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Finally a productivity payoff from IT?
By David Kirkpatrick
(FORTUNE.COM) -- Even though computer technology has become a major part of contemporary business, the productivity gains achieved so far have not been proportionate to the scale of investment. Even though companies now spend, on average, 37 percent of their capital budget on IT, U.S. productivity numbers have only crept up modestly over the past few decades, though they have accelerated markedly since 1995. For all of the obvious and monumental changes in how we live and work, we are still just starting to figure out how best to use IT. That's not as unusual as it seems. Economists also note a lack of increased productivity for some years after electric power was introduced in manufacturing in the 1800s. Pre-electric factories were almost uniformly built next to rivers and waterfalls. To get as much square footage as possible close to the water-wheel, plants were built vertically. With the introduction of electricity, multi-story factories became unnecessary. But it took a few decades for industrialists to figure this out. Only when they realized that the new power source made it possible to build plants all on one level did productivity really begin to surge--thanks to newly possible innovations like the assembly line. And the winner isSo what's our equivalent of the single-story factory? What change in habits or business practices could unleash the power of computing to dramatically boost productivity? I have a candidate--business process outsourcing. While it's not something we immediately associate with computing and networks, it's only after companies are automated and connected by a commonly accessible network (the Internet) that they can easily create links between themselves and their suppliers. Work can be passed seamlessly from worker to worker regardless of location. Now the question is starting to arise: Where is work most efficiently done? Though the process is slow, because the implications for both societal and corporate organization are unsettling, more and more companies are beginning to understand that many jobs don't have to be done at the office. We've seen a resulting increase in home-based work, and dispersal of back-office functions further from high-rent districts. In New York many financial services firms have moved clerical and other staff from Manhattan to Brooklyn or New Jersey. We've seen call centers for almost any activity be based where labor and real estate is cheap. When I ordered a new cable TV hookup for my Lower Manhattan apartment the other day, the representative I spoke with was somewhere in Canada. All of this has presumably improved productivity. Cost-savings could growBut the cost-savings grow really huge when companies exploit the big discrepancies in labor rates between the U.S. and still-developing countries like India, and outsource entire business processes to operators far away. International business process outsourcing, or BPO, started a few years ago with call centers, and it's spreading to a wider variety of jobs. It may enable a quantum leap downward in labor costs. Ravi Aron, a professor at the Wharton School of the University of Pennsylvania, estimates that such outsourcing can save companies up to 60 percent on labor. In an extensive recent feature, the online magazine Knowledge@Wharton assembles lots of new data on the nature and scale of international BPO (see knowledge.wharton.upenn.edu/100902_ss.html). For instance, an Indian national software association estimates that what it calls "IT-enabled services" provided in India for customers elsewhere will rise from $1.46 billion annually to about $17 billion in five years. By then over a million Indians could be engaged in these businesses. High growth rates are also expected in Eastern Europe and Latin America and the Caribbean. Countries with the biggest near-term opportunity are those with large English-speaking populations, such as Jamaica, Malaysia, the Philippines, and Singapore. Many companies are moving jobs now. Amazon.com conducts much of its e-mail customer service from India. America Online does some, too. DirectTV conducts telemarketing from there. AIG's claims processing employs 400 Filipino employees, reports Forrester, which also says that Delta Air Lines will save $15 million by moving its call centers to India. GE already does a good chunk of its back-office work in India. HSBC employs 1,000 people there. Procter & Gamble has been negotiating with outsourcing firms (notably EDS) to take over a huge range of its internal services. Much of that will presumably move overseas. Migration could be hugeThe potential extent of this kind of work migration is vast. I've heard of new operations in India set up to read mammograms from U.S. hospitals. Architects in Sydney, Australia subcontract some of their work to lower-priced architects in Singapore. A disturbing consequence of this shift will be fewer jobs in the U.S. Though only a few hundred thousand jobs have been displaced so far, the numbers could get huge. Forrester Research estimates that BPO will cause 3.3 million U.S. jobs to move offshore by 2015. That number is probably low. The price the economy will pay is an increase in U.S. unemployment, especially among those in low-skilled office work. Could we see a domestic anti-globalization backlash as a result? Perhaps. But companies will reap a huge productivity gain if they can lower labor costs by 60 percent in substantial portions of their operations. And without the Internet, it wouldn't have been possible. It's not surprising that such a major shift in how we think about work is taking time for businesses to absorb.
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