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Saturday, November 13, 2004

The Economist On Outsourcing -Part II

Economist's survey on outsourcing says," The global deployment of work has its critics, but it holds huge opportunities for rich and poor countries alike ". In Part 1, we covered the genesis of outsourcing, the anxieties felt in the western world about outsourcing, and more importantly in this age of globalisation,that the world's companies between them spend about $19 trillion each year on sales, general and administrative expenses. Only $1.4 trillion-worth of this is outsourced currently. Excerpts continued:

Brillian obtains both the goods and the services it needs to put together its televisions from outsiders all over the world, which means each bit of work goes to whatever company or country is best suited to it. This opens up huge opportunities. Diana Farrell, the head of McKinsey's Global Institute, thinks that by reorganising production intelligently, a multinational firm can hope to lower its costs by as much as 50-70%.

Such reorganisation takes two main forms.
- First, thanks to the spread of the internet, along with cheap and abundant telecommunications bandwidth, businesses are able to hand over more white-collar work to specialist outside suppliers, in the same way as manufacturers are doing already. A growing number of specialists offer, say, corporate human-resources services, credit-card processing, debt collection or information-technology work.
- Second, as transport costs fall, globalisation is beginning to separate the geography of production and consumption, with firms producing goods and services in one country and shipping them to their customers in another. Over the past ten years, countries such as Mexico, Brazil, the Czech Republic and, most notably, China have emerged as important manufacturing hubs for televisions, cars, computers and other goods which are then consumed in America, Japan and Europe. Such offshore production is central to the strategies of some of the world's most powerful businesses, including Wal-Mart and Dell

Over the next ten years, Russia, China and particularly India will emerge as important hubs for producing services such as software engineering, insurance underwriting and market research. These services will be consumed at the other end of a fibre-optic cable in America, Japan and Europe. Just as Dell and Wal-Mart are obtaining manufactured goods from low-cost countries, companies such as Wipro, TCS and Infosys, for instance, are already providing IT services from low-cost India.
As businesses take advantage of declining shipping costs, abundant and cheap telecommunications bandwidth and the open standards of the internet, the reorganisation of work in each of these areas is likely to advance rapidly
. IBM's figures suggest that companies have so far outsourced less than 8% of their administrative office work. Privately, some big companies say that they could outsource half or more of all the work they currently do in-house.
Rich-country manufacturers have already invested hundreds of billions of dollars in building factories in China to make clothes, toys, computers and consumer goods. In the next few years, they may invest hundreds of billions more to shift the production of cars, chemicals, plastics, medical equipment and industrial goods. Yet the globalisation of white-collar work has only just begun.

A forthcoming study by McKinsey looks at possible shifts in global employment patterns in various service industries, including software engineering, banking and IT services. Between them, these three industries employ more than 20m workers worldwide. The supply of IT services is the most global. Already, 16% of all the work done by the world's IT-services industry is carried out remotely, away from where these services are consumed, says McKinsey. In the software industry the proportion is 6%. The supply of banking services is the least global, with less than 1% delivered remotely. McKinsey reckons that in each of these industries, perhaps as much as half of the work could be moved abroad. But even a much smaller volume would represent a huge shift in the way that work in these industries is organised. There may be just as much potential in insurance, market research, legal services and other industries.

Outsourcing inspires more fear about jobs than hope about growth. But the agents of change are the same as those that brought about the 1990s boom. New-economy communications and computer technologies are combining with globalisation to bring down costs, lift profits and boost growth.
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