Success Factors in Outsourcing Service Jobs

Which jobs are good candidates for global disaggregation?

An increasing number of U.S. companies are outsourcing information technology and professional service jobs to offshore locations to reduce costs and take advantage of global skills. Given the stakes involved, both in terms of organizational capabilities and the bottom line, managers want to know which jobs are more conducive to global disaggregation. Sunil Mithas, assistant professor of decision and information technologies at the Robert H. Smith School of Business at the University of Maryland and Jonathan Whitaker, a Ph.D. student in business information technology at the University of Michigan, provide an answer to this question in their 2006 working paper, “Effect of Information Intensity and Physical Presence Need on the Global Disaggregation of Services: Theory and Empirical Evidence.”

Mithas and Whitaker introduce a mechanism that they call ease of disaggregation. Drawing on the U.S. Department of Labor’s Bureau of Labor Statistics listing of Standard Occupational Classification codes and Occupational Employment Statistics and mapping the data to the categories used in a seminal 1995 study by Uday Apte and Richard Mason, the authors were able to isolate the types of jobs with the greatest potential for outsourcing from 2000–2004. Since the Apte and Mason study, it has been believed that higher information intensity jobs are easier to outsource and higher physical presence jobs are more difficult to outsource. However, the authors use the data to understand more specifically how information intensity and physical presence affect the outsourcing potential of a given occupation.

Ease of disaggregation consists of three aspects of an occupation, what the authors call codifiability, standardizability and modularizability. Codifiability refers to the extent to which the activities in an occupation can be described completely in a set of written instructions. Occupations with a high proportion of explicit knowledge are more codifiable than occupations that use tacit knowledge. For example, the occupation of insurance underwriter is more codifiable than the occupation of heart surgeon. The process and acceptance criteria for an underwriter can be completely documented, but it is more difficult to completely document the step-by-step process during open-heart surgery.

Standardizability is the extent to which the activities in an occupation can be performed successfully using a set of consistent and repeatable processes. The consistency of processes applies across different workers and across different cases. Fast-food cashier is more standardizable than the occupation of lawyer. Fast-food cashiers can be trained to follow the same process with every customer (greet customer, ask for order, enter order, etc.), while a lawyer may need to follow a different process for each trial depending on the issues involved; or two different lawyers may follow different processes even for the same trial.

Finally, modularizability is the extent to which the activities in an occupation can be separated into components so that the components can be performed independently by separate people and then integrated later. For example, the occupation of technical writer is highly modularizable. Two different writers can each write one chapter of a user manual, and the two chapters can both be placed in the manual.

Taken together, the three occupational aspects can lead to a better understanding of which professional service jobs are good candidates for global disaggregation. Although the authors do not provide a direct link between ease of disaggregation and offshoring, they do provide evidence that occupational attributes such as information intensity and need for physical presence can help an organization understand the potential impact of offshoring on service occupations. These results have two major managerial implications. First, the authors suggest that occupations with high information intensity and low need for physical presence are the primary candidates for offshoring. Managers should make suitable investments in digital platforms and consider decoupling information-intensive activities from activities that require physical presence. This will enable companies to optimize their portfolios of business processes and to locate the processes where they can be performed with greater effectiveness at lower cost. Second, the authors stress the need for digital enterprises to develop process expertise so they can evaluate the interdependencies among service activities, modularize those activities and then disaggregate the activities to take advantage of global resources. Both recommendations, the authors suggest, should lead to more efficient and profitable organizations without any loss to core capabilities.

The paper is currently available for download at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=891519. For more information contact Sunil Mithas at smithas@rhsmith.umd.edu.