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identify and isolate these forty to fifty components and then sit down and ask [the

company], 'How much money are you spending in each component? Where are you best in

class? Where are you differentiated? What are the totally nondifferenti-ated

components of your business? Where do you think you have capabilities but are not

sure you are ever going to be great there because you'd have to put more money in

than you want?'"

When you are done, said Tropiano, you basically have an X-ray of the company,

identifying four or five "hot spots." One or two might be core competencies; others

might be skills that the company wasn't fully aware that it even had and that should

be built up. Other hot spots on the X-ray, though, might be components where five

different departments are duplicating the same functions or services that others

outside the company could do better and more cheaply and so should be

outsourced-provided there is still a savings to be made once all the costs and

disruptions of outsourcing are taken into account.

"So you go look at this [X-ray] and say, 'I have these areas here that are going to

be really hot and core,'" says Tropiano, "and then let go of the things that you can

outsource, and free up those funds and focus on the

projects that could one day be part of your core competency. For the average company,

you are doing well if 25 percent is core competency and strategic and really

differentiating, and the rest you may continue to do and try to improve or you may

outsource."

I first got interested in this phenomenon when an Internet business news headline

caught my eye: "HP bags $150 million India bank contract." The story on

Computerworld.com (February 25, 2004) quoted a statement by HP saying that it had

inked a ten-year outsourcing contract with the Bank of India in Mumbai. The $150

million contract was the largest ever won by HP Services in the Asia-Pacific region,

according to Natarajan Sundaram, head of marketing for HP Services India. The deal

called for HP to implement and manage a core banking system across 750 Bank of India

branches. "This is the first time we at HP are looking at the outsourcing of the core

banking function in the Asia-Pacific region," said Sundaram. Several multinational

companies competed for the contract, including IBM. Under the contract, HP would take

charge of data warehousing and document-imaging technology, telebanking, Internet

banking, and automated teller machines for the whole bank chain.

Other stories explained that the Bank of India had been facing increasing competition

from both public- and private-sector banks and multinational corporations. It

realized that it needed to adopt Web-based banking, standardize and upgrade its

computer systems, lower its transaction costs, and generally become more

customer-friendly. So it did what any other multinational would do-it gave itself

a chest X-ray and decided to outsource all the funtions it did not believe were part

of its core competency or that it simply did not have the internal skills to do at

the highest level.

Still, when the Bank of India decides to outsource its back room to an American-owned

computer company, well, that just seemed too weird for words. "Run that by me again,"

I said, rubbing my eyes. "HP, the folks I call when my printer breaks, won the

outsourcing contract for managing the back room of India's 750-branch state-owned

bank? What in the world does Hewlett-Packard know about running the backroom systems

of an Indian bank?"

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Out of curiosity, I decided to visit the HP headquarters in Palo Alto to find out.

There, I met Maureen Conway, HP's vice president for emerging market solutions, and

put the above question directly to her.

"How did we think we could take our internal capabilities and make them good for other

people?" she answered rhetorically. In brief, she explained, HP is constantly hosting

customer visits, where its corporate clients come to its headquarters and see the

innovations that HP has brought to managing its own information systems. Many of those

customers go away intrigued at how this big company has adapted itself to the flat

world. How,they ask,did HP, which once had eighty-seven different supply chains-each

managed vertically and independently, with its own hierarchy of managers and

back-office support-compress them into just five supply chains that manage $50

billion in business, and in which functions like accounting, billing, and human

resources are handled through a companywide system? What computers and business

processes did HP install to consolidate all this efficiently? HP, which does business

in 178 countries, used to handle all its accounts payable and receivable for each

individual country in that country. It was totally chopped up. Just in the last couple

of years, HP created three transaction-processing hubs-in Bangalore, Barcelona, and

Guadalajara-with uniform standards and special work flow software that allowed HP

offices in all 178 countries to process all billing functions through these three

hubs.

Seeing the reaction of its customers to its own internal operations, HP said one day,

"Hey, why don't we commercialize this?" Said Conway, "That became the nucleus of our

business process outsourcing service . . . We were doing our own chest X-rays and

discovered we had assets that other people cared about, and that is a business."

In other words, the flattening of the world was both the disease and the cure for

the Bank of India. It clearly could not keep up with its competitors in the flattening

banking environment of India, and, at the same time, it was able to get a chest X-ray

and then outsource to HP all those things that it no longer made sense to do itself.

And HP, having done its own chest X-ray, discovered that it was carrying a whole new

consulting business inside its breast. Sure, most of the work for the Bank of India

will

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be done by HP employees in India or Bank of India employees who will actually join

HP. But some of the profits will find their way back to the mother ship in Palo Alto,

which will be supporting the whole operation through its global knowledge supply

chain.

Most of HP's revenues today come from outside the United States. But the core HP

knowledge and infrastructure teams who can put together the processes that win those

contracts-like running the back room of the Bank of India-are still in the United

States.

"The ability to dream is here, more than in other parts of the world," said Conway.

"The nucleus of creativity is here, not because people are smarter-it is the

environment, the freedom of thought. The dream machine is still here."

Rule #6: The best companies outsource to win, not to shrink. They outsource to innovate

faster and more cheaply in order to grow larger, gain market share, and hire more

and different specialists-not to save money by firing more people.

Dov Seidman runs LRN, a business that provides online legal, compliance, and ethics

education to employees of global companies and helps executives and board members

manage corporate governance responsibilities. We were having lunch in the fall of

2004 when Seidman casually mentioned that he had recently signed an outsourcing

contract with the Indian consulting firm MindTree.

"Why are you cutting costs?" I asked him.

"I am outsourcing to win, not to save money," Seidman answered. "Go to our Web site.

I currently have over thirty job openings, and these are knowledge jobs. We're

expanding. We're hiring. I am adding people and creating new processes."

Seidman's experience is what most outsourcing is actually about-companies

outsourcing to acquire knowledge talent to grow their business faster, not simply

to cut costs and cut back. Seidman's company is a leader in one of those completely

new industries that just appeared in the flat world-helping multinationals foster

an ethical corporate culture around an employee base spread all over the world.

Although LRN

is a BE company-founded ten years before Enron exploded-demand for its services surged

in the PE era-post-Enron. In the wake of the collapse of Enron and other corporate

governance scandals, a lot more companies became interested in what LRN was

offering-online programs for companies to forge common expectations and

understandings of their legal and ethical responsibilities, from the boardroom to

the factory floor. When companies sign up with LRN, their employees are given anonline

education, including tests that cover everything from your company's code of conduct

to when you are allowed to accept a gift to what you need to think about before hitting

Send on an e-mail to what constitutes a bribe of a foreign official.

As the whole issue of corporate governance began to mushroom in the early 2000s,

Seidman realized that his customers, much like E*Trade, would need a more integrated

platform. While it was great that he was educating their employees with one online

curriculum and advising boards on ethics issues with another, he knew that company

executives would want a one-stop Web-based interface where they could get a handle

on all the governance and ethics issues facing their organizations- whether it was

employee education, the reporting of any anomalous behavior, stewardship of a

hard-earned corporate reputation, or government compliance-and where they could get

immediate visibility into where their company stood.

So Seidman faced a double challenge. He needed to do two things at once: keep growing

his market share in the online compliance education industry, and design a whole new

integrated platform for the companies he was already working with, one that would

require a real technological leap. It was when faced with this challenge that he

decided to enlist MindTree, the Indian consulting firm, in an outsourced relationship

that offered him about five well-qualified software engineers for the price of one

in America.

"Look," said Seidman, "when things are on sale, you tend to buy more. MindTree offered

a sale not on last season's closeout, but on top-notch software engineering talent

that I would have been hard-pressed to find elsewhere. I needed to spend a lot of

money defending and extending my core business and continue to take care of my

customers, who

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were working off my current programs. And at the same time, I had to make a giant

leap to offer my customers what they were asking for next, which was a much more robust

and total online solution to all their ethics, governance, and compliance questions.

If I don't meet their needs, someone else will. Partnering with MindTree allows me

to basically have two teams-one team [mostly Americans] that is focused on defending

and extending our core business, and the other team, including our Indian consultants,

focused on making our next strategic leap to grow our business."

Since ethics is at the core of Seidman's Los Angeles-headquartered business, how he

went about outsourcing was as important as the ultimate results of the relationship.

Rather than announcing the MindTree partnership as a done deal, Seidman conducted

an all-hands town hall meeting of his 170 or so employees to discuss the outsourcing

he had in mind. He laid out all the economic arguments, let his staff weigh in, and

gave everyone a picture of which jobs would be needed in the future and how people

could prepare themselves to fit in. "I needed to show my company that this is what

it would take to win," he said.

Have no doubt, there are firms that do and will outsource good jobs just to save money

and disperse it to shareholders or management. To think that is not happening or will

not happen is beyond naive. But firms that are using outsourcing primarily as a tool

to cut costs, not enhance innovation and speed growth, are the minority, not the

majority-and I would not want to own stock in any of them. The best companies are

finding ways to leverage the best of what is in India with the best of what is in

North Dakota with the best of what is in Los Angeles. In that sense, the word

"outsourcing" should really be retired. The applicable word is really "sourcing."

That is what the flat world both enables and demands, and the companies that do

sourcing right end up with bigger market shares and more employees everywhere-not

smaller and fewer.

"This is about trying to get bigger faster, about how we make our next leap in less

time with greater assurance of success," said Seidman of his decision to source

critical areas of development of his new platform to MindTree. "It is not about cutting

corners. We have over two hundred clients all over the world now. If I can grow this

company the way that I

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want to, I will be able to hire even more people in all our current offices, promote

even more people, and give our current employees even more opportunities and more

rewarding career paths-because LRN's agenda is going to be broader, more complex and

more global. . . We are in a very competitive space. This [decision to use outsourcing]

is all about playing offense, not defense. I am trying to run up the score before

it's run up on me."

Rule #7: Outsourcing isn't just for Benedict Arnolds. It's also for idealists.

One of the newest figures to emerge on the world stage in recent years is the social

entrepreneur. This is usually someone who burns with desire to make a positive social

impact on the world, but believes that the best way of doing it is, as the saying

goes, not by giving poor people a fish and feeding them for a day, but by teaching

them to fish, in hopes of feeding them for a lifetime. I have come to know several

social entrepreneurs in recent years, and most combine a business school brain with