of general hoping it will lead them to victory (which in reality is abdication of management responsibilities and functions). Although advanced IT applications may be and, in many cases are, an integral part of the corporate strategic arsenal, they are utterly useless in the wrong hands. Moreover, the cost of procuring, maintaining and using advanced IT applications in the name of competition may prove to be more than many businesses can afford and, ultimately conferring competitive advantage and superior strategic position to competitors. A perverse but possible outcome.

Effective business strategy, winning business strategy, is not a function of who has the most firepower but who has the most intelligence, who has the most SA, who can get into the competitors’ OODA Loops and cause the most disruption, chaos and disorder, and who can speed up and maintain their innovation cycles –each ability, each activity a key component of successful business strategy.

Selected Reading:

The Mind of War: John Boyd and American Security (Paperback)
by Grant T. Hammond

Comments: Of particular interest and relevance are the chapters dealing with Boyd’s theories on strategy (chapter 8 to the end).

The Google Story (Hardcover)
by David Vise, Mark Malseed

Comments: This is an account (and a somewhat repetitive one) which focuses mainly on the Google “culture”. Although very lean on any strategies employed it does illustrate the effect of “culture” and personal dynamics on success. A quick and fairly painless read.

Certain To Win: The Strategy Of John Boyd, Applied To Business (Hardcover)
by Chet Richards, Chester W. Richards

Spinney, Franklin C. “Evolutionary Epistemology: A Personal Interpretation of John Boyd’s Destruction and Creation,” 31 July 1997, 20 December 2005 <http://www.belisarius.com/modern_business_strategy/spinney
/ev_epis/evolutionary_1.htm>.

Tighe, Thomas, Hill, Raymond and McIntyre, Greg. “A Decision for Strategic Effects: A conceptual approach to effects based targeting,” 11 October 2000, 20 December 2005 <http://www.airpower.au.af.mil/airchronicles/cc/Hill.html>.

“A Guide to Implementing the Theory of Constraints (TOC)” 19 December 2005.

Selected References:

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[1] See selected references for more detailed information on OODA Loop.

[2] See Appendix I for OODA Loop Diagram

[3] Interesting to note, a fly has panoramic vision, views the world from a spherical point of view. See http://www.spectrum.ieee.org/print/2151 for an in depth discussion on this subject.

[4] See http://www.belisarius.com/modern_business_strategy/spinney
/ev_epis/evolutionary_1.htm

[5] See Appendix 1I for Corporate Culture Diagram

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[1] Carr, Nicholas G. “IT Doesn’t Matter” Harvard Business Review Product 3566, May 1, 2003: 4.

[2] Farrell, Diana “The Real New Economy” Harvard Business Review Product 5127, October 1, 2003: 39.

[3] “Situation Awareness,” Naval Aviation Schools Command. 2 January 2006 <https://wwwnt.cnet.navy.mil/crm/crm/stand_mat/
seven_skills/SA.asp>

[4]“Intuition, Dictionary.com. 3 January 2006

<”http://dictionary.reference.com/search?q=intuition>

IT Depart(ment)s Offshore?

NOTE: This was also posted here as it is relevant to a previous post on this site. Thanks :-)
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Steven Pearlstein's article Economy of Scale Might Inspire Companies to Ditch IT Departments poses a very poignant question at the end.

"I suspect, however, that Carr is on to something, and that there will be an important place in business history -- and the Forbes 500 list -- for whoever figures out how to become the Insull of computing. An equally intriguing question is whether he'll be a Sam or a Sanjay."[1]

The questions of outsourcing, to what degree and where continues to be asked and addressed by businesses all over the world. Although Pearlstein’s article focuses on Carr’s infamous article in HBR and the implications of Carr’s contentions, he leaves the reader hanging at the precipice of the true implications and consequences for Americans.

Outsourcing … and … Offshoring …

Some types of outsourcing are very evident, from displaced workers to closing of domestic companies; while other types of outsourcing are less evident, from Google to PayPal. One we decry as tragedy while the other we applaud for the convenience it affords.

The fact that computing is becoming more like a utility is of no surprise, but to generalize that all computing will become a utility is both fallacious and shortsighted in terms of strategic planning and implementation. Although computing may one day be centralized and homogenized to a large degree, corporate competitive and strategic advantage does not have to be sacrificed because of computing. Though businesses such as Google and PayPal are definitely leveling forces within the business communities, they can also become part of a business’ competitive and strategic arsenal when properly leveraged and implemented.

Regardless of who does the computing, successful IT initiatives are a part of, and maybe key to, successful business initiatives and strategies. In smaller companies, it (often) simply is not cost effective to run IT departments, hence, the need to outsource. However, many larger companies may be able (and willing) to run IT departments yet many will choose to outsource fundamental IT functions to trim the bottom line. As Thomas Friedman puts it:

“The cold, hard truth is that management, shareholders, and investors are largely indifferent to where their profits come from or even where the employment is created. But they do want sustainable companies. Politicians, though, are compelled to stimulate the creation of jobs in a certain place. And residents –whether they are Americans, Europeans, or Indians – want to know that the good jobs are going to stay close to home.”[2]

Though this quote is taken out of its original context, it is still applicable. Computing enhances the ability and accelerates the process to trim the bottom line – regardless if it is treated as (called) a utility (a commodity) or not it still can be outsourced, offshored.

As outsourcing's footprint grows and steps on the more affluent workforce, the more vocal workforce, there will continue to be roiling controversy and confusion (i.e., political, economic, displaced workforce, etc.) All the while our counterparts all over the world are ramping up their skills and resources not just to compete with us but to overtake us.

Are you running recklessly down the road in pursuit of quick profits or are you following a planned path of sustainable profits? (short-term strategy vs. long-term strategy) That is my question to you.

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[1] Pearlstein, Steven. “Economy of Scale Might Inspire Companies to Ditch IT Departments,” The Washington Post, 30 November 2005, 30 November 2005 <http://www.washingtonpost.com/wp-dyn/content/article/2005/11/29
/AR2005112901096.html>.

[2] Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century, (New York: Farrar, Straus, Giroux, 2005) 211.

Outsourcing BPO (BrainPower Offshore) -Draft -

“In India, our competitive advantage does not lie in cheap labor,” he [Baba Kalyani of Bharat Forge] says. “It lies in cheap brainpower.”[1]

Overview:

Outsourcing, or specifically offshoring[1], is one of the most singularly divisive topics within the global business and political communities. By removing the shades of shortsightedness and understanding the true progression and impact of IT developments, it is not difficult to foresee outsourcing (offshoring) as a predecessor of, an adjunct to automation. Given this premise, it is imperative to incorporate outsourcing strategies with long-term IT and business strategies not so much to create and enable dependencies but to complement each other to produce optimal short-term and long-term results and achieve enduring superior strategic positioning.

For the purposes of this discussion, India will be used as an example, a backdrop, because it is currently the number one destination for outsourcing[2] for call centers and IT functions because of the well educated, English speaking labour pool. This discussion will focus on key factors affecting and involved in prudent IT decision making for long-term strategy.

Strategic Impact:

Outsourcing, like IT, has become a mainstay of the digital economy and globalization, a necessity to be and stay competitive. Finding the correct balance is tricky and often an elusive endeavour, certainly not a static condition but fluctuating due to market conditions, product and service issues, and, unfortunately, at times, subject to business and consumer whims and fads. It is critical for businesses to not only keep up to date with current technologies but also to effectively market themselves in a highly competitive global market, to discern what technologies and business processes will be most suitable and profitable given the scope of business goals and objectives – both short-term and long-term.

Developing, communicating and implementing long-term business strategies are key to realizing maximum returns on investments of resources – human and economic-- whether in business practices and processes, IT initiatives or outsourcing. Like any other business initiatives, outsourcing should be a tool to gain and retain competitive edge and strategic positioning. When viewed as solutions to immediate issues, outsourcing’s long-term utility and effectiveness may be hampered, diminished, limited even, and, sometimes, negated over the course of time, particularly in the face of ongoing IT innovations.

As farfetched as it may seem now, outsourcing is conceivably but a stepping stone to automation, eventually to be relegated to the position of an adjunct to automation. “Technological displacement is a reality for Wall Street traders and offshore call-center workers alike.”[2] Where there are now Fanuc robots building motorcycles in India (and Japan), “{S}peech-enabled self-service technology may soon eliminate some jobs in offshore call centers.”[3] Bajaj, India’s second largest motorcycle maker, offers interesting contrast between pure manual labour and automation. In an effort “[t]o break the grip of recalcitrant labor unions at its [manual] plant”[4], it built an automated plant a few miles from the manual plant and staffed it with engineers (compromising 90% of the workforce[5]) running state of the art robotics. While there are fewer people working at the automated plant, the engineers are not only paid better than their counterparts working at non-automated motorcycle plant but are far more productive (manual plant: 4000 workers make 1,500 scooters/day; automated plant: 900 workers make 2,600 motorcycles/day[6]). Businesses have used and will continue to look to automation to cut costs and circumvent labour issues (i.e., labour unions, government policy and regulations, benefits, etc.).

What gives strategic advantage is not abundance but scarcity, not the tools but the utilization of tools. Outsourcing should be an integral part of a business’ value proposition or not at all (even if all of its competitors are outsourcing). Strategic positioning, choosing whether or not to outsource, should be a business specific based decision. Admittedly, most mid to large size companies will outsource to varying degrees; however, this does not imply they will (or should) outsource in the same manner but simply have it in their competitive arsenal.

Return to Fundamentals:

Regardless of the source, the most cited reason for outsourcing (offshoring) is cost savings; however, making a decision based solely on this parameter is folly. It is critical not only to have clearly defined and communicated visions, goals and objectives but also to communicate these to the outsourcing (offshore) partner(s). It is important to measure and quantify current productivity and costs before considering and implementing outsourcing in order to establish benchmarks and make accurate assessments of productivity (gains or losses) and results (both positive and negative) to base future decisions on (i.e., whether or not to outsource or continue to outsource). Also to consider with due diligence is the manager’s and company’s experience with outsourcing as well as the possible need for an intermediary (consulting firm) which may quickly negate the (initial) cost savings afforded by outsourcing.

In order to successfully outsource IT initiatives and/or business processes (e.g., BackOffice functions, call-center operations, etc.), the manager and business must have adequate and, hopefully, successful experience doing and/or managing the very same processes it is outsourcing in a local/domestic setting. Otherwise, how can managers (and businesses) communicate expectations, expect an outsourcing company to produce the deliverables? Though the motive in this case may be primarily economic, there may be other precipitating and/or mitigating factors that drive these processes offshore (such as more favourable governmental and regulatory conditions, a more appropriate labour pool, enabling 24/7 operations at a fraction of the cost, etc.).

Simply having a working knowledge of the processes is not enough and may leave the business vulnerable to risks it would otherwise be averse to taking much less handling when these risks materialize. Having experience and perspective gained from such is part and parcel of clearly defining and communicating expectations to a third party whose primary vested interest is to be paid in full and on time. It is incumbent that the manager (in charge of outsourcing) is able to maintain situation awareness and manage effectively, whether in the same office or over the span of thousands of miles and several time zones. Although difficult (and sometimes time-consuming), maintaining situation awareness across great distances is crucial to long-term success of outsourcing. Situation awareness in outsourcing involves establishing key trusted contacts, accountability, continual monitoring using quantifiable measures and, possibly, visits to align long distance communications with the reality of the situation.

Although business considerations may weigh in heavily, identifying and assessing which business processes and IT initiatives could (and should) be outsourced and in what manner is critical and must be weighted accordingly in order to properly assess risk and provide justification of such decisions. These decisions must be in line with overarching business strategies, complementing current and future business practices and processes and IT initiatives within the boundaries of fiscal and ethical responsibility and accountability.

There is a fine line between delegating and abdicating management responsibilities and business processes. In conjunction with economic considerations, the primary goal of outsourcing should not be abdication of responsibilities and processes but the judicious delegation of such in order to free up resources -- both human and economic – to not only capitalize on current opportunities but also to keep abreast of innovation and industry trends. It is critical to shift the business paradigm, mentality, from reactive to proactive.

Before incorporating outsourcing and/or offshoring into their business strategies, prudent managers should closely examine what is going on in India (and other outsourcing/offshoring destinations) to determine the associated benefits and risks. The following are questions every manager should be thinking about, asking:

• Wage inflation:

• When will it level out, be on par, with other developed countries?
• At what point will outsourcing/offshoring no longer be economically feasible?
• Worker mobility: Currently, India has a very high attrition rate due to corporate poaching/piracy of each other’s labour pool, as well as experienced workers negotiating better compensation packages.
• Is it plausible to presuppose that proprietary information, regarding not only clients, customers, products and services, but also management processes and decisions, would become a liability, eroding at the value chain of a business?
• Which outsourcing companies will shoulder the burden and cost of training the labour pool and be at economic risk – both short-term and long-term?
• Which outsourcing companies will reap the benefits of an already trained labour pool? Sustainable competitive advantage?
• Higher wages and more experience vs. lower wages and less experience: what is an appropriate balance to achieve performance and productivity and still maintain cost effectiveness for the outsourcing company and cost savings for the contracting company (i.e., How high should the outsourcing business set its expectations, how stringent should its guidelines be?
• Supply vs. demand of the labour pool:
• What will happen when supply finally catches up with demand?
• When will supply catch up with demand?
• How will China’s (and other countries’) emergence into and establishment in the global market affect supply and demand of India’s labour pool?
• Security:
• Will my proprietary information be safe (e.g., India currently does not have data protection laws.)?
• Will my clients’ and customers’ information remain private?
• Will I be able to fulfill whatever contractual non-disclosure agreements and/or security agreements I am operating under?
• Intellectual property:
• What are my intellectual property rights in India (or whatever country I am outsourcing to)?
• Performance and productivity:
• What is the performance and productivity of this company? Labour pool?
• Will the increased performance and productivity be enough to offset the logistical issues that may arise?
• How does performance and productivity compare between outsourced and domestic sources? And, is the cost savings between the two alternatives enough to justify outsourcing?

Though by no means an exhaustive list, these are some fundamental questions that should be answered before entering into an outsourcing partnership.

When involving third parties (outsourcing partners), it imperative to thoroughly communicate expectations up front, as well as maintain open lines of communications throughout the partnership to respond to fluid business needs. While it is not necessary to communicate the entire business strategy to the outsourcing partner, it is imperative to communicate the outsourcing partner’s role in the business strategy by communicating realistic expectations, responsibilities, and accountability. The outsourcing partner is, in truth, running part of your business for you! It is both prudent and profitable for your partner to not only be (and feel) vested in what they are doing for you (your business) to have incentives (even if the primary incentive is economic) but also to be held mutually accountable.

It is not coincidental or surprising that many of the pitfalls experienced in other business initiatives, particularly IT initiatives, plague outsourcing as well. All too often managers and businesses look first to the outside for solutions when the solutions may in fact lie in retooling current business practices and processes and restructuring corporate and management organization to effectively implement and capitalize on such initiatives and improvements. Communications, having aligned long-term strategies, and vested interest are key to not only meeting business goals but also to solidifying strategic position.

Fact vs. Fiction:

With so much information available, it is often difficult and tedious for any manager to discern fact from fiction, particularly when presented in an appealing and easily digestible format by outsourcing consultants (or BPOs[3]) looking to win his/her business.

A quick detour into historical context shows that “[w]age inflation is a natural component of a growing and evolving industry, particularly in developing countries.”[7] Historically, “[f]or most of the post-WWII period, the U.S. was in fact unrivaled in its scientific and technological prowess. In the last five to ten years, this once-predominant position has begun to decay, and in some places rapidly. In 1999, the U.S. Council on Competitiveness warned the U.S. could not rest on its laurels, since ‛other nations are accelerating their own efforts’ as America’s ‛innovation infrastructure’ begins to show signs of decay.”[8]

In a more contemporary context, U.S. wage depression, displacement and redeployment of U.S. workers often prove to be controversial issues which businesses are forced to reckon with. However, this controversy is not new (think back to the 80’s and the automobile manufacturing offshoring outcry) and is fueled by businesses trying keep afloat, stay ahead, by politicians with agendas, and by a very vocal group of white-collar workers. Thomas Friedman puts it very succinctly, “The cold, hard truth is that management, shareholders, and investors are largely indifferent to where their profits come from or even where the employment is created. But they do want sustainable companies. Politicians, though, are compelled to stimulate the creation of jobs in a certain place. And residents –whether they are Americans, Europeans, or Indians – want to know that the good jobs are going to stay close to home.”[9]

Though the current wage spread is definitely appealing right now, India’s wage inflation hovers around 13% to 14% and will not decrease in the near future. India’s wage inflation is fueled by shortages of qualified professionals, by existing qualified professionals constantly negotiating higher compensation packages (not to mention their high mobility between competitors), and exorbitant attrition rates of 20% to100% due to poaching/piracy amongst companies located in India (both domestic and multinational). Considering these factors alone, outsourcing may not achieve the intended results and productivity goals, much less provide the necessary contracted services on a consistent basis.

Although, the current wage inflation in India is 3-4 times that of the U.S. wage rate annual increases, this by no means puts India “[…] in dire straits. India’s offshoring business is more advanced than those of other countries and has unique benefits.”[10] Notwithstanding, “[h]onest corporate managers will tell you that to make offshoring work, you need at least a 300% to 400% wage spread between American software writers, engineers, accountants, and call-center employees and their Indian and Chinese counterparts. […] [l]abor costs have to be very, very low overseas – not just lower – to compensate for time-shifting, managing over such long distances and decreased productivity.”[11] In spite of its allure, wage spread alone is not enough to justify outsourcing/offshoring simply because there are far too many variables influencing and affecting the results thus making outsourcing/offshoring a very risky venture, particularly for the inexperienced manager (and/or business).

India’s response to its current shortage of qualified professionals is to produce more professionals in IT fields (i.e., much like the U.S.’s response during the dot.com era, Ireland in the 1990’s, and as is other countries’ now). History repeating itself.

Although India may be following in the footsteps of its predecessors, it is missing one key component that its predecessors had: infrastructure[4]. Given this premise, it is not unrealistic to extrapolate the following to materialize in India:

• The wage gap between Indian and American IT/call center professionals will continue to shrink while demand for qualified professionals outstrips supply thus reducing net profits, possibly causing increased costs to be passed on to the buyer, subsequently losing much of its initial allure and appeal
• Through global competition and technological advances , within 5-10 years supply could exceed demand having profound economic impact on India due to infrastructure improvements financed by the current boom
• Current technologies that India is gearing towards will be outdated or obsolete by the time students enter the job market thus leaving the onus of training on domestic and multinational businesses who may or may not be willing to invest time, resources (human and capital) in such

Although many “[…] U.S. companies will continue to prefer India [because of] the depth of its labor pool, which stems from the eagerness of its citizens to obtain technical training. [… and …] It remind[s] [them] what [the U.S.] used to be about[,]”[12]this may not be enough for India to surmount many of the obstacles and challenges it faces (and will face) as a premier outsourcing destination and as an emergent IT force within the global market.

More fundamentally, it is important to keep in mind despite its huge advances in the last few years, India’s technology industry is still a nascent industry compared to the industries it serves and the management structures it answers to. Having evolved as a result of and alongside technological advances, India’s technology industry is expanding at exponential rates yet is severely handicapped at the same time by its infrastructure, which struggles to keep up with the current and ongoing frantic pace of development. “India is the global economy’s idiot savant. It excels at the impossible, turning out hundreds of thousands of brilliant engineers. Yet flubs at the obvious stuff [infrastructure].”[13]

Though this is certainly a grim picture to paint, the reality is when a company outsources to places such as India, there are (very basic) logistical concerns (i.e., 9000 miles, 9 ½ to 10 ½ hour time difference) that may impede timely and effective response to fluid business needs and render effective management a function of the logistics involved (meaning someone in the US is either going to have to stay up in the middle of the to deal with any arising issues or actually go to India).

Summing it up nicely was an article by BPO India, “[h]igh attrition rate, price wars, poor infrastructure and lack of data protection laws could derail India's booming outsourcing industry.”[14] This is a very sobering statement to consider before jumping on the outsourcing/offshoring bandwagon.

Conclusion:

While outsourcing is a multi-faceted approach to improving the bottom line and seizing opportunities, it is also a risky approach for businesses that are not wary enough, savvy enough to avoid outsourcing’s inherent pitfalls in the pursuit of the ever elusive superior strategic positioning. Managers and businesses need to realize and understand that there is a vast range in expertise and accountability varies greatly from business to business and country to country.

Outsourcing has leveled the playing field for all businesses effecting changes, both anticipated and unanticipated, that has had reverberating effects within the global business community as well as upon the global economy. Despite the exponential growth of outsourcing, the fundamentals of management and business still hold true (as evidenced by reverse offshoring when multinationals find that offshore workers are not ready to assume management roles).

Outsourcing was once the luxury of the elite businesses. Now, outsourcing is becoming the mainstay of many businesses and the price for other businesses to enter the global business arena. Outsourcing has the potential to enhance a business’ value proposition and chain when properly utilized as well as supplement superior strategic positioning through cost savings and increased productivity. Outsourcing’s ability to attain and maintain competitive advantage is a limited proposition simply because of the degree of specialization required to attain and maintain such; however, this is not impossible with a comprehensive long-term strategy involving the entire business.

Outsourcing strategies in tandem with other strategies, particularly IT strategies, have the potential to encourage innovation, creativity and entrepreneurism as well as challenge the status quo of management and business principles, business practices and processes, and drive competition to new levels. Yet, at the same time, outsourcing’s success is largely dependent on having and a solid foundation in the fundamentals of management and business principles and being able to build upon these principles.

Properly implemented, outsourcing may help a business deliver a true value proposition and accurately reflect a value chain not subject to market distortions and passing business and consumer whims and fads.

Though outsourcing, particularly offshoring, is a controversial topic within the global community, it is neither good nor bad but simply a tool, a means to an end. What makes outsourcing (and offshoring) good or bad is the way that businesses implement and utilize it. Therein lies the quandary for individuals, businesses and governments alike. Where does outsourcing (and/or offshoring) fit into your strategy? Everyone has a different answer.

Footnotes

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[1] For the purposes of this discussion, outsourcing and offshoring are interchangeable.

[2] India has a vast pool of well educated, English speaking, and driven service oriented people. Their expertise in outsourcing exceeds that of their competitors (“More bang for the buck.”). Additionally, at this time -- and for the foreseeable future -- the wage gap is sufficient enough to justify outsourcing.

[3] BPO = Business Process Outsourcing

[4] Infrastructure: India has inadequate land transportation (roads, rails); utilities (electricity – comparatively high price and efficiency of approximately 60%).

Endnotes

[1] Clay Chandler, “India’s Bumpy Ride,” Fortune 31 Oct. 2005: 142.

[2] Kathleen Goolsby and, F. Keaton Whitlow, “What Causes Outsourcing Failures?” Outsourcing Center, Aug. 2004, 1 Nov. 2005 <http://www.outsourcing-journal.com/aug2004-failure.html>.

[3] Goolsby.

[4] Chandler.

[5] Hansen.

[6] Chandler.

[7] Fay Hansen, “Economic & Business Focus: Global Labor Arbitrage Resets Wages,” Business Finance Mag.com, April 2005, 1 Nov. 2005 <http://www.businessfinancemag.com/magazine/archives/article.html?articleID=14400>.

[8] Richard Florida, The Flight of the Creative Class, (New York: HarperCollins, 2005) 140.

[9] Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century, (New York: Farrar, Straus, Giroux, 2005) 211.

[10] Mike Yamamoto, “Will India price itself out of offshore market?” News.Com, 29 Mar. 2004, 1 Nov. 2005 <http://news.com.com/Will+India+price+itself+out+of+offshore+market/2100-1022_3-5180589.html>.

[11] Bruce Nussbaum, “Is Outsourcing Becoming Outmoded?” BusinessWeek Online, 20 Sep. 2004, 1 Nov. 2005 <http://www.businessweek.com/bwdaily/dnflash/sep2004/nf20040920_0654.htm

>.

[12] Thomas Hoffman and Patrick Thidbodeau, “Wage Inflation Unlikely to Soon End India’s Offshore Dominance,” Computerworld, 5 Apr. 2004, 1 Nov. 2005 <http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,91916,00.html>.

[13] Chandler, 138.

[14] “Attrition in Indian BPO Industry,” BPOIndia.org, Sep. 2004, 1 Nov. 2005 .

Selected References

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<http://www.businessfinancemag.com/magazine/archives/article.html?articleID=14400>.

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Nussbaum, Bruce. “Is Outsourcing Becoming Outmoded?” BusinessWeek Online, 20 Sep. 2004, 1 Nov. 2005 <http://www.businessweek.com/bwdaily/dnflash/sep2004/nf20040920_0654.htm

>.

Nussbaum, Bruce. “Outsourcing to India and China is getting more expensive.” 21 Oct. 2005, 1 Nov. 2005 <http://www.businessweek.com/innovate/NussbaumOnDesign/archives/2005/10/outsourcing_to.html>.

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Yamamoto, Mike. “Will India price itself out of offshore market?” News.Com, 29 Mar. 2004, 1 Nov. 2005 <http://news.com.com/Will+India+price+itself+out+of+offshore+market/2100-1022_3-5180589.html>.

Yourdon, Edward. Outsourcing: Competing in the Global Productivity Race. Upper Saddle River, NJ: Pearson Education, Inc., 2005. (ISBN 0-13-147571-1)