Global sourcing -- the use of labor from anywhere in the world outside of the U.S. -- was once a strategy of the information-technology (IT) domain. It now has proved to be a model pervading all areas of business, from software development to claims processing, HR administration, and accounting and finance. As with any significant change, this evolution will abound with both opportunities and challenges for U.S. companies and their employees.
Who will survive this process and increase their value in the global economy? Simply put: Those who can best adapt to change.
Thirty years ago, electronics companies such as Motorola (MOT), Texas Instruments (TXN), and Intel (INTC) sent manufacturing overseas to cut operating costs and speed product development by taking advantage of wage gaps and time zone differences. Because work that's both digitized and highly repeatable can be rendered anywhere in the world, IT has followed the same path. With the average software engineer in the U.S. earning $75,000 a year compared with a similarly skilled worker in India earning less than $10,000, companies have been outsourcing IT operations that can be performed at lower costs abroad.
The latest arena where global sourcing is taking hold: business-process services -- contracting a specific customer-facing or back-office business task, such as running a call center or processing loans or insurance claims, to a third-party provider. Expect other aspects of business, such as research and development, to follow.
Saving time and money are only two of the reasons American organizations have turned to global sources. Lack of domestic resources is clearly another. Companies are increasingly pressured to meet rapidly changing technology and market demands and to conform to ever-shrinking product life cycles. In some cases, the next generation of a product has to be rolled out in just weeks.
To keep pace, many firms are looking globally for research and development. Without global resources, these companies couldn't cost-effectively develop the hundreds of new product designs needed each year.
In 2004, the National Academy of Sciences reported that 350,000 students from China graduated with bachelor of science degrees compared with 140,000 U.S. students. In 2005, India graduated more than 300,000 engineering students -- providing an ever-ready pool of highly skilled workers.
While the drivers toward global sourcing are compelling, U.S. businesses, and their employees, can take a number of steps to compete.
First, organizations must be laser-focused on their core business -- whether it's manufacturing automobiles, developing software, or managing securities portfolios -- and on marketing, product development, and creating customer-centric solutions. For U.S. companies to effectively adopt global sourcing, they must identify which areas of their business global resources can perform and focus internal resources on the areas that elicit the highest value.
Also, managers who bring a global perspective and who excel at synthesizing a worldwide network of employees will shine. Like their cousins in manufacturing, whose expertise in running operations within their four walls has evolved into managing suppliers around the globe, IT managers who can understand and navigate technology, as well as manage teams globally, are in high demand. The same is true for managers in other functions, from finance to marketing.
American workers must demonstrate their value to their organizations over the long term. To achieve this, continuous learning and education is key. Just as IT knowledge workers must keep their skills at the forefront of technology, knowledge workers in other fields must update their skills or risk being displaced by a higher-skilled, lower-paid worker somewhere else in the world.
Let's face it; globalization is not going away. The U.S. represents only 5 percent of the world's population, yet we have been producing the majority of the world's technology for the past several decades. As Asia's and Europe's technology industries continue to strengthen, we will see a leveling of the playing field. The U.S. government and academia have a critical role to play. Without disciplined, purposeful action, the nation's economic future is at risk.
In February, I had the opportunity to testify before the House Government Reform Committee, and I outlined the areas we as a nation must focus on in order to remain competitive.
One of the most important areas: attracting more students into science, technology, engineering, and math (STEM) fields. Between 1985 and 2000, bachelor's degrees in engineering, math, and computer and hard sciences fell 18%, according to John Douglass, senior research fellow at the University of California, Berkeley, Center for Studies in Higher Education. America must at a minimum double the number of STEM graduates, from approximately 430,000 to 860,000 over the next 10 years, or risk losing ground to global competitors.
FREE AND FAIR TRADE.
Achieving this goal will depend on our ability to increase the numbers of women and minorities in STEM professions. In Massachusetts -- long regarded as the hotbed of science and technology -- about half of the Commonwealth's high schools offer an engineering course to encourage young people to start a career in STEM fields. The industry, too, can play a role by developing programs that invite young people to explore opportunities through community involvement, mentoring, and internships. But what's needed is a national effort on this front.
As with the origination of NASA, the federal government must invest in long-term research that will spur the industry over a period of time. The Internet, which started as a defense project in the '80s, evolved to a commercial application. Ten years ago, nanotechnology was driven by the government.
I support President Bush's American Competitiveness Initiative, which aims to double federal funding for science and technology research, promote private-sector technology initiatives through tax credits, and reinvigorate math and science education in schools. While this is great step forward, we also need economic policies that support free but fair trade around the globe.
While the global marketplace presents many challenges to U.S. companies, there are also opportunities. Studies have shown that with globalization, gross domestic product figures have gone up for all participants in the global economy, both in emerging and developed regions. Where there are trade barriers and protectionism, wealth declines. But where there is wealth, there are markets for U.S. products and services. Therefore, it is in the U.S. interest to create trade and wealth globally.
At the same time that automation brought a host of new conveniences and capabilities to American companies, it displaced certain job functions. Yet in the long run, automation has created more opportunities as U.S. firms grow. So, too, will an adjustment occur under the new model of the "boundary-less" enterprise. And what was true when Darwin said it still holds true today: the species that survives is the one that is "most adaptable to change."