Following on from my story from last November, Microcredit gains momentum, the leading Indian microfinance institution SKS India has launched a great new website, driven by Chris Turillo, who is in Hyderabad after acting as business development manager for my US partner organization Business Development Institute. The website provides details on the lending methodology SKS India uses, which is based on the community joint liability model originally developed by Grameen Bank. It describes how they select villages, form sangyam (centers) and do financial transactions. In addition it has case studies that help to bring the microfinance concept to life. SKS India has lent to over 150,000 women clients in some of the poorest parts of India, and aims to reach 1,000,000 clients by 2010. It is important to recognize that this is a financial institution, onlending from banks such as ABN AMRO, Citibank, and HSBC, yet using models that allow cost-effective, high repayment small loans that help lift people out of poverty.
If you happening to be flying Qantas anywhere in the world in the month of January, you can listen to an interview with me on the Qantas radio business channel, hosted by Peter Switzer. The interview was on the general theme of the future of the global economy and followed quite a few different tangents, but probably the most interesting part was about how we should feel about work being outsourced to China, India, and elsewhere around the planet. Work is becoming increasingly specialized, and technology allows business processes to be unbundled into small elements that can be easily integrated. Unless you are truly world-class at what you do, you can’t expect to do well in the long-term. The real value is often in coordinating how the pieces come together to create something new and valuable.
For example, many leading Indian technology services companies, such as Infosys, Tata Consultancy Services, and Satyam, have won contracts to run Chinese software development centers. These companies clearly have the expertise to do this. They weren’t chosen because Indian programmers are cheap, but because these companies know how to manage offshore software development centers. Yet why shouldn’t Australian, or Brazilian, or Singaporean companies do this? It is not an issue of cost, it is about effective project management and client liaison. Those organizations that have excellent capabilities at this level can create far more value than is possible by providing large numbers of inexpensive software developers. The problem is one of mentality. For example, there are any number of great software products developed in Australia and other mid-sized developed economies that are successful internationally. However I see very few initiatives being put together that deliberately draw on global best-of-breed suppliers, and create distinctive and high-value services and products from those inputs. This is where the smaller developed economies need to be playing. It is not about competing where you can’t compete, but about recognizing that value creation will cross boundaries, and positioning yourself effectively in that space.
[Update]: Just found out this is actually airing in February.
Microcredit (also known as microfinance) is the business of making very small loans, sometimes as low as $50 or less, to poor people who can invest the money to help them make a living. Recipients of loans may buy sewing machines or other simple tools that allow them to earn money, pay off the loan, and help to break the cycle of poverty. Muhammad Yunus acted as the grandfather of the industry by founding Grameen Bank in Bangladesh. One of its operations, Grameen Phone, exemplifies the spirit of microcredit by providing loans for villagers to buy mobile phones. If a single person in a village has the means to buy a phone, and then pay it off by renting the phone out to others, in one simple transaction an entire village can become connected. Long gone are the days when less than half the people on the planet had made a phone call. Today there are one third as many mobile phones as there are people alive, and many of the phones in the developing world service entire communities. Microcredit may be done as a not-for-profit venture, but is also frequently undertaken for financial return. One of the great strengths of microcredit is repayment rates that banks in developed countries would often drool over. Because loans are made within communities, there is a very strong understanding of the customer, and peer pressure to keep the funds in good standing.
Last week Pierre Omidyar, the founder of eBay, made a donation of $100 million to Tufts University, on the condition that it is used for microfinance in the developing world. The funds will be used to help develop economies and alleviate poverty, while the profits will go to Tufts, in a true win-win. This will play an important role in helping the industry grow and develop. The gift spurred a good article in BusinessWeek on the phenomenon, and an interview in Fortune, while coincidentally The Economist had almost simultaneously published an excellent story on microfinance. Other interesting blogs and references in the space include the blog of Unitus, one of the largest players in the field, and Nextbillion.net. The continuing rise of microcredit reflects the broader trend of greater granularity and flow in the economy. Business can easily be executed in smaller pieces, and has to be to access the next massive tier of the global middle class. The whole domain of “social entrepreneurship” also provides fine examples of knowledge-based relationships. Almost every microcredit institution is as focused on helping its clients invest funds effectively (and repay them!) as in providing those funds. I have long had a strong interest in microfinance, and hope to be more active in the domain at some stage.
Thanks to my friend Chris Turillo, who has recently arrived in India to work for the microfinance institute SKS after a few years working at my alliance partner Business Development Institute in New York, for pointing out some of these references to me, and keeping me posted on what’s happening in the exciting world of microfinance.
Last week The Bulletin, Australia’s premier newsweekly magazine, ran an interesting article on the role of technology in the future of Australia, drawing heavily on an interview with me. The broad topic of how Australia – and all other countries – can be successful in the swiftly evolving global economy is taking much of my attention, and I anticipate spending increasing time on this theme. In an intensely connected and interdependent world, it is impossible to stand alone. The idea of creating products, services, and ideas at home and then taking them to a global market is increasingly dated. All aspects of the innovation and commercialization process need to access global best-of-breed talent from the outset. Australia certainly doesn’t suffer from a lack of talent. Australians are well ensconsed in the most sophisticated business, technology, and academic circles around the planet. An interesting statistic is that 6% of open source coders hail from Australia, making it the most heavily-represented country in this domain relative to its population. However, with some notable exceptions, Australian technology innovation isn’t positioned to capture global markets. Part of the issue lies in the size of the economy. With 20 million people – not to mention the reality of geographical isolation – there is a mentality of economic self-sufficiency. Countries such as Singapore, with 3 million people, and Finland, with 5 million people, have no illusion of self-sufficiency and so seek more actively to integrate themselves into the global economy. A key theme that is brought out from my quotes in the article is that of specialization. As scientific and technological progress drives deeper specialization, we must as individuals, organizations, and indeed countries, very carefully select the domains in which we specialize, where we can have a reasonable possibility of being world leaders, and then who we will collaborate with to create value from our expertise. Very likely those collaborators will not be in the same country as us. We must form ties with whoever in the world provides the best complement to our skills. Building and leveraging the supporting networks is a critical skill that Australians – and others – must develop. We live in an increasingly location-independent economy. If you have deep specialist expertise, and connect and collaborate well, you can create massive value, wherever you reside.
An issue which almost everyone finds personally relevant is why we seem to be getting busier and busier, and having less time. Last week BusinessWeek’s cover story addressed this issue squarely with the title The Real Reasons You’re Working So Hard… and what you can do about it.
Very interestingly, the angle they took was that business is increasingly based on collaborative networks, a theme dear to my heart. That we are connected to many people (which is why our email inboxes are so full) and must collaborate with others in our work (which requires meetings, building trust, and ongoing interaction) is both the source of the challenge, and at the heart of the potential solution. The answer is not in becoming disconnected, which is a dead-end path, but in plugging effectively into the networks so that we can play just the roles we choose and where we can create the most value. With the right strategy, it is indeed possible to transcend the downward spiral of busy-ness. In the article they referred to Rob Cross, author of The Hidden Power of Social Networks, and founder of the Network Roundtable, which I am research leader for on client connectivity. Many of the members of the Network Roundtable were also referenced on their work on collaborative networks in organizations. Yes, a world of pervasive information and knowledge networks is challenging, but if we understand how to deal with it effectively, we can create far more with far less… including the most precious commodity of all, time.
John Hagel and I gave the two keynotes at the Silicon Valley KM Cluster last week. Hagel is a true thought leader in the intersection of technology and business strategy, with landmark books including Net Worth, that in 1999 described the currently still-emerging phenomenon of “infomediaries”, and Out of the Box, on how web services are transforming business. His new book, The Only Sustainable Edge, co-written with John Seely Brown, describes how value creation and innovation are increasingly happening at the edges of organizations, economies, and markets. At the event Hagel talked about “modular process networks”, in which business processes and activities become increasingly modular, and are brought together dynamically from throughout the network. In an excellent overview article (and in the book) the authors describe how the motorcycle industry in Chongqing, China, can now make a quality motorcycle for less than $200 by implementing standardized, modular design across an ecosystem of manufacturers and suppliers. China currently produces around 50% of motorcycles worldwide. While John and I use different language and frameworks, the messages in my book Living Networks and that I am currently preaching on modularization, integration, and global innovation networks are based on very similar premises. Executives should pay careful attention to Hagel’s vision of the future of business.
I frequently refer to online services exchanges to illustrate the inexorable drive of globalization and commoditization. These sites, such as Elance.com, Guru.com – both of which cover all personal services – RentaCoder.com specifically for software development, the Europe-based GetaFreelancer.com, and a host of others, allow anyone anywhere to post a job they need done, and to get talented professionals globally to bid their lowest price for the work. Graphic design, web development, marketing, writing, administration, sales – anything that can be done virtually is offered on these exchanges. Elance’s tagline “Everyday Outsourcing” says it all, particularly when 40% of work performed crosses national borders. The exchanges first rose during the dot-com boom, then struggled, with notably eLance changing its model – as many other B2B exchanges – to selling software and corporate processes to complement the actual exchange itself. Now the approach has been validated and increasingly, independent professionals are offering their services online. The most obvious implications are global competition, and that services are becoming commodities. Most professionals who experiment with the sites are shocked at the prices at which some people are prepared to offer their services. Yet some people do make a good living from the business they win on the exchanges. The exchanges bring home the idea of “polarization” that I believe is one of the key aspects of the future of work. Many people around the world will find their work increasingly commoditized in the face of global online competition, with constant pressures on fees and their livelihoods. However those who have deep specialist knowledge, and can create unique insights and value by collaborating with other knowledge specialists – be they colleagues, professionals at other firms, or at their clients – will command an increasing proportion of economic value. These are realities of the network economy. Yet we must guard against the dangers brought about by this polarization.
The excellent [email protected] site of Wharton Business School has just published an in-depth special edition on What’s Driving India’s Rise as an R&D Hub? (registration required). Motorola, Microsoft and many others are launching R&D programs in India. The real issue is that these are not isolated projects, but integrated elements of global research. The new term for this is Research Process Outsourcing. To do this effectively absolutely requires knowledge-based outsourcing, and harks back to the issues raised by the Harvard Business Review case study I discussed last month. There is no question that the increasing sophistication of the best of the Indian technology companies enables not just participation in global R&D efforts, but also the coordination of international efforts. However despite all the excitement about the potential of the Indian economy, the depth of its lag in education, infrastructure, and health will prove a massive drain on the ambitions of the leading edge of the nation.
A recent survey by TPI shows that 81% of large UK companies expect to increase their offshoring activities over the next 2-3 years, with just 4% saying they will decrease it. Other recent stories have focused on the woes of outsourcing. While these stories seem to be contradictory, the reality is that companies are not usually responding to outsourcing problems by stopping the practice. Rather they are working out how to do it better. This is reflected by another major finding of TPI’s survey: companies are tending to offhsore with wholly-owned subsidiaries rather than contracted providers. This relates to my current work on the rise of “knowledge-based” outsourcing. The global outsourcing business is rapidly moving into its third phase. In the first phase of outsourcing, organizations paid companies to take over selected business processes. In the second phase, clients became more sophisticated, specifying in detail how the companies would create results. The emerging third phase of outsourcing is “knowledge-based” outsourcing, in which organizations develop deep mutual knowledge, design knowledge transfer, and integrate their business processes so that the outsourcing companies are in a situation to effectively “lock-in” their clients. In some cases, in order to get that level of integration, you want the offshoring company to be owned by you. However this means far less flexibility on many levels. Ultimately you do want an external provider that can provide a high-level of knowledge-based integration. This relates to the rapidly increasing quality of offshore service providers. Another finding of the TPI survey is that 60% of UK companies believe that Indian companies match local UK providers on quality, irrespective of cost. Indian outsourcers, which for now are in the vanguard, are very actively focusing on building effective knowledge-based relationships. I featured Infosys as a major case study in the second edition Developing Knowledge-Based Client Relationships for some of the great work they’re doing on this.
Every issue of Harvard Business Review includes a hypothetical case study, together with commentaries by leading practitioners on what they recommend in the situation. The case study in the July-August issue, written by Nitin Nohria, titled “Feed R&D – or Farm it Out?” is a very interesting examination of a company that is wondering whether to outsource part of its R&D to India. Issues raised include accessing best-of-breed and potential loss of intellectual property. Of the four very interesting commentaries, the most striking is written by Azim Premji, chairman of Wipro, one of India’s top three technology services companies. He is cautious on the merits of outsourcing in this case, spends most of his analysis on the internal dynamics of the company involved, how to support collaboration, and emphasizes the importance of providing strong contractual protection of IP.