SMART COOKIES - International service - Wine from New Zealand, stereos from China ... production is global. Service, on the other hand, is still local - but for how long?
What forces are driving service globalisation?
The globalisation of physical production was driven by transport and storage becoming cheaper, faster and safer. With physical distribution cost cut to less than 5% of total cost of goods, competitors could produce in lowest-cost locations and then ship around the globe. Oil from the Middle East in huge tankers to Japan; beef in refrigerated freighters from Argentina to the UK; cut flowers via daily air freight from Colombia to New York.
The relative cost of physical distribution has declined dramatically - as has the cost of production - with scale economies and new technology.
For many producers, the biggest cost issue today is the cost of people - not production workers, but people working in sales, service, R&D, IT and administration. For pure service businesses - like software development, graphic design, IT outsourcing or accounting - this is the only cost that matters.
A next-stage globalisation revolution is now on the point of take-off, driven by rapid advances in telecoms, IT, the internet and e-commerce Global communications and transactions are getting cheaper, faster, and more reliable. A service centre on the other side of the world can be as connected and effective as the one on the floor below you in your UK office - at less than 50% of the cost.
Will this really be a revolutionary step-change?
Many firms have already put back-office service activities in domestic locations where staff costs are lower - like Manhattan banks' processing centres in Brooklyn or call centres in Liverpool or Scotland. In the 1990s, several firms have consolidated their European call centres into one pan-European location - such as Dell in Ireland. Investment banking and financial trading have been 24-hour global markets and labour pools for years.
But most service activity has stayed domestic. Sales, service, R&D, IT and accounting in or for a US firm, serving the US market, are carried out in the US. Ditto for German firms in Germany and UK firms here.
So it's fair to call the upcoming globalisation of service a revolution - in the sense that the 20th century saw a revolution in the globalisation of physical production, even though Asia and Europe have been trading since Marco Polo.
Can you give us an example of service globalisation?
Let's start with back-office, non-customer-facing activities. The Philippines and Indonesia are becoming a global centre for cartoon animation. Singapore (average income $30,000) is the nerve centre of an economic triangle, with Malaysia ( $3,000) supplying the white-collar services, and Indonesia ( $500) the factories. Western IT departments have outsourced to India to cope with Y2K-related programmer demand.
Customer-facing service activities are more challenging, but there are some interesting examples. GE Capital has located its debt-chasing call centre in India. Talisma, a leading Seattle-based software and outsourcing firm, handles Real Networks' customer care out of Bangalore, by e-mail.
German or American callers on phone sex lines end up talking to someone in the South Pacific (where phone sex can account for 50% of an island's GNP).
Which countries could be big winners?
One key requirement is English, the lingua franca of global business, currently used on over 75% of internet pages and e-commerce sites. If you need global customer contact - particularly voice, but also text - it needs to be in English first.
Skills, both technical and professional, are another requirement. IT outsourcing and technical support are candidates.
On these counts, the biggest winner (as in half the examples here) could be India. English-language schooling, some 50 million fluent English speakers and a large, well-qualified pool of engineers and technicians - India has the only sizeable population with these assets and with direct labour costs that are a fraction (10%) of levels in the US, Canada, Australia, UK or Ireland. Training, overhead, infrastructure and telecom costs are more comparable - but even with those factored in, the cost of a software developer or telesales rep in India is 25%-50% of the cost in the US or UK.
The markets are recognising this potential. Software exports from India will be $4 billion this year and are doubling yearly. The leading Indian exporter, Infosys, is valued on the Bombay Exchange at $4 billion-$5 billion on revenue of under $200 million - a higher revenue multiple than Microsoft.
Service globalisation could do for India in the 21st century what manufacturing globalisation and consumer electronics did for Japan in the second half of the 20th.