Low-Cost Politics By Julie Meyer		Download the Ariadne Capital Journal - Through the Maze in PDF
Outsourcing to lower-cost countries such as India has become a political as well as an economic issue in the West. Julie Meyer of Ariadne Capital says venture capitalists cannot afford to ignore the repercussions.

Outsourcing was the sleeper issue at Davos. We all tried to focus on the political issues – the Middle East in particular – but economic ones naturally rose to the forefront. I travelled back from Davos with the founder and CEO of Infosys, Nandan Nilekani – one of the businessmen driving the thriving Indian IT industry. His company’s success has been an extraordinary force behind globalisation.

You don’t have to look far to realise that the software industry is globalising.

Hostile offers for software companies, such as the ongoing battle for PeopleSoft by Oracle, were once unthinkable because the talent held the upper hand: look at the programmers the wrong way and they might walk out and start their own company next door. Then the bubble burst, India was discovered and Linux arrived.

This raises fundamentally touchy questions for all of us about what our value is in the market. If you’re a programmer in India, you’ll earn $8,000 to $11,000 a year. If you happen to live in Santa Clara, that’ll be a minimum of $60,000 and probably closer to $120,000.

I find it an amusing historical fact that one of the main reasons the IT industry sprung up and thrived in India is that the government didn’t understand it – so it left it alone. Free from that intrusion, it created a massive growth story for the country. This kind of capitalism is changing the average young Indian’s view of capitalism. It’s now something that works for him or her, as opposed to a concept woven into empire and exploitation.

With outsourcing a major issue in this election year in the US, and the US and UK partnering to take democracy to the rest of the world, shouldn’t we allow capitalism to work for emerging regions of the world as well? Isn’t it an imperative if we don’t want to be hypocritical? A rising middle class – whether in India or Iraq – buys goods and services from Western companies.

Nineteen years ago, a group of leaders from American business, labour, government and academia issued a report that created alarm in Washington DC. The report argued that America’s ability to compete in world markets was eroding in the face of emerging industries and low-wage workers in the Pacific Rim nations.

The strategy America pursued in the late eighties and nineties, creating more than 35 million new jobs and producing the longest period of economic expansion in its history – including a whole new IT sector, whose jobs pay, on average, 75 per cent higher than other jobs – was to invest in America by promoting R&D of new technology, improving education and training and lowering deficits to improve the cost of capital for business.

If European and US workers are to remain the best and the most creative in the world, they need national strategies for competitiveness that are as innovative and creative as they are. When you build walls to protect your own workers, you end up hurting them in the long run. We must focus on developing next-generation industries and next-generation talent – in fields like biotechnology, nanotechnology and digital media distribution and around issues like IT security, mobility and manageability – that will create long-term growth and jobs here at home, while raising all of our living standards in the process.

The leadership of the US is being challenged – not by Japan, but by emerging nations like India, Russia and China. What makes this challenge different to the one of 19 years ago is that these nations not only share rich educational heritages, but are also investing heavily in innovation and R&D to help drive the next generation of growth. In China, IT spending is increasing at an annual rate of more than 15 per cent. It is set to become the second-largest economy in the world either by 2050 or 2035, depending on which reports you read.

Knowledgeable workforces across the globe are in a position to compete for jobs that were once the sole province of the developed world.

Ariadne Capital gets involved on both sides of the equation through its Arbitrage IT initiative. We work with the CIOs of European corporates that are outsourcing IT budgets to cost-optimised locations in the world to find the best partner. But we also work with Indian companies that offer outsourced services to European companies. These client companies need to decide whether they want to enhance the external customer-facing opportunities or enhance internal operational effectiveness.

If they opt for the former, they should build greater industry, customer, product and service knowledge in selected vertical sectors. That way, they can build a reputation for excellence and be price-competitive on the basis of quality of service. It will be seen as a scaleable quality solution for customer service needs.

If the latter is preferable, then they would do well to situate themselves in the growing industry of business process outsourcing for which India-based companies are getting to be well known. Companies that do this can build their capabilities to enhance internal company processes, such as accounting and finance.

We believe a venture capital firm should increase its portfolio companies’ access to potential customers, exits, and partners. Outsourcing is not an issue on which we can take a neutral stance. Nor can we ignore it. We must be proactive in helping this make economic sense for high-growth private companies as well as FTSE 100 ones.

There was an expression that developed during the internet heyday as older, established industries considered the threat of the new emerging online challengers. It now applies far beyond the CIOs of European companies to every senior executive who wants to be here in the economic cycle: “Be afraid. Be very afraid.” Add to the list of things that one can count on – change, death and taxes – that someone somewhere is doing what you do. And they are on the other side of the planet operating at ten per cent of your costs.

Julie Meyer is chief executive of Ariadne Capital, a London-based investment firm. She can be contacted at Julie@ariadnecapital.com

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