Last December, I was invited to Johannesburg to attend a conference entitled “Impact Sourcing: An Emerging Path to Sustainable Job Creation?” The event, supported by the Rockefeller Foundation, offered an exciting opportunity to gain insight into some of the most encouraging recent developments in education and job creation and a chance to recognize some of the people at the forefront of these fields. Perhaps more importantly, it provoked some interesting points for discussion that I would like to share with you over the course of this article.
Impact sourcing is a new term that refers to the purchase of administrative services from a remote area where the lack of job creation has a significant detrimental impact on the local populace.
This concept provides a means in which the converging interests of two different organizations, each with their own separate motives, can be mutually realized. The creation of jobs in developing nations is beneficial for both the governments of these nations, seeking to mitigate economic stagnation, and the outsourcing industry, allured by the promise of low-cost labor.
In order to understand how impact sourcing can help meet this demand while also becoming an agent for sustainable growth and social responsibility, it is first necessary to examine the various benefits it provides for each organization.
First and foremost, impact sourcing provides a stimulus for the economies of emergent nations. Governments of developing countries are often faced with very high unemployment rates among younger generations, due in no small part to the scarcity of job opportunities in the agricultural and industrial sectors. A large percentage of young people drop out of school because their parents cannot afford the cost. Unable to then find employment in their villages, many of them relocate into nearby towns, often contributing to the growing population of slums.
Because impact sourcing allows for the rapid creation of jobs with limited capital investment, it can help establish administrative positions in these small villages and provide local young people with the training necessary to fill them. Electricity and an internet connection are the only prerequisites.
Impact sourcing also provides obvious benefits to the outsourcing industry in the form of cheap and plentiful labor. The outsourcing industry has been developed on a business model based upon labor arbitrage, a term denoting that the greater the difference in average salaries between the country of the end customer and the country of the delivery center, the greater the savings for the end customer and the outsourcing service provider (SP).
The SPs in Europe have spread from Western Europe to Eastern Europe, then to India, and now, to a lesser degree, to China, South America, and Africa.
In each country, they settle first in the main city (tier 1), which typically contains a thriving labor market and an educated workforce. They then create delivery centers in smaller cities (tier 2), where salaries are generally lower, and eventually move to even smaller cities (tier 3), where they find even cheaper labor and a more loyal workforce deprived of other economic opportunities.
The bane of the outsourcing industry is its high turnover rate (+20-30% per year). Employees often take the first job offered, settling for minimum wage, but after a few months move on to other similar jobs offering a slight salary increase. This recurring cycle of hiring and training is costly; however, it ultimately proves more financially prudent than increasing the salaries of current and prospective employees.
The current business model of the outsourcing industry, dependent upon an already entrenched infrastructure and educated workforce, has reached the end of the road: the remote villages of India and Africa. There is nothing beyond except jungle or desert.
Impact sourcing proposes a new model in which an educated workforce is established from the ground up, not simply tapped from an already existing pool. Is this model viable? It relies heavily upon the cooperation of two fundamental pillars: the government and the service provider.
The government will initiate and support the creation of employment opportunities through the financing of the infrastructure and by providing administrative work to the service provider. These unskilled, repetitive, bureaucratic tasks form the “low base of the pyramid.”
The service provider will be a reliable organization who will interface with the end user. The non-governmental client will trust the organization and provide loyalty and support when it decides to move part of the work to a smaller village. The service provider will ensure full quality of service wherever the job is performed. The employees will be satisfied because they received education, training, and a job.
There are, however, fundamental risks involved in the implementation of impact sourcing for both the employers and the employees. For the employers, there are concerns about the profit potential of an essentially weak business model. The creation of value is a very simple process. It consists of the input, the transformation process, and the output. If the output is more valuable than the input, the process is considered profitable. For example, a brick possesses more inherent value than a handful of clay and water.
On the other hand, if you have a bureaucratic process that yields little difference between the input and the output, those tasks will be eliminated in the short or middle term through the process of reengineering or technology. Betting on the “low base of the pyramid” is a short-term bet that may create false hopes if there is no commitment to move up the pyramid and bring more valuable and cost-effective tasks to the employees.
The outsourcing providers and their clients are profit-oriented organizations with little philanthropic motivation. Moving work to a remote location results in concerns regarding security, confidentiality, reliability, and safety of working conditions that would otherwise not exist in a closed, secured town building with supervision, management, and pool of employees to ensure business continuity. The client will not be willing to put its company image and business at risk if the working conditions and the service level agreements (SLAs) in a small village are not identical to those in a second-tier city.
For the employees, there are understandable concerns about exploitation. In these small villages, the service provider often assumes a monopolistic position over its employees. There is no other employer around, therefore allowing the service provider to set the precedent for wages and working conditions. For example, there was a discussion about a scheme in which the employee may have to take out a loan to pay for his education and training. The loan would be gradually repaid through deductions to his paycheck, fostering in the employee a sense of obligatory loyalty to his job.
I do not, however, want to conclude on a negative tone. Some of the young people I met in South Africa who received training and employment were extraordinarily bright, happy, skilled, and motivated. The managers of those pilot training and delivery centers are wonderful personalities who give testament to humanity’s ability to positively change the world.
Ultimately, when considering the viability of impact sourcing, one essential question remains: What steps need to be taken in order to ensure that such a promising idea does not allow for the exploitation of poor people? I propose the implementation of a process and control for impact sourcing similar to the one put in place for the fair trade agricultural products grown by small farmers in developing countries. Another option is to have an association, like the Global Sourcing Council in the United States, issue certification for the impact sourcing providers and ensure end users that an “Impact Sourcing Code” related to sustainable growth and social responsibility is respected and enforced.
There are certainly many ways to further the development of impact sourcing that will benefit all the stakeholders. If you have suggestions, please do not hesitate to open the dialog. I will collect and forward your ideas to the promoters of impact sourcing. □
François Degueldre is a seasoned BPO and ITO professional with an expert foundation in finance and the global management of multinational enterprises. François currently serves as Managing Director of OPULUS where he leads consulting efforts in financial transformation, strategy and planning initiatives, and sourcing initiatives from location assessments to negotiation and third party selection through implementation. His email is firstname.lastname@example.org.