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The future's a dead giveaway

Sun, 8th Aug 2004

THERE'S AN email joke going around about the latest US position to be outsourced to India: President of the United States.

Is the new appointee a bit shaky on some of the issues? To enable him to answer those he doesn't understand, says the spoof announcement, he will be given call centre-type scripts to follow. This will allow additional savings to be realised 'as these scripting tools have already been used by Mr Bush in the US'.

Actually, leaving Bush out of it, the joke may be nearer the mark than many people suppose. Behind press stories about the shift of call centre and low-level number-crunching jobs abroad, something much more fundamental is afoot, which will have implications for Western companies across the board.

We already know, for instance, that by using better methods, some Indian firms are producing software that is not just cheaper but of far higher quality than almost all their Western counterparts.

But in many other areas, too, from banking to shampoo to health, the testing conditions of the developing world are giving birth to cost and quality innovations that dramatically undercut the bloated business models of the West.

Some are recounted in CK Prahalad's new book, The Fortune at the Bottom of the Pyramid (Wharton School Press). While some are well known - for example, the extraordinary success of the Grameen Bank's microlending concept in Bangladesh - others are less so.

Take Casas Bahia, which has built one of Brazil's largest retail chains selling consumer goods to the shanty towns or India's Aravind eye hospital, which may be the best place in the world to have a cataract removed. At its four sites, Aravind treats 1.4 million patients and carries out 196,000 operations a year. The cost per cataract: $25, compared with $1,500-$2,000 in the US.

As these examples show, to put down today's shifts as 'outsourcing' - a transfer of employment scraps from the rich man's table - is patronising and simplistic. It's not just the international division of labour but the whole ecology of business that's changing. And among the prized Western entities in the front line are brands.

Look at it like this. It's now a given that you can get any commodity item you like, industrial or consumer, from the Far East without sacrificing reliability or quality. What you can't get (yet) is a brand.

But the brand, points out Paul Pankhurst, chairman of innovation consultancy PDD, while increasingly critical, is also becoming harder to sustain. For instance, he notes that 'there are now turn-key design services in India and Taiwan - so you can take not just the manufacture of an athletic shoe or mobile phone offshore, but the design and development work too'.

You can also mobilise a workforce the size of the population of Guildford in a week to ramp up production. Few Western firms can compete with that. The implications are profound. Brand holders have been pushed right to the top of the value chain. This means that they have less and less of the total activity to make their money from: just distribution and the brand itself.

That puts a premium on innovation. But - as companies are starting to comprehend - innov ative capacity is traditionally closely linked to manufacturing (new products often being dependent on new processes). By the same token, as the new turn-key houses are growing up, the in-house innovation capability of the brand owners is inexorably going down.

Outsourcing, as some of us have maintained all along, is not a one-way street. In return for lower costs (maybe) in the short term, 'advanced' firms in the developed economies have fragmented and given away increasingly high-level know-how which is being elegantly reassembled and sold back to them - and their competitors. Which means there's a differentiation problem, too. Says Pankhurst: 'The more you embrace outsourcing, the more you lose control.'

Testimony to the shift is his own firm, which has recently set up a subsidiary called Carbonate to develop and incubate new ideas. Carbonate's first new product, the Deck, is a multipurpose exercise platform that was the brainchild of Loughborough University. Carbonate helped to develop and design it (in return for equity) and, crucially, matched it to a brand (Reebok) which can give it much better distribution than it could manage on its own.

The Deck, says Pankhurst, sums up many of the changing aspects of innovation. On the one hand, university departments and small companies are finding it harder and harder to mobilise the clout to commercialise their intellectual property on the other hand, brand owners are in desperate need of new ideas.

The 'brand bit' is now absolutely key, he says. In the past, a leading consultancy would have sold engineering and behavioural research now it's marketing, brand planning and product mapping - 'stuff we didn't even think about five years ago'.

Western companies will have to have a solid brand and distribution to survive, he says. That goes for companies not just in consumer goods but also in business-to-business sectors. But they'll have to be a lot better at it than they are now. A good start would be learning to value and husband the unique know-how they have been so nonchalantly dissipating. Without innovation, there'll be nothing left to outsource.

the Observer, 8 August 2004


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