The Business Case for and Background on “Offshoring” Professional Work
I have written several posts about the potential of outsourcing legal work overseas (Law Firms Outsourcing IT and Document Production, 27 Sep 03; Power Outages and Outsourcing , 15 Aug 03; Technology Outsourcing Example – Document Management , 18 Jun 03; More on Off-Shore Outsourcing, 14 Jun 03; Central Back Offices and Outsourcing; 30 May 03). Among other points I make is that that law firms and law departments should consider outsourcing certain tasks performed by lawyers here in the USA (or the UK for that matter) to lawyers in India or other countries where lawyers are trained in English common law and cost much less than in the USA.
My old friend, Eric Mankin, is a business consultant who specializes in innovation, new products, and new ways of doing business. He has an impressive background (check his Innovation & Business Architectures web site) and has thought hard and deeply about many important business issues. His weekly e-mail update today provided some interesting background and perspective on the question of “offshoring” the work of professionals and knowledge workers. With his permission, I have reproduced it here.
From Eric Mankin (click here if you’d like to e-mail him)
The steel strike of 1959 shut down 90 % of US steel production for 116 days. In shutting down production, the US industry opened the door to steel imports, which had been a negligible factor before the strike.
Because they couldnâ€™t purchase steel from their usual US suppliers, buyers were forced to look for alternate sources, and they found that steel produced by Japanese or Koreans could meet their needs at lower cost. This marked the start of the decline of the integrated US steel industry.
The information technology explosion had similar effects on the American software industry. In the late 1990s, purchasers of programming found that they couldnâ€™t buy it in the United States or Europe. This wasnâ€™t because of a strike; rather, for a few brief moments, there wasnâ€™t enough programming capacity to meet exploding demand.
India played the same role in the capacity crunch of the late â€˜90s that Japan played in the steel strike of 1959. India-based companies started as an unproven supplier of programming, but have rapidly become world-class providers of software coding, and have expanded into many other computer-related business processes, from backoffice to customer service.
Forrester, the market research firm, estimates that offshoring will grow at 30-40% a year for the next 5 years. They believe that 3.3 million jobs will be transferred due to offshoring between now and 2015. They estimate that 400,000 jobs have moved offshore, although estimates from places like economy.com run as much as 50% higher.
Applying the â€œfour questionâ€ framework to offshoring reveals why itâ€™s such a compelling product. Offshoring excels across three of the four criteria required to guarantee a productâ€™s success. Compared to domestic alternatives, offshoring is cheaper and provides higher quality. The growth of intermediaries such as Wipro and Infosys makes offshoring easy to buy.
It fails only in its ease of use. All of the managers who work with offshoring warn about the difficulties of working across time zones, and of the importance of managing offshored operations closely.
Last week, I spoke at a venture capital conference in Boston, and offshoring was part of the discussion in a large number of the sessions. If you are forming a company that has customer service or technology needs, you have to consider India or the Philippines for getting this work done. As Jeff Robinson, the VP of Customer Care at UPromise, noted: â€œWe couldnâ€™t be in business if it werenâ€™t for the cost advantages of having our customer service in India.â€
At one point in the conference, a panel of CIOs from companies like Teradyne and Millennium Pharmaceuticals noted that they were all using offshore development houses for some part of their work. Which prompted John Logan, from the Aberdeen Group, to ask: â€œWhen will the CIOs themselves be offshored?â€
If offshoring grows at the rate predicted by Forrester, what happens to all those software engineers, call center representatives, and CIOs in the US and Europe?
Economics provides a rose-colored answer â€” all of these workers are now freed up to tackle new jobs of even higher value. An August 2003 report from the McKinsey Global Institute framed it this way: â€œThe United States has the worldâ€™s most dynamic economy and is fully able to generate new jobs â€¦ While still receiving services that employees were previously engaged in, the economy will now generate additional output, (and thus income) when these workers take new jobs.â€
Personally, I would find this argument more convincing if McKinsey could give some examples of the kinds of new high-valued jobs that these 3.3 million displaced knowledge workers are going to be taking. If you have any suggestions that come to mind, please send them along.
I recently visited a beautiful new research facility on the banks of Pittsburghâ€™s Monongahela River. Carnegie Mellon has a building in the complex, as does Sunoco Chemicals. My hosts pointed out to me that, forty years ago, the same site was the home of a huge Jones & Laughlin integrated steel mill.
The steel strike of 1959 was the beginning of the end of J&Lâ€™s mill, and the local economy built a research facility in its place.
Now, however, companies like Sunoco can get the same research done by equally qualified personnel in places like India or China. Fifty years from now, what structure will stand where the research facility exists today?
For more information:
-The steel history comes from the Wikipediaâ€™s entry on US Steel
-The McKinsey Global Institute published a report in August 2003 that gives facts and figures on offshoring.
-Offshoring as experienced by a hospital services buyer
– Thereâ€™s a site that is 100% maintained in the USA â€” itâ€™s Washtech â€” the website of the Washington Alliance of Technology Workers, Communications Workers of America, Local 37083, AFL-CIO
– This just in: The New York Times of 5 October provided a range of estimates of job loss in the U.S., as well as examples of Offshoring moving up the chain
So, in the legal market, will there be some one-time, “virtual accident” that causes a firm or law department to use lawyers in India and suddenly the market will realize what sense it makes? Only time will tell, but forward thinking organizations should be experimenting with this approach.
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