Saturday, March 21, 2009

Competitive Advantage

On my last jaunt to Singapore, I met up with an old friend. He had been living in Singapore for the past few years, and he ran the applications management division for a large multinational company. His area of operations spanned across Asia and Europe. I had always admired his acumen. I relished the chance to brush up on industry developments and pick his brain on sundry topics.

As far as categories go, applications management is just another form of outsourcing, but certainly far more complex to manage than your average call center or transcription services. Essentially what my friend's division does is to take over the entire IT operations of a company. It's not just a subsidiary function that they assume, it touches on the core capabilities of the company to manage their data. Very large, very complex, and, very profitable.

So what happens to the operations once my friend's division assumes the functions? As expected, they go offshore. And this was the part that interested me.

"Where exactly does the work go?" I asked my friend.

"Oh, the usual. India. China. The Philippines."

"The bulk of it goes to India, I suppose."

"Yep," he said. "We have 60,000 programmers working there."

"Wow! And how many in the Philippines?"

"Around 800."

"Let me guess: cost?"

"Yes, that's one factor, but not a very big one. The bigger issue is skill set. India just has the Philippines beat. One indicator: India produces about 6,000 PhDs a year; the Philippines would be lucky to produce a hundred."

"That is hard to beat," I admitted.

"In a way, it's also a function of percentages," he said. "India has more people than the Philippines, so if you hold the percentage of smart people constant. But then again, there is something else, too."

"Like what?"

"Michael Porter, in his 'Competitive Advantage of Nations', outlined a key factor and that's to develop local expertise for local needs. Eating your own cooking, as it were. By creating a local market, you create a pool of expertise and local innovations that you can later export. That's what India has done.

"In contrast, the Philippines is so export-oriented that as soon as you produce a graduate, he immediately leaves the country. There's no critical mass to speak of.

"And that's yet another difference. That graduate eventually sends money in the form of remittances. It's a piddling sum, if you think about it, just enough to get by. In the case of India, they're thinking in terms of investment, money that can be used to build new businesses. For the Indians who have made it big, there's a conscious decision to funnel money back into the country.

"In the Philippines, you have the opposite flow. The wealthy families are investing their money in safer havens abroad. As a result, very little recirculates in-country."

"That's a disturbing notion," I said.

"Most folks in the Philippines are quite content to be the big fish in their small pond."

"So it goes," I agreed. And of course, the whole conversation left me wondering where we would be headed, if we might be the business process outsourcing powerhouse that we always say we will be, handling large complex jobs like applications management, or if we would just be right around where we are now, chugging along contentedly.

So it goes.

That's one man's assessment and prescription, anyway. If you have a better ideas, I'd like to hear them.