Tufts Graduate Presents "Off-shoring for the Knowledge Industry"
Are corporate outsourcing and off-shoring strategies just momentary trends, or approaches that are here to stay? This was one of many questions addressed by Tufts graduate Luis Viada, the senior vice president of global resource management for the McGraw-Hill Companies, in his October 27 dialogue with faculty and students as part of
The Fletcher School’s International Business Program Global Speaker Series held in Professor Richard Thoman’sManaging a Global Corporation class.
“Actually, we’re just getting started. As so many businesses in the knowledge industry, we’re just starting to understand” the methods and best practices of outsourcing and off-shoring, Viada explained. “In a year or two, the title of this talk could be, ‘Off-shoring: What were we thinking?’”
In spite of his lighthearted acknowledgement of the as-yet-undefined role of outsourcing in the long term, Viada stressed that company’s decision to outsource part of its operations is a serious one. Global corporations face complicated choices, beginning with what process is “outsourceable” - i.e. can it be outsourced without causing an interruption or deterioration of service. They then must decide whether to outsource to a vendor or establish a captive operation in a more favorable off-shore environment.
Viada outlined some enabling forces of the drive to off-shore proprietary processes, including global economic integration, process standardization, and access to computing power, bandwidth and data. These forces, along with key changes in access to global labor markets, have led to new business models for the global corporation – ones that call for managing global supply chains, third party service providers, and shared resources centers.
These developments are forcing companies in the knowledge industries to respond to the challenges of new technologies that are transforming traditional information channels. “How do you maintain relevance in this world of search engines?” Viada said. “The need for innovation is acute and the time and resources to achieve it are enormous.”
Due to these new pressures, corporations are moving toward reallocating resources to high-end applications – the essential processes that define and differentiate the product and define the brand. There is a need, therefore, to find innovative ways to free up resources from non-core, low-value processes, Viada said. As they gain experience in outsourcing, companies are beginning to outsource not only routine business processes such as human resources, payroll and accounts payable, but also processes that are associated with core product production and customer services.
In traversing the path from ITO (IT Out Sourcing) to BPO (Business Process Outsourcing) to KPO (Knowledge Process Outsourcing), companies like McGraw Hill look to balance location and control risks with the efficiency and capacity opportunities that outsourcing and off-shoring provide. What process, which model and what governance structure are the key questions that top management like Mr. Viada must decide upon. It’s not simply a matter of shifting out a broken business process or “manage my mess for less”, to be successful companies often must undertake a fundamental assessment and re-engineering of their core business processes.
“We have a huge pool of technical talent that has suddenly come available in the large developing countries to do transactions and processes better, cheaper and faster, and in a scale that wasn’t possible before,” Viada said. “But there’s a sense of, ‘how far can you take it?’.
With increasingly complex transactions occurring off-shore, Viada noted the increased potential for research and development outsourcing. However, he also warned of the dangers inherent in delegating activities too close to a company’s core value proposition. Protecting your intellectual property and preserving product quality become growing concerns.
“You feel the pressure to innovate, but you have all the risks we’ve talked about, the possible loss of your intellectual property,” Viada said. “It takes a nanosecond today to have your product copied.”
“If you lose control of design, innovation,” he concluded, “you’ve lost control of your business.”
However, Mr. Viada noted that despite the compelling arguments for, outsourcing one still finds considerable resistance within many companies to these kinds of fundamental changes. Helping managers think through the alternatives and ways to mitigate the risks and dislocation associated with outsourcing/off-shoring is a key change management role he and others play in this transformation process. This started a discussion on where the outsourcing spark should strike. At the very top like when Jack Welch ordered that 70% of work should go outside of GE or at the line manager level.
As Mr. Viada noted, it depends a great deal on the corporate culture and the leadership style of senior management. One of the biggest challenges of these business models is developing the right governance structures to execute and manage the transitions to the new end-state.
