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ABOUT 10 years ago, I visited a nut factory in Italy and learnt something astonishing about pistachio production. Closed nuts, the bane of the pistachio-eater, were being shipped to China where they were cracked open by hand, exported back to Italy, packaged and sold on.
Here, I thought, was the irreducible kernel of outsourcing: a basic task that would always be done in the country that could supply the cheapest labour force. Nut-cracking would move around the world, sfiifting from country to country as workers' standards of living, expectations and skills improved. How long would it be before China grew out of pistachio-opening and developed higher-value manufacturing and services companies, while other countries took on this menial job? Could even the US or Britain, if they lagged too far behind in a global skills arms race, eventually turn into nations of nutcrackers?
But this was a tale from an earlier phase of outsourcing and offshoring when cost was often the overriding consideration -- and my assumptions turned out to be quite wrong.
Similar assumptions persist. Politicians talk about jobs "lost" from developed countries and "gained" elsewhere. When companies such as Powergen, the British electricity and gas supplier owned by Eon of Germany, bring call centres back from India, it is often seen as a sign that the whole trend has reversed. Commenting on the Powergen decision last month, David Fleming of Amicus, the UK trade union, said: "The business case for offshoring is being eroded by the day."
On the contrary. Outsourcing and offshoring continue to evolve and are increasingly simply part of good business practice. Companies -- and their critics -- must evolve, too.
The outsourcing decision of the mid-1990s -- if it is cheaper over there than over here, do it over there -- is now a complex strategic move. Pramod Bhasin, president and chief executive of Genpact, the back-office outsourcing business that used to be part of General Electric, points out: "These are six- or seven-year contracts. [Companies] have got to make savings in year one. In year two and three they are going to ask, 'Now what are you going to do for me?'"
Suppliers of the services are having to change their shape and what they offer to clients. Malcolm Frank, senior vice-president of Cognizant Technology Solutions, an information technology outsourcing company, says two distinct groups identified in the first phase of cost or wage arbitrage are overlapping and merging. The (offshore) providers of low-cost services used to be in one corner. In the other were companies and consultants that offered more sophisticated strategic or technological innovation - the Accentures, IBMs and McKinseys. The first group now has to grapple with many of the issues facing the second -- how to recruit and retain staff without pushing up costs, for instance. The second group, meanwhile, is absorbing or copying the first. Sam Palmisano, IBM's chief executive, now likes to think of his company as a "globally integrated enterprise", rather than a multinational with a "home country".
Some of this is rhetoric -- IBM's board and senior management are still dominated by Americans -- and some is jargon. Offshoring and outsourcing have been joined by "near-shoring" and "onshoring" under the umbrella of "best-shoring" or "smart-sourcing". But both rhetoric and jargon reflect the reality that companies are deciding how and where to arrange their operations based on a combination of available skills and efficiency rather than on cost alone. Leslie Willcocks of the London School of Economics says that he knows of outsourcing deals that do not at first save money but are more a way of exploring the best structure for the company. Such decisions have been the stuff of business strategy for years -- but technological advances have allowed companies to expand that strategy to include more partners in more places.
Trial and error are inevitable. Powergen decided it wanted calls answered in the UK because it now sees that as the best way to improve customer satisfaction. It could choose one of several Indian companies to handle that work. Two days before the Powergen announcement, Mumbai-based ICICI Onesource said it would create 1,000 call-centre jobs in Northern Ireland. It is the definition of onshore or offshore, in-house or outsourced, that is eroding rather than the business case for one or other path.
The nut factory I visited - New Factor, near Rimini - looked at the time like many family-owned Italian import-export businesses, run from the centre by savvy entrepreneurs who tended a network of distant suppliers and customers. It now has an "offshore" operation - in Ukraine where walnuts are cracked by hand. Nut-cracking, in this case, is not the lowest rung of the outsourcing ladder but an important way of improving a product harvested nearby: workers extract the flesh by hand, because unbroken kernels are more use to cakemakers and confectioners than walnuts broken open by machine.
As for China's pistachio-openers, they disappeared a few years ago. According to Alessandro Annibali, New Factor's boss, Californian farmers have developed "a fantastic automated system to open the nuts". Was that an advance or a reversal for outsourcing? Neither -- just a good, old-fashioned example of business innovation.
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FT Syndication Service
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