Global Innovation and Growth fueled by Outsourcing

Posted in Other | 12-May-06 | Author: Mark Minevich

Mark Minevich

“The World Leaders in Innovation and creativity will also be world leaders in everything else” Harold McAlindon, author Little Book of Big Ideas

“To those who continue to push globalization to advance the human potential in this ever-connected globe, I dedicate Six Billion Minds™. For those who continue, with unyielding faith, to push beyond the horizon, full of never-ending hope and enduring performance to change the world and bring us closer together, we have an obligation to do better”
Mark Minevich

Lead Author of Six Billion Minds, Technology and Globalization Visionary, and Albert Einstein Award Recipient

Something new is coming to you: Global Innovation

Global Innovation. It's the latest buzzword and one of the hottest topics in corporate business. It is appearing everywhere - in business leadership forums, corporate retreats, transit points, and in global metropolis like New York, New Delphi, London, Shanghai and Moscow. Whether the world has flattened or continues to create centers of excellence, it is quite clear that countries, developed or developing, must become competitive in tapping into the world’s six billion minds if they want to be a part of the knowledge economy.

It used to be that information was power. Not anymore. Information is becoming a commodity. Globalization is a reality. Globalization seems to have woven a web around the globe, but we stand at the outset of the next step in globalization.
Global outsourcing is fast becoming one of the greatest organizational and industrial shifts in modern history. Globalization to me is not just about outsourcing . It is also about the innovation, geographical expansion of business for growth in turnover and earnings. This strategy is actively pursued and institutionalized by many economies including Singapore. Israel and the United Arab Emirates. For many, it is a question of survival and being relevant in the global context. The real power in a globalized world is knowledge. We believe that Global Outsourcing = Knowledge Economy. It turns out that a good deal of creative work—software development, accounting, legal work, engineering— can be outsourced to India or China. The solution to becoming powerful is to focus on innovation and to design new core corporate competencies. Global outsourcing allows companies to break complex tasks into many small parts, outsource each part to whoever can do it most efficiently, and then combine all of the completed parts into the final product.

Innovation is what keeps US strong and competitive in the global knowledge economy. The implications for the global economy are immense. We live in an increasingly fast-changing, unpredictable world – a world in which traditional planning and strategies will no longer work for businesses or governments.

In 2006, systemic global drivers for innovation suddenly came together. Those drivers represent globalization, offshoring, new business paradigms, shift in international management order, increased mobility and advanced communications. The governments, NGOs, and MNC are in a race to develop and execute new innovation capabilities to build a scaleable foundation for our future.

The leaders are continuing to emphasis that while not perfect, globalization has been extremely successful for the world economy. It has created millions of jobs, raised millions out of poverty and improved the quality of life in countries that once were considered incapable of contributing to the world economy

At the same time, companies are throwing the words like innovation all over the place but what those large multi national organizations have actually done? For the last few years, most of the large MNCs have played a convenient lip service, and continued with its practice of its expensive maintenance on old software, its upgrades to old mainframes, and it is large conventional outsourcing contracts.

We must influence more people to think that global innovation is about much more than new product design. It is about reinventing global leadership, it is about knowledge workers, it is a global collaborative business systems and processes, and emerging customer markets. It is about leveraging global ecosystem cluster network and knowledge pools to select and commercialize ideas in rapidly changing world. It is also about corporate transformation focused on enhancing growth, creativity and collaboration. What is new today is summed up in the term “knowledge economy.” And this economy is about discovering and harnessing the knowledge that can spring forth from any mind, anywhere. Our new book, Six Billion Minds examines the global seismic shifts that threaten to engulf long-dominant nations like the United States, whose world leadership in innovation is now being rivaled.

One of the biggest issues is the development of global innovation leaders who understand the issues in the global knowledge economy. Most of the corporations need to find ways to unplug the old and proprietary business thinking and processes, and install the 21 century open innovation and transformation systems that accelerate growth and productivity

We need to change the future of business, government and our economy. We need to reinvent our ways we deal with society and customers. This means we should focus not only on products, services or even processes but DNA of Knowledge. We must transform and reinvent our core capabilities, our values, our leadership, our strategic insights, business models, management systems, and policies.

The recent Business Week survey shows that Asia will be on the rise in global innovation. 44% of MNCs will increase R&D spending in India and China. Global Leaders continue to look for the U.S. and EU for idea generation, but the situation and explosive growth in India and China may change this picture.

US and EU Competitiveness is being challenged

For more than half a century, the United States has led the world in scientific discovery and innovation. It has been a beacon, drawing the best scientists to its educational institutions, industries and laboratories from around the globe. However, in today’s rapidly evolving competitive world, the United States can no longer take its supremacy for granted. Nations from Eastern Europe to Eastern Asia are on a fast track to pass the United States in scientific excellence and technological innovation. We must create products and services that satisfy needs consumers don’t even know they have yet. Mastering new innovation is the key to corporate success, if not survival. Smart companies now have a senior level executive charged with driving innovation or sparking creativity.

We are seeing some different and alarming characteristics that are beginning to develop; Falling pay and rising prices of foreign made goods squeezing existing US and EU living standards. We recognize that a country cannot provide superior living standards to all its citizens without an advanced knowledge economy. Global outsourcing is rapidly converting US and EU MNCs into brand names with a sales force selling foreign designed, engineered, and manufactured goods. People who do not participate in the innovation, design, engineering and manufacture of the products that they consume lack the incomes to support the sales infrastructure to keep the national economy running.

For the past decade the U.S. had been leading the bandwagon of creating jobs in international locations, mainly India, China, and Brazil. Let's look at the latest trends of the very firms that acquired outsourced work from U.S. companies. Indian and Chinese firms like Infosys, Lenovo, and Tata Consultancy Services, to name a few, have been busy setting up centers in locations like the Czech Republic, Holland, the Philippines, and China. Considering that the search for low-cost, high-skilled labor is the prime motive behind these decisions, one is inclined to believe that this activity is but a bellwether for the second level of outsourcing, when these so-called offshore companies could further outsource nonstrategic work so as to concentrate on strategic issues that their audiences (the U.S. firms) would be more interested in.

Once a company completes its loss of proprietary innovation how much intrinsic value resides in a brand name? The outsourcing of, design and innovation has dire consequences for higher education in developed world. The advantages of an advanced education degrees are erased when the only source of employment is domestic non-tradable services.

Some critics are going further to say that the US and the EU are starting pay for their outsourced goods and services by transferring its wealth and future income streams to foreigners. Foreigners have acquired $3.6 trillion of US assets since 1990 as a result of US trade deficits. Foreigners have a surfeit of dollar assets. For the past three years their increasing unwillingness to acquire more dollars has resulted in a marked decline in the dollar's value in relation to gold and tradable currencies. Economists worldwide have a reason to be concerned where the US dollar will not be able to maintain its role as world reserve currency when it is being abandoned by that area of the world that is rapidly becoming the manufacturing, engineering and innovation powerhouse.

Developing world and Global outsourcing- global innovation model

Today China graduates four times more engineers and computer scientists than the United States. America is facing serious problems with both its education system and its immigration laws, and it wonders how to attract more students to science, improve education and open its borders. It is vital that tomorrow’s leaders have a multi-disciplinary education—training in both business and technology with a global perspective—so that we can eliminate the disconnect that exists in too many organizations today. The future is leaders who understand how business and technology have converged and who know to manage both in a global knowledge economy.

Today, more than 70 percent of the products we buy in Wal-Mart are made in China, but still there is no equal distribution of wealth. The United States, with six percent of the population, has 50 percent of the wealth. Meanwhile, 47 percent of Chinese and 86 percent of Indians make less than $2 per day. How does this impact the growth of the global economy and how will this change? It always has been a global economy. Many wars have stemmed from trade disagreements.

Indian and Chinese people are growing up in much harder conditions than those of the people they provided services in West. While an average American may be concerned about gas mileage, millions of people in Asia must think merely about surviving until the next day. Today, America hires Indian and Chinese workers to do otherwise expensive IT and business process outsourcing (BPO) work more cheaply than American resources.

Countries such as India and China, where wages remain low and new engineering graduates are abundant, likely will continue to be the biggest gainers in knowledge economy employment and become increasingly important suppliers of intellectual property. This leads us to the emergence of a new Global Labor division.

Just follow a certain chain of events with a computer scientist who starts by working on commodity process tasks and may eventually have the motivation and passion to transform and innovate. A plausible theory could develop in such a way where all the actual process work is being done in India or China; there is no inherent reason that American people will keep having innovative ideas. The innovative ideas will ultimately come from India or China. If American engineers or computer scientists don't get ample practice time, their innovation skills will atrophy and the innovations will simply stop coming.

Today in the developed countries many computer specialists and electrical engineers, who were well paid at the end of the 20th century, are unemployed and cannot find work. Many technical and engineering jobs, they said, have become "commodity jobs," routine work that can be performed cheaper offshore.

By 2005 standards, India is the most competitive and popular technology outsourcing destination in the world. However, by 2015, China will surpass the Indians to become the locomotive for growth as it did in manufacturing—only this time it will be in IT related services—boosting world economic output and productivity. The world economy will certainly benefit from China’s lead function, but what will happen with all those workers, IT engineers, and managers losing their jobs in the United States and in Europe? Places like Singapore and Israel will continue to specialize in research and development outsourcing. Russia eventually will evolve as a major R&D outsourcing giant. The political and economic dimension is still not entirely clear, as policy makers around the world have not thoroughly thought through that maze. But one thing is obvious—we are witnessing a sea change of what the future division of labor will look like. The old working class in the West is disappearing as developed nations provide capital and opportunities for the developing nations of the East. And the former underdogs may have a sustainable solution as more of their people have access to higher education

It is this struggle for survival that provides the framework for the next knowledge revolution of Six Billion Minds™ with a focus on global innovation. The design and innovation are starting to be outsourced. Our new book, Six Billion Minds , argues that the "left brain" intellectual tasks that "are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia's rising economies and the miracle of communications. Six Billion minds goes further to say that even "right brain" work that entails "artistry, creativity, risk taking and customer support and interaction may also slowly migrate to Asia. However, we have an opportunity to keep the competitive advantage with creative and knowledge centric work. It looks like the model for the EU and US is to focus on the highest levels of knowledge management, and all the routine jobs of turning concepts into actual products or services can be globally outsourced.

Global Innovation and Outsourcing is about flexibility to put resources in the right places at the right time. Western MNCs are on the cusp of a sweeping overhaul of R&D that will rival the offshore shift of manufacturing. Majority of programmers and engineers tasks that can easily be outsourced -- like software programming, translating prototypes into workable designs, upgrading mature products, testing quality, writing user manuals, and qualifying parts vendors.

Emergence of global innovation successes

We are seeing some incredible global innovation successes. Today we can find thousands of American multinationals in Asia and thousands of Asian companies in the U.S. The sell-off of IBM's PC business to Lenovo is an historical example of seamless integration. Just extrapolating from this trend shows that the Asian tiger has much to offer, and it is good for the world if we won't put chains all around it. Asian contract manufacturers and independent design houses have become forces in nearly every technical device, from laptops and high-definition TVs to MP3 music players and digital cameras. Examples are companies such as HTC Corp., a developer of multimedia handsets, a Taiwanese company developing latest wireless devices. Flextronics Corp, a very innovation company that developed its own basic platforms for cell phones, routers, digital cameras, and imaging devices. And Cellon International that has various product offerings like eye-popping software/device. When you cradle the device to your ear it goes into telephone mode but when Peer through the viewfinder and it automatically shifts into camera mode. Boeing Company is working with India's HCL Technologies to develop software for everything from the navigation systems and landing gear to the cockpit controls for its upcoming 7E7 Dreamliner jet. Pharmaceutical giants such as GlaxoSmithKline are teaming up with Asian biotech research companies in a bid to cut the multi million dollar cost of bringing a new drug to market. IBM is outsourcing its research brains to help customers develop future products using next-generation technologies and concepts. GE is reaching out to build a better wind turbine, it first built an international team of researchers in Germany, China, India and the USA. Procter and Gamble has improved R&D productivity by co-developing brands with other companies from around the globe. Chinese engineers in the Beijing lab from Motorola conceived a Linux-based mobile phone, now a crucial part of its software strategy. The revolutionary (non processor frequency based) technology behind Intels Centrino wireless technology was developed in Haifa, Israel where challenging orthodox ideas is rooted in the culture. Swiss-based Novartis is developing new medicines in a Shanghai laboratory, specializing in ancient remedies. Dutch electronics giant Philips got the idea for a core product, their new home heart defibrillator "HeartStart", via a US-based research lab.Offshoirng company like Wipro are focused on various R&D initiatives including designing prototypes for mobile phones, HDTV and satellite equipment.

For the first time ever the publication of the BTM Institute -- Six Billion Minds: Managing Outsourcing in the Global Knowledge Economy created a wake-up call to global leaders regarding global outsourcing and innovation. It is a global collaboration among the most accomplished academics and global leaders (over 60 top international figures). We have interviewed the most accomplished business leaders in the world and included not only methods, processes, and practical tips, but also human stories of success and survival – creating this unique exploration of the global knowledge economy. We examined management challenges and innovation opportunities in light of the profound impact of globalization and the emergence of the knowledge economy. We show how to build excellence by leveraging the vast global knowledge pool of the “six billion minds” that make up the emerging knowledge economy. We provide great insights and blunt realities from the business leaders pioneering and setting the pace of global outsourcing as the next big element of the knowledge economy.

US and Western Economies must control the brain parts and access points of the global innovation networks to maintain its competitive position. They must continue to innovate, provide leadership, facilitate complex management processes, and provide linkage with customers. The most successful players will be the ones who adopt the model of 6 Billon Minds encompassing the knowledge workers, knowledge skills and resources around the world.

Many companies are still multinationals—traditional companies with distinct operations in different countries, rather than a single company operating globally as a seamless entity—which is the preferred business model of the future. We recommend they take the necessary move to become global companies. We must transform global industries by reshaping our management for the next generation and aligning business and technology to produce global innovation.

A robust educational system to support and train the best U.S. and EU scientists and engineers and to attract outstanding students from other nations is essential for producing a world-class workforce and enabling the R&D enterprise it underpins. Research, education, the technical workforce, scientific discovery, innovation, and economic growth are intertwined. To remain competitive on the global stage, we must ensure that each remains vigorous and healthy. That requires sustained investments and informed policies. Early adopters, whether outsourcing IT or the miniskirt, get significant benefits either in profits or popularity. As others follow suit, the competitive advantage erodes and people who frankly shouldn’t have been seen dead in that style start appearing on the street. And then the world moves on. As outsourcing becomes more widespread and matures, and as the competitive landscape changes, some bad or disappointing experiences will happen, and some services will come back in house. The best outsourcing contracts now explicitly recognize this fact. We should expect more sophisticated models—shared services, for example, is making a major comeback—as companies try to get the best of both worlds.

We must develop better strategies to compensate the Western workers who lose in the global trade game—and crucially, boost education and training efforts so they acquire the “skill premium” they’ll need to get or stay ahead.

Clamping down on globalization by any country or company will ensure its own demise that much quicker. International money will always go to countries and companies that are most efficient and effective, wherever they are. If the U.S. becomes protectionist, it will only hasten the departure of innovations to other countries like India and China. Smart U.S. corporations know this and offer the chance to innovate in Bangalore, Shanghai, or Silicon Valley. Google, Microsoft, or Intel, you have these choices.

This call to action in Six Billion Minds leads us to establish a permanent global forum of thought leaders from businesses of all sizes, academia, NGOs, government, public interest groups, the investment community and other members of the ecosystem to look into the future and identify major trends, insights and opportunities. More than ever we must bring people together as a global community, and to collaborate with 6 billon people and their leaders in a discussion to focus on insights and plan for the future as part of the global community dialogue. The United States and Europe must act now, or face a diminished global leadership, and the talent pool required to support our high-tech economy will evaporate. This is not just a question of economic progress. Not only do our economies and qualities of life depend critically on a vibrant R&D enterprise, but so too does our national and homeland security, as pointed out by the Rudman Commission on National Security in 2001. We call on politicians, economists and entrepreneurs to conceptualize the future world economic paradigm—of a world filled with knowledge clusters, innovation and global outsourcing! American national leadership must understand these deficiencies as threats to its national security. If we do not invest heavily, wisely rebuild our core strengths and invest in homeshoring, EU and America will be incapable of maintaining its global position well into the 21st Century.

America and EU needs more sweat equity, more time back at the drawing board, more quality-driven testing, and core research. It needs more attention to its real future—its children and their education. We know there will be a future. We know that global outsourcing is here to stay. But we don’t know what it looks like.

There are six billion minds on this planet, all with their own beliefs about how to make the world work, and most of their beliefs are different, so there is bound to be conflict. In fact, conflict is inevitable. Yet, the greatest resource of all is people, and that's why a population increase is to be celebrated, not lamented. Six billion people on the face of the earth? They are also six billion minds capable of discovering the new knowledge economy with billions of resources and twelve billion hands to extract and refine them. The vast majority of people contribute far more to the world than they ever take away—and that’s just in material terms. In a world with over six billion minds (and climbing), sustainable globalization is a miracle.