Outsourcing 3.0

Outsourcing for survival

One of my favorite postulates is that in times of crisis, its the very strong and the very meek that survive. Whether its a crisis of nature, or a storm in the affairs of men, you need to have very strong moorings, or have the ability to lie low, be extremely flexible and innovate your way to survival.

Today's economic tsunami is one such crisis, and my thoughts went back to 2000/2001, when I had started Cerulean in the middle of the dot com meltdown and 9/11. Cerulean had, and continues to specialize in providing affordable technology and operations solutions to SMEs, especially in the US and I remember that we helped several startups get going by building their platforms for them. These were no ordinary non mission critical application maintenance and development jobs like HR and payroll functions that were being outsourced - we were building their core product offerings, stuff thats not supposed to be outsourced, if you go by conventional theories of capping risks in outsourcing, especially offshore outsourcing. These SMEs and startups were being exceedingly brave, in hindsight, but in reality, they had no choice - they HAD to outsource to offshore companies like us, since they had to economise on every bit of cash that they had.

I was betting that a similar trend should be applicable during the current crisis, and my first port of call was to check how Elance - the grand daddy of online outsourcing marketplaces, was doing. Judging by media reports, they seem to be in rude health

"Today, Elance does about a million dollars a week. It grossed $40 million revenue in 2007 and plans to gross $200 million in the next 2-3 years and get listed" (The Economic Times)

Now, this represents an opportunity for knowledge workers who are being laid off from larger companies to stop looking for the next 9 am-to-5 pm opprtunity and instead leverage their skills as a free agent. Elance is not the only online services marketplace - there's Guru, Odesk, Rent-a-coder, and even professional networking sites like LinkedIn are seeing traction in enquiries (and replies) on discrete project work. Just two facts can nail down the opportunity - (1) Elance currently has over 200,000 unfilled opportunities, and (2) unemployment levels in the US are at a 25-year high. It's a paradox that needs a resolution - and the way out is for capable individuals to get entrepreneurial - not with the objective of starting big businesses, but as knowledge workers who are a part of a vast services cloud, offering their service on demand and charging for just the bit of service that they have delivered.

Outsourcing is evolving to reach its logical culmination.

In 2007 I had written in The Economic Times about Outsourcing 2.0 -

"So far, IT Outsourcing has been perceived to be a big boy’s game. Most of the banner headlines have been about Fortune 1000 companies outsourcing their IT requirements to large, well known IT consulting and outsourcing firms, and increasingly to offshore locations. However, in the shadow of their big brothers, Small and Medium Enterprises (SMBs) have also been testing the offshore IT outsourcing waters for the last couple of years"

Outsourcing 3.0 will differ from the above in while Outsourcing 1.0 was about large companies outsourcing large chunks of work to large outsources, and Outsourcing 2.0 was about SMEs following a similar trend, we are now witnessing further disintermediation across the value chain - individuals and companies big and small are outsourcing their service needs to a "services cloud", which is formed by individuals, virtual teams and traditional companies. This wouldn't have been possible without the availability of online tools for project management, work allocation, safe and secure instant messaging, free (or nearly free) audio and video communication, online invoicing and payments, including the ability to process micro payments in a simple but cost effective way. Indeed, most online marketplaces have invested heavily in building these functionalities around the marketplace, thereby laying the basis for the services cloud.

Innovation, Geography and Economy - Will Innovation head Offshore too?

In a 2007 article, Pascal Zachary of the New York Times wrote, “When it comes to Innovation, Geography is Destiny”. It is true that geography matters, and as Zachary put it, if an entrepreneur gives birth to an information technology idea in Silicon Valley, the chances of success seem vastly higher than when it is done in another zip code. Most US companies and Indian outsourcers are only to happy to go along with this line of thinking, whereby the world is compartmentalized into developing countries like India with a large, educated, low cost work force that performs repetitive tasks of low value addition, while the USA and other developed countries focus on high value addition aspects like innovation. Such a line of thinking is certainly expedient in managing the political fallout of globalization and offshore outsourcing in the developed countries. But to assume that innovation is permanently mortgaged to a specific zip code that has its location in the western hemispheres is a bit disingenuous.

Location, Location, Location?
There can be no doubt that innovation is linked to geography, but only up to the point that the geography represents a premier economy. In technology, the location that fosters the most innovations is the Silicon Valley in the US, right in the heartland of the world’s most technologically advanced consumer marketplace and the world's largest economy. There are obvious advantages of being close to the consumer, and the American consumers are the world's ultimate consumers. It is logical that most consumer innovations today be centered on John Doe, the American consumer, and who else can be best placed to gain early insights into Mr. Doe's psyche, but American marketers and innovators? The process of getting the innovation to the marketplace can be global (e.g. the iPod is mostly made in Asia), but that's a matter of servicing the innovation ("innovation-as-a-service", as I call it) and not innovation itself.However, as other economies surge forward, we should find marketers trying to innovate for Mr. Zhao in Beijing or Mrs. Gupta in New Delhi and not just for Mr. Doe in NYC. It has already started - India's Tata Motors will be introducing a $2500 car in 2008, which requires substantial innovations in product and process; Nokia has value engineered the cell phone to below $50 to cater to the vast Indian market; the labs at Indian Institute of Technology, Chennai have pioneered wireless-in-local-loop (WLL) technology to provide last-mile telecom connectivity in India's crowded cities and far-flung villages. All of these are exportable to other developing countries, with India as the base. The Tatas, for example, have a clear blueprint of establishing their brand in developing countries like South Africa, South Asia, Latin America (in developed countries, they seem to prefer buying established brands like Corus and Tetley instead of introducing their brand). Nokia's $50 phone is being rolled out worldwide.

Innovation: India vs. China
The interesting contrast between India and China is that India's economy is led by domestic consumption and is not export-led, as is China's. Even though China's growth rate beats India handily over the last two decades - India is only now catching up - India's private consumption is already at 64% of the GDP, versus 46% for China. It is probably fair to say Mrs. Gupta is far more at the center of the Indian economy than Mr. Zhao is for the Chinese economy. Add to this other ingredients like democracy, rule of law, free market policies, prevailing ecosystem of advertising, sales & marketing, and protection of intellectual property, and its not too difficult to imagine innovation being more likely to brew in Bangalore, India than Shanghai, China.

Soft Power & Innovation
What makes innovative products and services outgrow its birthplace and conquer distant markets? It makes a big difference if the cultural ambience surrounding a product or service is popular and acceptable in significant parts of the world. Much of the reason behind the popularity of American brands can be attributed to the power and romance of Hollywood in capturing the dreams of a global audience. On the other hand, till recently, “Made in India” was something that even Indian exporters tried their best to avoid as a tag on their products. Today, we have a scenario where the Indian kurti is worn on the streets of Sydney; Bollywood music pulsates in the night clubs of London (and Davos!), and the best Indian restaurants are possibly in New York and not in India. We always had Indophiles amongst the global intelligencia, but it’s only now that Indian soft power is being accepted on the main streets of the world. The stage is set for innovation born in India to be adopted by the rest of the world.

Conclusion
If Innovation is like a store-front, it makes sense to be located on Main Street. However, the main streets of today could turn out to be the back alleys of tomorrow. Presumably, the trend to innovate in India, and for the Indian consumer, and then exported to the rest of the world, will gather increasing pace as India moves up to be the world's second or third largest economy by 2030, as per the Goldman Sachs BRIC reports. And then, companies will possible move on from offering innovation-as-a-service for Western corporation to operationalize their innovations, to actual innovation itself.