Outsourcing

What will be the long-term impact of offshoring American jobs to places like India and China? Leslie Walker hosted a live Web chat about intensifying competition in global markets with John Hagel III , co-author of the "The Only Sustainable Edge."

In their new book, Hagel , a management guru, and co-author John Seely Brown , the former director of the Xerox Corp. Palo Alto Research Center, argue that the only sustainable advantage companies will have in the future will depend on how well and how closely they work with other firms. Hagel and Brown did extensive research on what has been happening in China over the past few years and hold strong opinions on how specialization is already starting to change the nature of the firm as we know it.

A transcript follows.

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Leslie Walker: Hello, everyone. A big welcome to John Hagel. So glad you could come back to washingtonpost.com for another chat. We had you on during the dot-com boom, talking about how commerce would be forever changed by the Internet. Now we'd like to hear your views on how global business is being changed by offshoring, outsourcing and a bunch of new technology waves.

Submit your questions now, folks. John Hagel is online and will start answering them momentarily.

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Leslie Walker: Leslie Walker: Hello, John. Thanks for joining us today to take questions. You throw out a lot of ideas in your new book, many of them complex and inter-related, so perhaps you could start by telling us what you consider the book's most compelling new idea?

John Hagel: Our book is targeted primarily to business executives with the key message that they can't rely on static sources of advantage like economies of scale or core competencies but instead need to focus on a much more dynamic form of advantage: getting better faster by collaborating more effectively with other world-class companies wherever they are and pushing each other to accelerate capability building. Companies can't do this on their own - as Bill Joy has said "there are more smart people outside your company than inside." We feel there is too much complacency in most companies about traditional sources of advantage.

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Minneapolis, MN: It appears there is no stopping this trend toward outsourcing American jobs. While consumers and business may see some short term positive gain, are we not cutting our own throats? Please comment on the ramifications of this practice.

John Hagel: If all we do is go for short-term gain, we will be cutting our own throats. Our book is intended to be a wake-up call to say we cannot be complacent about global market trends and intensifying competition, but if we move quickly to build our own capabilities and focus on the pace of capability building, we can turn threats into opportunities. But we need to view this as a long-term strategic issue, rather than a near-term cost-saving opportunity. And we need to resist the temptation to resort to protectionist measures that only reinforce our complacency.

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Leslie Walker: Your book describes four waves in offshoring--starting with attempts to achieve wage and cost savings, then gaining access to new skills and capabilities, moving next to targeting emerging markets for the sale of goods and services, and finally, a boomerang effect back in developed markets like the U.S.

Most offshoring now is between the first and second stages, you write. So I couldn't help wondering, how long before the final stage-where global innovation really alters developed markets-and what exactly might that mean?

John Hagel: This is the concept of "innovation blowback". Companies who try to address the needs of customers in large emerging economies like India and China by offering more value at lower prices will end up developing innovative new products and services. These products and services will not only provide success in the emerging economies but can provide the basis for "attacker" strategies to go after more complacent incumbents in developed economies. We're still at the earliest stages of this process because most companies are still figuring out how to serve demanding customers in China and India, but you can see early indications for example in such diverse businesses as diesel motors, motorcycles and health care services.

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Washington, D.C.: Besides India and China, what are the emerging frontiers of offshoring for U.S. based companies?

John Hagel: Probably the most attractive areas are Eastern Europe, both because of the availability of highly trained workers and proximity to Western European markets (important for fast turnaround products), and Israel because of very strong digital technology expertise. In the past, we just looked for low wage rates in evaluating offshoring locations, but increasingly companies are looking for distinctive expertise and environments that encourage rapid capability building.

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Herndon VA: Can you provide some examples of American companies who are doing the kinds of things you are suggesting ?

John Hagel: Two examples of American companies that we discuss in more detail in our book are Nike and Cisco. Nike has developed very sophisticated orchestration skills in global supply chain operations where their focus is not only in efficiency but in rapidly building capability among their supply chain partners through a variety of mentoring and development programs. Cisco is doing something very similar on the customer relationship side of their business where, through Cisco Connection Online, they are not only mobilizing thousands of specialized channel partners to add more value to their customers, but they are also using innovative e-learning platforms to help these channel partners to become better at what they do.

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Baltimore, MD: Considering organizations don't outsource positions (or people) that are deemed vital, how realistic is it for the average American to achieve the blessed "vital" status? And, in light of the current corporate psychology, what jobs would realistically be "stable" in the US? It seems to me, in the short term, outsourcing can be very good for the few at the top. However, over-time, the practice will backfire and leave the government to pick up the pieces of the disenfranchised masses. By 2010, Toyota claims that it will begin selling a service robot. I can only imagine how many jobs this will replace by 2020. Will government ever step in and begin enacting economic legislation that is to the benefit the working class?

John Hagel: "Vital" positions in the end are positions where the company has truly distinctive world-class capability. The challenge and opportunity for American workers is to figure out where they either have that distinctive capability or could rapidly acquire it. But then there is also a need to avoid complacency - there are no "stable" jobs here in the U.S. except perhaps service jobs where physical presence is necessary - it will be hard to get a haircut or have a leaky pipe fixed from India or China. Otherwise, there are no safe harbors where we can sit back and relax - we all need to recognize that developing our talents must become a life-long mission. By the way, this is just as true in offshore locations in India where for example basic software programming is now getting outsourced to Vietnam and Cambodia. Indian software companies have a high sense of urgency about accelerating their own capability building to continue maintain a distinctive edge. In fact, I am struck by the much higher sense of urgency among executives and front line workers in India and China than here in the U.S. where we continue to look for - and too often think we have - "safe" or "stable" jobs.

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Leslie Walker: You referenced motorcycles as an example of "blowback" into developed countries. I was fascinated to read your account of motorcycle design teams in China's Chongqing area. You reported that China's average export price for motorcycles dropped from $700 in the late 1990s to under $200 in 2002, largely because of how Chinese businesses collaborated with suppliers.

Did you visit Chongqing, and what exactly was different about how they assembled motorcycles?

John Hagel: Chongqing is an interesting city that not many people here have heard about - even though it does have 32 million people. It has emerged as the center of motorcycle manufacture in China, which now accounts for 50% of the world-wide production of motorcycles.

A group of entrepreneurial motorcycle assembly companies has emerged in Chongqing, pioneering two key innovations in motorcycle design. First, they took the tightly integrated architectures developed by Japanese companies and developed much more modular, loosely coupled architectures. This in turn allowed them to mobilize a large number of much more specialized component and sub-assembly manufacturers. Rather than specifying in great detail the design of the motorcycle, the assemblers instead specified very aggressive performance, reliability and cost objectives and unleashed their partners in coming up with creative design approaches. In effect, they developed a modular, loosely coupled design process to complement the modular product architectures. Where there were conflicts that needed to be resolved in terms of components, the relevant component vendors would come together an negotiate resolution of the conflicts. In effect, a bottom-up, swarming approach to product design. Of course, it helped that most of these companies were located near each other in Chongqing so they could come together quickly whenever needed. Much of the rapid capability building we talk about in China and India comes from the emergence of highly specialized local business ecosystems in cities like Chongqing that help companies to learn from each other.

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Silicon Valley: Major VC firms are setting up shop in India and China. Engineers in India and China working on American projects will take the knowledge they get and start competing companies. Why do they need America or american execs? Is US business that naive?

John Hagel: Many VC companies in the high tech space will not fund a start-up now unless it has an offshore presence from day one - they call them "micro-multinationals" here in Silicon Valley. Your concern about competitive threats is a valid one, but it diminishes if we move from a static to a dynamic view. After all, the history of Silicon Valley was a history of workers in one start-up leaving and getting funding for another start-up, taking a lot of their knowledge with them. If a company does not continue to innovate and build its capabilities more rapidly than others, it is vulnerable to that competitive threat, whether down the road in Silicon Valley or across the Pacific in Bangalore. The bet is that by offshoring early, entrepreneurial companies can move even faster and stay ahead of the curve by continuing to add distinctive value from here in the U.S. in terms of architectural and market insight.

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Leslie Walker: Sorry we can't get to all the questions, but I am going to post some of the interesting comments and feedbacks sent in. Here's one from California:

Silicon Valley, Calif.: Do you feel that the press has done a sufficient job pointing out how often outsourced projects fail, how more expensive outsourcing is than advertised if you properly account for all the extra costs, or reporting on the magnitude of the risks that it brings to a company?

Several years ago my company experimented with outsourcing some well specified and well partitioned projects to india and china. It almost put us out of business.

The company in india hooked us with a "loss leader" for our first project, then nickel and dimed us to death with extra expenses, and finally charged us through the nose for a follow up enhancement once we were hooked.

The university in china that we paid to develop code for us which involved our trade secret information sold that same code to our direct competitors. We only found it out when we bought a competitor's product for evaluation and found comments from our code in their device models, which are used to link a simulator to real-world transistors. Outsourcing cost us a fortune. .... We tried outsourcing some of engineering projects to India and to China. It worked out badly for us.

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Leslie Walker: From Hartford, Ct. I am one of those protectionists. I'm convinced the standard of living for working Americans has decreased since Reagan fired the air traffic controllers/declaring war on the working class; and being rewarded with millions by the Japanese for a five-minute speech. Politicians continue to be paid off by foreign governments as jobs and the hopes of the middle class leave the country. Just as the French showed recently, people are beginning to take notice. Big-business Democrats like our Senator Lieberman and his globalist lobbyist wife; will be voted out of office. And Republicans won't be able to scare people with the threat of gay people for much longer. A political revolution is boiling; Ross Perot was just the beginning.

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Leslie Walker: From Boston, Mass. The easiest way to slow technical outsourcing for Americans is to not be so lazy and greedy. If American students would come out of college willing to only make 16 to 18 an hour for an intro programming job, build up some experience then move into higher paying positions, outsourcing wouldn't be much of an issue. My company runs a large development team in India in parallel to our team here and there are lots of disadvantages - the time lag, language barriers, time and effort lost to miscommunication. We generally figure they are about half as productive as the developers here. They make a little more than a third as much though, so its still a good deal. Their wages are increasing faster than ours here, so even that might not last too much longer.

It's hard for people to tomach starting out making 40k after they paid 100k+ for their education, but they should really take a more long-term view of things.

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Cleveland Ohio: Hi, I am in the midst of reading Tom Friedman's new book ["the World is Flat"] and so have been considering the newly Flat Earth and feeling unmoored by it all.

Looking to the past, it seems that outsourcing is bad (as people lose jobs and can't be easily trained) but looking to the future, I believe the rebirth of US cities, and that status quo state of most rural areas, can provide the jobs necessary for prosperity. Technically inclined people will always be so inclined, etc....I'd say that outsourcing and "flattening" will make the world a happier/more peaceful place overall and that this net positive won't harm the US. Comments?

Leslie Walker: In interviewing CEOs, I'm always struck at how many subscribe to the view that business globalization is going to lead to a happier, more posperous planet. Is that your view, too, John? A net postive impact?

John Hagel: I often feel like a schizophrenic when it comes to offshoring and outsourcing. On the one hand, I believe that overall it can lead to a happier, more prosperous planet. But there are two key points on the other side. The transition can be painful as we encounter the need to develop new skills and push ourselves even harder to stay at the leading edge of our chosen skill set. There will be a lot of uncertainty through this transition and current advantages will be threatened. That can lead to backlash in terms of protectionism and other efforts to resist change. Second, happiness and prosperity is not uniform. If we choose to be complacent about the challenges created by globalization, we will end up destroying a lot of economic value and probably end up less prosperous and happy. On the other hand, if we develop an appropriate sense of urgency and dedicate ourselves to effectively leveraging the capabilities now emerging on a global scale, we can create enormous economic value. Hence the schizophrenia.

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Leslie Walker: Another reader writes: From what I've read today, I believe your theories are too techno-centric. I'd say that China and India are/will be no more of an employment threat to the majority of Americans than Europe is.

A group of people will always be learning technical skills - they will not be affected, and a group of people will work in services - they will not be affected. A further group of people will be semi-skilled technically - they will always be at risk as technology moves forward, this will always be the case.

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Leslie Walker: Oops. That "I am one of those protectionists" comments above was not from me. It was from a reader and I was simply passing it along. Just one of those technical glitches. Maybe my job is being outsourced and I don't know it yet!

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Leslie Walker: We are running out of time and will be wrapping up soon, folks. Thanks for all your great questions!

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Herndon VA: What are your thoughts on many of the inherent advantages of some countries...sometimes referred to as natural monopolies....resources human, physical etc ?

John Hagel: Comparative advantage across countries used to be shaped much more by relatively fixed natural resource endowments like minerals, fertile soil or natural harbors. Increasingly, comparative advantage resides in relative skills and practices, which can change over time. Just as individuals and companies can no longer afford to be complacent about advantage, countries also must reassess their policies across a broad range of domains to ensure that they are accelerating talent development more rapidly than other countries.

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Leslie Walker: Joe in New York responds: Joe - NYC: In response to the "lazy and greedy" American comments, I think that person is missing the point. Young people have the opportunity for flexibility coming out of college. It is the established 30+ year olds that are having the biggest problem with outsourcing. When your job gets outsourced and you can't find another one and you have a mortgage to pay, you can't afford to start over again or take a huge cut in pay.

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Herndon VA: What advice would you give college students on what they should focus on during their studies in addition to technical skills like engineering?

Leslie Walker: Study Chinese is my two cents. John?

John Hagel: My key advice to college students is to find and pursue their passion. If they are pursuing a passion, chances are much better that they will become successful in developing world-class talent in that area and that alone will assure them a prosperous future - and they'll be a lot more happy if they are pursuing a genuine passion. If they are trying to "game" the system and pick something just because it seems more promising, chances are they won't invest the time and effort required to become world-class.

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Leslie Walker: It was great having you as our guest today. Thanks for answering so many questions! We hope you come back again. Any parting thoughts on what globalization will bring?

John Hagel: Globalization will challenge us to be our best. If we step up to that challenge, we will enjoy enormous success because the world will be available to us, both in terms of capabilities we can access to complement our own and in terms of customers seeking our products and services. If we fail to recognize the challenge and make the effort required to address it, the world will be ready to take our jobs. We can build walls to try to prevent this from happening but, in the process, we will walk away from opportunities as individuals and as institutions to grow and develop our talents in ways that were never possible before.

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Leslie Walker: That's it for today. A big thanks to John Hagel for taking time to answer questions. Sorry we couldn't get to them all, but maybe he'll rejoin us one day to see how globalization of business really does change the world. Bye for now!

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