Supplier innovation in a "Connect and Collaborate" world

If the 20th century was about "Command and Control", the 21st century is about "Connect and Collaborate". Companies are relying less on internal resources they control directly and are forming a network of global relationships with 3rd party suppliers to drive innovation and enhance the value chain.

A news story from The Japan Times illustrates this concept.  Foxconn, the Taiwanese contract electronics manufacturer, is purchasing Hitachi's controlling interest in their LCD business as part of an effort to enhance its knowledge of LCD manufacturing and to drive down costs.

Foxcon already provides LCD displays for smart phones and devices, including Apple's iPhone and iPad.  This is a perfect example of a company relying on an external supplier to drive innovation in the value chain.  As Foxconn enhances its capabilities in LCD research and manufacturing, companies like Apple will benefit from improved displays and lower costs.  Of course, the consumer will be the ultimate beneficiary as Apple and others continue to improve the value they deliver to the consumer.

You can read the full article at: Hitachi LCD biz to be run by Foxconn

Extreme Offshoring: IT Edition

India's Business Standard is reporting that Infosys is looking at moving IT work from outsourced contracts from the U.S. to India in response to rising Visa costs.  Per the article, Infosys has the ability to offshore 95% of its work.

An excerpt from the article:

Against the backdrop of a clampdown on visas by the US and growing antagonism towards foreign workers and immigrants in that country, Infosys Technologies, India's second-largest IT services firm, is mulling an ‘extreme offshoring’ model to help reduce its dependence on H1 and L1 visas.

“There is a cost element (due to the visa fee hike) to what is happening now and there is a philosophical or directional element. The cost is no doubt increasing, but it is manageable. But it is more about what it indicates. If there a build-up of negativity in sentiment, we have to prepare ourselves (for extreme offshoring) if need be. However, as long as unemployment remains high, the negative sentiment will continue, unfortunately,” Kris Gopalakrishnan, CEO and MD, Infosys Technologies, told Business Standard.

You can read the full article here: Infosys plans 'extreme offshore' model to tide over visa crisis

Companies in China look inward to locate factories

From The Straits Times in Singapore comes an interesting article about Chinese sourcing.  Rising wages and government incentives are causing companies like Hewlett-Packard and Cisco to look inwards for new locations to locate factories.  Historically labor has migrated from the inland provinces to coastal locations like Shanghai in search of opportunities.  Now the opportunities are moving to less developed areas of China.

As the article states:

A growing number of foreign companies in China, faced with spiralling wages and a shortage of skilled workers, are moving their factories inland to contain rising costs, analysts say.

After a spate of strikes and minimum wage hikes resulted in hefty pay rises for millions of workers, firms are looking to capitalise on government incentives to shift their operations to impoverished western China.

Foreign-invested firms are also looking to tap into a young, talented labour force which no longer wants to sacrifice family ties by leaving home to work long days in the coastal industrial belt.

While wages have been increasing for years, Vajpayee said foreign and Chinese manufacturers had now reached a 'tipping point' where labour costs were growing at a faster pace than revenues. 'Investment in a new factory in an inland province is a better option than continuing with a high cost base in coastal regions,' he said.

Although the article deals specifically with manufacturing, support services such as Finance, HR, and IT will no doubt be impacted by the same factors.  Companies looking to establish or build Shared Service Centers in China will need to evaluate the migration of manufacturing labor and where support services should be located to best serve the organization. 

Shanghai continues to be top choice for regional headquarters

Shanghai continues to attract the notice of Western companies seeking to establish a regional headquarter in Asia.  An article at Shanghai Daily notes that 24 more companies have elected to establish their regional headquarters in Shanghai.  These companies include Walt Disney, Kraft Foods and Novartis International. 

An excerpt from the article:

THE Walt Disney Co, Kraft Foods Inc and Novartis International AG are among 24 multinational companies that decided to move their regional headquarters to Shanghai.

It pushed the total number to 795 - including regional research and development centers - and maintained the city's status as China's top destination for regional headquarters of multinationals.

"The growing number demonstrated foreign companies' recognition of Shanghai's overall environment for foreign investments," said Sha Hailin, chairman of the city's Commission of Commerce. "It also came at a special moment when the World Expo was held in Shanghai, which greatly boosted the city's awareness among many foreigners."

The article also notes that Foreign Direct Investment (FDI) in Shanghai grew 4.5% in 2009 (year over year) despite the global economic downturn.

Verifying Country-specific Data in the Site Selection Process

Here's an interesting post by Kirk Laughlin at Nearshore Americas.  Mr. Laughlin discusses the need to verify data obtained about various countries as part of a site selection process.  Many times the data is provided by economic development authorities in that country who have a vested interest in getting companies to locate to their country.  This conflict of interest can lead to some rather interesting data.

The moral of the story is to always keep a skeptical eye on any data used to justify the selection of a specific country or city and to use multiple sources of data whenever possible to identify any significant anomolies in the data. 

New Global Outsourcing Hub - Wyoming?

A report from CNN discusses a new global outsourcing hub and it's not where you think.  This time it's in Wyoming.  The story discusses an innovative strategy of teaching English lessons to students in Asia using a real-time video link to classrooms.

From the article:

When it comes to call centers filled with English-speaking employees, India likely comes to mind. Not a tiny town in Wyoming called Ten Sleep, population about 300.   What Ten Sleep has is not, exactly, a call center. Instead, the town is home to a teaching center that is open 24 hours a day, seven days a week. There, American teachers provide real-time video English lessons to thousands of students in classrooms across Asia via high-speed fiber optic networks.

"This is more of an 'insourcing' phenomenon," said Robert Grady, managing director of Cheyenne Capital Fund, which invested $10 million in Eleutian in February. "We are creating jobs by helping the development and emergence of the high growth economies in Asia. We are the fastest private employer in Wyoming, and we are hiring at a time when job creation is priority number one."

 While this article doesn't directly relate to Finance & Accounting, it does hold some lessons:

1. Global sourcing is just that - global sourcing.  It's no longer a discrete decision between "Onshore" and "Offshore" but rather about defining your talent needs and locating the appropriate talent pool for a competitive price,
2. Creative minds find a way to complement the shift in global sourcing, rather than fighting it.  The company behind this operation could have complained about jobs moving offshore, but they found a way to compete.  After all, who better to speak American then Americans?
3. New talent markets are constantly maturing and shifting.  Even now, India and the Philippines are top locations when English language capabilities are needed, but new markets continue to emerge.  And as we see in this story, sometimes the new market is an old market.
4. Technology continues to drive the ability to source from new markets.  In this story it's the real-time video link.  In Finance & Accounting, it can be about scanning, workflow routing and Cloud computing.  Various technologies reinforce the death of distance and enable a truly global sourcing organization.

Here's a link to the full article.

Philippine Outsourcing Expected to Grow 26% in 2010

A brief article at Philstar.com discusses growth projections for Philippine outsourcing.  The president of the Business Processing Association of the Philippines states that they continue to have ongoing discussions with companies about moving processes to their country.   Here's an excerpt:

Business Processing Association of the Philippines (BPAP) CEO and President Oscar Sanez said Monday that for this year the Philippine outsourcing industry targets 26 per cent growth and projects revenues will total $9.5 billion.

"Many companies are under pressure to reduce their cost structure and have considered outsourcing and offshoring to boost their competitiveness," he added

The outsouring sector is one of the country's fastest growing industries, accounting for about five percent of the GDP and employs more than 400,000 people. Last year, despite the global meltdown, the sector posted a 19 percent growth, hauling in $7 billion of revenue.

The Philippines is an attractive country due to strong English language skills and low labor costs.  An interesting point in the article is that outsourcing now accounts for five percent of GDP.  While wage inflation has been a concern, the Philippine government is actively working to contain inflation.  It'll be interesting to see if 2010's actual numbers are in line with this prediction.

Would you like research with that?

I've previously written about the desire of Indian companies to move up the value chain from a back-office transaction processor to a value-added business partner.  An article about the pharmaceutical giant AstraZeneca illustrates the point.  They recently signed a contract with Cognizant Technology Solutions to provide electronic support for AstraZeneca's research efforts.  This includes the hiring and training of clinical investigators.

The article puts it this way:

Pharmaceutical giant AstraZeneca has signed a $95m (£47m) deal with Indian outsourcing firm Cognizant to provide electronic support to its research and development (R&D) operations.

The five-year contract will require Cognizant to provide a range of services, data management planning, medical coding, and the training of clinical investigators.

The agreement is part of AstraZeneca's wider plans to improve the effectiveness of its R&D projects, according to Anders Ekblom, vice president of clinical development.

“Delivering efficiencies through reshaping our business is one of our key strategic priorities,” said Ekblom.

The article notes that the two companies had an existing relationship as Cognizant has been supporting AstraZeneca globally.  Companies will continue to look to outsourcers like Cognizant to help "deliver efficiencies through reshaping our business".  Companies like AstraZeneca understand that the use of selective outsourcing can greatly facilitate that goal.

Here the link.

India's Newest Challenges

Quick.  Who is India's largest tech services provider?  Wipro? Infosys? Tata?  Turns out it's "none of the above".  The largest provider of tech services in India is....IBM.  Business Week has an interesting article on the challenge of India's largest tech companies to transform themselves from purveyors of relatively inexpensive back-office processes to truly global companies.  While companies such as Wipro, Infosys, Tata, Cognizant and others have focused on every major country except India, companies like IBM and Accenture have been actively building their services to Indian companies. 

The Business Week article puts it this way:

The writing is on the wall: India's vaunted technology companies must upgrade their business model or face dwindling profits and market share. At the annual conference of Nasscom, the powerful Indian software association, currently under way in Mumbai, the buzz has centered on one topic: When will Indian tech companies grow discontented with being no more than happy back-office campers and start behaving more like their global counterparts IBM (IBM) and Accenture (ACN)?

Given India's determination and talent, I'm pretty confident that the country's top companies can move to the next level.  It will be intersting to see how this transformation takes place and over what time frame.

You can read the full article here.

SEC Chairman lays out 2008 agenda

In a February 8th speech to the Practising Law Institute, SEC Chairman Christopher Cox announced his initiatives for 2008.  During the course of his remarks, Chairman Cox noted the increasingly global nature of regulation and emphasized that his agency would work to release a new roadmap that would facilitate the convergence of US GAAP and International Financial Reporting Standards.  This is not a question of "if" but "when".  The other point that the Chairman made was his belief that interactive reporting, his term for the XBRL technology, will become increasingly important.  Interestingly, the surveys I've seen for the CFO agenda puts the implementation of XBRL far down the list of priorities.  If Chairman Cox has his way, CFOs may need to rethink their priorities. 

Below is an excerpt from Chairman Cox's speech:

The same imperatives of ever-faster communications, ever-more-closely linked markets, and truly global competition for capital that underlie our conceptualization of mutual recognition have for several years been driving the project to converge the world's two great accounting systems — U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards. Because of the significant progress that has been made in developing IFRS as a high-quality accounting standard — and in light of its rapid and growing acceptance around the world — the Commission last year voted unanimously to take the next step on the SEC's "roadmap" announced three years ago. As a result, foreign issuers can now file their financial statements with the SEC using IFRS, without need of keeping a second set of books under U.S. GAAP.

Then, last August, the Commission issued a Concept Release seeking advice on whether U.S. issuers should be allowed to choose to prepare financial statements using IFRS. And in December 2007 we held roundtables on this subject and heard from more than two dozen experts. The many comments the Commission has received make one thing exceptionally clear: the rapidly growing acceptance in the rest of the world of IFRS as a high-quality accounting standard will make the U.S. GAAP-IFRS convergence project increasingly important for U.S. investors and issuers. In 2008, the Division of Corporation Finance and the Office of the Chief Accountant, led by Wayne Carnall and Julie Erhardt, will formally propose to the Commission an updated "roadmap" that lays out a schedule, and appropriate milestones on which the schedule will be conditioned, for continuing the progress that the United States is making in moving to accept IFRS in this country.

The third pillar of this international strategy — the adoption of a global computer language for the exchange of financial information — goes hand in glove with the concepts of a common accounting language and mutual recognition of high-quality securities regulation. A standard data format for sharing financial statements and other information that is important to investors will facilitate the kind of comparisons among global investment options that investors need. The international movement to employ eXtensible Business Reporting Language for this purpose will let investors easily find and compare business and financial data with the same ease of doing a Google or Yahoo! search today. And it promises to let companies prepare their financial information more quickly, more accurately, and for less cost. In 2008, following years of evaluation and experience through the SEC's voluntary XBRL pilot program, the Commission will consider a rule for the use of interactive data by U.S. reporting companies that will parallel efforts already underway in other countries. David Blaszkowsky, who heads the SEC's Office of Interactive Disclosure, has been an important leader in this initiative.

Factors Fueling the Growth of Outsourcing

The outsourcing research firm EquaTerra has new research on the factors fueling the growth of outsourcing services.  The study cites four primary factors:

• Weak economic indicators:  Although expense reduction isn’t the only driver for outsourcing, many organizations are reemphasizing outsourcing to increase their bottom line
• New functions outsourced:  Buyers are focusing on new and growing areas like legal and knowledge process outsourcing, document and electronic records management, industry specific offerings and knowledge intensive services
• Service provider readiness:  EquaTerra advisors are seeing some improvements in overall service provider capacity, in part driven by improved pricing and contracting terms
• Smaller, more numerous deals:  The outsourcing market continues to evolve with more but smaller deals spread across a greater number of service providers and delivered on a more global basis

There's no doubt in my mind that offshore outsourcing will continue to grow as a result of the desire to reduce costs.  This will be especially true if the U.S. slips into a recession.  The other point made by EquaTerra that confirms my own experience is that companies continue to look for additonal processes to outsource.  It's a natural evolution for companies to look at more complex processes, such as legal and other types of knowledge work, once these companies realized the benefits of their initial outsourcing efforts and become more comfortable with a delivery model that includes offshore outsourcing as a key component. 

China Rising

It's no surprise that China's getting a lot of press lately.  My last post noted a report on the top 50 offshore locations and China was near the top.  A new article in Forbes notes a study predicting that China will be the top destination for offshore activiy by 2011.  What I found interesting is how China is accomplishing this feat.  Through decades of manufacturing experience, China has focused on the following:

• Learning how to interact and meet the needs of foreign clients,
• Understanding project management,
• Upgrading their national English language skills
• Meeting global standards, and
• Establishing global brands

These factors, coupled with a vast labor pool and low costs, are converging to make China a powerhouse in global service delivery. 

You can read the full article here.

India Outsources Outsourcing

Here's an article that made me laugh.  The International Herald Tribune has a story about a new outsourcing trend.  Some of the largest outsourers in India, such as Infosys and Tata Consultancy Services, have begun setting up operations around the world to outsource some of their outsourcing work.  Part of it is cost.  Salaries in India have been rising rapidly due to the great demand.  But part of it is about finding the right language and technical skills wherever they might exist.  An excerpt from the article:

One of the constants of the global economy has been companies moving tasks - and jobs - to India, where they could be done at lower cost. But rising wages for programmers here, a strengthening currency and companies' need for workers in their clients' time zones or for workers who speak languages other than English are challenging that model.

At the same time, India is facing increased competition from countries seeking to emulate its success as a back office for wealthier neighbors: China for Japan, Morocco for France and Mexico for the United States, for instance.

Looking to beat back these new rivals, leading Indian companies are opening back offices in those countries, outsourcing work to them before their current clients do.

In an era of globalization, work will continue to be outsourced to the locations that offer the right skills at the right price.  Who knows, maybe even the US will pick up a few jobs.

You can read the full story here.

Offshoring: The Next Frontier

The website E-Week  has an interesting article about recent research into Offshoring alternatives.  They quote IDC research that discusses the maturing Indian market and attractive alternatives.  They note that salaries for some Indian resources are now 75% of their American counterparts, thus reducing the attractiveness of moving work to India.  However other global sites, notably in China, are rising up the list of Offshoring sites.

The article notes:

Companies that are not pulling out of outsourcing relationships altogether are shifting their offshore office to newer and different regions. A report released by the Aberdeen Group on July 2 found that while India remains the leading offshore destination for most companies—especially if cost savings are the primary driving force—both Russian and Asian providers are maturing quickly and sustaining double-digit growth by competing on both price and quality.

Wage inflation and higher attrition issues, as well as a rising demand for technology professionals in India are causing enterprise customers to shift from tier 1 to midtier providers, finds the report, and argues that companies that want to stay ahead should take advantage of multiple offshoring locations across the globe, or multisourcing.

Three Chinese cities are cited in the report: Dalian, Shanghai and Beijing:

Agent skills, political risk, cost of labor and language skills were all factors considered in the IDC report's ranking of three Chinese cities—Dalian, Shanghai and Beijing. These three cities were ranked by IDC as numbers five, six and seven of the top ten locations for global delivery. IDC predicted that Chinese cities could take over Indian ones as early as 2011.

China is working hard to match and exceed India's capabilities as an Offshoring destination.  Through both infrastructure investments, such as the Shanghai International Airport, high-speed rail services and English-language certification programs, China could easily become the region of choice for global service centers.

Will India Dominate Knowledge Processing?

I suppose it was inevitable.  With large numbers of educated, English-speaking professionals, India has already made huge inroads into the Business Process Outsourcing (BPO) market.  Now comes a story from The Times of India about the growing Knowledge Process Outsourcing (KPO).  According to the article, the KPO market will grow just under 40% a year through 2011.   Of the $16.7 billion (US) market by 2001, India would account for $11.2 billion.

You can read the full article here:

http://timesofindia.indiatimes.com/India_to_dominate_global_KPO_market/articleshow/2227383.cms

Strong Rupee Impacts Indian IT Salaries

An article in The Times of India discusses the impact of a strengthening Rupee on the Indian IT industry.  After years of strong salary increases, Indian IT and BPO companies are moving to slow the growth of salaries.   The story puts it this way:

Salary cost is by far the biggest component of cost, accounting for 45% of IT companies' costs and 40% of BPO costs. With many mid-size and small IT/BPO firms seeing a fall in profits in the Q1 of this fiscal, and most larger ones witnessing a sharp slowdown, varied options are being considered to keep the salary component under check or to get more work out of each employee.

After years of unprecedented growth, Indian companies are finally having to look at how they deploy resources.  It is no longer sufficient to hire large numbers of employees.  Wage increases are causing companies to rethink their personnel strategy and compensation programs:

Says Gangapriya Chakraverti of Mercer India, "Variable pay will come up in a big way. Compensation related to productivity and contribution will take over. Companies will have to be careful about headcount. They will no longer have the luxury of maintaining a large talent pool that's sitting idle." Such pools are maintained to provide for attrition or to use in the event of the firm suddenly bagging a big project.

Rupee's rise is expected to hit BPO employees harder than IT. Unlike infotech, where 30% to 50% of employees work on-site and paid in dollars, in BPOs, 90% of the work is done in India and employees are paid in rupees. "Mid and senior level executives in BPOs have been getting increments of 14-20%. I think that will come down to 8-15%. Overall weighted average of increments used to be 7-8%. That may be down to 4-5%," Vashistha says.

Does India Have A Talent Shortage?

Conventional wisdom dictates that the United States and the European Union face an onslaught of highly talented and low cost IT resources from India.  Indeed, many Western companies have moved their operations offshore or outsourced their operations completely. 

According to an article in the Los Angeles Times titled India’s Looming Talent Shortage (registration required), not everyone in India is that optimistic.  The article quotes Lakshmi Narayanan, President and CEO of Cognizant Technology Solutions.

[A] shortage of talent is looming that could put a dent in India’s reputation as the world’s information-technology outsourcing champion. Three or four years from now, Narayanan and others forecast, qualified engineers in India are going to be at a premium as companies like his vie for their services to sustain the industry’s remarkable growth.  “Clearly there’s going to be a challenge,” said Narayanan, the president and chief executive of Cognizant Technology Solutions Corp., which produces business system software for such clients as Wells Fargo & Co., Aetna Inc. and ACNielsen.

The article goes on to point out that while India does indeed graduate a large number of IT students, only between 10 and 25% of these students are qualified to work for a multi-national, primarly because of insufficient English language and other soft skills.

It remains to be seen if these will be a serious impediment to continued development of the Indian IT sector, but for now Western companies continue to source their IT requirements from low-cost countries like India.  This is a development worth watching.

From Customer Service to R&D

The Times of India has an interesting article on how layoffs from several global companies is likely to benefit India as these companies look to fulfill the work with lower cost resources. Embedded in the article is an interesting point about the nature of jobs being shifted to India. It is fairly well known that relatively low-skilled jobs (from a Western point of view) such as Call Centers have been moving to India. What may be less well known, but that has been documented by author Thomas Friedman, among others, is that countries like India are not racing us for the bottom jobs, but for the top jobs.

Here is an excerpt from the article:

Intel India has an employee strength of close to 3,000 with nearly 90% in R&D and related activity, while the rest are associated with sales and marketing. An internal mail sent out to employees on Wednesday said the restructuring plan may not affect India as compared to its other global sites. Intel may become a smaller company globally, but Indian operations will be pursued.

Intel India president Franklin Jones, in a communication to all employees, said: “India is a key market for us as it is considered a growing economy. When all IT companies are positioning their strategy with India in focus, we cannot look the other way.”

The interesting part is that 90% of all Intel jobs in India are in Research & Development - hardly a low-skill job. The fact is India has many talented people with advanced degrees, at a fraction of the cost of Western resources.  This is also true in the Finance arena. Companies began by moving transactional business, such as accounts payable and general accounting, to low wage countries.  As they gain more comfort with the off-shoring model, they are looking to move high-skill functions, such as business analysis, to India.  Companies like Agilent have already proven the concept.  Other companies are in hot pursuit to secure these resources.

Fixed Asset Investments in China Continue Rise

One of the aspects of globalization that has benefited Western companies is the ability to build plants in China on the cheap, relatively speaking.  Most people know that labor is substantially cheaper in China.  Indeed, the entire issue of labor outsourcing has been featured prominently in the news.  What gets less visability, however, is that capital costs are also substantially cheaper in China.  This only fuels the incentive for Western-based multi-nationals to continue shifting production to Asia. 

From the Shanghai Daily newspaper:

CHINA'S fixed asset investments continued to rise last month, buoying the money invested in factories and infrastructures to 29.6 percent in the first four months of this year, the National Bureau of Statistics said today.

Investments totaled 1.8 trillion (US$224 billion) from January to April, the bureau said.

In addition to the cheaper capital costs, the Chinese government also throws in various economic incentives such as tax holidays.  Without any counter-incentives from the U.S. and European governments, Asia looks increasingly attractive as a location to base manufacturing operations.  And the statistics continue to bare this out. 

The World is Fat

In developing the McDonald's theory of globalization, New York Times columnist Thomas Freidman may have overlooked an angle.  According to the Shanghai Daily, nearly 40 million Chinese are extremely fat.  Since China's population is over 1 billion people, they still have a lot of eating to do to catch up to Americans on a per-capita basis.  Still, it's interesting to see an article about Chinese health patterns.  Correlation does not imply causation, but I have to wonder if globalization and the growth of Western business in China (including McDonalds) is impacting Chinese health.  It remains to be seen if advances in health care will outweigh the disadvantages of a global economy, but at least the Chinese can overcome any depressing news with a nice Value Meal.