The Global Reorganization of Knowledge Work: The Rise of India and China

Martin Kenney

UC Davis

&

Rafiq Dossani

Stanford University

Outline of Talk

IntroductionMoving up the value chainGlobal service economyIndiaAn example of the changing MNC services global footprintEntrepreneurshipConsumersSummary

An Inflection Point for the Global Economy

No longer any fields guaranteed to workers in developed nationsTaiwan/China in manufacturingIndia for servicesIndia is moving into judgement based workPatent writingDatamining

Shenzhen 1985, 1995, 2004

Kun Chen 2005

Bangalores Electronics City

Technical Enabling Conditions and Business Drivers

Technical Enabling

Conditions

Business Drivers

Any place that has two wires and a sufficiently

large relatively skilled labor force at the right price

can become part of the global service economy

The Technical Enabling Conditions

Separation of information from physical media So they need no longer be done in close proximity to customers Global availability of low-cost telecom bandwidth and computing power Y2K increased penetration of standards and standardized SW packages, e.g., SAP, Oracle, PeopleSoft available globally. Today, you can be certified anywhere.Increasing divisibility of services

Business Drivers

Pressure to bring down costsRivalry -- rivals have done it so must followAcceptance of reengineering and outsourcing various servicesExperience w/offshore software production

Today it is just part of doing business

Moving Up the Value Chain

Mexico

China

India

USPTO Patenting by Year for Various Nations, 1963-2004

1

10

100

1000

10000

100000

19631966196919721975197819811984198719901993199619992002

Korea

Taiwan

Japan

USA

China

India

Mexico

USPTO Patents per 10,000 Persons, 2004

Taiwan-- 2.5835 (5,938)Korea-- .9145 (4,428)Japan-- 2.7436 (35,350)U.S.-- 2.850 (84,271)India-- .00336 (363)China-- .00457 (597)

The Educational Levels of Web Posted Job Descriptions

for Intel, HP and Oracle, February 2005

Sheet1INTELNoneTechnicalBachelorsMastersPhDTotalShanghai10961559144Beijing1076115Bangalore1173911210179HPNoneTechnicalBachelorsMastersPhDTotalShanghai62729145Beijing502528058Bangalore153624234156ORACLENoneTechnicalBachelorsMastersPhDTotalBeijing000202Bangalore916316089Hyderabad00623513110Sheet2Sheet3

A Job at Intel India

CAD Engineer: Hardware Engineering is all about finding solutions. As a CAD (Computer Aided Design) Engineer with the Intel Hardware Engineering team, you'll work on teams designing, developing and implementing solutions. As part of Hardware Engineering at Intel, you'll have the opportunity to be involved from start to finish on the development of world-class innovations.

Responsibilities
As a CAD Engineer, you will be involved in developing new very large scale integration (VLSI) CAD tools and methodology solutions for design for testability (DFT) and test generation for high volume manufacturing of next generation microprocessor products. You will be responsible for development, deployment and maintenance of in-house fault simulation and test generation tools. This position will be based in Bangalore, India.
Qualifications
You must possess a Ph.D. or Master of Science degree in Electrical Engineering or Computer Engineering with five to ten years of related work experience. Additional qualifications include:
Extensive knowledge of Digital Design and Design-for-test principles, digital circuit/fault simulation and automatic test pattern generation.
Good working knowledge in developing CAD tools using C++ in a UNIX*/Linux* environment.
Excellent experience in a related people management role would be an added advantage.

http://appzone.intel.com/jobs/uRequisition.asp?Posting=34339

Accessed April 9, 2004

Services Offshoring Growth Areas

Add segments of work within the existing functionsAdd analytical work R&D/designRisk managementConsultancy on process reengineeringSoftware products in narrow segments

The Global Service Economy

Major Pathways for Services Offshoring

Line thickness represents size of flows

India

Remarkable Diversity of Organizations

MNC in-house subsidiariesAgilent, HP, SAP, Morgan Stanley, HSBCMNC outsourcer subsidiariesIBM, Accenture, EDSU.S. startupsTensilica, Sierra Atlantic, KeteraMNC and domestic specialistsThomson, Evalueserve, KaleDomestic and NRI independentse4e, GTL, ICICI OneSource Indian IT subsidiariesProgeon, HCL BPO, Wipro BP, TCS

ITES Exports from India, 2004-05

Call centers are

declining as a share

Chart1Call centersClaims processingAnalytics and content developmentRelationship and risk management15002800670165Sheet1Customer care (low-risk): $1500 mData and claims processing: $2800 mAnalytics and content development: $670 mustomer care, vendor management, HR management: $165 m1500Call centers15002800Claims processing2800670Analytics and content development670165Relationship and risk management165Sheet1Sheet2Sheet3

2005 -- Employment Growth

CAGR 29.8%

Employee numbers 000s

Source: NASSCOM 2005

37.0%

18.5%

Employment for Global Operations in India by

Selected Large Non-Indian Software Firms

Sheet1NationalityEmployment inGlobal% in IndiaLocationsIndia (date)Employment*OracleU.S.6,900 (2005)41,65816.6Bangalore, HyderabadMicrosoftU.S.1,250 (2004)57,0002.2Bangalore, HyderabadSAPGermany5,000 (2006)38,80215.2BangaloreIBMU.S.38,000 (2006)369,27711.2Bangalore, Delhi, ChennaiVeritasU.S.900 (2004)17,2505.2PuneAdobeU.S.500 (2005)3,14215.9DelhiEDSU.S.2,400 (2004)117,0002.1Chennai, Delhi, MumbaiCap GeminiFrance2,000 (2004)59,3243.4Mumbai, BangaloreSymantecU.S.05,3000N/aSheet2Sheet3

An example of the changing MNC services global footprint

HPs Regional and Global Consolidation

Decentralized

(1990-95)

Regional Consolidation

(1996-99)

Off-Shore Global Consolidation (2000-03)

Source: Hewlett-Packard: Working Council for Chief Financial Officers research.

HPs Global BPO Footprint with Regional Specializations

Main Global Hub
Low-Cost, Transaction Processing Center
(Bangalore & Chennai)

Activities

Finance & AccountingBillingOrder & rebates managementCustomer fulfillmentEmployee services & payrollProcurement/SCMReporting

Workforce

3,800 FTEs, HP employees2 years to scaleLanguage fluency in English, French, German, Spanish, Japanese, Chinese

Support Centers
Specialized Language Transaction Processing (Barcelona, Singapore, Guadalajara, Dalian & Costa Rica)

Workforce

250 FTEs Barcelona 92 FTEs Singapore 380 FTEs Guadalajara

60 FTEs Dalian

120 FTEs Costa Rica

1 year to scale

Activities

Country-specific regulatory transactionsCustomer support for exotic languages (e.g., Serbo-Croatian, Chinese)Back-up and disaster recovery services

Onshore Centers

(Colorado Springs & Houston)

Activities

Call center support (A/P)Vendor refund & escalationTax reportingMail room & scanning

Workforce

65 FTEs, contract labor1 year to scale

Scale of Operations: 4,700+ professionals

Presence: 56 local front-offices, 7 regional business centers, 7 global business centers

Language capabilities: Expertise in 30 languages

HP BPOs Business Growth over the Last 5 Years

Data Entry (Engineering Services)

CAD Support

Vendor Payables

Accounts Receivables

Product Development EDA, T&M

ASIC Design

Biz Process Order Mgmt

Professional Services Network Design

QA Product Development

IT ADMS

Web Development

Collections

Finance Audit

Nov 01

Nov 04

Nov 03

Feb 02

Nov 02

Global Trade

& Logistics

ERP Reporting

COMPLEXITY

Actual Transition of Projects

at a Major US Firm

Bold = unplanned

Entrepreneurship

Small Silicon Valley Startups Now Have Indian Operations

Software upgrades, product extensions, technical writingDebugging and testingRemote supportSemiconductor design

Increasing number of firms using this model

Startup team in Silicon Valley (1st 25 employees)

By 100 employees (50-50)

After this (40-60)

Entrepreneurship Growing Rapidly in China, India Is Just Beginning

Venture capital is growing in both nationsChina so far me-too firms but also some new business models (Focus Media)Some close to world class firms may emerge in India the next five yearsAlready some acquisitions by U.S. firms of Indian firmsSo far only established Indian firms have exited on the U.S. market. Indian firms exit in India.

The Location of the NASDAQ-Listed Chinese Firms and Their Venture Capitalist Directors

Beijing

1 13 firms

Other U.S.

6

Shanghai

4 13 firms

Taiwan

2

Hong Kong

3 5 firms

SF Bay Area

15

Singapore

Japan

London

1

7

10

6

2

2

4

4

5

1

1

2

1

1

1

Consumers

They Will Be the Worlds Largest Market for Many Products

China already is the largest market for cell phones, televisions, and soon PCsIndia is following but rapidly growing in significanceEnormous new markets for steel, cement etc.E.g., Three countries, China, India, and the United States account for 60% of worldwide cable TV households.

Summary

Strengths of Both Countries

Enormous labor poolsChina has well-educated factory workersBoth nations have large numbers of college graduatesLow wagesIncreasing infrastructure investment in both nationsChina has enormous FDI inflows, India less, but is picking up rapidlyOverseas Chinese and Indians transferring knowledge and investing

Problems for Both Countries

Income distributionChina built on manufacturing which brought in the relatively uneducated (all Chinese had at least primary school and were literate)India built on services which does not integrate the uneducated (India has a large number of illiterates, not competitive with Chinese workers)China weak on EnglishChina -- the SOEs and bank difficulties

Problems for Both Countries (cont.)

India has weak infrastructureChinese universities have superior research capabilitiesChinese domestic market is large and growing rapidly. It is a focal market for some products. India not yet large enoughMNCs do R&D in China largely for domestic market. R&D in India for global market so there may be more knowledge transferIP rights more clear in India. Weak IP enforcement unclear effect on Chinese growth

Issues

Will this be a reprise of manufacturing?How fast? Some firms expanding at 30% per yearIn the firm there is a pyramid of activities -- how much is not place dependent?For what is moveable, how much can be done in lower cost locations?If the middle of the pyramid relocates what happens to career paths in U.S.?If the reorganization of the pyramid is profound, what will be new business model?

Concluding Thoughts

The complexity and diversity of services offshoringWe are at the elbow of the adoption S curve and this could be as important as the Internet in transforming our worldWe have only begun to see the new business models that service offshoring will create.Encouraging entrepreneurship in nations around the worldThe organizational and spatial footprint of the firm will be profoundly altered by service offshoring

Thank You!

Is Latin America going to be

largely irrelevant in this new world?

1

10

100

1000

10000

100000

19631966196919721975197819811984198719901993199619992002

Korea

Taiwan

Japan

USA

China

India

Mexico

USPTO Patenting by Year for Various Nations, 1963-2004USPTO Patenting by Year for Various Nations, 1963-2004

242

360

416

490

588

697

348

254

180

106

70

42

FY00FY01FY02FY03FY04FY05

IT Software and Services

ITES-BPO

NationalityEmployment in Global % in India Locations

India (date)Employment*

OracleU.S.6,900 (2005)41,65816.6Bangalore, Hyderabad

MicrosoftU.S.1,250 (2004)57,0002.2Bangalore, Hyderabad

SAPGermany5,000 (2006)38,80215.2Bangalore

IBM U.S. 38,000 (2006)369,27711.2Bangalore, Delhi, Chennai

VeritasU.S. 900 (2004)17,2505.2Pune

AdobeU.S. 500 (2005)3,14215.9Delhi

EDSU.S.2,400 (2004)117,0002.1Chennai, Delhi, Mumbai

Cap GeminiFrance2,000 (2004)59,3243.4Mumbai, Bangalore

SymantecU.S. 05,3000N/a

242

360

416

490

588

697

348

254

180

106

70

42

FY00FY01FY02FY03FY04FY05

IT Software and Services

ITES-BPO

Call centers

29%

Claims processing

55%

Analytics and

content

development

13%

Relationship and

risk management

3%

0

1000

2000

3000

4000

5000

6000

7000

8000

FY00

FY01

FY02

FY03

FY04

FY05

Headcount

Guadalajara

Bangalore

Chennai

Singapore

Barcelona

Costa Rica

AR, Global Service Accounting

Operations,

GL Consolidation, Bank

Operations, Sales

Compensation, Claims &

Rebates

P&G Accounts Payables,

2

nd

Commercial Account

Warranty Claims, Payroll

P&G Accounts Payables

Contract Administration

Employee

Reimbursements,

Contract Administration

Master Data Maintenance,

Rebates, Sales

Administration, Global

Service Accounting

Operations, Workforce

Development,

Financial Services

Bank Operations,

Treasury and Tax

Accounting, Order

Management, CRC

Accounts Payables,

T & E

Accounts Payables,

Accounts

Receivables, Intra

Corporate, Field

Inventory & Revenue

Accounting, Fixed

Assets

Accounts Payables,

Consolidation, T & E

Planned:

Employee Services,

Procurement,

Full Suite of

F&A services

Dalian