Those Darned Ecosystems...

Darwinian ecological concepts have been used to characterize California's Silicon Valley. Those analyzing the spectacular rise of Silcon Valley (and of course its occasional nosedives) have observed that the Silicon Valley is like an ecosystem where speed is essential, learning is by doing, failure is accepted almost as a "badge of honor", and creative destruction is the rule. An ecosystem is a system whose members benefit from each other's participation via symbiotic relationships -- relationships that provide mutual benefits, or are "positive sum" in nature.

Take the case of bumblebees. Mother Nature has guided these creatures into creating a nearly perfect ecosystem. Unlike most other species, bumblebees live in colonies and depend on each other for survival. For their sole source of energy, bumblebees extract pollen for protein and nectar from neighboring plants. Plants, in turn, rely on bumblebees to inadvertently brush pollen from one plant to another. This "salutary contamination" enables the plants' reproduction process to begin. The relationship between bumblebees and the surrounding flora is symbiotic. Each benefits from the other's participation. Through the year, the bumblebee hive goes through a lifecycle. In autumn, the queen bee lays eggs that are fed a different diet. These eggs turn into virgin queens and males. When the frost hits, the remaining worker bees die as does the queen. The virgin queens and males fly off, mate, and the males die. The inseminated queens seek shelter through the winter. The process then begins again.

Pretty drastic!

In techno-economic settings, while there are hardly any literal "deaths" of persons, the personifications of the entrepreneurs -- organizations such as startup firms -- do die.

In a techno-economic sense, Silicon Valley posseses most elements of an "ecosystem", quite similar to bumblebees and their surrounding flora. The entrepreneurial startup firms, the venture capital provders of Sand Hill Road in Palo Alto that fund the entrepreneurial industry, and the nearby technological mothership called Stanford University that supplies the talented human capital needed to develop innovative/creative ideas and technologies -- these are the bumblebees and flora of the Silicon Valley ecosystem. The goal of this ecosystem is to generate entrepreneurial ventures.

Once an ecosystem is established, and is able to take first-mover advantage, it becomes very difficult for other regions to emulate such success. The network feeds upon and nourishes itself -- like those cross-pollinating flora. These network effects create a lock-in. The switching costs associated with moving to another region are prohibitive. If another region offers incentives for firms to move, most entrenched players sniff at the carrots but look the other way. Entrenched firms have a clear incentive to remain, and new startup firms, venture capitalists, and students interested in the IT industry have a significant incentive to relocate to this region.

In India, Bangalore has developed an ecosystem friendly to and nurturing of the IT industry. There are well-established, high-quality educational institutions. STPI, an entity sponsored by India's federal government, provides reliable high-bandwidth telecommunications links as well as a single clearance window for all manners of government regulatory approvals. The lifestyle restaurants and bars of MG Road provide the young IT workers places to unwind and relax. The 3000-feet plateau provides relief from the blistering summer heat of the plains of India. Banks and venture capital firms that understand the IT sector -- while not prolific as in the Silicon Valley -- have started appearing in Bangalore. While sharing the general integrity and pro-education attitudes of South India, Bangalore also provides subtle advantages such as better English skills than the rest of South India.

And yes, in terms of the "bad" things -- crazy traffic, long commutes, urban sprawl -- Bangalore is no slouch either, and is beginning to rival Silicon Valley.

Other regions of India -- Delhi metropolitan area, Hyderabad, Pune, Chandigarh, Kolkata, Bhubaneswar -- are trying the create IT friendly ecosystems of their own. But it will be a long uphill battle. Those entrenched in Bangalore are unlikely to move. New entities would rather be in Bangalore, if they can afford it. Of course, India is demographically large, so some (though not all) of the aspiring ecosystems will take root.

There if of course also the question of the ecosystems suitable for the "next waves". Will the software-friendly ecosystem of Bangalore translate into equally supportive ecosystems for IT hardware, biotechnology, medical services, financial anaylsis, and so forth? Some aspects will translate and transfer. But the new industrial and technological waves would also create opportunities for other regions -- such as the quick move by Gurgaon region (near Delhi) to become the "Call Center" capital of India as multinationals scrambled to "offshore" this tedious but important business activity.

Those darn techno-economic ecosystems: you can't live without them, and you can't live (in peaceful trannquility) with them!

Nik Dholakia

The Accidental Manufacturing Superpower?

The last stretch of the road to Jigani village on the outskirts of Bangalore is sheer hell. Some day there will be a major multilane highway whizzing past this village. But in June 2004, to reach the village, our car had to navigate roller-coaster ditches of swirling red earth. These dug-up swaths of earth are the first stage of road building in this as-yet rural part of the IT metropolis of Bangalore.

As soon as you enter the village, you see the sign for APC. This is the Indian manufacturing plant of American Power Conversion, the global leader in making devices that provide "clean" power to computers of all types.

APC is headquartered in Rhode Island, just a few miles west of my university’s campus. I was aware that some years ago, APC had started an Indian manufacturing operation. One of the MBA graduates from the University of Rhode Island who worked at APC, Javed Ahmad, had been tapped to put the Indian operation into motion.

While in Bangalore, my thoughts were naturally about software and IT services. That’s what Bangalore has become famous for (or notorious for, depending on your perspective). So, when I heard in one of my meetings with the software leaders of Bangalore that the most successful IT hardware exporter from Bangalore was APC, a bell went off. “This must be the doing of Javed”, I thought. In the few hours I had before my flight out of Bangalore, I managed to reach the APC factory in Jigani village on outskirts of Bangalore. Javed was his usual polite and hospitable self, and gave me a tour of his plant.

Six production lines with sophisticated automatic transfer machines, where robotic arms with their Japanese automation wizardry punch in hundreds of tiny electronic components into printed circuit boards rolling on belts, run 24 hours a day and 7 days a week. Final assembly of larger components, and the subsequent finishing and packing operations are done by skilled men and women workers. The average production line in this factory that never sleeps spews out 120 Back-up Uninterrupted Power Supply (Back-UPS) units – the staple product of APC – every hour.

Some of the lines were making not the bread-box sized basic UPS but giant TV-sized larger units. All these devices were packed, arranged on palettes, and loaded into containers on backs of trucks waiting at the loading docks. Then – and I shudder to think how – these trucks make their way out of the potholed access ditches of Jigani, into the snarled traffic of Bangalore, over the messy highways with stray cattle and slow-moving tractors, to the port of Chennai about 500 kilometers away. And, then – unlike the efficient ports of Hong Kong and China where goods are usually steaming out on fast ships within hours of arrival at the port – these APC India containers would wait and wait until the congested Chennai port could berth a ship, the port workers could load the ship, the customs officials would give the green light, and finally the vessel would be en route to Rotterdam or Long Beach.

In his soft-spoken style, Javed explained that there was no intention of making the Bangalore factory an export unit when it started operations. But within six months, the factory was doing so well that the entire strategy was changed. Bangalore became an export production hub for APC, and the original goal of supplying the Indian market – while still relevant – became a secondary goal. In 2004, this factory was about to ship $400 million worth of hardware out of Bangalore and was beginning to nudge APC’s China operation from the top spot as a global manufacturing unit. In good old Rhode Island, next door to my university, the company has its headquarters but not much product is being manufactured.

The APC unit in Bangalore is fanatical about quality. It has gone for all the top quality control certifications and is in the quest for the very difficult Six Sigma level of quality. Over the four years of operation, APC’s India unit has built a network of suppliers who are equally devoted to quality and also run 24x7 operations. In the classical Japanese style, these suppliers make multiple deliveries – using their trucks and minivans over those impossibly potholed roads – to keep the APC production lines supplied with “just in time” inventory of parts.

Javed thinks that the “accidental move” by APC – from opening a factory to supply just the Indian market to becoming a global production hub – is a story likely to be repeated by many multinational firms that are opening up Indian factories to cater to the Indian market. He firmly believes that, despite all the infrastructure hassles, Indian plants can out-compete just about anyone – including China – in terms of low costs and high quality of production.

If Javed is right, then the globe-facing segment of India’s economy may turn out to be more than just a one-trick pony: it could become an “accidental manufacturing superpower.”


Nik Dholakia

Revenge from the Land of the Naked Fakir

Writing in The Hindu, southern India’s preeminent newspaper, historian Ramachandra Guha points out some interesting tidbits about the year that Winston Churchill spent in Bangalore in the late 1890s. The teeming IT metropolis was then a sleepy little cantonment town. As a young officer, Churchill was at first pleased with the quiet charm of this agreeable, green town. Churchill found that “the sun even at midday is temperate and the mornings and evenings are fresh and cool”. He described his house as “a magnificent pink and white stucco palace in the middle of a large and beautiful garden.” And there were all manners of servants to cater to the needs of a British imperial military officer.

But there was no military action in that part of British India, and Churchill was bored. He made good use of his time reading widely and deeply, but Bangalore to him was no longer a pleasant little outpost – it had become “a garrison town which resembles a 3rd rate watering place, out of season and without the sea, with lots of routine work and... without society or good sport…”

Churchill was also broke. In his memoirs he talks of the clever money lenders of Bangalore who were only too obliging in extending cash loans to the British officers, only to recover the money with substantial interest when the pay packets were disbursed. In the lobby of Bangalore Club, in the heart of today’s bustling city, one can see a record book with penned entries. It is open on the page with the list of Bangalore Club members who had outstanding dues. Against the name of “Lieutenant W.S. Churchill” is mentioned the sum he owed the Bangalore Club: 13 rupees. The Club Officers basically had passed a resolution waiving off these bad debts.

Fast forward to the early 1940s. The screaming bombers of the Luftwaffe were relentlessly pounding London practically every night. Half way across the world in India, Mohandas “Mahatma” Gandhi – the British-trained barrister turned ascetic freedom movement leader – had committed Indian troops to fight and die alongside the British because Gandhi believed that Nazism had to be defeated. But that did not mean Gandhi had given up the freedom struggle, and his quest to drive the British out of India. He launched the “Quit India” movement and even took his message to the factory towns and streets of England. As we all know, war-weary Churchill was incensed by this and characterized Gandhi as “that Naked Fakir.”

In the 2000s, bright young IT workers from the land of the Naked Fakir are extracting a kind of economic revenge out of the West, including the United Kingdom. It is now not the Indian workers under the colonial imperial yoke who are bristling. Rather, it is the government and company workers in Britain who are bristling at the jobs that are flowing to Bangalore and other Indian IT centers on an almost daily basis. Even the telephone inquiries to British Rail about train schedules and fares are sometimes answered from India.

History has a nasty habit of biting back, sometimes after decades or even centuries. In Bangalore, as the winds of protectionism pick up in the United States – the major client country for most of the IT work being done in India – the corporate strategists of India’s IT firms are readjusting their priorities. They find that the share of Europe in all the IT services being exported from Bangalore is less than 30 percent. This has to be boosted, the Indian IT managers reason, in order to lessen the dependence on the United States. So, where in Europe should Indian IT firms focus? With 200 years of British colonial history having established a good base of English language, where else but the United Kingdom!

Those mild-mannered money sharks of Bangalore are as clever as they were in the 1890s. The interest meter keeps on running on that 13-rupee bad debt!

Nik Dholakia

A Matter of Percentages

The CEO of an up-and-coming IT company in India related this experience about his recent trip to Taiwan. As we all know, Taiwan is the world's preeminent manufacturing source for semiconductor and electronic goods, especially complex high-end products. The Indian CEO was part of an Indian delegation that wanted to study Taiwan's success in the hardware arena.

In one of the presentations, an industry leader from Taiwan put up a slide that showed that each year, Taiwan with its 12 million people, exported $60 billion worth of hardware. India, on the other hand -- with its 1 billion people -- exported only $15 billion worth of software.

Yet, in the next slide, the Taiwan executive indicated why the Taiwanese hosts were envious of their visiting Indian guests. Hardware is manufactured and priced at razor thin margins. The margin on hardware was about 3 percent, netting the Taiwanese economy $1.8 billion on their $60 billion worth of hardware exports. The margins on India's software and IT services exports were in the 20 percent range. This means India netted about $3 billion from its exports of software and IT services.

Of course, for the multinational global clients from USA and EU, this fat 20 percent margin associated with India's IT exports triggers incentives to seek alternative sources -- within India as well as from other countries such as the Philippines, China, Vietnam, and Ghana.

As the International Herald Tribune columnist William Pfaff pointed out recently, globalization is subject to Ricardo's law of "comparative advantages" as well as to the lesser known, but more sinister Ricardo's "iron law of wages." The iron law of wages is simple and logical. It says that wages will tend to stabilize at or about subsistence level. In the global IT-aided economy, skilled workeers are infinitely available, replaceable, and generally interchangeable. Of course, the "subsistence wage" for such workers is more than for a peasant -- it is a wage that provides a barely-middle-class life.

As IT-related wages rise in India, and as strategically savvy Indian IT firms seek to maintain and boost their margins, it is inevitable that the multinational corporations' quest for "offshoring" will be a moving one. One implication is that locations in India other than the well-known IT hub of Bangalore may benefit -- it may be cheaper to get IT work done in Bhubaneswar than in Bangalore. Another implication is that other countries will find ways of attracting IT work away from India. But finally, for the Indian IT firms, the real challenge is to escape from the iron cage of Ricardo's wage-related law: to create IT innovations such that wages and margins can increase. This requires jujitsu moves on the multinationals.

It is said that the famous martial arts of East Asia originated with Buddhist monks who, in antiquity, traveled from India to various corners of Asia. To protect themselves during these perilous journeys, the monks invented martial arts. Now these arts flourish in Japan, China, Thailand, and Korea but have disappeared from India.

So, it remains to be seen whether Indian firms can come up with the requisite martial arts -- the "jujitsu" business strategic skills -- vis-a-vis the well-armed multinational corporations.


Nik Dholakia

Heads Don't Count... Don't Count Heads!

Much of the IT boom in India is based on "head count." Here is how it works. Say, an Indian IT company gets a $400,000 contract for software or other IT service-related work from an American client. The Indian firm is typically able to hire a proficient IT professional at an annual salary of $8,000. Such an employee, working at normal pace, is capable of producing in a year software or other IT services that have a market value of $30,000 in USA or Europe.

Let us assume the Indian IT firm, with this new $400,000 contract that it just negotiated, has its existing IT staff committed fully to other projects. This means the new project can be done only if the Indian company increases its head count by about 15. Given potential attrition from its professional workforce, perhaps a safer bet is to boost the head count by 20.

So, on any given day, hundreds of IT firms in India are scouring college campuses, classified ads, and job-related websites -- looking for IT professionals with requisite skills. The name of the business game becomes "head count." Those firms that are able to boost and then maintain their head count win out. On top of this, if the Indian IT firm can boost the productivity of the professional IT employee, then it benefits even more.

An IT giant such as Infosys has a head count of over 25,000, mostly IT professionals. Since it is a premier company with excellent working conditions, it is able to pick the cream of the crop from the new IT trained graduates. Its pleasant work campuses and enlightened human resource policies imply that attrition rates are low. Finally, by investing in the best available technology and through intensive training, Infosys is able to push up the average productivity of its IT employee to $40,000 per year or more.

Do the math: 25,000 IT professionals producing over $40,000 worth of project work per year. Presto, you have a billion dollar company!

It is no wonder that every Indian student seems to be chasing an IT degree, or at least a college degree with good English skills. After all, at $2,500 a year, even a Call Center job pays far above the average wage of a college educated Indian working at a typical domestic market-oriented or government job.

The head-count mantra, however, is beginning to attract some smart critics. People at the cutting edge of Indian IT industry are saying that increasing head count is simply the Information Age equivalent of amassing armies of the new economy "hewers of wood, and drawers of water." This new Information Age "plantation laborer" speaks C++, wears designer clothes and drives a Maruti-Suzuki car, but conceptually the Indian IT labor and their Indian IT sector emplyers are no different than economic value-creators slogging away in remote imperialist outposts to enrich the Euro-American multinational corporations...

....Unless, these Indian IT companies stop counting heads.

The ambitious among the Indian IT sector firms are saying "Don't count heads." A business model based on head counts would for ever remain at the poor and frayed end of the global value chain. These new breed Indian IT firms are saying: "Heads don't count."

These visionary managers and business leaders point out that, in their dealings with multinationals, some of the best IT firms in Israel and Ireland are able to garner between $500,000 to $1 million per IT professionals employed. This is the model, they say, the smart Indian IT firms should emulate.

Rather than boosting head counts, these leading managers in the Indian IT sector are trying to boost productivity through innovation, and to create globally marketable products rather than globally outsourced projects.

These new breed Indian IT firms are attempting to join a very tough and challenging global game. The winners of this game on the Indian side, if any emerge in the near future, are well worth watching.

Nik Dholakia

Trickle Yes, Torrent No...

In the Bangalore metropolitan region, the unquestioned IT capital of India, nearly a billion dollars of IT related wages and salaries are paid each year. In 2004, this translated to about $250 million of raw discretionary purchasing power chasing the glitzy, good things in life. These, of course, include eyeing and if possible buying a spanking new Toyota.

I had a chance to visit one of the two Toyota dealers in Bangalore, located off an impossibly congested arterial highway. Inside the clean showroom there was a spiffy Toyota Corolla with all the trimmings – plush leather seats, 6-CD music system, etc. The other car was Toyota Qualis, an SUV that is geared more for business than personal use. The rising IT-enriched class of Bangalore is the target market for the corollas and camrys at this Toyota dealership as well as cars at dozens of other name-brand dealerships and for the burgeoning malls of Bangalore.

The new economy associated with the IT agglomeration of Bangalore does benefit the old economy of retailing in the city. This Toyota dealership employs about 150 people. Of these, 80 are technicians.

This dealership is fetishistic about service quality. The waiting room for service customers has a huge plate glass window looking squarely on to the “shop” area. Quite different from my experience with my Toyota dealer in the United States, where my car disappears into a shed and then emerges after it is serviced. Here, in Bangalore, all the gory-glorious details of the service operation are clearly visible.

Of course, the service area of this Bangalore Toyota dealer is clean, well organized, and equipped with the best pneumatic and electrical gadgets that any top auto repair shop in the world would have. Workers wear smart uniforms, and go about their tasks with nimble skills.

These workers are hired from India’s technical vocational schools. This Toyota dealership recruits the best technical skills available at the automobile vocational schools.
After training and some experience, the technicians earn about $2200 a year.

Sounds low?

It is a princely wage in India, where the per capita annual income is barely over $500. At this $2200-per-year level, these 20-something young Toyota technicians can afford a motor cycle and a decent apartment with appliances.

So this is the trickle down effect: the 160,000 IT workers supporting 80 high-wage (in Indian terms) technicians at this one Toyota dealership, and of course the pattern repeats itself at other auto dealers and retail stores. And the trickle creates sub-tickles when, for example, the Toyota mechanic goes shopping for a DVD player.

But this trickle down is not a torrent. It is mostly within the Bangalore metropolitan region, with some further trickling into the rural areas but not much.

The political reality of contemporary India is such that these trickles are not enough. While torrents may not emerge instantly, the huge political challenge facing India’s federal and state governments is to create income streams in the rural sector where 70 percent of the population lives. The challenge is rendered more complex by the requirement that the rural development has to occur in parallel with the urban one. After all, killing the golden goose of Bangalore’s new economy is not the solution to the stagnating conditions of rural India!

Nik Dholakia

One-Hand-Tied Competition

Imagine a fencing duel in which one of the rapier-wielding combatants has one of his hand tied behind the back... and yet he manages to beat out skilled and resourceful opponents time and again.

This pretty much sums up the conditions under which India's successful and increasingly assertive IT firms compete in the global marketplace.

Take the case of Infosys, one of the big-five IT firms out of India, and probably the Indian IT company with the highest international profile.

At its main corporate head office campus in Bangalore, Infosys runs a bus service with a fleet of 150 buses, to ferry employees back and forth through the byzantine traffic snarls of Bangalore's exploding IT agglomeration. Not only is Infosys a bus operator, it is also a water supply company employing the costly Reverse Osmosis process to provide thousands of gallons of clean and healthy water to its employees. Infosys even harvests the rainwater on its verdant, flower-laden campus through beds of rocks to recharge the deep-underground aquifers that would provide water to the posterity. Infosys is also its own electric supply company, generating enough power to light up a small town.

A senior Infosys official estimates that about 30 percent of the time and energy of the top management is spent in solving such mundane infrastructure problems. This stands in stark contrast to not just the advanced nations, where giant IT service firms such as IBM, Accenture,and EDS that compete with Infosys are based, but also stands in stark contrast to China.

An Indian textile CEO was on a visit to China recently, touring their efficient textile factories. During such a factory visit, he asked his host Chinese CEO: "Do you face power cuts at certain times?" The Chinese CEO looked puzzled -- he did not quite understand the question because "power cuts" were beyond the pale of his experience.

In city after Indian city, there is an IT boom... but this boom is happening in an environment where the roads are congested, full of potholes, and snarled with unruly traffic; where water in scarce and unfit for human consumption; where electricity is erratic and blackouts and brown-outs are commonplace.

Governments at various levels in India -- federal, state, and local -- are either clueless about these problems, or are aware but trapped in plenty of red tape and corruption to do anything about these problems. In few rare cases, governments in India are willing and honest in terms of dealing with these issues but lack resources and skills.

The politicians also are on a tightrope whereby too much of a tilt toward the urban centers -- where the IT industry of India is located -- could cause unrest and outcry in the poor rural areas. Such violent swings could send the politicians tumbling off their tightropes. That's what happened in the early 2004 elections -- the top elected officials of the top IT states of India were sent home packing by dissatisfied rural voters.

Fortunately for India's competitors, this "one-hand-tied" model of competition is not likely to change any time soon. True there are major infrastructure projects underway, but these would take years to complete. And even these completed projects would hardly make a dent in an IT-laced economy that is growing at a phenomenal rate. The art and craft of making do without good infrastructure has a long, dismal future in India.

Nik Dholakia

Outsourcing vs. Automation

Growing up in an India that had barely achieved independence from over two centuries of British imperial rule, I read and heard many accounts of how terrible the British rule was. One story was particularly harrowing. The British found that India had a vibrant and sophisticated handloom industry. They started importing to Britain fine fabrics woven in India. Then came the industrial revolution. Manchester and Liverpool became thriving mill towns, with fast mechanical looms. Rather than sourcing handloom fabric from India, the British became more interested in selling mill made fabric to India.

The problem was, the quality of India’s handloom fabric was superior to quality of the mill made fabric from Manchester and Liverpool. The only way to create a market in India was to curtail the production of fine Indian handlooms. It is said that the British soldiers went looking for the master weavers in Northern India and chopped off their thumbs – to prevent them from working the looms.

I am sure there is a grain of truth and a large apocryphal element to this story. What it shows is the long-standing contest between outsourcing and automation. In the richer of two trading partners, this contest is particularly sharp. It may be possible to prevent outsourcing and to preserve an industrial or business process in the rich nation if the process can be automated. In software programming, for example, automation tools like Computers Assisted Software Engineering (CASE) and Computer Aided Design (CAD) attempt to stem the tide of outsourcing to locations where labor costs are low.

But even in the 17th to 19th centuries, the technology of the Manchester and Liverpool mills soon became globalized. Charles Slater, celebrated as a hero in my present home state of Rhode Island, was almost seen as a traitor in England because he memorized the design of the mechanized loom and kicked off the industrial revolution in the United States by opening factories on this side of the Atlantic. Similarly, Bombay and Ahmedabad in India became booming textile towns, rivaling Manchester and Liverpool.

In today’s Information Age, it does not take decades for the automation methods invented in the rich nations to transfer to less well-off nations. Sometimes such transfers occur in months, even weeks. So, the advantage that automation offers – in terms of stanching offshoring – is ephemeral. In fact, as the offshore companies internalize these technologies, they become doubly competitive – combining the advantages of low labor costs and the productivity enhancing aspects of the automation techniques.

So there are no good ways to chop off the thumbs of the master crafts people of the Information Era. The only possible options are political – to ban offshore outsourcing by government agencies or government contractors, to offer tax incentives to firms that keep business processes at home rather than “offshore” them, and so on. But the tightening of such “thumbscrews” also has limited efficacy. Under conditions of global capitalism, process work flows to locations that can guarantee quality at reasonable cost.

It took couple of centuries and the charisma of Beatles to reinvent Liverpool as an icon of rock-and-roll culture. What the rich nations need are ways of speeding up charisma-creation processes!

Nik Dholakia

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

Hollow Economies?

In the 1980s, driven by the then-new concepts of “reengineering”, American firms began to rearrange all their business processes. All activities that could be done cheaply by outside contractors were outsourced.

Many observers of the business scene were horrified. Companies were shuttering everything from manufacturing plants to payroll accounting to logistics, and getting cheaper contract firms to do the work.

The resultant shells of firms were given the shameful epithet of “hollow corporations.” These were corporations that had nice looking corporate skins, something that gave them the appearance of solid business entities. But inside, these entities were hollow -- owning only some key brand assets and possessing financial clout, but having very little in terms of technology, operations, and embedded skills.

American corporations shrugged off these ignoble labels. They had something that made people pay attention: money, or at least the appearance of wealth that kept their stock valuations high. Business commentators came to accept the inevitability of this next phase of capitalism and the “hollow corporation” label not only disappeared but was grudgingly replaced by obliquely admiring labels such as “lean and mean” and “rightsized.”

By 2000, almost the entire American economy, including government agencies and non-business entities, had embraced the gospel of reengineering, contracting out, and outsourcing. Moreover, the locale for outsourced work shifted – to China for manufacturing and of late to India for some of the software and service operations. Outsourcing acquired a foreign accent – in many cases it became “offshoring.”

China, as we know well, has become the global manufactory. This is not going to change anytime soon – there are vast reserves of expansive geography and catch-up wages in China’s Wild West that will continue to provide competitive manufacturing to not just the United States but indeed to the world.

China, therefore, is by no means hollow. It is a solid manufactory, from coast to tundra to desert to mountain.

Meanwhile the hollowing out continues in America. This economy of hollow corporations is becoming a hollow economy – owning and artfully enhancing its symbolic assets while ruthlessly outsourcing to Asia any work that can be done at a rate that is a few dollars cheaper.

Unlike China, in India a curious phenomenon is afoot. A hollow economy is springing up in cities like Bangalore, Delhi, Hyderabad and Pune – a low-cost mirror image of the hollow economy of the United States. For now, despite political rhetoric and media outcry, there is no end in sight to this mutual hollowing out process. The front-office customer-facing hollow economy of USA is developing in tandem with the back-office tele-connected economy of India. If hard goods are needed somewhere in this process, China provides these. It is interesting that there is almost as much lament in India as in USA – often a hollow lament in both countries – about the lack of solid, muscular manufacturing facilities and jobs.

Just as in the older instance of “hollow corporations”, the “hollow economy” label is not likely to stick – in fact it may not even get any play except in this note here! As long as money keeps the wheels of global capitalism spinning, new and flattering labels are being tried: “knowledge-based economy”, “offshore knowledge base”, “global technology development center”, and so on.

In some instances, the two hollows don’t make a whole – and here China or Vietnam or Indonesia step in to provide the solid filler.

Indeed, in the unfolding annals of global capitalism, “hollow” and “solid” are not enduring notions. As every stock market investor knows, the claim of year-on-year solid returns on investment rings hollow.

Nik Dholakia

The East is Shining

When the issue of software outsourcing and business process outsourcing (BPO) comes up, the focus is very often on USA as the economy from which such work is outsourced and India as the country to which such work is outsourced. Separated by thousands of miles, with a continent and oceans in-between, USA and India have emerged as the visible partners in the growing love-hate dance of outsourcing.

Yet, quietly and with far less fanfare, outsourcing is a burgeoning activity across the much smaller geography of the Sea of Japan.

Typical of such relationships is the one between BroadenGate Systems, a software firm based in Dalian, China and this company’s major Japanese clients. In 2002, for example, SCM – a construction industry unit of the Japanese giant Mitsubishi – awarded nearly a $100 million contract to BroadenGate. As part of this contract, BroadenGate provided “SCM with offshore COBOL coding services in databases (DB2) and business process in the environments of IBM S390 series”.

Started in the late 1990s, by 2004 BroadenGate scaled up rapidly to 400 software-development and systems consulting professionals and over 30 project managers. Its foreign locations include offices in Los Angeles and Tokyo. The company has become adept at developing comprehensive outsourcing solutions, systems development work, implementation projects, and providing consulting services in the telecom, network security, e-Business, ERP, CRM and GIS sectors for customers worldwide. While BroadenGate has a small but growing base of American clients, the company’s most successful foreign market is Japan. Its Japanese outsourcing clients include Mitsubishi’s SCM unit as well as Kawasaki Steel, mega-retailer Sogo, Canon, Yasuda Trust Bank, Sakava Bank, Sanyo, Tokyo Gas, Daitokyo Insurance, Kaneka Engineering, and Kyushu Electric Power Company.

At its 2004 annual meeting NASSCOM, India’s software industry association at the forefront of discussing outsourcing issues, invited Dr. Hongbing Lan, President of BroadenGate, to speak about “China - The Next Outsourcing Frontier”. Dr. Lan pointed out that outsourcing work was a natural offshoot of the billions of dollars – about ten times the level of India – that multinationals invested in China’s industrial sectors.

Of course, for BroadenGate the major source of revenue is the burgeoning domestic industrial sector of China itself.

Just as the British colonial legacy and the widespread use of English among the college educated workers of India provides India good access to the outsourcing markets of UK and USA, the centuries-old cultural affinities – even though marred to some extend by the hostilities of the twentieth century – provide Chinese outsourcing firms with preferential access to Japan, and of course to many Asian nations as well as North American settings where Chinese diaspora are in positions of business leadership.

For India’s software and BPO firms, China presents a very challenging mix in terms of potential clients, possible partners, and most definitely a range of strong competitors. In terms of technical skills, the gap – if there is one – between Chinese and Indian software and BPO firms will disappear rapidly. The question of cultural comfort and connections will then become increasingly central. From the perspective of India, the key question is what is being done to narrow the cultural gap between India and the region where much of the real future economic power of the world resides – East Asia. While much of the braggadocio of the “India Shining” advertising campaign was exposed during the 2004 elections in India, the fact of “The East is Shining” is here to stay for decades. Business and political leaders of India should take notice!

Nik Dholakia

e-Clouds over India

Paul Saffo of the Institute for the Future in Menlo Park, California believes that the Web is creating an ever expanding electronic cloud, rife with new commercial opportunities. In a Business Week interview in 2004, he said:

“I've been to places in Shanghai where people are laboring away at online-game personas that they're selling on eBay. If I had told you 10 years ago that someone would be selling an EverQuest character for $12,000 on an online auction system, you would have looked at me like I'm crazy. But it's real enough to be supporting businesses. We've reached the point where we're trading in clouds of electrons.”

In India, the electronic cloud has spread into Information Technology Enabled Services (ITES) sectors in cities like Bangalore, Gurgaon, Hyderabad, and Pune.

In the current stage, cost-cutting and quality-seeking Western, mainly American, firms scout the world for offshore solutions to the problem of lower their costs. India quite often emerges as the source of such solutions.

Like everything else, this too will change. At some point, India will find that it is being outbid for outsourcing work by firms from Vietnam or China, or there are automation-oriented process enhancements that do away with the need for offshoring of processes altogether.

The situation is not too different from that of a Carpenter or a Plumber, who – after considerable success during a building boom – finds that there are other cheaper tradespeople undercutting the project bids. The only way to survive in such a situation is to offer greater value than the next fellow – to become the Carpenter or Plumber to call upon when the project requires high quality work.

In such situations, it also becomes essential for the originally successful craftsman to become a creative design advisor – a purveyor of not merely skills but sagacious advice. In fact, the best among them may even take some risks and build speculative or “spec” houses – attractive high-quality properties that buyers would flock to and pay premium prices for. Building a “spec” house is not just a skilled act – it is an act of orchestrating many different skills and multiple resources relating to finance and marketing.

The software-ITES sectors in India have reached such a stage. Like the skilled game players of Shanghai, who are creating “spec” online game characters that could command good prices, the software-ITES shops of India have to create strong and growing “spec” divisions. These are the units that would go out on a limb and create “tomorrow’s breadwinners.” Innovation and speculation are inherently risky and dangerous activities – they do not offer the reassurance and safety of a cost-plus contract. But India’s IT sector has little choice in this regard – the e-cloud is spreading globally, and it could as well bring showers of dollars, euros, and yens to the parched IT service fields of Ghana and the Philippines as to the lush IT fields of India.

India, and other aspirants to information technology enabled global services, have to handle the e-clouds with care. With the proper mix of efficiency, effectiveness, and innovation, these e-clouds would bring gentle nurturing rain. When there are lapses in any of these dimensions, the e-clouds could turn ugly and unleash destructive thunderstorms.

Nik Dholakia

BPO: Bangalore Pariah Orientalism

Edward Said, the great Columbia University scholar of global political culture, who died in 2003 and whose masterwork "Orientalism" defined and delineated the field of postcolonial studies for the current and subsequent generations of scholars, probably had little knowledge of or interest in BPO: Business Process Outsourcing.

Among Said's ideas, summarized below by reviewers, the most notable is the entrenched millennia-old Western view of the exotic East, the inferior and yet dangerous "Other":

"The Orient exists for the West, and is constructed by and in relation to the West. It is a mirror image of what is inferior and alien ("Other") to the West....The Orient is seen as separate, eccentric, backward, silently different, sensual, and passive. It has a tendency towards despotism and away from progress. It displays feminine penetrability and supine malleability. Its progress and value are judged in terms of, and in comparison to, the West, so it is always the Other, the conquerable, and the inferior...The [oriental]man is depicted as feminine, weak, yet strangely dangerous because [he] poses a threat to white, Western women. The [oriental] woman is both eager to be dominated and strikingly exotic. The Oriental is a single image, a sweeping generalization, a stereotype that crosses countless cultural and national boundaries."

Orientalism is alive, well, and thriving in the BPO field. There are no outcries of political incorrectness when political, business, and media leaders in the United States routinely and regularly bash the "orientals" -- men and women -- of Bangalore and other exotic locales in India for stealing American jobs by accepting pennies to the dollar of American wages.

Business Process Outsourcing or "offshoring" is of course not new. When it was people from Ireland or Israel that were doing these outsourced jobs, there was no political outcry. Ireland is not the Orient. While technically in the Middle East and thus squarely within the geography of the Orient, Israel is for all practical purposes a Euro-American enclave.

But India... that is Orient par excellence... Ganga Din.. Naked Fakirs...Riding the Elephant on a Howda.... Going for a Shikar of the Royal Bengal Tiger... Ten-armed Godesses...

In 2004, legislative efforts are rife in the United States to ban offshoring of government work to India or to require India-based Call Centers to explicitly state "This call is being answered from India", when responding to queries by denizens of the Occidental master races.

Unfortunately, there is usually not much to be gained in global business settings from explicit discussion of such political-cultural issues. In the days when South Africa was ruled by the white supremacist Apartheid regime, that country wanted to do business with the resurgent economic superpower that was Japan. So the Apartheid regime decided to characterize the Japanese not as "colored" people but as "honorary whites".

Indians, Filipinos, Vietnamese and others gloating at the BPO pie.... put on your pin-striped tie...

It is time to revive another grand old Kiplingesque orientalist idea... that of the WOG: the Westernized Oriental Gentleman!



Nik Dholakia

It's a Small, Strange World

The bank clerk in Boston gets a layoff notice
The backoffice employee in Bangalore gets a bonus...

The Bangalore backoffice mushrooms in size tenfold
Chockfull of Dell computers and Coke bottles ice cold...

The Bangalore lad takes his girlfriend to the latest Bollywood movie
Replete with special effects created with Silicon Valley wizardry...

The complex software to run those mighty Silicon Valley computers
Proves too costly and is offshored to Mumbai-based programmers...

Whose salaries zoom to levels never seen before in Mumbai
Bringing smiles to lips of Software Park managers in Hanoi...

__________________________________________

Welcome to the whirl of electronic globalization. This blog explores the economic, political, technological and cultural dimensions of this whirl, returning the focus from time to time to the business implications of all this global spin....

Nik Dholakia
Professor
University of Rhode Island