The evolution of global outsourcing
The emergence and growth of global outsourcing reflects continuous industrial upgrading and the redefinition and relocation of specialized activities along the industrial value chain. Outsourcing gives an enterprise access to the capabilities needed to perform business activities without owning or managing the resources that are required to generate those capabilities. As shown in Table 12.1, in order to provide the context for understanding Chinese institutional factors and their influence on the development path of the Chinese business service outsourcing industry, we illustrate the different types of outsourcing and the evolution of global outsourcing as a by-product of the continuous shift from downstream to upstream activities. The evolution of global outsourcing has two important characteristics.
First, the different stages of outsourcing represent distinct paths and characteristics. Manufacturing outsourcing is very different from business service outsourcing. Within business service outsourcing, there is also a continued shift from downstream information technology outsourcing (ITO) concentrating on IT-related activities, to midstream business process outsourcing (BPO) concentrating on IT-enabled business process activities, to upstream knowledge process outsourcing (KPO) concentrating on IT-enabled knowledge process activities. Even within each of these categories, there is a continuous shift from their respective downstream activities to upstream activities.
Second, shifts from downstream activities to upstream activities require not only the outsourcing vendors to adapt to new process capabilities but also an upgrading of infrastructure from that which supports downstream process capabilities to new infrastructure that supports upstream process capabilities. The upgrading of infrastructure includes not only changing hard infrastructure – such as technology, facilities, communications, and transportation systems – but also transforming soft infrastructure – such as institutions, culture, skills, and processes. The transformation of the soft infrastructure is much more difficult and takes significantly longer than transforming the hard infrastructure.
China versus India: outsourcing industry development paths and market positions
India has been a top business service outsourcing destination for the last four decades. As China aims at extending its competitive advantage from manufacturing outsourcing to business service outsourcing, leapfrogging India becomes the target for the industry. China and India have both experienced significant national economic reform and growth in the past four decades, with different development paths and market positions. In terms of overall economic development and growth, China has outpaced India.