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Speaking
I speak on
topics related to business, strategy and technology. From conceiving and implementing
FAST strategies to pragmatic technology approaches, I seek to challenge traditional
assumptions and help uncover simple, yet profitable solutions best suited to
your company's situation. Get details >>
Papers
- Moving
from Push to Pull - Emerging Models for Mobilizing Resources
(PDF)
John Hagel and John Seely Brown
- Capturing
the Real Value from Offshoring in Asia (PDF)
John Hagel
- The
Agile Dance of Architectures – Reframing IT Enabled Business Opportunities
(PDF)
John Hagel and John Seely Brown
- Overview
of Working Paper Series (PDF)
John Hagel and John Seely Brown
- Break
On Through to the Other Side: A Missing Link in Redefining the Enterprise
(PDF)
John Hagel and John Seely Brown
- The
Secret to Creating Value from Web Services Today: Start Simply (PDF)
John Hagel, John Seely Brown and Dennis Layton-Rodin
- Service
Grids: The Missing Link in Web Services (PDF)
John Hagel and John Seely Brown
- Some
Security Considerations for Service Grids (PDF)
Martin Milani and John Seely Brown
- Control
versus Trust: Mastering a Different Management Approach (PDF)
John Hagel and John Seely Brown
- Orchestrating
Business Processes - Harnessing the Value of Web Services Technology (PDF)
John Hagel and John Seely Brown
- Orchestrating
Loosely Coupled Business Processes: The Secret to Successful Collaboration
(PDF)
John Hagel, John Seely Brown and Scott Durchslag
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Viewpoint
April 2, 2004
Capturing
the Real Value from Offshoring
There’s
a storm brewing over offshoring, but the irony is that neither side
in the emerging debate fully understands the challenges – and the opportunities
– ahead. One side – the
opponents – focuses on the workers being displaced from their jobs as
companies shift work to offshore locations and see nothing but challenge. The other side – the companies that are actually
shifting key areas of activity offshore – focus on the near-term cost
savings and see only benefit, if only they can keep a low enough profile
to avoid adverse publicity. Both sides miss the key significance
of the offshoring trend.
Offshoring
is not just about cost reduction through wage rate arbitrage. Instead,
it is a powerful way to improve performance by accessing distinctive
resources and accelerating capability building. Bottom line: offshoring will force all of
us to become more specialized and to make some difficult choices to
exit certain activities along the way. In fact, by viewing offshoring
too narrowly as simply a way to access cheap labor, companies risk unleashing
a vicious cycle that will lead to value destruction.
I
have just written a working
paper that develops this message in some detail.
My perspectives on offshoring have been developing over quite
some time. Many of you are familiar with my writing on
Li & Fung, the leading offshoring service provider in the apparel
industry. My first experience with offshoring actually goes back to
1982 when I played a key role in helping Atari (remember them?) shift
its manufacturing of home computers to Hong Kong.
But
this particular working paper came about through my collaboration with
a private equity firm based here in Silicon Valley. Crimson keeps a low profile, but it is a remarkable
firm. It is the leading private
equity firm focused on advising and investing in the efforts of U.S.
companies to build out their offshore capabilities. Crimson and its
portfolio companies work with some of the most sophisticated global
players in developing offshoring operations.
These companies are building impressive capabilities that deliver
world-class performance.
In
studying their experience, it has become clear to me that offshoring
creates an opportunity to build a new kind of high performance organization.
We generally are familiar with the characteristics of a high
performance organization in the U.S., Europe or Japan.
Many of these characteristics are present in offshoring operations
as well, but offshoring creates an opportunity to tailor these approaches
to more effectively tap into the full potential offered by distinctive
resources offshore.
What
are these distinctive resources that can be accessed offshore?
In some cases, they involve world-class skills.
For example, Chinese engineers are now recognized as some of
the leading designers of semiconductors for wireless devices. In many
cases, Indian software programmers perform at a higher level of productivity
and expertise than software programmers in the IT shops of large enterprises
in the United States. But it’s not just about unique technical skills.
It also includes distinctive cultural attributes, like the reliance
on social networks that helps Chinese companies to collaborate closely
across enterprise boundaries.
To
realize the full potential of these distinctive resources, companies
need to adapt their approach to building high performance organizations,
often going against conventional wisdom. For example, in offshoring locations, it makes
sense to significantly reduce the ratio of front-line managers to staff
while in the U.S. we have been focused on ripping out entire layers
of management and expanding the ratio of managers to staff. Why the difference? The alternative approach
makes sense in offshore locations given both the significantly lower
wage rates for managers and the opportunity created to deploy more management
time to coach staff and to work with staff to identify performance improvement
opportunities.
What
are other differences in approach? In many offshore locations, it makes
sense to hire people who would be viewed as overqualified for comparable
positions in the U.S. Once again,
lower wage rates are part of the reason to do this, but the real opportunity
is to accelerate performance improvement by drawing on highly trained
and motivated people and creating opportunities for rapid advancement.
In offshore locations it often makes sense to open up new operations
sites that would be regarded as sub-scale in the U.S. rather then expand
existing ones because these operations tend to be less capital-intensive
and because the greater competition across sites can also accelerate
performance improvement. The working paper discusses these and other
differences in more detail.
It
is challenging to master these techniques for building high performance
organizations offshore. In many
cases, it will make sense to go with specialized offshore service providers,
rather than trying to create your own offshore operation. Even here, techniques must be mastered in terms
of working effectively with offshore third parties. It is hard enough for us to outsource activities
to third parties domestically – the distance, time zone differences
and cultural differences all conspire to make this even more challenging
when dealing with offshore service providers.
But
the real value comes once these techniques have been mastered.
Once companies have mastered these techniques in one area of
offshore operations, they can rapidly improve performance by systematically
expanding offshore operations into adjacent areas. This is where
the power of offshoring comes into full view. Rather than viewing offshoring simply as a
defensive move to cut costs, the real winners will be companies that
understand that offshoring can be used as a competitive weapon to expand
market position. Look at some of the more aggressive computer
companies like Dell, Gateway and Hewlett Packard. They’re using offshoring
service providers as a way to accelerate entry into the consumer electronics
market.
This
is another way that companies think too narrowly about offshoring.
Since they focus so heavily on cost savings from lower wages,
they tend to view this purely as an operational issue.
By understanding how to access world-class capabilities through
offshoring, companies are more likely to recognize that offshoring is
not just an operational initiative. It has profound strategic consequences.
As
in the case of the computer companies, offshoring can be used to restructure
entire industries, not simply to improve the performance of individual
companies. But this cuts both
ways. Industries can be restructured
to your advantage or to your disadvantage. If you choose to let go of
activities, you had better be sure that these activities cannot be used
to erode your own position or profitability over time. Offshoring
creates significant strategic issues that few companies have begun to
recognize, much less resolve.
This
is particularly challenging because the strategic choices must be made
in a highly dynamic environment. Capabilities offshore are rapidly deepening,
reinforced by robust local business ecosystems that seem to be emerging
overnight in key areas like Bangalore, Taiwan and coastal Mainland China. Choices that seem sensible today may be deeply
regretted 18 months from now. Given
this situation, choices must be continually reassessed and fallback
positions clearly identified.
Given
all this, what should companies do? Let me suggest a few early steps.
- Get
on the ground. If your senior management team hasn’t personally
been to India and China recently, it probably makes sense to arrange
a visit and see firsthand the kinds of capabilities and infrastructure
that are now available in these areas.
- Identify
high impact opportunities. Conduct a diagnostic of your operations
to identify systematically the highest impact opportunities to improve
performance through offshoring initiatives. Don’t just focus on performance
in your existing business. Think creatively about entering new businesses
by accessing offshoring capabilities and combining them with assets
and relationships you already have (think of the example of computer
companies entering the consumer electronics business). If you already have activities offshore,
audit their performance to date and focus on lessons learned.
- Debate the
strategic choices. Use this diagnostic as a catalyst for a broader
strategic discussion within your senior management team regarding
the choices involved in offshoring.
This may be the time to re-visit the most fundamental question
of all: what business are we really in?
It may be useful to focus on the three business choices I outlined
in the “Unbundling
the Corporation” article in Harvard Business Review. Beware of
simplistic core and context distinctions – many core activities are
being moved offshore and outsourced while context may in some cases
become core. Remember also that offshore doesn’t necessarily mean
outsource – there are options to build your own operations offshore
or to engage in “build, operate, transfer” arrangements that ensure
long-term control of strategic operations.
- Staff the
right team. Determine if you have the operational skills necessary
to successfully move target operations offshore and to manage them
effectively over time. If
you have limited experience in this area, it may make sense to either
recruit the skills or to work with advisors that have relevant experience.
Whether or not you are outsourcing the operations, make sure appropriate
teams are configured both in the offshore locations and your home
operations to get maximum performance impact.
- Make sure
the foundations are solid. Clean up the operations targeted for
offshoring. Offshoring is
not a panacea. If performance
metrics are not clearly defined, business rules poorly articulated,
underlying data fragmentary and inconsistent or interfaces with other
activities unclear, then offshoring will only complicate your life.
- Set
aggressive targets. Benchmark the performance of the operations
targeted for offshoring and work with the offshoring team to define
aggressive targets for performance improvement.
- Implement
redeployment plans for staff.
Successful offshoring initiatives require a smooth transition
from existing locations to offshore locations.
This in large part depends on retaining and motivating existing
staff to transfer knowledge. This
will generally be more effective if the existing staff can be effectively
redeployed in other activities once the offshoring transition has
been completed. You’ve invested a lot in these people so, if at all
possible, find alternative roles for them in your company. If this
cannot be accomplished, then at least help them in their transition
to other employment and provide them with enough cushion so that they
stay focused on ensuring a smooth transition as long as required.
This
last point brings us back to where we started. A lot of the opposition to offshoring is driven
by concern over the job losses that occur as activities move offshore.
Supporters of offshoring focus on the macro-economic view
that the savings generated by offshoring will get re-invested and create
new jobs. That’s generally true. But it misses a key question. Who will create these new jobs? Will the same companies that shifted the jobs
offshore to begin with create these new jobs? Or will they be created
by a different set of companies?
If
you are the senior executive of a company, don’t celebrate because you
have cut your employment expense through offshoring. Unless you were able to do this in some proprietary
way that can’t be easily copied by competitors, the savings you generate
will soon get competed away and captured by your customers. The only
way to continue to create value in this environment is to reinvest those
savings to fund major new growth opportunities. If you do this well,
you will thrive and create new jobs along the way.
If you ignore this challenge, someone else will create new
jobs and you will be managing a shrinking business.
If
you are an employee in a company and concerned about the threat that
your job may be moved offshore, don’t blindly resist the offshoring
option. If this is a viable
option for the kind of work you do, your company will be weakened by
efforts to prevent it from accessing the capabilities available offshore. Your job security will erode as your company
faces growing challenges from companies that have been more aggressive
in accessing offshore capabilities. Your challenge is to invest in
your own skills to make them irreplaceable.
Just as every company must ensure that it has a distinctive specialization,
every employee will need to develop a skill set that cannot be easily
reproduced offshore. This
is a moving target, so you must continually reinvest in deepening your
expertise.
We
are all consumers. In that dimension
of our life, we will all reap the benefits of offshoring in the form
of higher quality products and services delivered at lower prices.
But we are also producers. Offshoring
will challenge us to get better and better at what we do. That will
mean more specialization, more effective coordination with other specialized
resources and more rapid learning to maintain our edge.
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Blogs
- The Big Shift (HBR)
- EdgePerspectives blog
Books
The
Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion
by John Hagel III, John Seely Brown, and Lang Davison
ALSO
The
Only Sustainable Edge: Why Business Strategy Depends on Productive Friction
and Dynamic Specialization
by John Hagel III and John Seely Brown
- Out
of the Box: Strategies for Achieving Profits Today and Growth Tomorrow through
Web Services
by John Hagel III
- Net
Worth: Shaping Markets When Customers Make the Rules
by John Hagel, III and Marc Singer
- Net
Gain: Expanding Markets through Virtual Communities
By John Hagel, III and Arthur G. Armstrong
Deloitte
ongoing
research:
The 2009 Shift Index
The Big Shift Index: Uncovering the Emerging Logic of Deep Change
www.edgeperspectives.com
Cloud Computing working papers
BusinessWeek
The Next Wave of Open Innovation
April, 2009
Does the Experience Curve Matter Today?
April, 2009
Peer-to-Patent: A System for Increasing Transparency
March, 2009
How World of Warcraft Promotes Innovation
January, 2009
Harrah's New Twist on Prediction Markets
December, 2008
Innovation for Hard Times
November 2008
How SAP Seeds Innovation
July 2008
Student Activism Can Change the World
May 2008
Myelin Repair Foundation's
Institutional Innovation
May 2008
Learning from Facebook
April 2008
Learning from Tata's Nano
February 2008
Catching the Innovation Wave
January 2008
Phoning from the Edge
January 2008
Embrace the Edge - or Perish
November 2007
Funding Invention vs.
Managing Innovation
February 2006
Articles
- Creation
Nets: Harnessing the Potential of Open Innovation (co-authored
with John Seely Brown) April, 2006
- Connecting
Globalization & Innovation: Some Contrarian Perspectives (Prepared for the
Annual Meeting of the World Economic Forum in Davos, Switzerland January 25
– 30, 2006; co-authored
with John Seely Brown)
- "The
Benefits of a Long Distance Relationship" (co-authored with John Seely Brown),
August 9, 2005
- "Feed
R&D - Or Farm It Out?" (HBR Case Study with Commentary co-authored
with John Seely Brown), July 2005
- "Productive
Friction: How Difficult Business Partnerships Can Accelerate Innovation"
(co-authored with John Seely Brown), February 2005
- "From
Push to Pull: The Next Frontier of Innovation" (co-authored with John Seely
Brown), 2005, No.3
- "Innovation
Blowback: Disruptive Management Practices from Asia" (co-authored with John
Seely Brown), 2005, No.1
more
articles >>
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