Offshoring goes both ways.

There has been a lot of debate in the U.S. about the advantages and disadvantages of offshoring. Proponents say that companies should be able to tap the global talent pool and take advantage of lower production costs in other countries. Opponents claim that offshoring takes jobs away from Americans and allows companies to take advantage or even abuse lower paid workers in other countries. Something that doesn’t get talked about as much here in the U.S. is reverse-offshorting (from a U.S. point of view): foreign companies hiring Americans to work for them remotely.

The NY Times published exceprts from an interview with Henning Kagermannm, CEO of SAP, arguably the largest enterprise software producer in the world. SAP is a German company. Kagermannm talks about how they do about a third of their engineering work offshore, i.e. outside Germany. One of the places where they offshore from is Palo Alto, CA (India, China, and Israel are the other three). The other interesting thing he talks about is how they specialize their offshoring activities depending on the talent pool and capabilities at each location:

Q. How does the global division of labor work? For example, what stays in Germany?

A. If it comes to deep application integration, we go to Germany. It’s where we have many people with deep knowledge of finance, manufacturing, human relations — those kinds of things, and knowledge of those functions in specific industries, the domain specific knowledge. That kind of deep knowledge is essential to platform work, designing the basic architecture of the core product.

Q. How about Silicon Valley?

A. In Palo Alto, we leverage the kind of innovation and creativity that is in Silicon Valley. It’s a place where a lot of new companies and technologies pop up and you can more easily integrate those new things into your thinking and your products. A lot of the Internet work has been done there, the technologies that open our products to others.

Q. And India?

A. India is mixed. But we do a lot of implementation of the design work in India. Our intent was to go there for the large talent pool. But we’ve been in Bangalore for seven years and we’ve grown somewhat gradually there. You cannot go in and hire 2,000 in a year and believe they are going to be ready to develop high-quality integrated software applications.

I think that offshoring can have its own problems but overall, it’s a practice that no company that dares call itself global can avoid. The fact that offshoring happens in and by many countries means that the U.S. shouldn’t be pursuing an isolationist policy of discouragin U.S. companies from offshoring. Instead, it should be competing by providing the best talent in the world, enticing foreign companies to offshore their operations here.

Which of course brings us to education and training which is another huge topic for another time.

It takes a village to make a laptop.

The New York Times today report that Amazon will expand its program called Fulfillment by Amazon which allows independent sellers to use its network of distribution centers to fill their orders. Up to now, it was available only for sellers who listed their products on Amazon but they are expanding it to independent sellers everywhere, even eBay.

Amazon’s distribution system, with more than 20 giant warehouses and a well kept secret inventory management system, is something that the company is very proud of. But they also recognize that in today’s world, it’s just another service that can be made leveraged to create revenue outside of Amazon’s own core operations. Sure, they may be making it easier for some sellers who list their products on competitor sites (like eBay) to sell their stuff and in that way increasing their competitors’ business and profits. But they also know that these are sellers who would have sold their products on the competitors’ sites anyway. Instead of trying to hijack sellers by making it mandatory to list items on Amazon in order to use Fulfillment by Amazon, they are letting them sell anywhere they want and they are making money by providing them with a service they already know how to do very well.

In today’s highly networked business environment, this is only a sign of things to come. It will become less and less possible for companies to maintain their competitive advantage by producing and bundling all their services within themselves. Instead, market mechanisms will prevail and more and more services that were traditionally kept within a company will be bought and sold in a networked market environment. So, what will be left of the traditional company, you ask? Well, things like the end physical product (the toaster, the TV, the car) with its brand will be what the company is all about. Same thing with the end service product (the marketing campaign, the tax preparation). But how that final product or service is put together and delivered, where the parts come from, who coordinates the activities, and so on will all increasingly be coming from outside the companies.

The reason is simple: lower transaction costs. These are the costs of search and coordination which in a highly integrated and networked environment decrease dramatically. It has become easier to go out into the market and outsource a service that up to now had to be done inhouse. The result can be lower cost and higher quality, especially since this service can now be provided by another company that specializes in it (hence the higher quality) and can take advantage of economies of scale (hence the lower price). That’s exactly what Amazon is providing with the service of order fulfillment.

 This isn’t speculative fiction by the way. This is happening right now. By the time your customize Dell laptop arrives at your doorstep, dozens of companies have contributed with parts, knowledge, labor, and delivery services to get it there. It didn’t all get produced in a giant Dell factory from beginning to end.