outsourcing | Paul Wallbank - Communications Professional

Offshoring, the internet and the future of business

Outsourcing sites like oDesk, elance and Freelancer are changing recruitment and labour markets in ways that big and small businesses need to understand.

One of the big changes in business over the past thirty years has been outsourcing offshore – offshoring – as labour markets around the world have opened, communications have become cheaper and trade barriers fallen.

As the global war for talent accelerates, offshoring may be one of the ways many businesses deal with labour shortages in their home markets.

For most of the last thirty years, offshoring was only really available to larger businesses who had the resources to manage overseas suppliers and service providers.

With the internet becoming accessible services like eLance, Freelancer.com and oDesk started appearing that established virtual labour exchanges where smaller businesses could connect with individual contractors.

As part of the Decoding The New Economy video series, I had the opportunity to speak to Matt Cooper, Vice President of Business Development & International at oDesk about how the global workforce is evolving.

oDesk itself came about in 2005 when its founders Stratis Karamanlakis and Odysseas Tsatalos wanted to engage developers in their native Greece while working in North America.

That project turned out to be a business in itself and now the company now has over three million freelancers registered with the service.

Addressing the global skills shortage

Cooper sees oDesk’s big opportunities in areas such as developers, e-commerce and customer service.

“If you look globally there are very acute shortages in certain geographic areas and certain skills,” says Cooper.

Looking ahead, the company sees new skills coming onto the market with larger companies adopting oDesk and similar services.

“We’ll see new skills come onto the marketplace with increasing liquidity and depth with this longer scale of skills,” says Cooper. “We’re also seeing increased demand from enterprise companies. Of the 600,000 clients using oDesk have been traditionally small companies, entrepreneurs and startups. Now we’re seeing increasing demand from the enterprise companies.”

Managing remote workers

Regardless of the size of the company, managing a global workforce of freelancers presents challenges for management and Cooper has some advice for those businesses looking at engaging workers through his service.

“Managing an online, distributed workforce is different to managing locally,” says Cooper. “You have to be much more specific, you have to document your expectation and you have to make the investment in getting your team up to speed.”

One common problem Cooper sees with engaging workers through services is like oDesk is employers thinking they can throw their problems over the fence, “you can’t just throw your project over the wall and hope it comes back.”

Cooper also suggests businesses “try before they buy” with engaging potential freelancers to do smaller trial tasks to see if they do have the skills needed.

“If you need one person, hire three and keep one.” Cooper says, “create a very small and very discrete project that closely replicates the long term role that you want and see how they perform.”

The threat to existing businesses

Services like oDesk present a number of opportunities and challenges to industry, in some ways they threaten existing service businesses which have relied on providing skilled knowledge work to local markets.

Now cheaper workers are to anyone with a computer and a credit card, there’s a fundamental shift happening in the small business sector.

How the small business sector, and larger corporations, use services like oDesk and Freelancer.com while reacting to the threats these sites present to their businesses will determine how many of them will survive over the rest of this decade.

Farewell to the knowledge economy

The promise of the knowledge economy isn’t being delivered as knowledge becomes a commodity worth less than data.

One of the mantras of the 1980s was the future of western nations lay in becoming ‘knowledge economies’, unfortunately things don’t look like they are turning out that way.

As the developed economies moved their manufacturing offshore – first to Japan and Korea, then Mexico and finally China – the promise to displaced Western factory workers was the replacement jobs would be in vaguely knowledge based industries like call centres and backoffice computer work.

From the 1990s on, those jobs also started to go overseas to lower cost centres in India, the Phillipines and other countries.

When the internet became ubiquitous in the developed world in the late 1990s, the creative industries – musicians, artists and writers – found income dried up as their work became commoditised by digital distribution channels.

Now the professions are being affected by combination of offshoring, artificial intelligence and automated processes. Many of the jobs that were done by highly paid accountants and lawyers can now be done by computers or in places not dissimilar to those that took away the call centre jobs twenty years ago.

So it turns out the knowledge economy isn’t the key to riches after all and the future turns out to be more complex than what we thought in the 1990s.

Rethinking the middle class

Has the internet destroyed the western world’s middle class lifestyles?

Technologist Jaron Lanier says the internet has destroyed the middle classes.

He’s probably right, a similar process that put a class of mill workers out of a job in the Eighteenth Century is at work across many industries today.

Those loom workers in 18th Century Nottingham were the middle class of the day – wages were good and work was plentiful. Then technology took their jobs.

Modern technology has taken the global economy through three waves of structural change over the past thirty years, the first wave was manufacturing moving from the first world to emerging economies as global logistic chains became more efficient.

The second wave, which we’re midway through at the moment, is moving service industry jobs and middleman roles onto the net which destroys the basis of many local businesses.

Many local service businesses thrived because they were the only print shop, secretarial service or lawyer in their town or suburb. The net has destroyed that model of scarcity.

The creative classes – people like writers, photographers and musicians – are suffering from the samee changed economics of scarcity.

Until now, occupations like manual trades such a builders, truckdrivers and plumbers were thought to be immune from the changes that are affecting many service industries.

The third wave of change lead by robotics and automation will hurt many of those fields that were assumed to be immune to technological forces.

One good example are Australia’s legendary $200,000 mining truck drivers. Almost all their jobs will be automated by the end of the decade. The days of of relatively unskilled workers making huge sums in the mines has almost certainly come to an end.

So where will the jobs come from to replace those occupations we are losing? Finance writer John Mauldin believes the jobs will come, we just can’t see them right now.

He’s almost certainly right – to the displaced loom worker or stagecoach driver it would have been difficult to see where the next wave of jobs would come from, but they did.

But maybe we also have to change the definition of what is middle class and accept the late 20th Century idea of a plasma TV in every room of a six bedroom, dual car garage house in the suburbs was an historical aberration.

Just like the loom weavers of the 18th Century, it could well be the middle class incomes of the post World War II west were a passing phase.

If so, businesses and politicians who cater to the whims and the prejudices of the late Twentieth Century middle classes will find they have to change their message.

Exploiting the weak points

The Great ATM Heist illustrates weaknesses in outsourcing business processes

The Great ATM Heist, where a crime gang subverted the credit card system, could well be the digital equivalent of the Great Train Robbery of the 1960s.

While the logistics of the operation are impressive with hundreds of accomplices across twenty countries, the real moral from the story comes from how the gang targeted outsourced credit card processing companies to adjust cash limits.

Again we see the risks of throwing your problems over the fence, a system is only as reliable or secure as the weakest link and, regardless of how tight commercial contracts are, outsourced services can’t be treated as someone else’s concern.

No doubt banks around the world will be having a close look at their systems and how they can trust other organisations’ outsourced operations.

Employment’s changing face

Is it management’s and white collar workers’ turn to deal with the change of contracting and business process outsourcing?

Last Thursday recruitment company Talent2 launched its 2013 Market Pulse Survey looking at the employment trends across the Asia Pacific.

According to the survey, things are looking good with 61% of businesses across the Asia Pacific forecasting growth and 45% expecting to hire more staff.

However there’s an interesting underlying theme to the good news, employment is changing in large organisations.

One of the give-aways is the fact that while nearly two-thirds of businesses expect to grow in 2013, less than half intend to increase staff. Businesses are doing more with less.

Part of this is because of increased automation. Despite the headlines, productivity is increasing in workplaces – particularly offices – as technology automates many business functions in fields like logistics and workforce management.

Another aspect driving the lack of employment is outsourcing, Talent2 say the proportion of Australians working as full time employees dipped below 75% in 2012 with a four percentage point drop over the year.

With more businesses contracting work out, one could expect the number of sole proprietors to be increasing. However this seems not to be the case.

According to the Australian Bureau of Statistics, the number of sole traders is barely moving – between 2006 and 2011 the number of “non-employing Australian businesses” only increased 5% while the population grew over 8%.

This implies the proportion of contractors in the workforce is actually shrinking.

Much of this is probably due to the work going offshore, particularly to Business Process Outsourcers (BPOs) in countries like the Philippines, Malaysia and Sri Lanka.

Saturday’s Australian Financial Review looked at what the BPOs are doing in the Philippines and they aren’t carrying out the call centre and basic clerical work that’s made up most of the outsourcing over the last twenty years. Now it’s management roles that are going offshore.

The bigger issue confronting Australians, however, is not call centre workers being relocated to the Philippines. It’s low- to mid-level professional jobs, being moved out of companies, accounting firms and law offices.

Legal outsourcing has been growing for a decade as large law firms have moved many of their para-legal and routine tasks offshore to countries where legal graduates are plentiful but work at lower rates than their western colleagues.

An interesting aspect in legal offshoring is that much of the work that was done by young lawyers has now gone to overseas contractors, which probably means there’s going to be a shortage of experienced legal practioners in the medium term. This is going to have profound consequences for law firms and their partners.

It’s also going to mean law and associated degrees are going to be less popular with school leavers as career prospects dwindle.

The biggest impact though is for managers – we’ve grown used to the assumption that management jobs stay at head office while the lower level jobs go to the lowest cost provider.

Now is those lowest cost providers are offering good quality management staff along with support desk and call centre staff.

During the restructurings of the 1980s and 90s, it was blue collar workers who were the most affected by change. Now it’s the turn of the office workers and managers.

It will be interesting to see how many of the people who thought they were secure in their roles deal with the uncertainty they now have. For some it’s going to be a tough decade.

Proudly designed in Gyeonggi

Asian manufacturers are moving up the value chain. Could Korea, China and Taiwan start competing with Apple?

“Designed by Apple in California ” is the boast on the box of every new iPad or Macbook. That the slogan says ‘designed’ rather than ‘made’ says everything about how manufacturing has fled the United States.

Last year the New York Times looked at Apple’s overseas manufacturing operations, pointing out that even if Apple wanted to make their product in the the US many of the necessary skills and infrastructure have been lost.

Now the US is facing the problem that Asian countries are looking at moving up the intellectual property food chain and doing their own designs.

In some ways this is expected as it’s exactly what Japan did with both the consumer electronics and car industries during the 1960s and 70s.

The big difference is that Japanese manufacturers travelled to the US and Europe to study the design and manufacturing methods of the world’s leading companies. In the 1990s and 2000s, the world’s leading companies gave their future competitors the skills through outsourcing and offshoring.

In the next decade we’ll see the latest consumer products coming with labels reading “Designed by Lenovo in Fujian” or “Developed by Samsung in Gyeonggi”.

For western countries, the question is what do we want to be proudly be putting our names to?

Image from Kristajo via SXC.HU

Outsourcing the service economy

The forces that shrank our manufacturing economy are now affecting the service industries.

Through the 1970s and 80s we accepted manufacturing industries moving jobs offshore because those jobs were done by working class, blue collar workers and the future lay in white collar, middle class service industries.

As a consequence of moving manufacturing offshore, the US, British and Australian economies became more service based. The thought in the 1980s was that while goods could be made in Taiwan, the ‘knowledge industries’ couldn’t be.

Then the Internet came along.

A panel on The Future of Outsourcing convened by the Indian Institute of Technologies Association of Australia last night discussed some of these issues.

Now the service industries are being offshored, at first it was the low skilled service jobs like call centres but it didn’t take long for higher value work – such as paralegal, medical transcription and of course IT services – to follow.

The belief that white collar jobs couldn’t be taken over by cheaper foreign labour has been proved wrong.

It isn’t just those working in the call centres or IT departments of telcos and big banks that are being affected, those small businesses in support industries like secretarial services or design are finding their clients are moving offshore too.

What’s interesting with all of this is how long the executive classes can resist being outsourced. Indian and Chinese managers work for harder for less than their US, British or Australian colleagues and in many cases are better educated.

One can only wonder how long the partners of major consulting business can hold the line as well, these guys – the vast majority are men – have done very nicely charging first world rates while increasingly paying developing world rates.

Already Indian outsourcing companies, including at least two sitting on that Sydney panel, have set up their own consulting arms that cut out the expensive middle men. Without the overheads flashy offices and big packages for entitled partners, they’ll have a pretty competitive offering.

While we can cry for the high paid management consultants and executives who are increasingly threatened by these changes, the Anglo-Saxon economies have a real problem as service industries move offshore.

In Australia, the Bureau of Statistic’s 100 Years of Change in Australian Industry tracks how the nation’s industries have changed – in the 1950s Australian manufacturing peaked just shy of 30% of the workforce, by 2000 it had shrunk to 11% while service industries were doubled from around 25% to 50% of the economy.

While it’s unlikely we’d see the service sector workforce shrink by 2/3rd over the next fifty years, there’s a good chance incomes will fall in these industries unless we start to invest in education and skills which allow Australia to stake a place in the global economy.

One of the key takeaways from the Future of Outsourcing event was that this change is happening regardless of what we think is a fair wage for our work. It’s something our government and business leaders need to start considering.

Redefining affluence

Are we at the end of the Western world’s era of great prosperity

Finance writer Scott Pape always has an interesting perspective in his regular columns.

This week he talks about Melissa a mother of three who lives in the US state of Georgia who also happens to be Scott’s virtual PA.

Scott hires Melissa because she’s cheap; far cheaper than her competitors in Australia.

For the $8 an hour she earns, she gets no sick pay, no health insurance and no retirement benefits. Unless Melissa has a well paid partner and her work for Scott is just a sideline to help pay the bills, she will work until she drops.

This is the new reality for those in America, Spain, the UK and most of the West. It’s slowly becoming the reality in Australia as well despite the current hubris about the Down Under Economic Miracle.

Melissa’s job as a secretary or PA was safe and comfortable twenty years ago. Today – just like auto workers, shop assistants, accountants and even lawyers – secretaries are having to trade their secure jobs for precarious, and reduced, incomes in the globalised and casualised marketplace.

Scott makes perfectly valid points that individual drive and determination will be important in the globalised economy, but nothing changes the fact that Melissa and millions like her – including ourselves – will not have the living standards of her parents.

While we can talk about billions of Indians and Chinese improving their standard of living the new globalised world, we shouldn’t forget for a moment that living standards are declining for the most of developed world’s middle and working classes.

This decline isn’t totally due to globalisation and was probably going to happen regardless of the rise of China. The West’s prosperity was built upon the post World War II reconstruction and the credit booms of the 1980s and 2000s. Eventually the money – or the credit – had to run out.

How we as a society deal with this will define our nations and communities over the next fifty years. Our governments, business leaders and media commentators are ill prepared for the effects even if they recognise the problem.

Those most deeply affected are the businesses based on the twentieth century model of ever increasing prosperity. As our retailers are finding, this model is running out of steam.

While some expect the newly affluent Chinese and Indians to save their well padded hides, most will find Asian consumption patterns in the 21st Century will be different to US auto workers of the 1950s or English real estate agents of the 1980s.

Even financial planners like Scott are going to find things different – many financial planners thought they could get rich just skimming commissions off their clients’ portfolios which grew with the ever climbing stock and property markets. That model dropped dead in September 2008.

For those of us born and raised during the Western world’s era of great prosperity, we’re going to find we have to work a lot harder and not take affluence for granted.

Melissa and her eight dollar an hour secretarial service is the future and it’s probably Scott’s, yours and mine as well.

Some may say that’s a pessimistic view of the world, but a leaner, harder economy may be the best thing could happen for us as individuals and a society.

When taxpayers hearts sink

Outsourcing can be a good thing, but governments often get it wrong.

Nothing is sadder than a government or business that believes it will gain huge savings through outsourcing.

Part of the 1980s management mindset is that outsiders can do a job better and cheaper than existing staff. Almost always this is proved to be expensively wrong.

The announcement the New South Wales Government will outsource Sydney Ferries is a good example of this. Media reports claim the “government is hoping to save hundreds of millions of dollars over the next decade.”

Good luck with that. As the people of Melbourne found when the Victorian government outsourced operations of suburban trains and trams the levels of service remained poor, subsidies increased and new level of bureaucracy developed to manage the disconnect between a private operator running a service accountable to the public.

Advocates of outsourcing always overlook the cost, time and skills involved in supervising contractors.

This is something the banks found in the early days of offshoring services as the claimed massive labour cost savings by moving operations to the developing world were offset by higher supervision costs.

Governments have a bigger problem with outsourcing as the public service generally lacks the contractual and project management skills to effectively specify and supervise major service outsourcing contracts.

A good example of this is the Royal North Shore Cleaning contract where the hospital has seen a fall in hygiene levelsas the contractor attempt to meet their KPIs under an agreement that has been designed primarily to save the area health service money.

Focusing on cost savings when outsourcing is almost always a recipe for failure. In both business and government its rare that a function or operating unit is so badly managed that savings offset the increased management expenses.

This isn’t to say outsourcing isn’t always appropriate. Sometimes those savings are achievable – albeit not as often as proponents claim – and outsourcing can deliver skills that the parent organisation lacks.

Which is another concern about the Sydney Ferries outsourcing. The Sydney Morning Herald article referred to above says the following about the CEO of the winning consortium.

Mr Faurby, who has more than 20 years maritime experience, has never run a passenger service before. But he said he understood what it would take to improve Sydney’s ferries.

”It doesn’t really matter very much if it is a towage, tug company, or a container shipping company, or for that matter a ferry company … what matters is that you have the competencies to run it in an efficient, safe and effective manner.”

Um no. That’s 1980s management school thinking where every business – from airlines to software – can be reduced to selling soap.

Not having experience in running a passenger service with all the customer service issues that come when you’re dealing with the public is a concern. One hopes, prays even, that Mr Faurby and his employers have the wisdom to support the CEO with managers who do have a customer service ethos.

Then there’s the black hole of Australian public transport – ticketing.

While it’s impossible to quantify just how poor Australian governments have proved themselves to be with ticketing systems; Sydney’s convoluted, complex, siloed and passenger unfriendly public transport system adds another layer of complexity that the new management of Sydney Ferries is going to have to deal with.

There’s no doubt though that Sydney Ferries need reform; its management was incompetent and, beyond the usual cheerful deckhands, the staff were surly with little concept of customer service.

Done well, outsourcing Sydney Ferries could be for the better; but the emphasis on cost savings and what appears to be naive management expectations should make taxpayers’ hearts sink.

Risks and opportunities in crowdsourcing

There are real benefits and dangers for business in the globally connected marketplace

Crowdsourcing and offshoring are changing bringing to small business the same changes we’ve seen in manufacturing and low level office jobs over the last forty years.

Those trends are going to affect local businesses – particularly the home based service providers – in a serious way as the local web designer and bookkeeper find themselves undercut by freelancers in countries where an Australian day rate is a month’s pay.

With those thoughts in mind I went along to a round table discussion with crowdsourcing advocate Ross Dawson, Freelancer CEO Matt Barrie and Design Crowd founder Alec Lynch to hear them discuss some of the issues around the concept ahead of their half day workshops in Sydney later this months.

Having read Ross’ recent book, Getting Results From Crowds, many of the concepts and arguments are familiar but its worthwhile considering how the trend of a globalised workforce is changing.

The benefits of crowdsourcing services

Crowdsourcing services like Design Crowd and Freelancer have benefits traditional outsourcing services don’t have.

Alec Lynch describes these as reduced expense, speed and risk. A broad range of cheap, accessible suppliers mean businesses aren’t locked into costly contracts with the attendant risks while they can bring projects to fruition in days.

Until recently, globalisation only bought benefits for major corporations with manufacturers contracting work out to China, back office functions to India and software development to Eastern Europe.

The rise of web based services where smaller, one off projects could be paid for by credit card has bought global outsourcing into the small and medium sized business markets.

Now local businesses are affected by business practices that, until recently, were the concern of those working for large organisations.

This is bad news for local service businesses; the suburban web designer or bookkeeper is now finding themselves competing with individuals who, as Matt Barrie points out, have a very good weeks’ income for the equivalent of a day’s pay in Australia.

Basically the same forces that drove most low value manufacturing offshore are now driving services and white collar jobs the same way.

Responding to the threat

There are major downsides for clients using these project based outsourcing services; for instance designing a logo is only part of a much bigger branding exercise which in turn has to be considered against the orgainisation’s longer term objectives.

Often, most of us don’t know what we don’t know and that’s the real reason why we hire an expert to explain why a logo should look a certain way, an expense should be allocated to one specific cost centre and not another or why we should one software package over another.

When we outsource our services, particularly to a low cost provider, we lose that expert insight and end up with someone just carrying out a task; it is up to us to supervise something we probably don’t understand ourselves.

Part of that supervisory role is project management, in the design field managing creatives can be like herding cats. This is why experienced project managers are worth their weight in gold.

Like many essential skills, project management is one of those which most of us don’t have and is chronically undervalued but when a business is outsourcing to a freelancer in Estonia or Eritrea then this service is essential.

Providing those skilled supervisor and management roles is where the opportunities lie in a crowdsourced market place.

In many ways, we’re seeing the end result of the post-industrial society. Just as we offshored the manufacturing industries through the 1970s and 80s then the low skilled office work in the 1990s and 2000s, we’re now outsourcing local services to low cost countries.

Whether ultimately this is a good thing or not is a big question but for local businesses, the trend is clear and much of the basic work is going offshore. Those who choose to whinge rather than adapt will be left behind.