Global outsourcing: the challenges of a revolution

Outsourcing is the gateway to a new world. A new world we get to see right here.

·         An economy driven by the revolution of Information Technologies.

Transformations are visible in many cities of emerging countries. It's evident for the outsourcing of computer programming or communications systems, that have been growing fastest. IT services outsourcing is now the key to tomorrows economics, with new giants acting on the world scene, India and China. In Morocco for example, as well as in India, but also here in the spectacular success of Chinese cities like Shenzhen or Ningbo.

·         An interdependent economy directed by globalization.

After decades of trade driven globalization, with the more recent development of outsourcing, the change concerns the very quality of this globalization. It's a globalization of the economic actors' identities, actions and strategies. Global firms can claim positions by optimizing their resources and activities, and particularly by diversifying their outsourced activities.

·         A service economy based on knowledge, qualification and the development of powerful infrastructures.

This is the new world we are all getting acquainted with. We have to change habits. We have to take risks for the sake of all.

That's why I'm particularly happy to speak here in a country that has impressed the whole world by the development of a strong economic model, a country at the heart of this century. This summit is, I believe, a great opportunity to share points of views and to develop strong and diverse expertise and that's why I thank you for giving me the opportunity to speak to you here.

It's a hot topic, because it's not something that's just happening. It's something we can shape, organize, build up together.

First of all we must consider outsourcing not as a solution, but as a choice, as a conception of relationships within the globalized economies. It's an opportunity we can seize.

All partners have to draw all inferences of this new deal. Outsourcing is a huge challenge for governments, as well as for private companies and for the international cooperation. It calls for coherent strategies and global regulations.

1    We must make the choice of partnership and reject competition without rules.

Outsourcing is a complex matter. It can produce the best effects. We see it in emerging countries like here, where it leads to more activity, more efficiency, more perspectives for the future. But, depending on the way it's managed, it can also lead to instabilities, conflicts, weakening of management. There are definitely two sides to the process, depending on how it's interpreted.

·         One way is to misinterpret outsourcing as a general and permanent competition, a win-loose situation, where one country rips off the activities of another one. It's a very risky one.

-          In this perspective, the danger is clearly to see a stiffening of international trade relationships as a reaction to the boom of outsourcing.

The debates have grown vivid in the United States during the last presidential campaigns, particularly in 2004. It's also a hot topic in Europe.

Many societies are naturally frightened by the massive job losses they witness. They blame outsourcing. If they should be proven right, what will be the consequences in the near future? Evidently the rise of protectionism, xenophobia, nationalism. We know the downward spiral that could come out of a logic of general distrust. The world had to cope with it in the 1930es, when it faced the consequences of the Great Depression.

That's why it's necessary to look at outsourcing from both sides at once, from the country loosing activities, and from the country receiving new activities.

-          For private companies, this general competition isn't beneficial in the long run either.

 The cost reduction doesn't match the instability it would generate. If the logic of minimizing costs prevails, companies would be bound to a kind of economic nomadism, by switching activities from one country to the other as infrastructure costs and labor costs rise. Today it would be China, India, tomorrow, if conditions there become cheaper or easier, South East Asia or Africa.

-           We can't afford a model of global outsourcing dividing even more strictly than before decision centers and execution regions in the world.

We must aim at a fair and sustainable division of the labor process over the globe. In consequence, global outsourcing must be a strategic networking of decision-making, a new model of company management and of the companies' identities.

·         Indeed global outsourcing can be an opportunity to choose a mutually beneficial partnership.

-          It's a dynamic partnership between private companies, first.

This fact should not be underestimated by the companies resorting to outsourcing. They choose to tie their destiny to another company. They choose to share responsibility.

It's not only a way to optimize existing processes, to redistribute time and energy in favor of core activities. It's also, in the long term, a way to encourage the discovery of new processes through a permanent dialogue between different management and trade cultures.

It's a lasting partnership, because you can't transfer activities as easily as shares in stocks, loans or investments. Trust can only be built up over time. That's why today's changes are a deep commitment for the future.

With this conception,  the developing of outsourcers is an incentive for more accountability, more dialogue, more efficiency of the companies. That's a positive factor for the whole economy.

-          Let's take a broader view. It's also beneficial for societies and cultures because it's a way to open up to the world.

Indeed the massive development of this new worldwide division of labor creates visible interdependencies and can be a factor of appeasement in international relations, as we see for example in the Asian Pacific area. Outsourced activities create trade links from country to country but also human encounters for students, workers, managers.

It's a source of fairer opportunities for all parts of the world, emerging countries, developing countries, industrialized countries alike.

It's in fact a complete turnabout in the conceptions of globalization, because there’s no time lag for emerging countries in the development of new activities, with a progressive specialization in value-added activities. Because service outsourcing, particularly in the IT sector, creates qualified jobs and is justified by the competitiveness of high-level labor forces. It allows a straightforward competition in all activities where physical presence is not needed, those where few qualifications are needed as well as those with very high qualification. It's a fair chance for emerging and developing countries.

It also favors the development of economic elites and of new classes of entrepreneurs in emerging or developing countries. In this regard, some sort of trickle-down effects can rightly be expected.

It can also be a chance for developed countries outsourcing their activities to reshape their economic model, to look for higher qualification, new specializations, if they develop the right strategies to face change.

Strategies and partnerships are, as we've seen, the cornerstones of a successful global outsourcing model.

2     In fact, as we see, developing outsourcing as a sustainable growth model is all about inventing and defending rules. It’s about cooperation. It's a challenge we have to take up.

·         Outsourcing is a major issue in the building up of a global governance.

-          It gives us a model for sharing responsibility and decision between emerging countries and developed countries.

There are conflictual interests that have to be harmonized. Can it be done without strong institutions able to conduct this difficult discussion? Would the G8 adapted to organizing outsourcing when it necessarily has a very one-sided perception of the question? It's a positive element that the G20, where both interest of northern and of emerging countries are represented, about 90% of the world’s output, has taken up more responsibilities in the last year, when it came to face the consequences of the financial crisis. I think stakes are very comparable.

China, India, Brazil have had a possibility to explain their points of view and to defend their specific interests. But, before all, their legitimacy to  concur to the world's stability has been recognized. A new era of international relations may be about to begin, if world leaders seize the opportunity and don't go back to business as usual.

We need a thorough reform of multilateral institutions to face the real challenges of the century, economic stability, climate change, global security, pandemic diseases and poverty. The United Nations, as they are, are not efficient enough any more. The Security council must be reformed so as to be more representative and it must be given more power in sompe definite areas, balanced by a greater accountability.

-          The case of outsourcing shows us the necessity of formal rules.

We can't be satisfied by good intentions. In many cases codes of good practices should be developed to guarantee the quality of services. The financial crisis has shown how badly the world economy needed concrete common rules for the banking system, for the rating agencies, concerning offshore finance centers. The G20 meeting in London has been promising. Who would disagree that we need a dedicated regulation authority backed by the IMF? We need an open discussion on monetary stability, be it by replacing the predominance of the dollar by a more realistic and sustainable counting unit.

Security of information flows and a great openness of the world's economy are the conditions of sustainable growth and confidence in this new economic growth model. Regulation is needed concerning technical standards in the IT sector. Transaction costs and incompatibilities could be put away to create a favorable environment for all economic actors by creating regulatory authorities at world level. Letting things get done by themselves can have two dangerous impacts. It can lead to the hegemony of the leader in one sector or the other. There should be a harmonized governance over Internet rules for example and I don't think the very American ICANN is the right tool to achieve it.

-          It makes new steps in free-trade agreements necessary, concerning services.

China’s membership in the WTO in 2001 has been a tremendous step. The market integration has made great progress in the last decades. But on the services agreement, further progress must be made in the coming years.

Intellectual property rights will be the major stake for the world economy in the coming years, because legal traditions are very different and because it's the very heart of the knowledge economies we will be living in soon. We' ve seen during the Doha round of the WTO how conflictual these issues still are. Greater efforts are needed on all sides.

·         Outsourcing is also a challenge for governments to favor new implantations.

-          It's a coherent economic model that can give a place and a chance to all countries in the new globalized economy.

The United States have been pioneers in this respect ; Europe now tries to define a strategy to become the first knowledge economy in the world, but what is most impressive are the changes and opportunities of India and China. Let's only have a look at the Bangalore district in India and its stalwart growth.

But China is even more impressive: it has managed to define a new strategy in the field of research and technology in the past years, with a massive increase of foreign investments in science and technology, with zero duties strategies and with the creation of industrial clusters. Whole districts are specializing in high-tech activities, while excellent Chinese universities allow the creation of high-level jobs, with more than 6 million engineering graduates.

-          It's a new relationship to the world, a new conception of government strategies. legislative impact.

 Globalization is in no way a weakening of the states. It's a matter of national strategies, in education, in competitive investments, particularly infrastructures, and in fiscal policies.

The financial crisis of the past year has shown that the countries that were able to put up with the recession were those in which a strong state could take quick, massive and targeted measures, rescuing the banking systems or financing major stimulus plans.

Concerning the development of new activities, the same is true. The different national, regional or provincial governments must on the one side anticipate the negative effects of disappearing activities by strong social policies and on the other hand actively promote the installation of other activities by realistic strategies.

·         It's also a challenge for private companies.

-          Because they have to redefine their relationships to public partners.

Companies outsourcing activities in developing or emerging countries should consider themselves as strong and long-lasting partners of the governments in the development process. That's an evolution that has been witnessed in many countries in the past years. Companies can share their know-how to adapt the workforces qualifications, as has been done through partnerships with IBM for example in China, so as to train engineers.

-          Because they have to contribute, on their side, to the definition a global common standard to guarantee the stability of an outsourced economy.

I believe private companies and particularly great global firms can become crucial partners of international regulation and in the public debate. They should be more thoroughly represented and listened to in the international institutions, for example in the United Nations' Social and Economic Council.

-          Because they are put in a position to invent a new model of company.

It should be based on a greater accountability, ethical responsibility, social integration within the different countries it's implanted in. That's the only way to match the challenges of tomorrow's competition where initial advantages and entry costs on many markets will be lower, where differentiation will be the key issue of consumer relations.

Ladies and Gentlemen,

Global outsourcing is one of the keys to organize the new world economy, to give it secure and long-lasting rules so as to work towards a fair, shared, sustainable development and to reshape the states activities and functions within globalization in  a more cooperative way.

Stakes are high. They are not only technical, legal, local. When discussing global outsourcing, we should always try to keep in mind the whole picture, the diversity of questions, interests, uncertainties, fears that are linked to it and the whole development possibilities it offers.

It's about responsibility. The different governments' action can't aim only at receiving as much as possible by any means possible. This would lead to a general weakening, even to worldwide economic conflicts, in the end endangering stability.

Cooperation is the key at all levels:

-          Cooperation between private partners linked by the global outsourcing of an activity.

-          Cooperation between governments, internationally as well as regionally, to create the conditions for a fair competition to receive activities and develop their population's satisfaction.

-          Cooperation between public and private partners to define a General Interest that can be adapted to all local situations with the least ethical, social, environmental contradiction.

Dominique de VILLEPIN