Does outsourcing really kill innovation?

August 28, 2010

Recently I read a blog in the Harvard Business Review web site. It is an interesting blog that discusses outsourcing and IT innovation. The blog suggests that large scale IT outsourcing limits strategic value of companies and limits innovation using IT as a strategic asset. It is sad that still blogs and articles are being written questioning the value of outsourcing and connecting company’s lagging innovation to outsourcing. Most of the Fortune 1000 companies in US have fully-owned subsidiaries in emerging countries like China, India, Brazil, Philippines, etc. US companies have been sending work from US to its subsidiaries all over the world. What do you call this practice? Outsourcing, offshore outsourcing, insourcing?

Offshoring – From cheap labor to Innovation
US multinationals have been sending not only IT but all types of work to China, India, etc. They are not only sending simple low-level work but also higher-level tasks as well. The emerging countries are no longer a source for cheap labor but a breeding ground for both process and product innovations. The middle-class consumers in emerging countries (Graph 1) are already bigger than developed countries and growing faster than developed countries. Similarly emerging economies are growing faster (Graph 2) than developed economics.

world consumer growth
Graph 1

world richness growth
Graph 2

In the 90’s offshore destinations were seen as a source of cheap labor. US companies sent low-level tasks to countries like India and China, with a clear set of instructions to perform the tasks, and offshore vendors took orders and executed them as per their customer’s instructions. During that time, for US companies cost arbitration is the only motivation for sending work to offshore locations. As the emerging countries’ economy matured, demand for better goods and services increased for the local customers. To keep up the demand, local companies in emerging countries started innovating better products and services targeting local customers. Spotting the huge opportunity, in the late 90’s US companies opened their branches in developing countries to target goods and services to local consumers.

In the beginning US companies in emerging countries used the products and processes developed for US consumers and marketed them for local consumers. Now with Polycentric Innovation, US companies in emerging countries started innovating products and processes for local consumers and started bringing it back to US if needed. Simply put, the intellectual cross pollination that started within Silicon Valley several years back now includes the entire world. Welcome to Globalization!

Instead of asking questions like:

  • Does outsourcing kill innovation?
  • Can I send my low-level or high-level IT tasks to offshore location?

Ask questions like:

  • Where can I find talent to execute my business value chain cost effectively?
  • How can I seamlessly connect my business value chain that spread across the globe?
  • How can I innovate and reuse services, products, processes that touches my business value chain from one country to other?

What do you think? Does outsourcing really kill innovation?


4 Responses to “Does outsourcing really kill innovation?”

  1. Does globalization helps? on August 31st, 2010 6:10 am

    It is an interesting blog. But does globalization really helps matured economy. I do not think so. Look at the job growth in US. It may help developing market but not developed markets.

  2. Good one on August 31st, 2010 6:36 am

    Globalization is not a one way street. Both countries benefit from it. If you look companies like IBM, Cisco, Intel, etc, bulk of their revenue comes from emerging countries. Similarity innovation is happening in emerging countries as well.

  3. Innovation has no physical boundries on September 7th, 2010 2:53 am

    Yes, I agree with the blogger that innovation can happen anywhere in the world. Though developed countries are in the cutting-edge, developing countries are slowly catching up.

  4. MicroSourcing on September 20th, 2010 3:04 am

    Outsourcing does pave the way for innovation. For one thing, it incentivizes the outsourcing hubs like China and the Philippines to really push their infrastructure and services. The same goes for local US providers. Knowing that there’s competition out there, they are pushed to delineate themselves from foreign competitors.

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