Industry Perspective: Vijay Gurbaxani on Value Networks and Offshore Outsourcing

As Director of the Center for Research on IT and Organizations Industry/University Consortium at the University of California Irvine, Graduate School of Management, Vijay Gurbaxani is one of the foremost observers of information technology trends. csc.com recently interviewed Gurbaxani for his opinion on the latest developments in IT. Part 1 of the interview, transcribed below, focuses on important recent trends, including value networks and the timely topic of offshore outsourcing. Gurbaxani provided insights on the potential and pitfalls of going offshore. Part 2 of this interview, to be published next week, will take a look at utility computing, return on investment (ROI) and BPO/BPM.

csc.com: What do you see as the most important recent trends in enterprise IT?

Gurbaxani: Focusing on the business use of technology, I would argue that the most important trend is the move toward value networks — an integrated collaborative of specialist companies each providing complementary intermediate goods and services, linked by sophisticated business-to-business information systems, that creates and markets end products or services to customers.

Moving to this value network model means digitizing much of what we do, but more importantly, understanding how to work within a network setting, collaborating and cooperating with customers and suppliers. This is something that we haven’t exploited fully.

There are many barriers to building online communities with customers and suppliers around technology standards, around collaborative business processes. It requires a lot of work, but that’s where the big payoff is going to come from. It’s really how you’re going to work in a value network.

We’re used to making many decisions within a single company. But when we’re in a situation where the value that we receive from our investment can go up or down based on whether our partner has made complementary investments — that’s a scenario that we’re not really comfortable with, where the return to us depends on what other people do.

We need to find new ways of working. In some sense it has much less to do with the technology, though technology is critical, than it has with finding collaborative ways to work with customers and suppliers. Given each company’s individual profit motives, this can be quite difficult.

			We need to find new ways of working ... finding collaborative ways to work with customers and suppliers.

csc.com: In what ways can companies collaborate with their customers?

Gurbaxani: Customers can play a very active role in product development; that would be one forum. Another big piece of it is integrating the supply chain. Customers are demanding that their suppliers be connected to their systems. Wal-Mart and Dell are often used as examples of this.

But if you notice, we tend to use the same examples over and over again — it’s always Wal-Mart, Dell and Cisco. The real question is, "Where is everybody else?" One of the issues we need to focus on is ensuring that these innovations diffuse to other companies in the economy.

One of the interesting things to note here is that as a result of Wal-Mart’s amazing productivity achievements, Kmart has also had to become way more productive as a result of its technology deployment. But unfortunately it came a little too late to the party.

If you pay attention to Kmart’s productivity numbers, they’ve actually been going up very rapidly as they struggle to keep up with Wal-Mart. It wasn’t enough, but I think there’s a good lesson here, which is you really need to think about how you use technology to advance the business; but it can sometimes be too late. Wal-Mart has leveraged its lead to develop tremendous economies of scale, and it is now virtually impossible for direct competitors to catch up.

csc.com: What do you think of offshore outsourcing, and how can companies benefit from it?

Gurbaxani: Offshore outsourcing has to be one of the biggest trends for the next 10 years, both for IT outsourcing and for what we call IT-enabled services or business process outsourcing. It’s part of the trend toward globalization. With low-cost telecommunications, companies now have the ability to exploit cheaper labor in other countries not just for manufacturing but for all sorts of knowledge work.

One surprising benefit that we’ve discovered over the last five years or so is that not only have we received a huge cost advantage, but that the quality tends to be much higher as well. So it’s not just a cost equation. If you get higher quality at a lower cost, the value proposition is pretty compelling.

Offshore suppliers have matured tremendously in the last five to 10 years. Moreover, U.S. suppliers have also developed a very significant offshore presence to exploit this opportunity.

csc.com: What are the downsides to offshore outsourcing?

Gurbaxani: One downside is the loss of control from the client perspective. But if you outsource to a company with a U.S. presence that has a development arm or a delivery arm in the lower-wage countries, those risks can often be mitigated. Also recognize that we sometimes confuse offshore and outsourcing — you could go offshore yourself without outsourcing or you could outsource to an offshore entity or you could outsource to a U.S.-based entity that has an offshore delivery arm.

csc.com: What about other downsides, such as ramp-up costs?

Gurbaxani: I don’t see ramping up as a huge issue, quite honestly. I think these costs can be managed. Moreover, these costs are amortized over the long term.

csc.com: How do you address the issue of IT job losses in the U.S.?

Gurbaxani: This is a critical issue for the U.S., but the picture is not as black-and-white as some observers seem to paint it. No question, some people have been laid off here because their jobs migrated somewhere else. But there are also a lot of people who have been laid off here by consulting firms and by systems integration firms because IT spending has plummeted. These are two trends that often get confused. In fact, if you look at the numbers of H-1B visa applications you see a lot fewer foreign developers moving here because there hasn’t been enough demand for IT services.

It is also worth considering the issue from a different perspective. As we are based in the U.S., we tend to only see the negative impact on U.S. jobs. But if you focus on what’s going on in countries like China and India, their ability to export goods and services to the U.S. has resulted in increases in the wealth of the people there and they are for the first time buying large amounts of American products.

I recently talked to the CEO of an offshore company about this. His response was, "Yes, there is some truth to the claim that offshore companies are taking jobs from Americans. On the other hand, we drive American and Japanese cars now, we eat at McDonalds and Pizza Hut, and we drink Coke."

The other key piece of it is that this trend allows U.S. companies to be much more competitive, resulting in higher profits and increased growth, because you have higher purchases of your products and services if you can offer them at lower costs. It’s straightforward economics.

I think the correct response for the U.S. is to focus on making sure our workforce can create value at the wages that we need to sustain and improve our lifestyle and that means heavy investments in education. Improving the quality of our workforce is the primary means of increasing the value created by the workforce. U.S. universities are unquestionably the best in the world, and we must maintain this lead.

			Jobs related to managing information-intensive environments will stay in the U.S.

csc.com: What do you think will be the key areas of job growth in IT?

Gurbaxani: I like to think in terms of where the demand is. One needed set of capabilities relates to managing in information-intensive environments; these jobs will continue to stay in the U.S. I distinguish between what I would call the production of information services and the use of information services — the latter are activities that will be done here. Production activities will be done both here and offshore.

The real value-add comes from managing in these technology environments. So it’s at the interface of technology and business — that’s where I believe a lot of the growth will come.

A lot of companies are talking these days about business consulting around technology and the use of the information. You look at why some companies aren’t able to execute as well as others and I think it’s because they don’t exploit the information that they get out of their systems as proficiently as their competitors.

All of our research shows this huge variation in the way companies use technology and the way they manage with it. That’s where I see a lot of the growth occurring. Companies that are migrating to what the corporation of the future will look like are the ones to watch.

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Read Part 2 of this interview, in which Professor Gurbaxani discusses utility computing and ROI, among other topics.

Read about a CSC Research & Advisory Services project to which Vijary Gurbaxani is contributing.