Global Concerns about the US Economy

I have been  out of the country for a while (notice how I slip in an excuse for blog absence here–new trick I learned) and have come to realize that people outside the US are far more worried (aware?) of impending doom  in the US Economy than those of us who live here.

One of the things I do when I travel abroad is pick up local business magazines–most of the time I even read them. I also talk to people (imagine that!). And what people have been talking to me about is the sub-prime crisis and the recession that is due to hit us any moment now. So here I have been plodding along not worrying much about the business climate and my own stability while the rest of the world worries on my behalf!

There’s been muted talk of a recession here for a while, and the first few trading days of this year (not to mention the value of my own meager investments) certainly suggested we might be there. But then in one fell swoop IBM comes along and convinces the investing masses otherwise. In this post, I am not as interested in our economic stability as I am about the role of mass media–including of course blogs like this one–in setting people’s expectations and trepidations. I also wonder: is our mainstream media is sugarcoating a truly dire situation? Or if the non-American media is exaggerating by calling a giant’s wobbly step a full face-plant?

 There are a bunch of surveys that measure executive’s expectations for the year ahead, and by and large all the ones I have seen say pretty much the same thing: the captains of industry, as of a month ago, were not expecting a recession. They were expecting some growth in employment and tightening credit conditions, yet some overall growth in the economy. In other words, they say pretty much what we hear in the media (or is it the other way around?).

I don’t know, but I am interested in what others think. Most of Europe and Latin America seems to think the US Economy is headed South. China and the US, with their ever-growing interdependency, are careful never to spook the system. What are you hearing in your region of the world?

And who do you think is right? Are we blindly optimistic? Why does the picture look so negative from overseas?

Dollar Panic

 I have referenced the sliding dollar a couple of times in this blog, but until a recent The Economist cover story, I did not realize people were in a panic about it! I am no economist, so there may be many complexities that are over my head here, but the one thing I know for sure about it is that a falling dollar will not change the United States’ position as the largest and most successful modern economy. Sure, a precipitated fall would wreak havoc on worldwide financial markets and that’s no fun. But what we are seeing is a slow, meandering decline in the value of the dollar over several years.

Here are some of the real consequences, good and bad, I see every day:

• If you opened up shop in India in 2002 and achieved, say 25% savings, those savings have been wiped out by the change in currency exchange rate.
• The trade imbalance that so incenses some politicians is moving, for the first time in decades, in the opposite direction.
• With another 10-20% decline, we have to start looking seriously at the US as the newest (and probably best) low-cost location!
• Experts in currency hedging are making a fortune.
• Europe sure has gotten expensive!
• The volatility in the currency, and the dependency on its stability that exists in China and other large economies that hold their reserves in dollars and buy American debt, has sent a not-so subtle message to those other economies to clean up their currency act.

I am not panicked. Can someone out there substantiate panic?

A more human place to work

Today I write from a plane on my way to one of our events at the beautiful Pebble Beach Golf Resort on the Monterey Peninsula (I know, I know, I’ve got it rough…) and was thinking about the last time I was there. Earlier this year, I had the honor, privilege, and sheer, paralyzing intimidation of speaking to a group of executives following Gary Hamel, Lynda Gratton, and Tammy Erickson on the platform. I survived my speech, and some in the audience even stayed awake for it, but I was struck by the similarity of at least one conclusion that all of these intellectual heavyweights arrived at, even coming at management problems from different angles.

Professor Hamel shared his research on management innovation; Lynda spoke eloquently about her research on Hot Spots, where business breakthroughs happen; and Tammy shared her updated studies on generational cohorts and their unique behaviors in the workforce. But all of us came to basically the same conclusion, and I liked Professor Hamel’s wording the best: companies throughout the world need to provide “a more human place to work” now that the industrial has given way to the knowledge age. I don’t think this is much of a surprise for anyone, yet the majority of companies are moving far too slowly. A part of this trend is the simple competition for limited talent as baby boomers slow down. But a lot of it is about a far more democratic work environment that the subsequent generations have come to expect.

A student in school today can google a topic during a lecture and prove her teacher wrong. In real time. How do you think that same student will deal with her boss? 

We insist on conducting modern enterprise with tools and conventions that could generously be described as “antique”. Schedules? Punching the clock? Staff meetings? How about “the meeting before the meeting”? How much do these tools of control do to unlock the creativity in individuals that serves as the basis for competition? 

So what is a “more human place to work”? Here’s what it means to me: 

·        An environment where creativity that leads to value is richly rewarded

·        Flexibility. In my schedule, in the technology I use to conduct my work, in the media through which I communicate.

·        Space to experiment, make mistakes, learn, and move on

·        A real meritocracy where results and consistency are valued over tenure and authority.

 What does it mean to you?

Well, I stand corrected. Last post I expressed surprise about the raging, emotional debate about offshoring. I was hoping to get some angry comments of my own but I guess I was not nearly provocative enough! In any case, today I came across some McKinsey data that says offshoring is still the #3 issue for executives, after the environment and privacy and data security, though in this study only 25% were concerned about offshoring versus 42% two years ago. Maybe this supports my view that offshoring is mainstream now.  On the plus side, it seems like we are now more concerned with issues that companies really can do something about: adding value to shareholders and customers by stewarding the air we breathe and the data we share.

Why are we still debating offshoring?

Its November of 2007 and we are still having violent discussions about offshoring. A recent post in InformationWeek’s blogs triggered, as of today, 162 mostly emotional comments. I think the ship has sailed, yet cannot resist joining the debate.

Amongst them, there are some enlightened points of view (I happen to agree with the author on many). And for the record, these opinions, as well as all others in this blog, are not necessarily those of my employer.

1. We still view the offshoring issue as personal…its my job and the customer service I receive. Get over it. Personal affronts hurt, but this is part of a phenomenon called globalization that is much bigger than an individual.

2. The numbers don’t support the critics of offshoring. The US remains a net job importer and some 90% of jobs could not go abroad even if we wanted them to. And if you don’t believe me, or Steve R., why not check the Bureau of Labor Statistics?

3. The arguments for policy or regulation of offshoring fly in the face of the market-based capitalism. If you don’t like the service you receive, you can take your business elsewhere. If a company can’t make its shareholders the highest return, it has an obligation to do something about it. If my skills are no longer in demand, I owe it to myself to get some new ones. I don’t think we can be selective about when we like free markets and when we don’t.

4. Xenophobes exist (just read through this list of comments), and they are vocal. They may annoy or even offend someone like me, but they have opinions, voices, wallets and votes. Don’t ignore them!

5. We can all come up with numbers and facts to support our position (one blog-commenter actually argued that the falling dollar exacerbates the trade imbalance with China when the opposite, but theoretically and in actual performance, is true!), so the debate needs to move to something more meaningful to be productive–how about addressing the training needs of the nation in order to remain competitive?

6. Offshoring does, sometimes, stink. Its difficult to pull off. Its difficult to manage. The savings are falling and were probably overstated anyway. The people who make the decision rarely have to deal with its execution, so they feel the gain and not the pain. Customer service can and often does suffer.  But we the consumers demand lower pricing (other than that, we’re not particularly good at expressing what we want from the companies we deal with). Furthermore, in the last 20 or so years, we get upset if our 401(k)s and investment accounts don’t hit at least 10% growth per year. So at the end of the day, which way the offshoring pendulum swings is really up to us.

Picking Locations for BPO

A reader, Phil, recently asked about which geographies are particularly strong in certain skill sets for BPO (see my post If not China, then where?)

 Before I go on though, there’s an important consideration that is making previous BPO decisions look bad, and my case for diversifying your portfolio of locations look good! The slide of the dollar relative most currencies is making offshore expensive! In fact, my view is that if the US dollar slides another 10-15% against the Indian Rupee, Euro, Yen, Real Yuan etc., a perfectly plausible scenario, the US will be hard to beat as a low-cost location!

 A good strategy, especially for larger firms, is to split offshore work across a couple of currency-type locations: one that moves with the dollar (such as Mexico, Costa Rica, Panama, Chile, Australia) and one that tends to move against the dollar (such as India, Europe, China, Brazil, Russia, Canada). Coupled with flexible enough agreements, volume can be shifted from one to the other as currency fluctuates. There are lots more considerations that should go into picking a location, but currency and projections for its behavior are frequently ignored.

At the end of the day, most go abroad for either labor arbitrage, to get closer to a group of customers, or access to talent they would not have otherwise. Diversification applies to all three, but its easiest for the arbitrage part.

 I can only comment from my experience and personal observations, but here is what I see:

Canada: Call centers (cost advantage has all but disappeared due to currency change)

India: Application Development, transactional BPO, research, medical,

Mexico: Most untapped relatively mature market–lots more that could be done here. Check out Neoris‘ big push here. Lots of good people to be hired in Mexico.

Central America: Costa Rica and Panama lead, with good engineering, IT, HR, and call center services. Because they are both small and Costa Rica started first, I would say right now Panama has more upside.

Brazil: Great engineering and IT talent. Lots of good business and engineering schools to recruit from. Getting better with English fluency by the day. On the downside, a super-strong currency and small fiery hoops you have to jump through to actually set up shop there.

Chile: Good business services in general, more on the BPO side. Stronger in F&A.

Argentina: Good IT capability and availability. One of the few very favorable exchange rates relative to the USD

Eastern Europe: Very well established around F&A, some HR and IT many other types of BPO, but expect to pay a premium.

South Africa: I am really impressed. I have only seen F&A so far, but what I did see was very cool. Interesting time zone alternative to India, plus a great place to visit if you can!

Rest of Africa: some very credible data entry and processing capability popping up here and there. Outrageously inexpensive on a per-hour basis, but infrastructure is still both challenging and expensive.

China: Very tough labor market all around. Focus your efforts here on serving the Chinese market and you will be OK.

Philippines: Traditional strength in IT and call center being caught up  by other locations.

Singapore: a credible knowledge hub for the region, maybe the world really soon.

Now for a different opinion. I don’t know much about some of these places, but if you look at where the Indian services firms are diversifying to, that’s a really good clue from people that know the “remote delivery” BPO business really, really well. TCS, the most “global” of the Indian majors, has gone to Hungary and Uruguay and a host of other countries. Others are in Brazil, Malaysia, Indonesia, and Sri Lanka, China, and Mexico. And I am sure there are a few service centers in areas I haven’t come across yet.

To get started researching your destination, the CIA’s World Factbook is a good place to start.

Quality resources are scarce everywhere. Remember to keep your eye on the dollar to know when its time to “come home”, or better yet, to diversify for currency risk.

Which locations have you had success with? For what disciplines and skills?

Why some love to hate professional services

OK, so I never promised I would stay on topic. Steve Hamrin’s brief comment awakened one my deepest passions and pet peeves with services companies: why do we rush to productize everything we do? Why do we only sell “what we’ve got” instead of “what you need”? Why does everything look like a nail to our hammer?

The beauty of not having a physical product is that we can be malleable, adaptive to the client’s needs. I have heard the argument–a million times–that services businesses cannot scale without repeatability and standardization. There is some truth to that…though part of it is driven by the inability of services companies and their customers to agree that customized, groundbreaking solutions come as a result of collaboration and innovation–abandoning old paradigms. And they cost more.

In a career entirely in professional services, nobody has ever come to me at the end of an engagement and said “Esteban, we love how your team applied a canned industry solution to us. We are so happy that we now have the same thing you can sell to any of our competitors”

What people have said to me, when we are successful, is “We love the way your team understood the unique nature of our problem and created a solution that differentiates us from other companies” That, I believe, is the reason clients can be delighted with professional services. The quote above is the moment that defines why I keep doing what I do.

 What do you think?

Death to Offshoring. Long live Offshoring!

Apologies to Rob Thomas for my blatant swiping of the title of his blog entry. For those of you who don’t know, he is a musician-the lead singer for Matchbox 20-and his successful solo career had led the media to pronounce his band dead.  I am amused by how quickly we jump to conclusions about the failure of offshore sourcing of labor. Now, I know I am at odds with many of you (and many of my own colleagues) on this topic, but I believe this “backlash” is a fabrication of the media and the marketers. 

But while the media and many bloggers and other pundits are happily chirping about the “offshoring backlash“, Western, Asian, and even Latin American firms continue to post significant revenue growth. Did you really expect them to keep doubling in size every year after they hit the $2-4 billion mark? The fact that companies with nearly 100,000 employees are not doubling in size every year should not be a surprise to anyone. Offhsoring has been a royal pain for many (the majority, in fact), but the “backlash” is a popular fabrication not supported by the revenue numbers of the providers or the ever-increasing volume of captive offshoring. The Indian IT/BPO industry, the most visible, is growing at a 28% clip in 2007. Doesn’t sound like a backlash to me! And while difficult to do right, if it were not contributing to the financial performance of client companies, the backlash would be manifesting itself in a revenue contraction for the providers. 

But that is not what I want to talk about. I believe that the current model for off-shoring is inherently flawed. It is far too India-centric, as opposed to portfolio-centric. It is almost entirely based on low cost rather than high talent, and the switching costs inhibit the agility that so many enterprises seek. That’s why so many offshoring initiatives fail. Until recently, the low cost of offshore resources obscured the very real challenges that led to these failures, but the sliding dollar, the global scarcity of qualified talent, and the unfortunate but inevitable mistrust that exists across organizational and international borders, have exposed the problems with the current off-shoring models. 

The next phase is about the globalization of the individual. Sure, service companies will continue to exist, but we will be able to assemble teams on-demand in multiple locations. If the two most talented people I can find are in India and Bulgaria, respectively, then why would I not use them both on a project? There will of course be a need for a few centrally located large teams somewhere in the world, but that is very much yesterday’s business model. Knowledge work has gone virtual, but it is time for it to dissociate itself from “off-shoring” as we know it. 

There’s value (and money to be made) in becoming a competent broker of global talent. One company has hopped on the anti-off-shoring bandwagon only to go on to what I consider this “next level” of offshore-more dynamic, more individual, far more fluid, and much more likely to succeed, as it will be easier-I sincerely hope-to align the motivations of the individual doing the work with those of the company paying for the work to be done.

Whenever somebody says to me “Our Talent/Knowledge is our #1 differentiator” I immediately ask “Where is it?”. And if its all locked up in an R&D lab, or in headquarters, or even across a few locations in the US and Europe, then I immediately discount the claim. No one company can lock up all the best and brightest in its field. But I am a lot more comfortable investing in one that has searched the earth for top talent than one that believes the talent must come to them!

Maybe the argument is over semantics (how many definitions of off-shoring have you heard?), but I think that shutting off talent that happens to reside outside the US or Western Europe is a losing strategy.  Call it what you want, but if you want to compete on talent, given how scarce it will be, your strategy better involve finding, retaining, and maintaining people inside and outside your home country.

So if not China, then where?

In my last post I offered a provocative stance on multinationals’ development of their Chinese presence. A legitimate question to ask, then, is where will we grow and prosper if not China? It turns out that lots of regions and nations are experiencing growth that makes them attractive to multi-nationals. Both from a markets and a workforce perspective, there are more than a few alternatives. For the purpose of this posting, I’ll skip the obvious and mention a couple of places that don’t figure nearly as prominently on corporations’ radar screens. 

Did you know that the most profitable airline in the world, the second largest mining company in the world, and the fastest growing diversified bank in the world, and second-lowest energy costs  are all located in the same country? If you guessed Brazil, give yourself an A in globalization 101. Brazilis nowhere near shaking its historic plagues of extreme poverty , access to quality education, and institutional kleptocracy, but its GDP per capita is at $8800 (compared to China’s $6800) and growing. Better yet, with a median age of just 28.7 (nearly 4 years younger than China’s and a full 10 year’s younger than the US), Brazil is one of the few countries without a significant workforce demographic problem as we enter the next decade. Did I mention that Brazilian engineers score better than Chinese or Indian engineers on independent tests? Also, let us not forget that Brazil, depending on the policy direction its government chooses to pursue, has the size, population, and natural resources to potentially become the world’s first environmental superpower. It is the world’s largest producer of clean air (something the rest of us are consuming rather rapidly and, so far, for “free”), and has the potential to substitute close to 90% of the world’s current oil consumption with bio-fuels. Sounds like a promising future to me—not to mention a wealth of business opportunities for multinationals. 

Now let’s take a look at South Africa. When I toured service centers processing financial transactions for US and European organizations, I thought the capabilities I saw were groundbreaking. The best outsourcing facility, process, and quality of output I have ever seen—this from a guy that has lived over 75 different BPO and ITO relationships. The story of South Africa is far from written, and its own challenges are daunting: an HIV/AIDS epidemic, civil security, poverty and mass immigration from its even poorer neighbors, but there is a lot to get excited about as well. Innovative, global businesses seem to thrive in South Africa and its entrepreneurial culture is taking hold like in no other young democracy. The black middle class has grown from effectively zero to over two million people in about fifteen years and GDP per capita is on the rise. South Africa enjoys undisputed political and economic leadership in its region; making it an attractive launching point for future African ventures should the region ever become attractive to multi-nationals. 

Of course, there are others: Chile offers the lowest energy costs of any country and has a lower risk profile than India or China, and its stability and tax code rank it as more business-friendly than Germany. Companies like P&G, IBM, and Intel have had significant success with global operations delivered from tiny Costa Rica, to the point it has become the most challenging country for hiring in the world, according to a recent Manpower study. Panama and Colombia’s economies are booming in part due to foreign enterprise investment. New York City parking tickets are processed in the Republic of Ghana. Singapore has very publicly and very successfully set its sights on becoming a global knowledge hub. WhenTCS became the first Indian services provider to establish a service center outside of India, its destination was Uruguay.  

The list of non-traditional destinations with something to offer goes on—truly global Next Generation Enterprises will diversify their risk across multiple geographies and nations based on market factors, competitiveness factors, and talent availability factors.

Global does not Equal China: a contrarian point of view

I sometimes shock some of my clients (and sometimes get laughed right out of the boardroom) when I advise the not to invest aggressively in China—and this from a sworn proponent of globalization! Bottom line, it is my opinion that China Inc’s risk/reward profile is not yet where it needs to be for many of the corporations I serve. Too many executives associate “globalization” with “let’s go to China.” In fact, the obsession with growing and developing business in China may be the result of incomplete analysis of the opportunities and rewards associated with this huge and challenging market.

 

Doing business in China is difficult. Hiring and retaining competent managers is an issue for every multi-national in China whether they have been there for twenty days or twenty years. There are probably less than 4 million people in the developing world with the skills and aptitudes to work for a multi-national, and most of them are not in China.  China will have 100 million middle class households by 2010, and while that “prize” cannot be ignored we must remember that many companies have “grown” themselves out of business in China. Simply put, the cultural, regulatory, and scale realities are such that its easy to overstate the business case based on sheer market size without due emphasis on the challenges of market share. But one must always look at both the positive and negative demographics. Like in many other economies, the gap between China’s richest and poorest is growing quickly. One of the fastest-growing segments of the population is the East coast’s “migrant workers”—essentially homeless day laborers. Some estimate there are currently 150 million of them.

 

Doing business in China is Risky. Most knowledgeable economists agree that the collapse of China’s financial system is a matter of when, not if. The crash of the Shanghai markets on February 27^th of this year, and its global repercussions, are but a scary warning of what could happen when China’s banking system can no longer sustain the illusion of performance. Recent very positive reforms notwithstanding, any crisis in the capital markets in China will have a profound effect on global companies, and one of the ways to hedge against it is to limit exposure. Finding people to run your business in China is just one of the problems. Navigating the complex regulations and political hurdles which seem so foreign to most of us is not just challenging: getting it wrong can put your entire investment—and a good chunk of your intellectual property—at risk. Add the cultural understanding factor that has been the Achilles heel of so many Western ventures in China, and you have a very high return hurdle to hit to even justify the risk.

 

China is not as stable as it appears. China has arguably become the world’s worst environmental offender. Fully one third of its population breathes seriously polluted air and gets acid rain on a regular basis. Last year, a riot triggered by citizen unrest over the known pollution of their water supply by industry and government powers led to street combat involving more than 10,000 police and unspecified casualties on both sides. This was one of 50,000 environment-related riots (a 30% increase) admitted to by the state-run ChinaDaily—the real number may well be higher. At its core, the issue is simple: lots of people are being poisoned by a coalition of government and business that promotes economic growth at all cost—and the people are getting restless. Social unrest, combined with exposure to capitalist ideas, the Internet, and western habits and culture may well force a day of reckoning for the current regime that could jeopardize the investments Western companies are currently making to the tune of about $1 billion per day.

 

To be clear, my argument is not that China and its vast opportunities should be ignored—it is fundamentally one of timing. With so much opportunity emerging throughout the developing world, its quite possible for some companies to develop their global prowess in less challenging environments, waiting for the eventual correction in Chinese financial markets and the presumable chaos that could follow, then acquiring a competitor’s assets and market share for pennies on the dollar. It may not work for every company, but I can certainly see how this approach could mitigate one of the great risks that business leaders are being forced to take today.