Can you outsource economic dynamism? By Robin van Koert India provides quality. Cost savings are nevertheless still the most important reason for outsourcing. Are we missing something? Wim Kok's working group thinks that we are. A lagging productivity growth and an aging labor market are the problems of the future. The economies of China, India and the United States are growing faster. Dutch companies could well fall behind on the world market. What to do? "We must dare to be more dynamic", says Will Hutton, rapporteur for Kok's working group, in the British newspaper The Observer. Just like other European countries, the Netherlands has to invest more in the knowledge economy. Such an economy cannot be built on air. It is based on research-oriented universities, an excellent transport system, enterprising financial institutions and networks for the transfer of technology. The issue is whether the Netherlands should achieve all that within its own borders. After all, the increasing importance of networks is the characteristic of globalization. Can offshore outsourcing perhaps make a contribution to the knowledge economy in the Netherlands? India is the best-known destination for offshoring. However, Ireland tops the sales ranking. Israel, Russia and the other Eastern European countries are also popular destinations. In the Netherlands, outsourcing is often synonymous with programming, although offshoring of business services is gradually increasing. However, developments are moving fast. India, China and the Philippines are providing medical services, such as analyses and diagnoses of samples, analyses of x-rays, digitizing medical data, as well as doctor's advice. In addition, accounting, audits and tax work are increasingly being conducted in India, Singapore and Eastern Europe. Data is being processed into information, although the knowledge workers do not live in the Dutch 'polders'. So where do they live and how do they make their contribution? Paul Tjia, senior consultant with GPI Consultancy, distinguishes among four outsourcing methods. In the Netherlands, work mainly is being outsourced to service providers in India and Eastern Europe on a project basis. Hiring experts, another option, has become less popular as a result of the economic crisis in the ICT branch. Another possibility is entering into a joint venture with a service provider in the offshoring country. Establishing a subsidiary, for example in China, India, Eastern Europe or Russia is the fourth method. Whichever method is selected, the current main reason for offshoring is still cost savings. Quality comes in a good second. Nevertheless, in the long term productivity and aging seem to become more important economic obstacles. What role can outsourcing play? Cost savings is mainly a short-term advantage. The competition will follow. The same is valid for quality advantages. Competing companies can also buy those services or products. Other advantages are less easy to obtain, such as continuous access to flexible labor markets with well-educated and skillful workers. Aging is not a topic of discussion in China, India or any of the other destinations for offshoring. Productivity increases is another example, as is an expansion of the range of services. "That's an obvious advantage", says Chandra Turage, director of New Horizons Cybersoft in Hyderabad. "Restructuring an organization by outsourcing back-end activities can free resources for new front-end services", he explains. Whether such advantages can really be achieved depends mainly on the selected outsourcing method. Running a business is taking risks. Offshore outsourcing is such a risk. Dutch entrepreneurs tend to err on the side of caution. It is called taking responsible risks, hence a preference for outsourcing on a project basis. Furthermore, a lot of programming work is already being outsourced inside the Netherlands itself. By the way, offshoring project work is not only an option for smaller companies, but also for KPN. Nevertheless, the objective is limited. The result is minimal as well. In addition, little use is made of the economic dynamism in the countries involved. Only the fruits of that dynamic are harvested. According to Tjia, a subsidiary or a joint venture offers better opportunities to take advantage of long-term benefits. The local branch is part of the local economy. At the same time, the subsidiary or joint venture is also part of the Dutch knowledge economy. In that way, that economy will be able to benefit from the economic dynamism in for example India and China. Direct access to new markets is another advantage. The ING Group is a good example. Via subsidiary ING Vysya the company can serve the Indian market and benefit from the economic dynamism of the country. In 2004, the first tentative talks were held about offshore outsourcing. ABNAmro is applying the same strategy with branches in Mumbai, Chennai and Delhi. That sounds nice. So is this the future? Microsoft's CEO, Steve Ballmer, is in no doubt. On Monday 15 November, he opened the American software company's new campus in Hydrabad. The number of Microsoft employees in Hyderabad is 1600. Next year 500 jobs will be added. Low wages are no longer the only motivation. The availability of highly educated and skilled staff is just as important. At the same time, the company is strengthening its position in the Indian consumer market. It is a logical strategy, according to Fl. Lt. Chandra Bipin, Vice-President of India Operations for Knoah Solutions. "Offshoring leads to more consumer spending power for the Indian employees involved", he indicates. "They spend their money partly on products from companies which they know as outsourcers in India", he adds. Companies like Microsoft and Intel are moving more and more highly technically skilled work to India. Where Americans go, Europeans cannot afford to stay behind. The strategic partnership between the EU and India, which will be signed in January 2005, could be a first step. Of course, offshoring cannot solve all problems of companies and the knowledge economy. You cannot source economic dynamism. Nevertheless, competition on the world market is becoming more intense. India and China will start to play an increasingly important role in the worldwide competition game. The same applies to the spending power of their markets. The Netherlands needs to adapt to these developments. Outsourcing via subsidiaries and joint ventures can bring the economic dynamism of India and China within reach. In the long run, Dutch companies and the knowledge economy might be able to benefit. Robin van Koert, 13 December 2004