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Outsourcing Experts at the Michigan Business School

3/8/2004 --

ANN ARBOR, Mich. – Globalization is transforming the way America does business as firms increasingly rely on an international workforce for goods and services ranging from pharmaceuticals and electronics to telemarketing and financial analysis.

The following experts at the University of Michigan Business School are available to discuss the ramifications of outsourcing or offshoring:

Robert Kennedy, executive director of the William Davidson Institute and clinical professor of corporate strategy and international business, is an expert on business strategy and industrial dynamics in emerging economies. His current research focuses on the globalization of service activities. He also has worked in more than a dozen countries as a management consultant and venture capitalist.

Kennedy says that moving software activity or payment processing offshore offers a much greater cost advantage than moving manufacturing offshore.

"Typically, when you move auto parts offshore, you save 20 percent to 30 percent. When you move software development offshore, you save 60 percent to 80 percent once you have the infrastructure in place," Kennedy said. "In the past, you would get somewhat lower productivity offshore, which was outweighed by the cost savings. Now, some suppliers are seeing productivity actually increase.

"In the call center business, low-end centers in the United States typically recruit people without high school educations. Turnover is 100 percent to 150 percent per year. In India, they won't interview you unless you speak fluent English and have a college degree, so there are tremendous cost savings and quality improvements."

Kennedy sees offshoring as a continuation of past trends.

"Forty percent of Americans once worked on farms then moved to factories, then 40 percent of the people worked in factories and then started moving to services," he said. "Is this fundamentally different?"

Dennis G. Severance, the Accenture Professor of Computer and Information Systems, has substantial industrial experience and is an expert on how information systems can support strategic change in manufacturing firms. Co-author of the book Making IT Work, Severance is an information systems consultant to a number of large corporations and a member of the Board of Directors of Tenneco Automotive. He also has served on technology advisory councils at General Motors, Chrysler and Whirlpool.

Severance says that work is going to India and China because transportation has become more reliable and communication costs have dropped. Also, the perceived risk has gone down.

"Workers in India, China and other countries are doing the same jobs better, less expensively and more reliably than we can in the United States," he said. "We also have developed methods for and feel more comfortable about managing talent overseas."

Severance says that U.S. companies must invest in research and development and retraining to "lubricate the transition" to the next thing we are going to do.

"When you get a $1 job done for 33 cents, you have created 66 cents excess and the country that gets the job is better off for it," he said. "But someone has been dislocated from a job. If this person has a comparative advantage, he or she ought to move on to a job that makes use of that comparative advantage and creates additional excess."

C.K. Prahalad, professor of corporate strategy and international business, is the Harvey C. Fruehauf Professor of Business Administration and co-chair of the Center for Global Resource Leverage: India. Prahalad is a globally known figure and has consulted with the top management of many of the world's top companies. His research specializes in corporate strategy and the role and value added of top management in large, diversified multinational corporations.

Prahalad says that U.S. companies have promoted globalization and it is working. Unfortunately, he adds, globalization is hurting segments of our population.

"America's biggest advantage is its continuous capacity to innovate and create new businesses," he said. "The biggest mistake we have made is under-investing in research and development. We must invest massively in research, biotechnology and bioinformatics, which will support new businesses.

"You cannot protect jobs that can be done better somewhere else, but you can create fundamentally new jobs that no one else knows how to do."

Prahalad says that relying on tariffs and visa restrictions to make the transition less painful for Americans is self-defeating because we lose credibility as a nation.

"My attitude is that every time other countries become successful, we sell more jet engines, so it is not bad for China and India to be successful," he said. "They don't make jet engines or CAT scanners. We do. And if 33 percent of our students are from overseas, it's one of our nice exports, exports that keep us employed."

Izak Duenyas, professor of operations and management science, is the John Psarouthakis Professor of Manufacturing Management and associate dean for faculty development and research. He is an authority on supply chain management and coordination, evaluation of investment decisions in flexible capacity, and in modeling and control of production systems.

Duenyas believes that companies can learn valuable lessons about outsourcing from the manufacturing sector. He says that when decisions are made on cost alone, without considering the entire supply chain, companies typically fare worse.

"Firms that take into account quality, cost and responsiveness in their supply chain and value chain analysis gain a distinct advantage," he said. "In the manufacturing sector, companies have long asked what portion of their value chain can be outsourced. Services are now going through the same type of analysis and decision making."

Duenyas says that outsourcing decisions made at the company level must take into account both the risks and rewards of offshoring, while from the standpoint of an individual looking for work or a state government trying to increase employment, the only important question centers on where the jobs are located.

"Offshoring is bad if it takes jobs from where you live, good if it brings jobs from other countries," he said. "General Electric is taking some of its jobs to India and Toyota is opening more factories in the United States.

"At the company level, both firms are offshoring from their traditional locations because this is benefiting them. For the person looking for work, the benefit-cost calculation is entirely different."

Don Grimes, senior research associate at the Business School's Institute of Labor and Industrial Relations, is an expert on economic forecasting and the labor market.

Free trade, he says, causes economies to produce more of the goods they make relatively efficiently and leads to more production, jobs, rising wages and profits in comparative-advantage sectors. In turn, growth in these sectors leads to higher demand for goods and services, which creates new jobs.

"Conventional wisdom says that increased international trade, outsourcing, globalization and productivity growth are eliminating high-wage jobs and creating a nation of low-wage workers," Grimes said. "This is not true."

New workers, he says, must have skills to match the new job market and existing workers need to be retrained as the economy shifts. We also need better management of health care coverage and costs, he adds.

"Workers cannot take their coverage with them when they change jobs, but changing jobs is a critical part of keeping the economy dynamic," Grimes said. "Also, large increases in the cost of health insurance have encouraged companies to cut their domestic work force and increase outsourcing."

"Without free trade and productivity increases, however, the U.S. economy will stagnate. Outsourcing is part of the essential wealth-creating engine of growth. Our attention would be better focused on solving the health care problems and improving our educational system so that workers can take advantage of the new opportunities being created."

More information on outsourcing can be found in the Outsourcing Special Report.

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847
Email: bernied@umich.edu