Labor Arbitrage or Transformation
Adam Smith recognized in 1776 that a foreign producer with a lower cost of labor can have an advantage over domestic producers with higher costs of labor. He also recognized that labor cost was just one of the components contributing to the total cost of production, quality, time-to-market, sales, and revenues.
Smith is famous for his view that governments cannot protect domestic producers or labor markets from foreign superiority. However, Smith is known as the father of transformation, because he deduced that business leaders focused on transforming their operations to optimize production ultimately were the most profitable, and produced the highest quality products garnering the leading share of the market.
The environmental and technological limits of Smith’s time constrained the wide-spread use of offshore labor. Offshoring is a term that only came into use since 1998, since that time, thousands of business processes have been moved to offshore operations taking with them millions of domestic service and manufacturing jobs.
The value of labor arbitrage is naturally limited and perishable. As more business processes are brought offshore, over supply in foreign labor markets is exhausted causing labor costs to rise. Additionally, experience indicates that business processes are harder to improve and evolve when they have been moved offshore. These issues can catch business leaders by surprise especially when lower labor costs are the only the only improvement derived from an outsourcing program or offshoring program.
Smith noted that transformation provides the means to lower the number of workers needed to deliver a business process, therefore reducing total costs. He also documented that reducing the number of workers required for a process improved quality and time-to-market. As a result, higher performing companies had higher customer loyalty, and as a result higher sales, and revenue. A comprehensive transformation program holistically resolves more business goals, and mitigates the advantage of lower offshore labor costs. High unemployment in Europe and the United States makes a transformational roadmap is a key strategy for any organization.
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Developing Business Cases for Upgrading Contact Center Infrastructure
Over 233 years ago Adam Smith wrote about transformation and high performing businesses. He noticed by studying Pin Factories that the successful businesses were those focused on transforming their operations. Smith wrote,
First, the improvement of the dexterity of the workmen, necessarily increases the quantity of the work he can perform; and the division of labour, by reducing every man’s