Tech's Next Global Challenge

By Brian P. Watson  |  Posted 07-09-2008

Tech's Next Global Challenge

Corporate America, beware: They're coming. Previously known as members of the Third World, handfuls of developing economies are turning the tables on the developed worlds of North America, Western Europe and Japan, churning out businesses that seek global competition--not just traditional outsourcing contracts.

Businesses from India, China and many other less developed nations are stepping onto the global stage, taking advantage of lessons learned from spending years as the industrialized world's service providers. Sound familiar? It's happened before. Early 20th century America took on European powers and won. Post-World War II Japan revved its manufacturing engine to become an industrial leader.

But this time is different. "We haven't seen a trend this huge in ages," says Harold L. Sirkin, a senior partner and global head of the operations practice at Boston Consulting Group, a global management consulting firm.

Roughly six years ago, Sirkin and fellow BCG partners James W. Hemerling and Arindam K. Bhattacharya began theorizing about the future of global outsourcing. Their years of collaboration, travel and observation are detailed in Globality: Competing With Everyone From Everywhere for Everything (Business Plus, June 2008). The vividly detailed tome describes the latest shift in globalization from a one-way street of Western domination to an increasingly competitive global playing field, where businesses from once-discounted nations are solidifying their standing.

Despite the great challenges this shift presents for old-world multinational corporations, Sirkin, who previously headed the firm's global IT and e-commerce practices, sees a compelling opportunity for IT departments to play a large role in managing global operations, provided CIOs and their C-level colleagues acknowledge that the pressure is on.

Sirkin spoke recently with CIO Insight Online Editor Brian P. Watson, who edited and condensed their conversation.

CIO INSIGHT: What's the difference between globalization and globality?

Harold Sirkin: We think about globalization as multinational companies from the first world [capitalist, technologically advanced and with a high standard of living]: North America, Western Europe and Japan. As companies in those parts of the world continued to face cost pressures, they recognized a tremendous opportunity to take advantage of low-cost labor in the developing world and produce products from there, taking 20 percent to 30 percent out of the cost structure.

In the course of these outsourcing deals, some interesting side effects occurred. Companies in the developing world that were smart and forward-thinking realized they were getting two things out of this relationship in addition to cash flow. The first was scale: They kept getting larger because, if they were good at what they were doing, more companies would outsource to them. Second, they gained the knowledge of what's required to serve the Western markets.

All of a sudden, these companies wanted to take control of their own destiny. A lot of them decided that they would build their own relationships with organizations in the developed world. They began to sell their own products domestically and in the American, Western European and Japanese markets. There was a huge advantage to doing this, because the companies were able to keep more of the profits and be in control of their own destiny.

It used to be a one-way street dominated by companies from the developed world. Now it's a two-way street, where you have organizations competing from the developed world and the developing world: India, China, Russia, Eastern Europe, Brazil and other parts of South America, as well as Southeast Asia, Turkey and Egypt--between 13 and 18 countries that account for 3.5 billion people, or half the world's population.

That's the distinction between globalization and globality: It's a fundamentally different competitive environment, and we see all sorts of effects of this change. It involves competing with everyone from everywhere for everything--and the everything becomes very important.

We see oil prices going up because we have 1 billion people who were living in abject poverty now getting better jobs and becoming consumers. That means the demand for food goes up, because you're adding hundreds of billions of calories to the world's food demand. The demand for oil goes up because they can afford not to walk and buy a low-end motorcycle.

One billion people are moving from poverty to consumerism, and our systems are not geared to produce or deal with that much more energy demand. In essence, early-stage shortages are occurring.

The Shift

Was there a particular event that signaled this shift or ignited the increased competition?

Sirkin: A group of us got together and talked about global trends. We started to see all these other companies appearing on the horizon, about to enter the world stage. It wasn't a new phenomenon, but this one would be different.

If you go back to the late 1800s and early 1900s, U.S. companies were challenging European incumbents as we started to become much more of a manufacturing society with our lower-cost labor and materials. Those companies began to take their place on the world stage, which was primarily Europe.

In the late 1950s and early 1960s, the Japanese began to reindustrialize. Many people talked about Japanese imports as transistor radios or the little plastic umbrellas we put in our drinks. Japanese products were the definition of poor quality, which is quite the opposite today.

Then Japan shipped over its first car, the Toyota Crown car. They were not high-quality automobiles and were not designed for the U.S. market. We had our big muscle cars with fins that got four miles to the gallon, and Japanese cars were tiny. But it gave them the first taste of the U.S. market. That started a radical change. Soon enough, Japanese companies learned how to operate in the West. Now Toyota is the No. 1 car manufacturer, and everyone wants to buy Sony TVs.

We saw this with Mexico in the 1980s and Korea in the 1990s. It used to be that those countries were the places where companies outsourced.

So what makes this shift different?

Sirkin: In Japan's case, we were talking about 140 million people. Now, we're talking about 3.5 billion people. The wave can be 20 times bigger.

And there's another reason why it's going to be bigger this time. In the past, foreign companies had no way to find people to help them understand something like U.S. car design. When it came to a car, they had to build it themselves. Now, an automobile manufacturer in China can use the Internet to understand how U.S. distribution works and can understand customer needs through surveys. If it wants to do car design, the Chinese company can outsource to a car styling shop in Los Angeles to do the design. That's now a realistic option--and a big change.

There's also a fundamental hunger--capitalism unleashed--to control your own destiny and become a player on the world stage. Put those things together, and it's going to be a very powerful shift.

How are incumbent companies from industrialized nations handling this?

Sirkin: A lot of companies are in denial about this. I've had CEOs tell me they have four or five years to figure it out, that it'll take that long for this to happen. But it will happen far faster than Japan did. They were in denial about Japan when they shipped over their transistor radios and cars. There are many in Michigan who are still in denial about that.

IT's New Role

What caught them so shortsighted?

Sirkin: We viewed these countries as third-world countries. There was a belief that they couldn't do these things. But as the United States showed in the early 1900s, they can do these things; they can stand as equals. Of course, it's difficult to think of how to respond, especially when dealing with other pressures.

The classic example is the Big Three Detroit auto manufacturers. They watched the Japanese come to America, and they were in denial the whole time. If you look at Detroit and companies based in Michigan, you could argue that this country doesn't have a thriving automotive industry. They've struggled mightily to survive and try to thrive in this global environment.

It turns out that the United States does have a thriving auto industry--in Tennessee, Mississippi, Alabama, North Carolina, South Carolina and Texas, where Toyota, Honda and Nissan have plants. Korean and German manufacturers also are coming to put in plants.

The interesting thing is that with the dollar where it is now, we're not a low-cost manufacturing country compared with China. But compared with Europe, we're a midcost manufacturer, particularly if you set up shop in the southern states.

What's the most fundamental thing IT executives need to understand about this trend?

Sirkin: This shift is going to be more IT-enabled than other shifts. All of a sudden, businesses are going to have to grow into truly global operations, not just country-specific operations. The only thing that will bring that together--and one of the things you absolutely have to have--is IT. This becomes a much more important challenge for CIOs.

The traditional way of solving IT issues is to go to a very standardized system of operations. However, to be successful in each of these countries, there's a need for massive customization.

It's the concept of "manyness." Manyness is going to be a challenge for CIOs, because it basically means they will have to deal with more varieties of ways to do things and will need more flexibility, especially with management information systems.

There's going to be less centralized authority. The authority within the company may be around the different standards, but each country--and each operation--is going to want to do things differently. It's going to be crucial for IT to make it work, especially because we're going to see a lot more movement of people, ideas and goods between countries.

There's going to be a fight over resources for everything, including talent. The shortage in the supply of talent is going to be of high-end IT people, because they're going to be in such high demand.

Companies are going to have to find a way to attract those people, but they also will have to find a way to attract customers, because everyone will be fighting for them. Businesses must find a way to better manage suppliers because they're going to become more important. They will need much more robust IT systems for managing intellectual capital, and they'll have to deal with a variety of distribution channels.

This will increase the challenge and importance of IT, and particularly of the CIO, who will have to make a lot of the decisions in conjunction with the business on how this is going to happen, and how to balance costs and add flexibility. Companies will have to manage global footprints. That can't be managed solely on paper--it has to be managed with the aid of IT.

We'll also see many more acquisitions, aligned partnerships and structured deals. The big problem with post-merger integration is integrating systems--that's the long tail--and CIOs will have to deal with this more often. There also will be more partnerships in which information needs to flow freely, and that's another huge issue for CIOs.

This is going to be a major challenge. Companies will ask IT to handle it, and IT won't have a choice.

A New Breed of CIO?

Is this going to give birth to a new breed of CIO?

Sirkin: When there's change, there's always some alarm and disturbance. People are going to have to step up to the plate. CIOs have had to step up before; some have been able to, and some haven't.

This isn't fundamentally different from what's happened in the past. This is going to be a bigger step, though, so in theory, fewer will be able to step up.

What specific skills will CIOs need to survive?

Sirkin: It's still early to know, but three areas will clearly be critical to enable success.

First, CIOs must take a global perspective on IT and have the skills available to implement globally, especially in developing markets. They will need to ensure that IT systems can support a significant increase in the rate of acquisitions--many of which will be cross-border--and quickly integrate new partners and new customers into their supply chain. An increase in their company's global footprint will mean a greater need for systems tailored to comply with different local requirements for accounting and reporting.

Most important, given the need for companies to be global but act local, their IT systems will need to have the flexibility to deal with different business models, different distribution systems and different management reporting needs. Finding the right balance between the business needs and cost will become much more difficult, but also much more important.

Second, CIOs will need to be more than just partners with business leaders. They will need to think and act like business leaders themselves. They will need to get ahead of the business needs and be able to take the IT capabilities built in one market and adapt them to other markets.

CIOs will need to be able to work with a variety of IT firms in potentially dozens of countries and be able to integrate their work into the overall company system. Given the long lead time of IT, they will need to be ahead of the business leaders, rather than reacting to the needs of the businesses.

Third, CIOs will need be fast and flexible. They will need to think multiple steps ahead and embrace different ways of operating. CIOs will play a major role in shaping the competitive advantage and therefore the strategy of their businesses.

Over the next five years, the value of speed will double or triple. CIOs who can keep up with the speed and flexibility requirements will give their companies a real advantage. The good news and bad news for CIOs is that the future is here. Those who are most ready are most likely to help their companies win. Unfortunately, the opposite is also true.

This is a big step up, a big recasting of the scope and scale of what CIOs are capable of.

Sirkin: We haven't yet come to grips with what this is. IT hasn't, nor has the C-level suite.

Why is that?

Sirkin: They don't understand what's coming at them. Those who are in denial won't think about it at all, but most people operating in businesses just haven't gotten to that point yet.

It's not surprising that the CIO and the rest of the C-level suite haven't adopted this yet, because we're just beginning to tell them it's going to happen. They're behind where you might expect them to be. The ones who have had to operate in global environments may have figured out more of it.

This shift will start to become more apparent in the next few years. It's still in the early stages, because people continue to think about globalization in a traditional context.

Globality is not a new word. But it's very important for people to know the difference between it and globalization; otherwise they'll say it's just a continuation of a trend.

While technically that is correct, this is a very different change. This is not a step change; it's a sea change.

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