Service offshoring & innovation The Information and Service Economy October Bob Glushko and Anno Saxenian

Why are economists worried? Classic economic view: Offshoring as latest manifestation of ‘gains from trade’ with comparative advantage New wrinkle: Comparative advantage not static and not purely ‘natural’ -can be created and changed quickly New trade theory: Government role in creating and maintaining comparative advantage through trade policy, education, welfare systems, etc.

Marx’s view “It is not the articles made, but how they are made, and by what instruments, that enables us to distinguish different economic epochs” Karl Marx Capital Industrial age: equipment replaced tasks that are repetitive, codifiable, and programmable…eliminate human caprice

“This time its personal” What sort of jobs can be offshored? In the past, could go in a box: manufacturing v. non-manufacturing jobs Services clearly tradable: jobs requiring highly educated v. less educated/skilled? Easily deliverable via wire or wireless connection without diminution in quality?

Current limits to offshoring? 1.Job process not routine 2.Job can’t be done long distance 3.Poor infrastructure overseas 4.Cost of labor or other too high 5.Cultural or communication problems 6.Risks to privacy, data security, IP 7.Impacts on domestic worker morale

How about intellectual tasks? Architect, attorney, teacher: jobs didn’t change much from How does microprocessor change this?  PC allows architect to render drawings quickly and efficiently, frees up to do creative tasks computer can’t perform  Machines lack wills of their own, too obedient to reliably innovate & create

Computer: forklift or microphone? It doesn’t matter much who drives the forklift, but it matters a lot who sings into the microphone.  I’m not as strong as Bob but I can operate forklift and lift as much as anyone else...  Forklift is a force for income equalization  I might have to pay you to listen to me sing into the microphone; I’ll never be opera star  Microphone is a strong force for inequality

A computer is both...  Computer as forklift: strengthens all Clerks in fast food stores Computer as microphone: amplifies natural talent Lawyers, architects, programmers offload mundane tasks Most talented more likely to succeed  Implication for interaction between talent and training?

Why innovate? Because the world is flat... & competition is inevitable, sooner or later. => shorter product cycles, more innovators, more knowledgeable customers, much faster and greater access to information

What is innovation? Innovate (L. innovatus) to make changes, to do something in a new way; first use as transitive verb in English, Standard view of three steps to innovation: 1. Invention 2. Adoption 3. Implementation / Commercialization

What is innovation? Real innovation is about more than the simple launching creation and launching of new products. It is also about...S. J. Palmisano, 2006 How services are delivered How business processes are integrated How companies and institutions are managed How knowledge is transferred How public policies are formulated etc.

Joseph Schumpeter The introduction of a new good —or of a new quality of a good. 2.The introduction of a new method of production, or a new way of handling a commodity commercially. 3.The opening of a new market, whether or not this market has existed before. 4.The conquest of a new source of supply of raw materials or half-manufactured goods 5.The carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position

Service innovation Service innovation: 1.Improve productivity of service delivery 2.New models of service: information- intensive and interactive Service productivity still lags behind manufacturing In 2003 (Index 100, 1997) manufacturing productivity: 219 grocery retail, wholesale, merchandise stores: 141 commercial banking: 102

Improving service productivity  Eliminate or raise efficiency of labor 1.Self-service 2.Interactive voice response 3.Automatic provisioning 4.Converged networks (distribution channels) 5.Wireless communication

New service models  Create new services or deliver services in new ways: 1.Remote delivery (e.g. telemedicine) 2.Service-enhanced products 3.Co-creation or co-production of value