Outsourcing not strictly a cost issue, says head of IBM

IF COST was the only consideration global businesses would outsource all their work to low-cost Asian economies, according to IBM chief executive Sam Palmisano.

"Now if [cost] was the only factor you would conclude that all work is going to flow from east to west, because clearly that's where the comparative advantage from a cost perspective is," said Palmisano. "But then it doesn't happen that way, does it?"

Speaking at an IBM-sponsored conference in London last week Palmisano discussed how companies and countries can thrive in the new hyper-connected economy.

"When the world is connected, work flows where it can best be done," said Palmisano. "It's like water; it will seek its own level."

It's a debate that has massive implications for the Irish economy. While the technology sector has felt the effects of globalisation earliest and most strongly, increasingly businesses of all sizes are finding they have to compete on the world stage.

As one of the world's largest technology firms - with 387,000 directly employed staff and about "a million people around the world touching our enterprise in a meaningful way each day", as Palmisano puts it - IBM is acutely aware that it could be accused of simply moving jobs to the cheapest location. It has saved $20 billion (€13 billion) in the last three years by moving all its supply chain operations to China, rather than having regional supply chain hubs in different parts of the world.

Although IBM has won outsourcing contracts in Ireland in the last two years - most notably with Xerox and O2 - where jobs have moved outshore, Big Blue has been a significant net investor. It employs more than 4,000 people doing everything from developing communications software to configuring and shipping mainframes and in July 2005 it announced a €46 million investment in its Irish operations.

According to Palmisano, countries such as Ireland that are now relatively high-cost need to focus on two other factors: expertise - in the form of knowledge, innovation or creativity - and openness.

Despite it being a US firm and himself a US citizen, Palmisano was scathing about the massive burden of regulation that US firms have to deal with. He described it as an overreaction to Enron and "an environment that occurred where three or four companies did some incredibly dumb things".

IBM has been championing the notion of the "globally integrated enterprise" for a number of years and Palmisano has even predicted that the multinational, which establishes a "mini" version of itself in each country, will shortly become extinct. What was once seen as providing market access, competitiveness and an understanding of the local market is now seen as redundancy, inefficiency and bureaucracy.

IBM believes the global economy provides opportunity for small firms as well as large multinationals. Palmisano announced in London that it is working with the World Bank to create an information exchange for small businesses in emerging markets.

Locally, support for small to medium enterprises is provided through the European Venture Capital Centre in Dublin. Martin Kelly, a partner in the centre, says its role is to enable smaller firms to "use IBM's reach and ecosystem".

Two Irish firms already benefiting from support are Porto Media, which provides a digital movie rental service, and BiancaMed, a company which has developed technology for health monitoring and management.