By Martin Conboy

There are parallels between the Australian outsourcing sector and the Australian car industry. I saw an article in our local media and saw immediately the common theme.

In the mid-1960s, when Australia’s trade minister Sir John McEwen was urging Holden and Ford to seek motor vehicle export markets in Asia, the leader of one of Asia’s poorest countries decided his country needed a car industry. Defying the advice of economists, he ordered the country’s biggest company to start making cars – with Ford’s assistance.

The country was South Korea. Its leader was Park Chung-hee, one of the authoritarian economic visionaries who was to transform Asia. The company was Hyundai.

Today, Australia’s car industry is on the brink of collapse. Ford will stop manufacturing here in 2016. Holden and Toyota are persevering for now, but running up big losses. If their sales, and our dollar, remain at current levels, they too will be unviable.

The car parts manufacturers are thinning month by month. A manufacturing sector which employs 50,000 workers, produces 221,000 cars a year, and generates $3.7 billion of exports and $5 billion of value-added output is in real danger of closing down.

South Korea, by contrast, is now the fifth biggest car maker, behind only China, the US, Japan and Germany. Hyundai is the world’s fourth biggest car manufacturer; it overtook Ford several years ago.

There are many reasons why the Australian car industry is dying, but one is inescapable: Australians are no longer buying the cars our manufacturers make.

Why is car manufacturing here in danger of collapse, whereas South Korea has become a world leader?

The higher dollar has made Australia globally uncompetitive as a place to produce.

It worked fine when our tastes were simple, and Holden and Ford had the market to themselves.

Koreans, by contrast, built their own car industry. They erected higher protective walls, which shut out all imports. But from the start, they aimed to build globally competitive manufacturers, and export to the world.

As South Korea grew richer, Hyundai built up its scale of production, holding down costs. It worked relentlessly to improve quality, and to innovate.

South Korea has changed a lot since, but it remains dedicated to being a global force in car-making. Imports usually take less than 10 per cent of the Korean market; in Australia, they now have 91 per cent.

In South Korea, manufacturing is seen as a national mission. In Australia, it is seen as a costly diversion from the nation’s real strength in ripping out minerals.

The government and Reserve Bank have allowed the dollar to soar, making local producers globally uncompetitive.

Goods and services are now twice as expensive to produce in Australia as in South Korea. A decade ago, when the dollar was low, they were almost identical.

The high dollar is one reason why the Australian car industry now stands on the brink of collapse. Since 2011, it has oscillated around $US1.05, 50 per cent above its pre-mining boom average of US70¢.

That has made our exports far more expensive, costing them sales in the Middle East and elsewhere.

How could Ford, Holden and Toyota reduce their prices by 25 per cent since 1995 to match the fall in import prices when average costs in Australia have risen by 55 per cent in that time? And average weekly earnings have risen 107 per cent?

It was impossible, and those who blame the car makers don’t understand the business. The cost equations have shifted so dramatically. A range of factors has changed consumer preferences. And their market share has slumped, and as their production has fallen, their unit costs have soared.

Australia is no longer a competitive place to produce cars. To save what is left of the industry will require both the dollar and consumer preferences to shift back to where they were. It’s a big ask.

Therefore if you substitute the words ‘Car Industry’ and put in ‘Outsourcing/Call Centre’ Industry and Substitute ‘ Philippines’ for  ‘Korea’ one can understand what has happened.

The higher dollar has made Australia globally uncompetitive as a place to have a call centre.

It worked fine when our tastes were simple, and there was limited competition, however along came Asian service providers with more rigour around their KPIs.

The Philippines, by contrast, built their own industry. From the start, they aimed to build globally competitive service providers, and export to the world.

It worked relentlessly to improve quality, and to innovate. They appointed a minister for the sector and got a seat at the cabinet table.

The Philippines has changed a lot since it became the world champ for Voice BPO work, but it remains dedicated to being a global force in BPO. From zero agents seats in the late nineties the Philippines now has nearly 30,000 seats servicing Australia.

In The Philippines, the BPO and service sector is seen as a national mission. In Australia, it is seen as a sideshow from the nation’s real strength in mineral exploration.

Read more: http://www.smh.com.au/national/retracing-the-fall-of-the-car-industry-20130524-2k6q8.html#ixzz2UMtCC7ii

By Alan Hanson

As recently as 2006, Pluto was a planet, Apple hadn’t broached the iPhone, and India may have been the choice for low cost off shoring – without serious significant competition.

Today, as outsourcing and off-shoring users increasingly are contemplating the question of how easy or challenging it may be to bring work “back” into an organisation, much has changed. The prerequisite question however remains: “Why would work come back?” This in turn should inform: “Where is Back?” And the possibilities are broader and more interesting than ever.

Customers are Considering It

Many global and organisational factors have changed since the time that companies made their initial decisions to leverage a global model for service delivery. As a result, a number of important considerations and alternatives should be evaluated in determining what to do next, if radical change in contemplated.

Customers who have made use of various global locations to source business services or information technology services may consider the question of bringing work back for a variety of reasons. First, it is good business planning hygiene. Call it Plan B. Second, regulators such as the US Fed, corporate boards and other governance-minded stakeholders increasingly want a better understanding of how well equipped subject firms are to deal with changes whether prompted by an outright failure of the current model, or, more likely, reasons that are “elective” in nature.

Not Always Binary

It is interesting to keep in mind that the prompts for bringing work back are probably not limited to the binary scenarios of either a Termination for Cause or for Convenience. On hardly an exhaustive basis, consider that in between these extremes lie a series of possible causes, including:

• Compliance or regulatory changes
• Scope or scale changes
• Changes in supplier competency
• Location issues
• Revenue model shifts

One example of a “compliance-driven shift” is a former client; call it “Bank A”, which placed some first party collections activities in the Philippines on a co-sourced basis. Although pleased with the performance of the function, after an acquisition the prevailing view of its new senior compliance personnel was that the arrangement was inappropriate.

Another example, this one of a “scope or scale-driven shift” occurred with a large regional client; call it “Bank B” that had placed an Auto Leasing related function in a near shore location on an outsourced basis. Performance was hardly an issue. In fact, continuous improvements to the underlying process were so dramatic that ultimately the size of the delivery team needed was deemed too small to be effectively managed on a sourced basis. We should all have such problems, right?

Finally, clients seeking to enhance revenues in an emerging economy may eventually deem it attractive, imperative, or both to “own” their previously sourced operations in that country.

While any of these factors may prompt the organisation to consider termination, and could likely be classified into the “Convenience” category, the more important point is the implications of each respective cause on potential Choices in taking the work back.

Where is Back?

And where exactly is “back” anyway? Does it mean back to the country of the process’s origin? Back to the same city or the same centre? (Though, it is doubtful that the centre was mothballed in anticipation of such a day).

How about back to the same business model? Or does it mean somewhere else entirely? The right answer may well depend upon the reason for termination.

Recall that both of the Banks in the earlier Collections and Auto Leasing examples found that performing their processes “offshore” was acceptable, but doing so on an “outsourced basis was not deemed effective.

Now consider their differing possible solutions. Bank B with its outsourced auto leasing process could have made the choice of adding scale to its outsourced operation, rather than taking back the particular function. After all, it was pleased with both the outsourcer and its near-shore choice, while only the shrinking scale was problematic. By contrast, Bank A, performing outsourced collections, seemed to have little choice other than to shift the operation away from an outsourced partner.

The next question might be whether to move it back onshore, or keep it offshore – where it worked – and possibly domesticate the operation. By the time of its shift in compliance views, might the Bank also have other company-owned operations in the same or another offshore precinct that it should consider?

Further, if outsourcing had not become a compliance issue for the Bank, but instead factors such as resourcing or pricing in the country had become problematic, could another country work rather than bringing the function back onshore?

The point is that much has changed in the world in the short period of time since many organisations made their first or even second-round of global services sourcing decisions. In a world exploding with options, bringing work back in-house or onshore should not be the knee-jerk reactionary solution.

What’s Changed?

If the primary objective of the sourcing activity remains cost savings, consider that today the cost differential between India and the Philippines can be less than 100 basis points, with Philippines being the preferred choice between the two for certain processing functionality.

Factors such as lower IT wages, while sporting significantly lower levels of wage inflation, infrastructure and supplier maturity have made important strides in many of these locations, so the available options when needing to shift a function have never been greater

It is not just a tale of two countries. On the software development front, for example, today there are no fewer than 19 global destination countries with at least some level of IT scalability attractiveness and entry-level IT salaries less than 40% of those in the US.

Several countries in that mix – China and Vietnam – feature lower IT wages than bellwether India’s, while sporting significantly lower levels of wage inflation. Factors such as infrastructure and supplier maturity have made important strides in many of these locations, so the available options when needing to shift a function have never been greater.

If, for whatever reason, “back” does mean only “to the country of origin”, the menu there has also likely changed significantly, mirroring the global phenomenon. In the US as an example, there were at least 20 US Cities where IT job creation increased by more than 40% in 2010. Many of these were relatively lower cost cities such as Raleigh, NC; Pittsburgh, PA; and Columbus, OH.

While such statistics speak to the demand-side of the equation, and can have the short term effect of soaking up talent and driving related wages higher, the longer term impact is a tendency to create pools of supply as experienced workers migrate to such areas, and universities feeding the local eco-system crank up programs geared to a sector of the market where jobs are being newly created.

Similar patterns of opportunity are taking shape in other buyer-populated areas such as Canada and Western Europe and other areas. When faced with making complex choices about moving a function, the result of all this activity is a richer set of options. And these can be explored with far more geo-operationally-informed data in hand.

Financial Case

This is not to say that a greater number of options make the financial case easy. Despite contrary claims, much globalisation activity has been driven by a quest to find the lowest cost solution or destination. As a result, when a process must move, the financial case may not be obvious.

Returning to the earlier example of Bank A, there would not be an expectation of retaining the prior financial case if the collections process were brought onshore. But, given that compliance was the driver of change, then the shift should necessarily consider the broader business case. For example, would such a move reduce the likelihood of compliance infractions or monetary penalties? Would it lessen the likelihood of legal actions by borrowers, or the probability of the success of any such legal claims?

Similarly, if an application development process is relocated because of poor quality, when it is subsequently moved to a higher wage location, the outputs – inclusive of quality, turnaround time, user proximity, code flexibility, or how early an error is found in the testing cycle – rightly should be counted and quantified. Examining only input labour costs misses many of these factors.

Performance Trough

There are numerous other factors to consider when the “back” question presents itself. For example, there is the challenge of managing the “Performance Trough” that follows the transition of work regardless of business model. For many, bringing work in-house harbingers a smooth return to experienced hands. Of course, those hands may be long gone. Even if not, the trough will likely persist.

Researchers from Carnegie Mellon and CalTech convincingly found that even when people trained in doing a specific, identical task did nothing more than rotate amongst themselves, their performance, as measured by such metrics as turnaround time, could get as much as 170% worse in the short term.

There is also the “Social Contract” with the resources or the locations in question that must be considered. If an employer, or client, is viewed favourably for creating 500 new jobs in an area, then the flip-side of their actions may engender ill-will – particularly if the resources aren’t quickly re-engaged.

What is the social contract between globaliser and community? What is the potential impact on brand – even in the case where Termination for Cause exists? Back is definitely not a simple question.

Alan Hanson is Senior Vice President of Neo Group, a Globalisation Advisory and Analytics Company.

www.the-outsourcing.com

By Matthew Hall

Businesses and customers are looking for each other in the wrong way.

Is the traditional call centre finished as a customer service platform now that social media and crowd help are the new fashion?

Strutting the floor at a promotional event for Salesforce.com in New York earlier this year Marc Benioff, the cloud computing company’s founder and chief executive, declared landline call centres antiquated, if not entirely deceased.

Benioff would say that – Salesforce sells products enabled by social and mobile technology. That aside, he also has a point. As communication technology rapidly develops, Benioff said businesses must rethink how they approach servicing customers.

Significant numbers of customers today will turn to online FAQs, email, instant messaging, online forums, and virtual agents rather than pick up a phone.

Research from industry analyst Forrester suggested that while a majority of customers in the US at least still use the telephone for customer service, that number is declining. Forrester’s research indicated Twitter was the least-used but fastest-growing channel for customer service.

“There is so much change, there is so much happening today in the world, that the ability to listen to customers, empathise with them and understand them, is the single most important thing that we can do,” Benioff said.

More than 4.5 billion people are connected on social networks, according to Forrester, and each is connecting through social media with friends and colleagues both at home and at work. That’s not only a big audience for enterprise customer service it is a huge platform for customer relations. The market is also growing – more than 1.7 billion touch devices were shipped in 2012.

Research in Australia, however, suggests that while businesses are trying to use social media for customer service, consumers are slower to use those channels for their own benefit.

A report on Australian customer service trends by Fifth Quadrant found that businesses and customers were looking for each other in the wrong places.

Australian consumers consider Facebook to be their number one choice for customer service engagement, followed by online forums and communities, and YouTube.

Networks like Twitter, LinkedIn and blogs were the least popular options. Tweet this – according to Fifth Quadrant, more than seven in ten consumers claimed they “rarely” or “never” turn to Twitter, LinkedIn, or blogs for customer service.

Yet Twitter is used by more than three quarters of Australian organisations and businesses, perhaps tweeting at themselves rather than customers. Company blogs, websites, and online communities were ahead of Facebook, YouTube, and LinkedIn as preferred tools for businesses.

“Simply creating a new service channel then standing back and waiting for the customers to come won’t work,” said Chris Kirby, Fifth Quadrant’s head of research. “If organisations want to offer customer service through social media, they need to go to the networks that their customers use.”

Anecdotal evidence is inconclusive for the merits of social media over a traditional telephone. For every customer that says an issue was resolved through Twitter, another claims their tweet to a company was ignored.

There may, however, be some firmer evidence that call centres have a short-term future. Reaching out to the Philippines, US and Australia, no call centres or industry organisations, including the ATA (previously known as the Australian Teleservices Association), responded to requests for comment on this story.
Read more: http://www.smh.com.au/it-pro/business-it/pulling-the-plug-on-call-centres-20130508-2j6m6.html#ixzz2T4LCDlUa

Robot recruiters

THE problem with human-resource managers is that they are human. They have biases; they make mistakes. But with better tools, they can make better hiring decisions, say advocates of “big data”. Software that crunches piles of information can spot things that may not be apparent to the naked eye. In the case of hiring American workers who toil by the hour, number-crunching has uncovered some surprising correlations.

For instance, people who fill out online job applications using browsers that did not come with the computer (such as Microsoft’s Internet Explorer on a Windows PC) but had to be deliberately installed (like Firefox or Google’s Chrome) perform better and change jobs less often.

It could just be coincidence, but some analysts think that people who bother to install a new browser may be the sort who take the time to reach informed decisions. Such people should be better employees. Evolv, a company that monitors recruitment and workplace data, pored over nearly 3m data points from more than 30,000 employees to find this nugget.

Some 60% of American workers earn hourly wages. Of these, about half change jobs each year. So firms that employ lots of unskilled workers, such as supermarkets and fast-food chains, have to vet heaps—sometimes millions—of applications every year. Making the process more efficient could yield big payoffs.

Evolv mines mountains of data. If a client operates call centres, for example, Evolv keeps daily tabs on such things as how long each employee takes to answer a customer’s query. It then relates actual performance to traits that were visible during recruitment.

Some insights are counter-intuitive. For instance, firms routinely cull job candidates with a criminal record. Yet the data suggest that for certain jobs there is no correlation with work performance. Indeed, for customer-support calls, people with a criminal background actually perform a bit better. Likewise, many HR departments automatically eliminate candidates who have hopped from job to job. But a recent analysis of 100,000 call-centre workers showed that those who had job-hopped in the past were no more likely to quit quickly than those who had not.

Working with Xerox, a maker of printers, Evolv found that one of the best predictors that a customer-service employee will stick with a job is that he lives nearby and can get to work easily. These and other findings helped Xerox cut attrition by a fifth in a pilot programme that has since been extended. It also found that workers who had joined one or two social networks tended to stay in a job for longer. Those who belonged to four or more social networks did not.

There is no point asking jobseekers if they are honest. But surveys can measure honesty indirectly, by asking questions like “How good at computers are you?” and later: “What does control-V do on a word-processing programme?” A study of 20,000 workers showed that more honest people tend to perform better and stay at the job longer. For some reason, however, they make less effective salespeople.

Algorithms and big data are powerful tools. Wisely used, they can help match the right people with the right jobs. But they must be designed and used by humans, so they can go horribly wrong. Peter Cappelli of the University of Pennsylvania’s Wharton School of Business recalls a case where the software rejected every one of many good applicants for a job because the firm in question had specified that they must have held a particular job title—one that existed at no other company.

From the Economist -Business

By Robert De Neufville

Where did America’s workers go? The future of the American economy may hinge on the answer.

The US economy added 165,000 new jobs in April and the unemployment rate fell to 7.5%. But labour force participation remained low. In fact, the labour force participation rate fell three points since the end of 2008. In April, just 63.6% of Americans 16 and over were working or looking for work. Although the unemployment rate fell steadily over the last three years, people who have given up looking for work aren’t counted among the unemployed. The fact is that a smaller percentage of Americans are working now than at any time since the 1970s.

Labour force participation rose in America—and in other advanced economies—more or less steadily from the end of the 1960s to the early 2000s as more and more women began to work. The percent of men in the workforce dropped over the same period, but not as quickly as percent of women in the workforce rose. That net increase in labour force participation is one of the major reasons the US economy grew so much over that period, since more workers means more production. But in the early 2000s the participation rate of women levelled off around 60%, and total participation began to go back down.

In other words, the influx of new workers that helped make America rich in the last century has begun to reverse. There were always limits to how much the labour force could grow. You can’t have more than 100% of the population working, after all. And in general labour force participation tends to be lower in rich countries, where more people can afford not to work if they choose. But the drop in labour force participation in America is part of a troubling long-term trend, which has been only been amplified by recent economic problems.

Part of the explanation for the drop in labour force participation is demographic. Baby Boomers began to reach retirement age right around the start of the recession. The recession probably led many of Americans to retire earlier than they planned (Why look for a new job when you were planning to retire in a few years?), but the truth is that many of them were planning to leave the workforce soon anyway. For many Americans, it wasn’t that they couldn’t find work, but they were ready not to work anymore.

Labour force participation has also dropped among Americans in their prime working years. It declined most sharply during the recession. But for reasons that are unclear it has been falling steadily since the end of the 1990s. The drop in labour force participation among Americans 25-54 means there are roughly 3 million fewer workers today than there would be if it had stayed at peak levels.

The problem is that fewer workers means a smaller economy. It means—roughly speaking—fewer people producing goods and services for the population as a whole. Some Americans of prime working age are likely to return to work if the economy improves and better, higher-paying jobs become available. But with Americans living longer and birth rates staying low, the workers lost to retirement probably aren’t coming back. As Americans age, demands on the social security and health care systems will increase while the tax base shrinks. To avoid deficits, the country will probably have either to raise taxes on those are working or cut benefits for those who have retired or can’t find work.

America might still be able to maintain its historical rate of growth. But it will be hard. A 2011 McKinsey Global Institute report estimated that productivity would have to increase 34%—to a level we haven’t since the 1960s—just to compensate for the aging of the population. Barring some dramatic industrial breakthrough it’s not clear where that much new productivity could come from. In other words, the recession may be over, but that doesn’t mean the boom times are coming back.

Follow me on Twitter: @rdeneufville

• South Africa has won the National Outsourcing Association (UK) – Offshoring Destination of the Year in 2013, for the second year in a row.  Congratulations South Africa!

  See: http://thesauce.net.au/south-africa-nominated-for-european-outsourcing-award

• Avalon Airport which is 56 kilometres south-west of Melbourne is poised to become Melbourne’s second international airport after the Australian and Philippines governments cleared the way for direct flights in and out of there. Australia and the Philippines signed a memorandum of understanding on Friday that a Philippines airline could fly directly between Manila and Avalon airports once a day. Justin Giddings, Avalon airport’s chief executive, said the next step in achieving international status was locking in an agreement with a Philippines airline, then establish customs and quarantine facilities. He said this would pave the way to attract airlines from other countries. “We are also seeking air rights to Hong Kong, Malaysia and India.”
• Australia – Hits 23 Million – Australia’s population is about to tick past the 23 million mark as the country continues to grow at the fastest rate in the developed world.
• For the fourth consecutive year, IDC ranked IBM number one in worldwide market share for enterprise social software. Social networking adoption continues to soar as businesses look to transform their organization into a smarter enterprise that is capable of empowering a global workforce and transforming client experiences.  According to IDC, the worldwide enterprise social market segment reached 1.0 billion in 2012, representing growth of 25 percent over 2011.
• A Deutsche Bank report illustrated what many suspect – whether catching public transport, ordering a beer or buying medicine to battle a cold, Australians pay among the highest prices on the planet. The Deutsche report uses prices in New York as a baseline, and converts all prices to $US. It echoes the findings of the Economist Intelligence Unit’s annual Worldwide Cost of Living survey, which ranked Sydney and Melbourne as the third- and equal-fourth most expensive cities in the world to live. Labour costs on average, three times more than in Britain. Wages in Australia are about 50 per cent higher than in the US or New Zealand, and average weekly earnings have risen roughly 3.5 per cent a year for the past five years. Australian wages have outstripped inflation for more than a decade.

• The first contact centre in Tasmania to be certified to the COPC CSP Standard was recently announced. The COPC CSP Standard is a performance management system for customer service providers and is the original Standard in the COPC® Family of Standards. Created in 1996, the COPC CSP Standard remains the most prestigious and widely recognised certification program for operating a high performance customer contact centre. The facility in Devonport is owned and managed by Sitel.

• The US-based JPMorgan Chase & Co. is likely to transfer more of its business support functions to Manila, the largest US-based financial holding firm by assets, is to move more of its support operations to the global in-house center (GIC) in Manila to reduce costs. The Manila based center provides strategic support, including voice-based customer services, to JPMorgan’s various lines of business 24 hours a day, seven days a week. It supports card services, retail financial services (home lending, auto finance, education finance, telephone banking, business banking), and treasury and securities services. The center also assists in human resources, performance improvement, quality assurance, IT, accounting, account servicing, collections, operations management, project management, and risk and compliance.

• GICs in the Philippines are Citigroup Business Process Solutions; Wells Fargo; Bank of America; Deutsche Knowledge Services; Emerson Electric; IBM Daksh; IBM Business Services; IBM Solutions Delivery; HSBC Electronic Data Processing; Shell Shared Services; Thomson Reuters; Lexmark Research & Development; Chartis Technology & Operations; Manulife Data Services; and Dell International.

Improved optimism in the US economy is helping bring much needed stability to many organizations and is fueling positive trends in the labor market. Based on a detailed survey of 618 U.S. based firms representing every major industry, the outlook for employment growth shows steady improvement with 51% reporting they plan to add new employees this year and another 31% plan to remain at their current levels. Only 19% indicated they plan staff reductions in 2013. This and many other findings were released today by TalentKeepers in their 9th annual Employee Engagement and Turnover Trends Report, a national survey on key trends in employee retention, engagement and talent management practices.

“Over a four year period, companies reported a consistent decline in plans to downsize or reduce staff, from 43% in 2010 down to 21% for 2013,” said Christopher Mulligan, CEO of TalentKeepers. “Also, more companies are stabilizing major business strategies as well as human resources practices, such as compensation and benefits, showing less urgency to react to changes in the economy and a greater focus on executing current plans,” he added. For all reporting firms, 11% forecast “significant increases” in hiring for 2013.

This year’s report highlights the top 10% “Best in Class” organizations and how they engage and retain valued employees and help them excel in their roles. More organizations are treating employee engagement metrics as essential data to guide business growth and many now formally link talent engagement metrics to key performance indicators. The final report covers a wide range of talent management issues and will be available in early April.

www.talentkeepers.com

Here there and everywhere

After decades of sending work across the world, companies are rethinking their offshoring strategies, says The Economist’s Tamzin Booth

Early next month local dignitaries will gather for a ribbon-cutting ceremony at a facility in Whitsett, North Carolina, USA. A new production line will start to roll and the seemingly impossible will happen: America will start making personal computers again. Mass-market computer production had been withering away for the past 30 years, and the vast majority of laptops have always been made in Asia. Dell shut two big American factories in 2008 and 2010 in a big shift to China, and HP now makes only a small number of business desktops at home.

The new manufacturing facility is being built not by an American company but by Lenovo, a highly successful Chinese technology group. Founded in 1984 by 11 engineers from the Chinese Academy of Sciences, it bought IBM’s ThinkPad personal-computer business in 2005 and is now by some measures the world’s biggest PC-maker, just ahead of HP, and the fastest growing.

Lenovo’s move marks the latest twist in a globalisation story that has been running since the 1980s. The original idea behind offshoring was that Western firms with high labour costs could make huge savings by sending work to countries where wages were much lower (see article). Offshoring means moving work and jobs outside the country where a company is based. It can also involve outsourcing, which means sending work to outside contractors. These can be either in the home country or abroad, but in offshoring they are based overseas. For several decades that strategy worked, often brilliantly. But now companies are rethinking their global footprints.

The first and most important reason is that the global labour “arbitrage” that sent companies rushing overseas is running out. Wages in China and India have been going up by 10-20% a year for the past decade, whereas manufacturing pay in America and Europe has barely budged. Other countries, including Vietnam, Indonesia and the Philippines, still offer low wages, but not China’s scale, efficiency and supply chains. There are still big gaps between wages in different parts of the world, but other factors such as transport costs increasingly offset them. Lenovo’s labour costs in North Carolina will still be higher than in its factories in China and Mexico, but the gap has narrowed substantially, so it is no longer a clinching reason for manufacturing in emerging markets. With more automation, says David Schmoock, Lenovo’s president for North America, labour’s share of total costs is shrinking anyway.

Second, many American firms now realise that they went too far in sending work abroad and need to bring some of it home again, a process inelegantly termed “reshoring”. Well-known companies such as Google, General Electric, Caterpillar and Ford Motor Company are bringing some of their production back to America or adding new capacity there. In December Apple said it would start making a line of its Mac computers in America later this year.

Choosing the right location for producing a good or a service is an inexact science, and many companies got it wrong. Michael Porter, Harvard Business School’s guru on competitive strategy, says that just as companies pursued many unpromising mergers and acquisitions until painful experience brought greater discipline to the field, a lot of chief executives offshored too quickly and too much. In Europe there was never as much enthusiasm for offshoring as in America in the first place, and the small number of companies that did it are in no rush to return.

Firms are now discovering all the disadvantages of distance. The cost of shipping heavy goods halfway around the world by sea has been rising sharply, and goods spend weeks in transit. They have also found that manufacturing somewhere cheap and far away but keeping research and development at home can have a negative effect on innovation. One answer to this would be to move the R&D too, but that has other drawbacks: the threat of losing valuable intellectual property in far-off places looms ever larger. Also, a succession of wars and natural disasters in the past decade has highlighted the risk that supply chains a long way from home may become disrupted.

Third, firms are rapidly moving away from the model of manufacturing everything in one low-cost place to supply the rest of the world. China is no longer seen as a cheap manufacturing base but as a huge new market. Increasingly, the main reason for multinationals to move production is to be close to customers in big new markets. This is not offshoring in the sense the word has been used for the past three decades; instead, it is being “onshore” in new places. Peter Löscher, the chief executive of Siemens, a German engineering firm, recently commented that the notion of offshoring is in any case an odd one for a truly international company. The “home shore” for Siemens, he said, is now as much China and India as it is Germany or America.

Companies now want to be in, or close to, each of their biggest markets, making customised products and responding quickly to changing local demand. Pierre Beaudoin, chief executive of Bombardier, a Canadian maker of aeroplanes and trains, says the firm used to focus on cost savings made by sending jobs abroad; now Bombardier is in China for the sake of China.

Lenovo, as a Chinese company, has its own factories in China. The reason it is moving some production to America is that it will be able to customise its computers for American customers and respond quickly to them. If it made them in China they would spend six weeks on a ship, says Mr. Schmoock.

Under this logic, America and Europe, with their big domestic markets, should be able to attract plenty of new investment as companies look for a bigger local presence in places around the world. It is not just Western firms bringing some of their production home; there is also a wave of emerging-market champions such as Lenovo, or the Tata Group, which is making Range Rover cars near Liverpool, that are coming to invest in brands, capacity and workers in the West.

Such changes are happening not only in manufacturing, but increasingly in services too. Companies may either outsource IT and back-office work to other companies, which could be in the same country or abroad, or offshore it to their own centres overseas. Software programming, call centres and data centre management were the first tasks to move, followed by more complex ones such as medical diagnoses and analytics for investment banks.

As in manufacturing, the labour-cost arbitrage in services is rapidly eroding, leaving firms with all the drawbacks of distance and ever fewer cost savings to make up for them. There has been widespread disappointment with outsourcing information technology and the routine back-office tasks that used to be done in-house. Some activities that used to be considered peripheral to a company’s profits, such as data management, are now seen as essential, so they are less likely to be entrusted to a third-party supplier thousands of miles away.

Coming full circle

Even General Electric is reversing its course in some important areas of its business. In the 1990s it had pioneered the offshoring of services, setting up one of the very first “captive”, or fully owned, offshore service centres in Gurgaon in 1997. Up until last year around half of GE’s information-technology work was being done outside the company, mostly in India, but the company found that it was losing too much technical expertise and that its IT department was not responding quickly enough to changing technology needs. It is now adding hundreds of IT engineers at a new centre in Van Buren Township in Michigan.

This special report will examine the changing economics of offshoring in the corporate world. It will show that offshoring in its traditional sense, in search of cheaper labour anywhere on the globe, is maturing, tailing off and to some extent being reversed. Multinationals will certainly not become any less global as a result, but they will distribute their activities more evenly and selectively around the world, taking heed of a far broader range of variables than labour costs alone.

That offers a huge opportunity for rich countries and their workers to win back some of the industries and activities they have lost over the past few decades. Paradoxically, the narrowing wage gap increases the pressure on politicians. With labour-cost differentials narrowing rapidly, it is no longer possible to point at rock-bottom wages in emerging markets as the reason why the rich world is losing out. Developed countries will have to compete hard on factors beyond labour costs. The most important of these are world-class skills and training, along with flexibility and motivation of workers, extensive clusters of suppliers and sensible regulation.

By Bernard Condon

To workers being pushed out of jobs by today’s technology, history has a message: You’re not the first.

From textile machines to the horseless carriage to email, technology has upended industries and wiped out jobs for centuries. It also has created millions of jobs, though usually not for the people who lost them.

“People suffer their livelihoods, their skills and training are worth less,” says Joel Mokyr, a historian of technological change at Northwestern University. “But that is the price we pay for progress.”

A look at breakthroughs that made the goods we buy more affordable, our lives more comfortable and our jobs more precarious:

The First Industrial Revolution

For most of history, people made many goods themselves. That changed with the First Industrial Revolution, which began in England in the mid-18th century and lasted about 100 years.

New mechanical devices that allowed one man to do the work of several flooded the market with products, most notably textiles. Using cords, wheels and rollers, inventors sped up the twisting of threads to make yarn and the weaving of yarn to make cloth.

Next, steam was used to free the new machines from the limits of man’s muscle and make them run faster. The new machines produced so much, so fast and so cheaply, more people could afford to buy textiles. Demand soared and so did jobs manning the machines and doing other work.

In America in 1793, Eli Whitney freed slaves from the laborious work of picking sticky seeds from cotton bolls by inventing a cotton gin that did that automatically. It led to widespread planting of cotton but even more work for the slaves.

Whitney also is credited with another invention: interchangeable parts. At a workshop he ran for making firearms, he had his staff make the same part many times so that his guns could be assembled quickly. It worked, and industries such as watchmakers copied his method.

In 1831, Cyrus McCormick invented a reaper that cut wheat stalks as it was pulled by horses and piled them on a platform. Farmers could harvest faster.

In 1837, John Deere stuck the blade of a steel saw onto a plow and invented the steel-edged plow to replace cast-iron ones. Farmers could cut a furrow in the earth more easily and sow faster.

So began a series of inventions that made farming efficient, and began to drain farms of people. In 1800, two-thirds of Americans worked on farms; today, 2 percent do.

The Second Industrial Revolution

Life sped up more in this second period of innovation, from the mid-19th century to the early 20th century, an age of steel and electric power, expanding railroads and the automobile.

In 1856, an Englishman discovered a way of making steel fast and cheap, and other inventors soon improved the process. Railroad companies started using steel for their rails instead of wrought iron, which bent easily and needed to be replaced often. Trains could carry heavier loads, which meant businesses could send more products to distant markets. Sales increased, and so did jobs.

In 1861, a telegraph line was strung from coast to coast in the U.S., vastly improving communication. It also wiped out the Pony Express delivery service; it went out of business the same year.

In 1879, Thomas Edison made a light bulb that wouldn’t burn out in a few hours. Factories replaced gaslights, reducing the number of fires.

In quick succession came a string of breakthroughs the automobile, an automatic typesetting machine for printing, a tractor propelled by an internal combustion engine instead of pulled by horses and the Wright brothers’ airplane.

Henry Ford started his eponymous car company in 1903. He put men and their tools in stationary positions and had a car being assembled roll from one man to the next. The moving assembly line was born, and cars could be made faster and cheaper. As with textiles earlier, car prices plummeted and demand soared, creating new kinds of jobs in a new industry  and helping to wipe out 100,000 jobs for carriage and harness makers.

The Information Age

The inventor’s focus shifted from building things to manipulating information. The tools of this new period help people gather and analyze data and communicate faster, cheaper, better.

No invention is commonly accepted as first of the age, but one contender is the first digital computer in 1937, created by George Stibitz of Bell Labs, the former research arm of AT&T. Stibitz seized the idea of using the open and closed positions of metallic devices when electricity runs through them to do simple math.

In 1947, a team at Bell Labs led by William Shockley discovered how to amplify and switch electronic signals using semiconductor material. It was the first transistor. A decade later, many of them were crammed onto a small chip, dubbed an integrated circuit.

Before the transistor, electronic products worked with bulky vacuum tubes. Now computing power could be miniaturized, a breakthrough that led to small radios, personal computers, cellphones and an array of other devices today. In 1971, the first email was sent by a Defense Department computer engineer.

The same year, John Blankenbaker built the Kenbak-1, the first computer small and cheap enough for the masses to buy. They didn’t. Fewer than 50 Kenbak-1s were sold, mostly to a community college, according to oral history by Blankenbaker at the Computer Museum in Boston. His company went out of business within two years

In 1981, the National Science Foundation set up a network linking university computers, a milestone in the development of the Internet. Its impact could scarcely be imagined then.

The past three decades, new products and innovations have allowed people to entertain and inform themselves anywhere, anytime.

In 1983, Motorola introduced the first portable cellphone, a 2-pound clunker called the DynaTac 8000x. In 1984, the first PDA, or personal digital assistant, was sold the long-forgotten Psion. In 1994, BellSouth sold its first Simon, the start of a stream of ever-smarter smartphones from which you can access virtually any information while on the run, including that staple of the telephone operator a phone number.

Which helps explain why there were just 36,000 U.S. operators in 2010, down nearly two-thirds in 10 years.

A job that rose in the same period? Software engineer. They numbered 1.03 million in 2010, up nearly 40 per cent.

AP

Read more: http://www.theage.com.au/it-pro/business-it/is-technology-a-job-killer-a-few-history-lessons-20130123-2d708.html#ixzz2JKcr6sQ7