by: John Sviokla

If something is digitizable, and can be well described and monitored, it will be traded.  Services are more and more tradable every day.

The best way to extract value from the global trade in services is to start with a short, but difficult question: Which members of my organization's thinking workers are high leverage, and which low?   Most organization begin by looking at the low leverage workers for cost improvement, but there is much more value to be had by figuring out where the high leverage resides and finding the best talent on the globe to create new value. 

The current run up in the twin trends of outsourcing (buying a task from someone) and offshoring (moving a task to a different country) will continue because as my friend Bob Kennedy, Executive Director of University of Michigan's Davidson Institute (and one of the world's leading thinkers about the dynamics of developing nations) pointed out many years ago, English is spreading as the language of business, western business practices are moving across the globe, telecommunications costs continue to plummet, and every rational country -- from India to Ghana -- has a knowledge worker strategy -- aimed at capturing some of the emerging value created by the new dymanics of the global thinking class.  Thomas Friedman has popularized these ideas (along with many others) in his recent book The World is Flat

Why are so many countries now commiting to a knowledge worker strategy?  There are some very straight forward economic answers.  The minimum efficient scale of many types of knowledge work is trivial (for software it is a computer and net connection); the capital costs are low, and the desire and potential for wealth creation for the entrepreneurs is very high.  Azim Premji, who owns 82% of Wipro is worth $13.3 billion, according to Forbes, and with a purchasing power parity of 7:1 in India, that makes him worth more than Bill Gates with a paltry $50 Billion, if Premji spends it all in his home country.  It is no wonder, many nations want to get in on the boom.

Outsourcing and offshoring are essential for cost reasons, and every significant company that I know of has used a combination of these two techniques to lower their total average cost to serve customers and to develop new products and services.  Even the fabled story about Dell moving 500 customer service jobs back to the USA from India, was only for a small customer group.  During the same time period that Dell was moving these jobs back, it took over 1,000 additional jobs to India. 

I spent many years researching and teaching at Harvard Business School, and one of the most fascinating questions I learned there was: Where is the leverage?  Put another way, how can you both create and extract more value?  For example, many people have heard of the idea of performing a "roll up" of an industry, where one company consolidates many smaller players into a single, larger company.  GE did this in many forms of consumer credit, Bank of America did it in banks, Cisco continues to do it in technology.  A roll up is an example of what I mean by leverage. 

In the world of the thinking class (and I like Tom Davenport's distinction of people who "think for a living" because I think that scientists have more in common with customer service workers, than they do with chefs) there are "high leverage thinking workers" and "low leverage thinking workers".  When a mathematical genius creates a new algorithm to make Google's search engine faster, that is high leverage thinking because the results of that thinking can be put into a set of complementary assets (e.g. Google's technology, and brand) to extract huge leverage.  Pharmaceturical companies, software companies, investment banks, and publishing houses have many high leverage thinking workers.  Customer service is generally low leverage, as is radiology, the law, and consulting -- to name a few.

In general, organizations seem to be using outsourcing to lower the average cost (and to sometimes increase the quality) of low leverage service work.  It is predictable that outsourcing, and offshoring low leverage service work will be politically volatile, and people like Lou Dobbs have been around throughout history, when jobs are at stake.  The lower the leverage, the greater the number of jobs.  For low leverage work, most organizations have leaned toward buying the service.  Whether it is Dell, or AOL, or American Express, or Citibank, or any other large organization, they all are sourcing low leverage service work from around the world.  They may have some internal capacity, but the Spectraminds of the world sell their call center services to many large companies.  This trend will continue, as it must, because any firm that has a significant volume of low leverage service workers will have to source the services in such a way that their cost base is close to the global average cost -- or they will suffer significant profitability problems.

What I think is more interesting is how large organizations are using a global pool of talent to tap into the best minds -- wherever they are.  If you look at what GE is doing, they sold off their low leverage call center business, and now buy the service from that company.  They kept their high leverage research and engineering centers.  The smart companies are not outsourcing these capabilities -- they are offshoring them so that they can get access to the best talent, but at the same time try to keep the value for themselves. 

The reasons for this are very straight forward.  First, by having the high leverage thinking class as employees, GE can keep better (not complete but better) control of the intellectual property they generate from a legal perspective.  Second, culture matters, and if GE can make their centers the best place for an engineer to learn and grow, he or she is less likely to take their knoweldge and talent elsewhere.  Third, the last thing in the world GE wants to do it to teach a supplier how to create things that may be of value to their competition. 

A friend of mine told me a story about how Google Finance was created.  As many people know, Google gives its employees 20% of their time to do anything they want to do.  The woman who championed Google Finance first showed the idea to the founders who said, "If you can convince people to help, go for it (but how will it be better than Yahoo! finance?)"  She was not able to convince anyone in Mountainview to help, but she found a cadre of engineers in their Indian offices to help, and eighteen months later, they launched this innovation.  This is an example of very high leverage, tapped from a global base. 

Investment banks like Goldman Sachs, and Morgan Stanley, technology companies like Microsoft and Google and many others are creating captive organizations in many parts of the globe to get access to this local talent pool.  Why is this important?  Well very few of the thinking workers "trade" on a global basis.  Put another way, of the millions of engineers in Russia or India, few of them can move to where the work is -- so the smart companies, who have models where they can create high leverage for thinking work, are moving to that local supply of talent.  The challenge is, very few organizations analyze who their thinking workers are, and which ones add the most leverage.  Fewer yet ask, do we have the best in the world?

The immortal word of the founder of IBM, Thomas Watson, Sr. , was "THINK".  If he were alive today he might say, "THINK! BUT WHERE?"

Original Post: http://www.svioklascontext.com/2006/05/the_thinking_cl.html

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