Next wave of offshoring?

Are personal services the next wave of offshoring? Even though you may think that personal services are locally rooted, there is a growing trend to offshore certain services, such as writing projects, graphic design and tutoring. According to the Wall Street Journal – Outsourcing Your Life:

Such “personal offshoring” is still new and represents a tiny fraction of the more than $20 billion overseas outsourcing industry. But management consultants and economists say it’s likely to evolve into a larger niche as offshore workers identify the opportunities. Thanks to instant messaging, computer scanners and email attachments, any work that doesn’t require meeting in person has the potential to be done overseas.
The approach relies on the same model that drives corporate outsourcing: labor arbitrage, or benefiting from the wage differential between U.S. workers and those in developing countries. In the U.S., tutoring services charge $40 to $60 an hour for math help. Some skilled tutors in India are paid $2 to $3 an hour.

The Journal article tested a number of services — from simply databases (for a wedding guest list and mislabeled “Wedding Planning” in the article) to kitchen remodeling design. They liked most of the services – except for the kitchen design with required on-site measurements (which they labeled “inconvenient”). Having lived through at least two kitchens, I can tell you it is more than inconvenient to have to do your own measurements. Unless your house is new (and then why are you redoing the kitchen) and therefore perfectly standard in its dimensions, don’t do it yourself. There will be some nuance of the space which an on-site designer is going to catch that you will miss.
The test of the landscape designer was a similar (but more positive) case:

Though it would have helped if our designer had seen the property in person, the plans proved to be a good starting point, for a very affordable price.

Once again, if what you are looking for are started ideas and are an experienced gardener who can take the idea as basic input, this may work. Otherwise, my experience is that there are too many nuisances to carry this through to completion.
All in all, the article doesn’t change my view of what can be offshored. Telecommunications are now good enough to be able to do math tutoring from a distance — at least for many. However, those areas which need some sort of physical or site specific knowledge require on-site presence.
But how those on-site jobs translate into exports is still a mystery (see my previous posting).

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Private equity – and long term investing

OECD has a new study out on private equity and hedge funds: The Role Of Private Pools Of Capital In Corporate Governance. Their finding is that these types of investors are generally positive:

On the basis of available evidence, the Steering Group concluded that “activist” hedge funds and private equity firms could help strengthen corporate governance practices by increasing the number of investors that have the incentive to make active and informed use of their shareholder rights. This may include demands for changes in management, the composition of the board, dividend policies, company strategy, company capital structure and acquisition plans. Such active and informed ownership is expected to stimulate the search for the best possible use of corporate assets and thereby contribute to better risk and resource allocation in the economy as a whole.

To me, one of the most interesting findings concerned the long-term/short-term perspective:

It is sometimes suggested that activist strategies weaken corporations by directing resources away from long-term, value-creating strategies, which are the ultimate objective of good corporate governance. This point of view is associated with other propositions including a belief that the economic and corporate governance frameworks together foster short termism rather than patient, long-term investment by “real owners” that leads to improved economic performance. The period of engagement by activist investors of some 2-6 years is often taken as proof of the “short run” proposition.
The claim is closely related to a long running debate about the degree of market myopia and about whether and under what circumstances markets are likely to be strongly efficient (“perfect foresight”). Empirical work suggests that while markets are not necessarily perfect, longer term factors are valued even in markets characterised by short-run behaviour: equity valuations tend to reflect corporate investment activity and price/earnings ratios imply long term considerations of often around 15 years. Research and development (R&D) investments and related innovation strategies are also incorporated quite rapidly into market valuations. Even if investors as a whole might be myopic, the literature indicates that a small pool of active investors looking at long-run prospects are key to market performance even if the same investors will only invest in the company for a limited period. Hence, at least in cases where these market participants consider long-term prospects, reference to the investment horizon of an investor class does not say much about the efficiency of the market and long-run economic performance.
Available empirical research suggests that it is the lack of a credible long-term strategy that makes a company a target for active investors in the first place, especially when it has large cash reserves and is unable to communicate a credible investment strategy. It is not surprising that corporate strategies that have been developed to make companies less attractive to private equity firms and “activist hedge funds” typically highlight the need for the company to: (a) have an informed board; (b) communicate a viable long-term strategy to market participants; (c) review the capital structure; (d) establish a clear dividend policy, etc. That is to say, even in response to investors with a limited time horizon, companies are encouraged to make sure they meet standards that are commonly associated with good corporate governance.

So, a myopic focus on the short-term is what attracts the buyout and hedge funds – thinking that they can do better. Company CEO’s and Boards take note: the weakness of your long term vision makes you vulnerable.
Very interesting. But Warren Buffett already had that figured out.

The secret of the Celtic Tiger

Over at The Globalist, Brian Beary has posted a good summary of > Global Economy” href=”http://www.theglobalist.com/DBWeb/StoryId.aspx?StoryId=6172″>Why Ireland’s Economic Boom Is No Miracle. The answer may disturb some of the anti-economic planning types:

The Celtic Tiger continues to roar — the product not of a laissez-faire culture but rather of a consensual, comprehensive, constantly updated plan to create conditions that allow the economy to flourish.

Beary traces the history of Ireland’s deliberate economic development (i.e. “industrial policy”) strategy to attract investment in key areas and build up its jurisdictional advantage — including the creation of regional technical colleges.
The article is only a synopsis view of the Irish “miracle.” But it makes the important point: strategic economic development by national governments make a difference in the I-Cubed Economy. A lesson we should keep in mind here.

Opening up the slush pile

Every author (or aspiring author) knows about the slush pile — that stack of unread book manuscripts. Most manuscripts end up in the pile because there is not enough time or energy to read everything. Publishers concentrate on known writers or agent referrals. Now, authors may have the chance to have their works read by a larger group, with an increased possibility of acceptance. According to a story in the Economist (Place your bets), a new online method of picking books has emerged:

Gut instinct plays too large a part in the publishing industry’s decisions, says Mark Gompertz, vice-president of Touchstone, an imprint of Simon & Schuster, a publisher based in New York. So Touchstone is trying a new approach: a service concocted by Media Predict, a start-up based in New York. It uses the internet to obtain editorial feedback from a large number of volunteers in order to help executives decide which manuscripts should become books.
Media Predict hopes to do this using a virtual stockmarket for unpublished books, unsigned music acts and proposed television shows. It opened last week at mediapredict.com. Artists or their agents post samples of their work (a book chapter, say, or a television pilot). Traders armed with a free wad of virtual cash buy shares in the material they feel has the greatest potential. The idea is that as traders buy and sell shares in competing content, the cream will float to the top—where entertainment-industry bosses can skim it off. In September Touchstone plans to choose one or more of the top 50 book manuscripts on offer for publication.

Sounds like it might just work. On the other hand, are traders really going to be able to find that needle in the haystack or will they just go with the safe bets? After all, we know that attention is limited in real stock markets and Wall Street has its own herd mentality. Information overload continues to be a major factor in the I-Cubed Economy. These “wisdom of the crowd” mechanisms are useful in bringing more eyeballs to bear — to collect and categorize information. But, as Nick Carr recently pointed out, they may not be as useful in developing new ideas and insight.
If publishing is about finding the next blockbuster, the stockmarket approach may work very well. But if finding and nurturing new talent is the goal, some other way of getting through that slush pile may be required.

Eroding national brand

According to an article in Advertising Age – Ditch the Flags; Kids Don’t Care Where You Come From, national origin is becoming less important as a brand. The article cites a recent study by Anderson Analytics of college students:

“They don’t care about country of origin because of the way their world has been defined,” said Ted Morris, senior VP-global alliances at BrandIntel. “Being online transcends geography. … Point of origin is becoming less relevant.”
. . .
“For the most part, this next generation of educated American consumers either have no clue where the brands they use come from or simply assume everything comes from the United States, Japan or Germany,” said Tom Anderson, managing partner.
For instance, only 4.4% of college students surveyed knew that Nokia is Finnish, while 53.6% guessed the brand was Japanese. Lego, LG, Samsung and Adidas faced similar problems, with fewer than 10% of students knowing the respective countries of origins as Denmark, Korea, Korea, and Germany, instead guessing, also respectively: U.S., U.S., Japan, and U.S. Not surprisingly, retail brand Ikea did well with this crowd — likely because their stylish but cheap furniture is a college staple — with 31.2% correctly guessing Sweden. But even then, another 23.6% thought the brand was from the U.S.

However, just because they didn’t know or apparently care where something came from doesn’t mean that national reputation isn’t a factor:

Interestingly, though, the same kids had definite ideas about which countries produce the highest-quality goods overall: Japan was first at 81.8%, followed by the U.S. at 78.5%, Germany at 77.1%, Italy at 3.9% and the U.K. at 66.1%.
Linking to one’s home base seems to work better for some products than for others. In the Anderson Analytics study, college students rated tech products like cellphones as roughly of the same quality, whether they knew the correct country of origin or not.
But that was not the case for luxury goods — or, interestingly, for cars. Hermès scored 23% higher with students who correctly identified it as a French rather than a U.K. brand. Similarly, Lexus got 13% more low ratings from students who thought it was a U.S. brand than it did from those who knew it was Japanese.

So subconsciously, national brands still seem to matter in some cases.
But for other goods, the kids may be right. It is not just that they live online, disconnected from geography. They understand that the products they buy are themselves disconnected from geography. Adidas is German – but is it associated with high-precision German engineering or with American athletes? Does being from Denmark mean anything to the marketing of Lego? At least Ikea, who probably makes very little in Sweden, benefits from the mental association with “Swedish” design.
Country of origin may or may not be losing its importance. But, like any other brand, it relies on the substance behind it. And more and more, that production is less national than global. How soon before some ad agency picks up on this and starts running a “Made on Earth” campaign?

The Ignorance of Crowds – Nick Carr

Nick Carr may have done it again. In 2003, he wrote an article (later expanded into a book) that set the IT world spinning — “IT Doesn’t Matter” — where he argued that IT was no longer a company strategic advantage but was becoming a commodity.
Now he has a new article out — The Ignorance of Crowds, questioning the hype over peer production systems (of which open source is a common example):

First, peer production works best with routine or narrowly defined tasks that can be pursued simultaneously by a big crowd of people. It is not well suited to a job that requires a lot of coordination among the participants. If members of a large, informal group had to coordinate their efforts closely, their work would quickly bog down in complexity. The crowd’s size and diversity would turn from a strength to a weakness, and the speed advantage would be lost. Second, because it requires so many “eyeballs,” open source works best when the labor is donated or partially subsidized. If Linus Torvalds had had to compensate all his “eyeballs,” he would have gone broke long ago.
Third, and most important, the open source model — when it works effectively — is not as egalitarian or democratic as it is often made out to be. Linux has been successful not just because so many people have been involved, but because the crowd’s work has been filtered through a central authority who holds supreme power as a synthesizer and decision maker. As the Linux project has grown, Torvalds has gathered a hierarchy of talented software programmers around him to help manage the crowd and its contributions. It’s not a stretch to say that the Linux bureaucracy forms a cathedral that coordinates the work of the bazaar and molds it into a unified product.
. . .
But for all its breadth and popularity, Wikipedia is a deeply flawed product. Individual articles are often poorly written and badly organized, and the encyclopedia as a whole is unbalanced, skewed toward popular culture and fads. It’s hardly elitist to point out that something’s wrong with an encyclopedia when its entry on the Flintstones is twice as long as its entry on Homer. Eric Raymond himself has become one of Wikipedia’s harshest critics. “The more you look at what some of the Wikipedia contributors have done, the better [Encyclopaedia] Britannica looks,” he told the New Yorker in 2006. If Wikipedia weren’t free, it is unlikely its readers would be so forgiving of its failings.
The Linux operating system, in contrast, is renowned for its high quality. It routinely runs for months on end without crashing. What explains the difference? Wikipedia’s problems seem to stem from the fact that the encyclopedia lacks the kind of strong central authority that exerts quality control over the work of the Linux crowd. The contributions of Wikipedia’s volunteers go directly into the product without passing through any editorial filter. The process is more democratic, but the quality of the product suffers.
. . .
The bottom line is that peer production has valuable but limited applications. It can be a powerful tool, but it is no panacea. It’s a great way to find and fix problems, to collect and categorize information, or to perform any other time-consuming task that can be sped up by having lots of people with diverse perspectives working in parallel. It can also have the important added benefit of engaging customers in your innovation process, which not only allows their insights to be harnessed but also may increase their loyalty to your company.
But if peer production is a good way to mine the raw material for innovation, it doesn’t seem well suited to shaping that material into a final product. That’s a task that is still best done in the closed quarters of a cathedral, where a relatively small and formally organized group of talented professionals can collaborate closely in perfecting the fit and finish of a product. Involving a crowd in this work won’t speed it up; it will just bring delays and confusion.
The open source model is also unlikely to produce the original ideas that inspire and guide the greatest innovation efforts. That remains the realm of the individual.

Whether you agree or disagree, you have to admit that Carr will once again get us thinking.
By the way, Carr has a new book coming out — The Big Switch: Our New Digital Destiny:

A hundred years ago, businesses began dismantling their waterwheels, steam engines, and generators. After producing their own mechanical power for centuries, they suddenly had an alternative. They could plug into the newly built electric grid and get all the electricity they needed from central stations. The cheap power pumped out by electric utilities didn’t just transform how businesses operate. It set off a chain reaction of economic, social, and cultural changes that brought the modern world into existence.
Today, a new technological revolution is under way, and it’s following a similar course. Companies are beginning to dismantle their private computer systems and tap into rich services delivered over the Internet. This time, it’s computing that’s turning into a utility. The shift is already remaking the computer industry, bringing new competitors like Google and Salesforce.com to the fore and threatening stalwarts like Microsoft, SAP, and Dell. But the effects will reach much further. Cheap, utility-supplied computing will ultimately change society as profoundly as cheap electricity did.

Sounds like an interesting follow on to IT Doesn’t Matter.