Volume 17, Number 2
Firms from emerging markets are becoming more innovative and mature. Ning Su's research explores the changing face of global outsourcing.
When Business Week published the top 100 technology companies of 2010, the Chinese firm BYD headed the list. A maker of plug-in hybrid cars and rechargeable batteries, BYD was relatively unknown until a few years ago, when Warren Buffet invested $230 million. Now his investment is worth about $2 billion.
For the past 20 years emerging countries like China and India have been thought of primarily as sources of low cost resources. As many companies from these countries have matured, they have become powerhouses in their own right. Today western multinationals also look to emerging market firms as sources of innovation and knowledge.
In his research, Ivey Professor Ning Su explores how companies in developed economies can better work with companies from emerging markets - a process that can be described as "co-creating value." One area that he focuses on is the changing nature of global outsourcing. "Outsourcing today is much more than setting up a help desk in a call centre in a low-cost country," he says. "It includes the outsourcing of knowledge-intensive services, such as product development, research, and design."
In two recent studies Su examined outsourcing from the perspectives of the sourcing client and the service provider. He recently published a paper in the academic journal Decision Sciences, and has another forthcoming in the academic journal IEEE Transactions on Engineering Management. For this research he and his co-authors interviewed more than a hundred managers from Western and Japanese Fortune Global 500 companies as well as technology companies from emerging markets.
One of Su's studies focused on the financial services industry, where outsourcing is a critical component. Su found that sourcing companies need to combine formal structures with organizational flexibility - two seemingly conflicting goals. On the one hand, a company must create formal structures and processes to govern its global supplier relationships. "It's necessary to have a very top-down, structured process," he says. "An example is setting up a formal program management office to rationalize the company's overall strategy."
But the opposite is also true, he says. The organization must have the flexibility and freedom to explore the changing global supply market. "Companies need people who are very flexible, very agile, and very entrepreneurial," he says. "These are the ones who can find new locations and new suppliers, and adapt to the changing environment."
As an example, one of the global banks in Su's research was looking to develop very high end trading software. A company manager found a specialized talent pool among Russian engineers. After spending some time in Russia, the manager ended up outsourcing to Russian vendors. Eventually the company won industry awards for innovation and took on their Russian vendors as strategic partners.
In his second study Su focused on relatively new and entrepreneurial companies, mostly from China, who provided outsourced services. He found that the key to success and growth was continuous learning from clients. "Emerging market suppliers must have processes in place to synthesize, disseminate, and integrate learning from their clients," he says. "Only through this continuing learning process can they improve their capabilities and move up the global value chain."
For example, Chinese IT service companies worked for Japanese companies for years on tasks like software coding or testing. "In the process these Chinese companies learned how the Japanese were managing their businesses and their IT services," says Su. "By integrating these practices into their own systems, the Chinese companies became stronger and more mature."
Today many companies from China and India are providing high value services, such as research and development. Some of the more mature ones are also aggressively "reversely" outsourcing to knowledge firms in developed economies, or even acquiring them outright. In the meantime, some low cost work is being moved to other even lower cost countries in the global supply market.
As companies from emerging countries become more innovative and competitive, the nature of outsourcing is becoming more dynamic. "The only way to stay competitive is to really embrace change and create proactive strategies to adapt to the changing environment," says Su. "In this way companies from developed economies and emerging markets can really create value for each other."