Knowledge work’s rapid commodification – 3 Feb 03

Ø Ernst & Young establishes an accounting center in Manila to work on taxes and financial reports. Cost: $300/month vs. $5,000 / month in high wage countries.

Ø A small software startup in the Boston area contracts with a software coding firm in Minsk, Russia. Cost: $20 an hour in Russia vs. $120 an hour in Boston. Productivity: higher.

Ø Boeing opens its Moscow design center in 1998, where Russian aeronautical engineers work for as little as $5,400 a year.

These are a few examples of knowledge worker “commodification” – the increasing ability of companies to send complicated technical work to lower wage countries, and thus have it completed at a much lower cost than would be the case in North America or Europe. This topic is Business Week’s cover story for the 3 February issue.

The plot of the story is not new, although the actors are. Manufacturing work has been moving for more than a century, first to low wage regions within one country, and then across borders to low wage countries. These movements have been enabled by transportation and infrastructure improvements, and by changes in public policy. Some of the policy battles of the 1980s concerned whether “Manufacturing Mattered,” to borrow the title of a 1987 book by Steven Cohen and John Zysman at Berkeley’s Roundtable on the International Economy.

Now the knowledge economy is undergoing the same transition. The characteristics of knowledge work may make this transition from high wage countries to low-wage countries faster than it was with manufacturing employment, for several reasons.

First, the communications infrastructure required for knowledge work is well-developed.

Second, the nature of most knowledge work requires significantly less physical capital than does industrial work, and, as the Business Week story documents, the human capital is readily available.

Third, outsourcing and re-engineering have enabled many companies to reconceive their companies in a modular fashion. For companies with modular organizations, it is straightforward to source activities such as financial analysis, accounts payable, or even product design, from providers in low-wage countries. These providers may be owned by the firm, as is the case with Texas Instruments’ semiconductor research facility in India. Or the providers may be independent, such as Tata or Wipro in software development.

As a result of these changes, a company in Bordeaux can contract with an architectural firm in Hungary almost as easily as it can with a firm down the street. In doing so, it will pay one fifth the price for services that are equal to (or better than) what it can buy locally.

Link to the article:

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