ONCE UPON a time, all of, oooh, 20 years ago, the press was full of strident headlines about site closures, the decamping of jobs to Asia and the inability of the West to compete with low-wage countries in the East. Business Week dubbed the phenomenon 'the hollowing of the corporation' and wondered if the US economy would survive.
Then, of course, the subject was manufacturing. We know what happened: manufacturing survived, but metamorphosed, with Dell, Cisco, Microsoft and Intel replacing General Motors, Ford and GE as the motor of the US and world economy. Out of the new order emerged an unprecedented phase of expansion that was only reined in when the dotcom boom toppled over its own exuberant overconfidence three years ago.
We should do well to bear the parallel in mind when thinking about the current outsourcing/offshoring boom. On the one hand, '[Offshoring] is nothing new,' notes Ananda Mukerji, chief executive of fast-growing Indian outsourcing service provider ICICI One-Source (I-OneSource). Twenty years ago, multinationals discovered the advantage of global sourcing of physical goods now the technology exists to do the same thing with business processes, ranging from payroll processing and account handling to customer service.
On the other hand, it's pretty clear that after the current reconfiguring of comparative advantage is done, it won't be business as usual. The potential for fresh combinations of resources being created will almost certainly see to that.
Mukerji's company, astutely set up by a leading bank in 2002 to specialise in 'business process outsourcing' to UK and US firms, mainly in financial services, is a good example of this potential. Now boasting a workforce of 4,800 and six processing centres, I-OneSource grew by 134 per cent last year and is projecting annual expansion 'faster than the industry's 50 per cent' for the next four or five years.
The Indian outsourcing sector will employ 1 million Indians by 2008. The same number of IT professionals will be writing software and running offshored IT contracts. And if you thought their advantage was just low cost, think again.
'In practice, the cost proposition only comes into play if quality is up to scratch,' Mukerji says. 'As an offshore vendor, you have to be even better before people will consider you.'
Typically, I-OneSource is seeking to hop quickly up the value ladder from commodity transaction supplier to fully fledged business partner, offering not just an end-to-end service but also advice and consultancy in the mould of an IBM or Accenture. In a nutshell, firms such as I-OneSource are positioning themselves squarely at the leading edge of the knowledge economy.
Given India's output of more than 2 million graduates a year (although not all of the highest standard), this is not far-fetched. A year ago, says Mukerji, the choice of location for a world-class processing centre was down to Mumbai or Bangalore now eight or 10 cities are jostling to be chosen.
It is a different story in the UK, where service companies should be preparing for a shake-up quite as fundamental as the one that hit manufacturing for six two decades ago.
UK manufacturers in particular were slow to react to the threat of global sourcing at first, then rushed pell-mell into out- and offshoring. However they took time to register (some never did), that there's nothing inevitable about this. As the performance of many, often small or medium-sized, companies has shown, it's perfectly possible for manufacturing to prosper in the UK - on condition that companies rethink all their processes from end to end and go lean.
Lean is a lot more than the tools and techniques it is sometimes sold as, since it involves reversing the top-down flow of influence and information - from manager-push to customer-pull - something that does not appeal to most managers. This is one reason why take-up was so half-hearted.
As specialist consultancies such as Vanguard, and now mainstream outfits such as McKinsey and AT Kearney, have shown, the lean logic applies equally well to providing service as to making things. AT Kearney, for instance, says the 'lean leap' can take 30 to 40 per cent out of the cost of transaction or other processes - after which the offshoring equation takes on a different complexion. It may still be a sensible option, but it is then about something more sophisticated than cost advantage, which is rapidly eroded when competitors follow suit.
Almost all service companies are where manufacturing was 20 years ago, stuffed with waste and offering poor service and value for money. To get beyond the mass-production attitudes that prevent them moving up to the higher-added-value uplands where most people think the UK's economic future lies, they need to clear out the clutter - irrespective of outsourcing.
The lesson of manufacturing (and of comparative advantage) is that outsourcing to each other's strengths can and should be a positive-sum game: each party can gain. But to reap that benefit, UK service companies will need to be much cleverer in improving quality and cutting cost than their manufacturing counterparts. Otherwise, Indian companies - which, after all, know a lot about UK tastes - will turn them into, well, curry.
The Observer, 17 Observer 2004