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In a year when, after all the bad press about the former chief executive officer's remarks, the firm would have been ecstatic to maintain their job offer acceptance rate, we
increased
it by 50 per cent. This is an example of a company recognising that business is personal for both customers and staff, and successfully managing a PR disaster at the same time as attracting more of the best and brightest job candidates. It also illustrates the overarching flip that in today's business world you must 'Think AND, Not OR'. Conventional business thinking holds that it is an 'either/or' world in which customers or staff can be number one, but not both. In fact, as my clients discovered to their benefit, making customers and staff conumber one creates a win-win situation. There's no better evidence of that than the fact that the firm won the same client service award the following year as well.

Making sure that you do not treat staff in a way that is at odds with the way you treat customers is essential, even if you are a sole proprietor and you are the only staff your business has. The way you treat yourself will inevitably be reflected in the way you treat customers, for good or ill.

With that in mind, let's take a close look at the decisions on outsourcing and off-shoring by my bank and numerous other companies.

GETTING HIT IN THE HEAD WITH A BRIC, OR, GETTING OUTSOURCING RIGHT

Over the next forty years, according to projections by Goldman Sachs, the BRIC economies (Brazil, Russia, India and China) will likely become larger as a group than those of the so-called G6 (the US, UK, Japan, Germany, France and Italy). Most of that growth will come in the next thirty years, over which time China will probably surpass the US as the world's largest economy. Of the current G6, only the US and Japan economies will remain among the six biggest.

Many people find this prospect frightening. A study by one of Europe's leading business schools, IMD (the International Institute for Management Development in Lausanne, Switzerland), found that of 1962 US businesses surveyed, 49 per cent believe they have lost their competitive edge to China and a further 47 per cent believe they have lost their edge to India as well. These fears are fuelled by the undeniable growth of outsourcing from the developed to the developing world. China and India are now consolidating positions as the world's manufacturing and service-provider destinations, and former Soviet-bloc countries such as the Czech Republic are increasingly doing the back-office work for big companies in France and Germany. For example, GE do 48 per cent of their software development in India, where the engineers earn on average $12,000 a year compared to $72,000 in the US. It is estimated that salaries rose 17 per cent in India in such professions in 2006, which could quickly erode this price advantage.

Much of the anxiety in developed economies about outsourcing to developing economies betrays a poor understanding of the value chain. It is one thing to make products or do the paperwork for the world cheaply, and it is another thing entirely to innovate, design and sell goods and services in the world's advanced consumer markets. Own the manufacturing of a product or the back-office part of a business, and you own the links in the supply chain that are farthest away from the consumer and most easily commoditised. They are the least valuable. Own the links that are closest to the customer, however, and you own the links that represent the highest value and profitability. Thus, as Goldman Sachs also projects, per capita incomes in the United States and other currently developed economies will remain higher than those in Brazil, Russia, India and China, even after these economies have grown bigger than the G6.

Doomsayers on the threat of the BRIC economies to the developed world often cite such figures as the numbers of engineering graduates per year in different countries. In 2006, according to multiple media sources, China graduated 650,000 engineers and India graduated 500,000. By contrast, the US graduated 70,000, Australia 4600 and New Zealand 1500. Even given the vastly larger populations of China and India, this seems like a huge disparity.

Even though I think we should be concerned about the emergence of technical skills in economies with clear labour cost advantages, it is important to note that these oft-cited statistics are now generally considered to be quite misleading. In December 2006 researchers at Duke University in the US reported that in the case of India only 112,000 engineers graduated with a bachelor's degree or higher, and that the higher figure publicised by India's National Association of Software and Service Companies (NASSCOM) was not only wrong but included those with less than degree-level qualifications. In the case of China the correct figure for graduating engineers was more like 350,000 than 650,000. Using the definitions that generate these numbers for India and China, the US actually graduates as many as 137,000 engineers per year. This places it at 470 engineers per million people, compared to 270 per million in China and just 100 per million in India.

The Chinese and Indian numbers are still impressive, of course, and are growing every day. Consider that according to the UN, 8.5 million regional Chinese citizens move to urban areas every year. So, should freshly minted engineers in the US, Australia and New Zealand be freaking out? That depends. If you're a new engineer who is betting on applying the rote engineering knowledge you learned in engineering school for the indefinite future, yes, you should be worried. If you're betting instead on a lifetime of learning and unlearning, and of leveraging relationships with valued customers and clients, you should be confident of your ability to make your way.

You might even find it very profitable to go to work in India for a time. India graduates 112,000 engineers a year, but the average quality of these engineers is so poor that Indian business and government officials fear it could be a limiting factor on India's economic growth. To find engineers who can think creatively, Indian firms are beginning to recruit aggressively in the US and other developed countries.

It is the same if you are an accountant. The Big 4 accounting firms are beginning to adapt their existing 'get them in young, work them hard, pay them as little as possible and charge them out at as much as possible' to the developing world. In 2006 alone, more than 360,000 US tax returns were completed in India at a value of over US$40 million. That figure is projected to rise to anywhere between 1.6 million and 22 million by 2011. Instead of getting some young graduates in developed countries to crunch the numbers and do the basic work, they found they could get it done cheaper and to a better standard in India.

Again, should you be worried if you are an accountant? Yes, if you believe your value is the left-brain numbercrunching skills that are rapidly being replaced not just by some graduate in India for one-fifth of the wage but by software that those same graduates are developing. No, if you realise your value is making your clients feel secure by minimising their exposure to risk and remembering the little things about their businesses. And definitely no, if you realise the value of aligning yourself strategically with those clients, building deep relationships that enable you to help them grow and develop their businesses. Skills are becoming commoditised. Relationships are not!

The trend to outsourcing the production of goods and services will continue, as well it should. There are huge cost savings to be had, and companies that do not achieve these savings will be at a disadvantage to companies that do. Successful projects orchestrated by firms such as Accenture are evidence of how powerful such outsourcing activities can be for businesses.

The biggest, most profitable companies in the world are among the most aggressive outsourcers. In the early 1990s, Jack Welch, then CEO of GE, mandated a 70/70/70 rule: 70 per cent of business processes to be outsourced, with 70 per cent going offshore and 70 per cent of that (around 30 per cent of the total) going to India. That policy has been continued by current GE CEO Jeffrey Immelt, and GE has around 13,000 employees in Delhi alone. It's no wonder that according to
CIO
magazine, 73 per cent of Fortune 500 companies see outsourcing and off-shoring as an im-portant part of their strategy, and that Gartner, the US-based information and technology research firm, estimates the global off-shoring market in 2007 as worth around $US50 billion.

But if you can achieve short-term savings from outsourcing almost anything, you can also suffer serious long-term costs from outsourcing the wrong things. The right things to outsource, depending on your business, could be manufacturing, process engineering or back-office services. The wrong things to outsource, no matter what your business, are those that touch the customer. Outsource knowledge and expertise by all means. But own, nurture and leverage the final link in the value chain, the relationship with your customers.

Let's go back for a minute to my bank's decision to outsource customer service call centres to Bangalore, India. My client at the bank told me, 'Don't worry, Pete, your call is unlikely to be answered by someone in India.'

'How is that?'

'Well, if you are a low net-worth customer, then in all honesty you are not that valuable to the bank and your calls will be answered in Bangalore. If you are a medium net-worth customer, we will have your calls answered in Australia but most likely by an outsourced provider. You are a high net-worth customer, so your call will not only be answered by a bank employee here in Australia as a priority matter, but you will also be assigned a personal representative and given their mobile phone number.'

Flattering to me, and every business needs to target its most profitable customers (although as we will discuss in 'To Get Control, Give It Up', the old 80/20 rule may not apply as readily today). The risk is that some high net-worth customers were once low net-worth customers. If my business had not taken off before my bank moved its low networth customer service overseas, I might well have moved to another bank before I became a valued high net-worth customer. Or a customer classified as low net-worth because they have only a small account with the bank may actually have plenty of assets elsewhere and be giving the bank a trial run to see how they're treated.

It reminds me of the sequence in the movie
Pretty Woman
where the Julia Roberts character goes shopping with credit cards given to her by Richard Gere's character. Julia's character goes into a fancy Rodeo Drive store wearing her own cheap (maybe almost non-existent would be more accurate) clothes and is treated so disdainfully by a sales assistant that she retreats in embarrassment. After getting her courage up and venturing into another store where she is treated better, Julia returns to the first store, wearing beautiful new clothes and carrying bags with thousands of dollars of other purchases in them. Julia asks the sales assistant if she is paid on commission. When the sales assistant says yes, Julia holds up her overflowing shopping bags and says, 'Big mistake. Huge.'

It's a moment that drew cheers from audiences when the movie was first released. And it carries a powerful lesson: all customers have potential, and you'd better be very sure of what you're doing if you deliberately treat some customers worse than others or in a way that simply runs counter to their fundamental expectations.

Just ask Dell Computer, which has spent millions of dollars bringing call centre operations for North American customers back to North America. Yes, it is more expensive to operate your customer call centre in the US than it is in Bangalore. But not as expensive as losing thousands of clients who, rightly or wrongly, do not want to deal with a staff member 25,000 kilometres away.

JP Morgan Chase, Capital One and IBM have done the same thing. The reason is not necessarily that the outsourced customer service was bad, although in Dell's case it certainly seems to have been, judging from the stories on websites such as crmlowdown.com. In cases where the outsourced-to-India customer service was actually quite good, North American customers could still feel ill-served and condescended to by call centre staffers speaking English with British-inflected Indian accents. The fact is that North American customers of a company with North American operations want to speak to someone who sounds like them, like a neighbour.

The same thing is true in Australia, the UK and the rest of Europe. Citing consumer preference, the Irish arm of the Swedish telecom firm Tele2AG recently switched its call centre operations out of India and back to Ireland. British bank Lloyds TSB closed all of its call centres in India in response to a petition signed by 400,000 customers.
³
One in three respondents in a British survey said they would stop doing business with a bank that relocated its call centres offshore. Another study reported that only 5 per cent of British customers are satisfied with offshore call centres. In Australia a study by McNair Ingenuity found that 91 per cent of Australians are concerned that the personal information that offshore call centres access is not safe.

If my bank genuinely had customers at the centre of all they did, they would have considered outsourcing something besides their call centres. They would have outsourced the payroll division, the risk assessment division or another backoffice function that does not face and touch customers. There is no question that these, or potentially some other functions, can be adequately handled in parts of the world where labour is cheaper than in Australia.

The bank could then use these cost savings to create better working conditions, increased remuneration and improved training for the staff on the front line. This would improve the bank's ability to attract higher quality customer service staff to their call centres (one of the major motivations for offshoring customer service in the first place), which in turn would deliver a better experience to customers. All of which would give the bank a genuine competitive boost against the other Australian banks. After all, there is no competitive advantage to speak of in financial products themselves, which are largely the same in every bank.