Does offshoring make IT organizations dumber?
September 4, 2009
The July/August issue of Harvard Business Review contains an article from Gary Pisano and Willy Shih titled “Restoring American Competitiveness“. The authors argue that, against the general consensus, American companies will be unable to develop the next generation high tech products due to underestimating the impact of sending their manufacturing offshore. If this is true, will something similar happen to the IT service industry? Will the next generation of high added value IT services come from Asia and not from Europe or America?
The article in HBR uses the value chain of personal computers and laptops as one of their examples. Where American companies like HP, Dell and Compaq outsourced initially only their manufacturing to low cost offshore destinations, is now almost the whole industry based in Asia. Every laptop sold by an American brand, with the exception of Apple, is today designed, developed and manufactured outside the U.S.. The same applies to most mobile devices.
With manufacturing leaving its shores, developed countries tend to focus on creating economic growth through designing and producing services. I wonder however whether the following quote from the article is also true for the service industry (p119): “One [myth] is the popular belief that an advanced economy like the United States no longer needs to manufacture and can thrive exclusively as a hub for high-value-added design and innovation. In reality, there are relatively few high-tech industries where the manufacturing process is not a factor in developing new – especially, radically new – products.”
In other words, are we in Europe and United States still able to develop new high added value IT services if the IT graduates leaving the universities today start working in an environment where the developers and support engineers can only be reach by telephone and video conferencing?
Today there are still employees available within Western companies who used to sit behind the screen themselves to write code or maintain servers. They will however retire in the coming two decades, which leaves people which have to manage and instruct offshore suppliers based on theoretical experience only. It is already difficult as an experienced hands-on manager to get the IT services the organization needs, let alone a situation where all the hard core knowledge of creating and managing IT services is oversees.
The argument of the authors that an intact value chain is important for future innovation conflicts thus with the message within Thomas Friedman’s in “The World is Flat”. Friedman believes that geographies lost their importance due to the ability to communicate anytime, anywhere to anybody in the world. Also Amar Bhide’s book “The Venturesome Economy” (2008) argues that innovations will find their way to the customer, regardless of the country it was invented.
Personally I believe that this last argument is flawed. An economy can grow only if it produces products and services which customers want to buy. As soon as all innovations have to be imported the trade balance will become uneven (in the case of the US: collapse completely as there is already a considerable deficit) which in the end will result in a society which gets poorer instead of richer. I think that, regardless of which author is right, we have to be careful that Europe and America don’t end up being locations where everybody is a ‘managers’ and nobody doing any actual value added work anymore.
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