Outsourcing Dissected

Outsourcing is a word that can instantly divide the guests at a party. Is that eventually generating more jobs or taking away jobs? Global Insight, a private consulting firm hired by the Information Technology Association of America, an industry lobbying firm, while outsourcing does result in some short-term unemployment, its long-term benefits outweigh its costs.Politicians talk about it to support their case - depending of course which country's politicians we are talking about. Is it inevitable as firms try to retain their competitive edge or is it driven by the greed of the capitalist system to drive more profits every quarter?I live in Bangalore, a city that has taken on a new meaning in this new world. Getting "Bangalored" refers to workers laid off because their jobs have moved to India or to other lower wage economies. Despite the debate and divide we all practice outsourcing regularly in our capacity as individuals.The services economy is proof of how much we are willing to outsource. When you are feeling too lazy to cook and decide to eat out, you are outsourcing the meal to a service provider. When you decide to take the bus or cab, you are outsourcing the commute to some service provider. We routinely buy stuff that is too complex to make at home. The neighboring departmental store has all the things people are outsourcing to others. Outsourcing at an individual level gives rise to savings and leisure - two prime drivers of our economy. All outsourcing decisions get made when we see that having someone else provide that service will result in us saving money or time. This is how outsourcing works every day for us as consumers. Is the process different when outsourcing is done by organizations?Organizations are routinely expected to keep producing profits for their shareholders. This in turn forces them to look for savings by way of labor arbitrage. Nike had said Just Do It for outsourcing the manufacture of its shoes and uppers to economies such as Indonesia, Vietnam and China. In the process they got a lot of flak for running sweat shops in many countries. (Click here to see cartoon). Despite all the public outcry of exploitation and job loss, outsourcing is only increasing but the bouquet of offerings is different. Value added work is what is driving the industry today and not just cost differential.I asked Prof Ravi Aron of Wharton the question: What kind of work gets outsourced? Is it work that is simple to do and therefor harder to mess up if done by others that will get outsourced or is it work that is complex and what is beyond one's ken that gets sent to another part of the world? According to his studies, large data set handling, number crunching, quantitative analysis or algorithmic calculations are seen as more complex by the West. Persuasion, disambiguation, judgment is seen as complex in the eastern parts of the world like China, Singapore or India and will get outsourced to the West possibly in the form of expats. "Like beauty, complexity lies in the eyes of the beholder." says Prof Aron.  The market is actually for perception of complexity arbitrage and not cheaper cost of labor.There is a second shift that happens. The act of sending part of the work to be done outside of the firm's boundaries changes the way the firm is going to operate. The boundary of the firm has thus become more amorphous. Various free agents are working together to create value when we outsource even part of the work. The physical boundaries and economic boundaries are getting blurred. Depending on the nature of the work, some free agent is at the center of the network that is creating value. That is changing the competencies that managers need to have. The ability to ask questions and reframe problems is a key skill in this new scenario. Just being an "information gopher" is no longer valued. Research and data collection is a task that is easily outsourced and available on tap. What really matters is the ability to ask the right questions. Having the world's information at your finger tips, the Google search bar does not guarantee that we will find the precise answer if we do not know what is the correct term to be searching for.------------------Download a copy of my cartoon on outsourcing from hereRavi Aron is an Assistant Professor at Johns Hopkins University Carey Business School, and a Senior Fellow in the William and Phyllis Mack Center for Technological Innovation at the Wharton School, University of Pennsylvania (UPENN).