Perspectives on Electronic Globalization

Technologies of global electronic communications, political-economic forces of globalization, business strategies of global outsourcing, and tendencies of global cultural interchange are all implicated in a growing, complex matrix. This blog explores various aspects of it, with the vantage point of business strategy providing a focus.

Saturday, June 12, 2004

Tug of War with the Value Chain

Writing a column in the CIO magazine, Susan H. Cramm – who held Chief Information Officer (CIO) and higher positions in a major American corporation – offers insightful comments on the tugs and pulls of outsourcing projects. To reflect her own position, Susan invokes the views of N. Dean Meyer, from an outsourcing firm Susan had used in the past. Dean says (and Susan agrees) that “outsourcing, under certain conditions, will save money, reduce risks, accommodate peak loads, and develop internal staff and processes. But these benefits come about only if internal staff remains in charge of the client relationships, deciding whether to ‘make or buy,’ selecting and managing vendors, establishing strategies and technical directions, defining standards and policies, and seeing that the vendor's knowledge is transferred internally over time.”

These are noble sentiments, especially from an outsourcing service vendor. And of course Susan’s admiration for this position, as a major client and buyer of outsources services, makes perfect sense.

But let us put things in a bit of historical perspective.

Almost from the beginning phase of the industrial revolution, the issue of who controls knowledge and processes has been contentious – a tug of war yanking at both ends of the value chain. Such tug of war gets even more contentious when the value chain stretches internationally.

In the nineteenth century, the fledgling American industry did outsourcing work for UK and Europe, and eventually ended up usurping Europe’s technology and knowledge, later developing the knowledge base so far ahead as to leave Europe biting the dust of the galloping American industry. In mid-twentieth century, Japan paid America back in its own coin – at first it acted as a meek provider of outsourced products to the American economy but soon everything from cars to cameras to copiers were made better, faster, and cheaper in Japan than in America. Now, China is playing this game and Japan and America are watching ruefully as China both efficiently supplies thousands of items and at the same time garners knowledge, technology, and experience to become tomorrow’s competitor.

Yes, the meek do inherit the Earth, but not by remaining meek forever.

So, why do those – like Susan Cramm – who outsource symbolic activities such as software and services believe that things will be different in these arenas than they have historically been in industrial arenas?

While it makes perfect sense for the outsourcing client to write tight contracts, seek strict compliance, and call the strategic shots in an offshore outsourcing relationship, it makes equally good sense for the foreign outsourced service provider to tug meekly but cleverly at the value chain.

In the automobile industry, the Japanese and the Koreans have made significant inroads into the American market. Most observers of the automobile industry believe that Chinese car models will be rolling on American roads starting in 2010, if not sooner. So, shouldn’t software firms from India be making their own branded products and targeting American and other international markets in due course? The 300-year history of global business relationships indicates that they probably will.

Indeed, the nature of the software and service sectors is such that knowledge leakage into the outsourced service provider firms will happen rapidly. After all these are knowledge based sectors, and the material techniques and skilled craft elements that slowed knowledge leakage in manufacturing fields are no longer very relevant.

Let the games begin – in fact they already have. Who tugs the value chain how fast in what direction – these have become much more open questions in the knowledge-based world of today. The answers to these questions are not as easily predictable and projectable as they were in the manufacturing era.

Nik Dholakia

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