The tough game you have to play: offshoring is driving a structural change that is transforming cost structures, value chains and the skill needed to manage global firms While initially drawn to this services shift by labor cost, that's now just the "sideshow".

• Author: Kennedy, Robert
• Position: OUTSOURCING/OFFSHORING

The global economy is in the midst of a structural change that will affect every business for decades: globalization has come to the services sector. For most of history, the great majority of services were sourced and sold locally. This has now changed.

[ILLUSTRATION OMITTED]

Offshoring, or the "services shift," is transforming cost structures, value chains and the skills needed to manage global firms.

Here are four things to know to prepare for the new global economy:

* One word, "outsourcing," is used to describe two distinct phenomena--which causes immense confusion.

[ILLUSTRATION OMITTED]

* This services shift is driven by fundamental factors and is unlikely to slow down or reverse anytime soon.

* Leading-edge firms now focus on accessing world-class talent, improving quality and cutting cycle times. (Labor costs savings are a sideshow.)

* Some predictions can be made based on current developments.

Outsourcing and Offshoring--Two Distinct Phenomena

There is a tremendous amount of confusion caused by the fact that many casual commentators use the word "outsourcing" to describe two distinct phenomena.

Outsourcing involves moving a task or process across a firm boundary. This is the basic "make-or-buy" decision. The activity being outsourced is typically considered noncore to the business or involves some specialized skill. Because contracts are involved, it is extremely important that performance levels can be specified and monitored.

Offshoring involves moving a task or process across a geographic boundary. This is a decision about where, not who, should do the process. Governance issues are small, but solving the operational issues needed for remote provision are large. The several ways that companies answer these questions lead to different sourcing options (see figure at right).

[FIGURE OMITTED]

For example, General Electric Co. might choose to perform research on a new plastic in its laboratory in Connecticut (in-house); contract with a vendor in Connecticut to build its supply-chain application (local-outsourcing); conduct research and development in its own center in India (in-house offshoring); and procure finance and accounting services from a vendor in China (offshore-outsourcing).

'Services Shift' is Here to Stay

Over the past 25 years, five "enablers" have changed substantially, thus bringing globalization to the services sector. They are:

1. Economic liberalization has spread to all corners of the globe. While globalization can be measured in many ways, nearly every measure shows that economic linkages among countries have become more extensive.

2. The digitization of business processes. In the mid-1980s, 70 percent to 90 percent of client and transaction records were kept in paper files. A major initiative in 1985-86 was to design a system that allowed remote storage (for example, Chase Manhattan Bank moved its files from New York to New Jersey). Now, more than 90 percent of customer and transaction records are in electronic databases. Once the information is electronic, it can be almost instantly transmitted to New Jersey, or to India.

   The options available to operating managers have expanded tremendously, and smart managers are seizing those options.

3. The low cost and high speed of computing and telecom. The increasing availability of high-speed...