Indian business has played a major role in supplying the global business service outsourcing market, estimated to be $400 billion (Rs17.2 lakh crore) strong. Apart from outsourcing of IT infrastructure and IT application development, this market is about the provision of services in customer care, logistics, procurement, R&D, HR, and finance and accounting.
But why should Indian companies continue to have a competitive advantage over other firms in providing these services? Beyond low-cost labour and English language skills, what does it take to remain internationally competitive in the global delivery of services rather than manufactured goods?
Undoubtedly, information and communication technology (ICT) has been a powerful enabler of outsourcing and offshoring. Services used to be non-tradable because consumption had to happen at the point of production, i.e. consumers and producers had to be co-located.
There are, of course, personal services that retain this essential characteristic of services, in the form, for example, of restaurant and hotel service, hairdressing, and nursing.
However, ICT has transformed a considerable proportion of services in two distinct ways. First, with the fall in telecommunications cost, geographical distance is not a barrier to the simultaneous production and consumption of some services, as European customers can phone contact centres in India. Second, services are becoming more like manufacturing as processes can be standardized and data stored for medical diagnosis, benefits administration, and even legal services.
So some services can be standardized, built to order, assembled from components, as it were, then picked, packed, stored and shipped, all using processes resembling manufacturing’s. Services, therefore, can be ‘productized’, made more efficient by applying the same sort of techniques as in manufacturing to improve productivity and quality.
We have come a long way from Adam Smith’s notion a few centuries ago that all services, typically offered by personal servants of a defunct social order—players, buffoons, musicians and opera singers—are perishable and unproductive.
But the power of ICT should not blind us to the fact that it is only a necessary, but not a sufficient reason for the growth in the market for business services. Two further reasons are peculiar to the growth of business service outsourcing and offshoring, and are distinct from what is driving growth in outsourcing of manufacturing.
Noting these service-specific factors provide a pointer to the future of India’s international competitiveness, if it is to be based in part on its role in services.
First, the demand for business services has been created by restructuring of global corporations, as they unbundle processes from their corporate functions. In manufacturing, suppliers typically provide input into the final product of their client firms, such as seats for an automobile manufacturer, or electronic assembly and testing for a PC manufacturer.
Over time, electronic assembly sub-contractors moved up the value chain by undertaking product design, and in some cases, such as Lenovo and BenQ, owning their brands in direct competition with their client firms.
In contrast, suppliers in business services do not typically encounter this invasive head-to-head competition with clients. This is because they provide processes in clients’ corporate functions such as IT, finance and accounting, procurement, human resources, and marketing, regardless of clients’ final markets.
Thus, IBM, by providing HR services to Proctor & Gamble, would never be in head-to-head competition in P&G’s consumer goods markets. The same logic applies to Indian IT service providers such as TCS and Infosys and their clients. And this fact provides a different set of market opportunities for service providers. They can add more value horizontally across sectors without becoming direct competitors with their clients.
Second, services are converging, but not completely, towards manufacturing. There are limits to ‘productizing’ services after all. Despite the power of ICT, some services continue to require complex interactions with clients, or exercise of expert judgement in the process of delivery.
So services are difficult to specify on a piece of paper like for a product drawing. Consequently, for a variety of services, ranging from surgery that requires high-level knowledge down to haircuts requiring basic skills, proximity between the points of production and consumption remains a necessity.
Indian businesses would do well to take heed of these two peculiarities of services as they compete in international markets. The first, namely the competitive positioning of suppliers, gives them great opportunities to specialize in these services without head-to-head competition against their client firms.
The second, the essential characteristics of services, implies that service growth results from a combination of ‘back office’ economies of scale—the same engine of growth as for manufacturing—and ‘front office’ co-production with customers. Competing in the latter arena implies Indian IT and BPO firms will need to continue to locate closer to their customers at the same time as perfecting their global delivery model.
These are approaches to achieving international competitiveness, not by relying on natural endowments or national competitive advantage per se, but by attending to the fundamentals of sound business practice grounded in the characteristics of what is being made and sold.
Mari Sako is a P and O professor, management studies at University of Oxford
Send your comments to businessatoxford @livemint.com