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The Outsourcing Dilemma:

During this year’s presidential campaign season, America was inundated with the opinions about “outsourcing,” the global trend that is sweeping through businesses and enraging many US workers. In the midst of this polarizing outsourcing debate sits a unique Cambodian firm, with strong Harvard connections, showing the world an alternative to traditional ways of doing business. The fascinating story of Digital Divide Data is one of confluence between outsourcing, international entrepreneurship, information technology, and social enterprise.

The firm, located on dusty pot-holed street 360 in Phnom Penh, Cambodia, seems like it ended up on the wrong side of the digital divide: stray roosters and dogs roam near open sewers wafting a pungent stench, while moto taxis, noodle carts and the occasional prostitute navigate between the mounds of trash lining the street. Just around the corner is the infamous Khmer Rouge death camp Tuol Sleng, a horrific relic of Cambodia’s genocide that resulted in the extermination of 50% of the adult population. But, in Building 36 the outside world gives way to a vision of the future. Inside these confines, 100 Digital Divide Data (DDD) employees coordinate digitization contracts from India, the United Kingdom, Iran, Laos, Mongolia and the United States. It was here in 2001 that DDD fulfilled its first contract by re-typing one hundred years of the Harvard Crimson newspaper.

To outsourcing experts and globalization critics, DDD is simply one more company looking to take advantage of cost arbitrage between the world’s haves and have nots. But for Tim Keller (OA), a DDD founder and now student at the Harvard Business School, DDD represents a new breed of international social enterprise that melds the merits of the private sector with the morality of non-profits. “DDD is a social enterprise that operates a bit like a co-op. Profits generated from data entry services are funneled into scholarships, healthcare and continued training,” Tim notes. “The problem with most non-profit organizations is that they require annual grant funding. At DDD we aim for a double bottom line – the first is to be operationally self-sustainable, which funds the second, the direct, tangible improvement of disadvantaged people’s lives and the communities they live in.” Unlike similar companies in the developing world, DDD reserves jobs for only the most disadvantaged citizens, those who wouldn’t otherwise have a chance to work. Cambodians and Laotians disabled by polio or land mines, former prostitutes and trafficked women, and impoverished residents make up most of its 175 workforce.

Despite its success, DDD has met difficulties and even controversy. “There were enough challenges to last a life time,” Keller prefaces before expounding on living in such an unstable environment. Early on, the DDD team faced challenges in bringing IT to a country of dirt roads. For the first month, typists didn’t save their documents, so every new day’s typing wiped out the previous day’s work. Workers were also too shy to ask questions or too embarrassed to point out errors in each other’s work. Accuracy rates were low. Progress was slow.

Then word got out that the Harvard Crimson was paying Cambodians significantly less than the U.S. minimum wage. The Boston Globe openly attacked the Crimson for hiring sweatshop labor. Soon DDD was tagged a “digital sweatshop.” The firm feared that they would fall victim to the anti-outsourcing movement. Tim recalls, “Between the [Globe] article, riots, corruption, and election violence, there were times when I wondered how sustainable things were for us.” But, instead, the publicity led to more business from customers who liked DDD’s prices and its social mission. “Before, we competed on price and quality, after the [Globe] article we found that our social mission was a selling point.” Since then, high profile clients such as Harvard graduate students and faculty, Tufts University Library, Bain Capital, Utah University and others have become repeat users of DDD’s services.

DDD is just one small speck in a line of organizations that have sent simple but time-consuming data-entry projects to developing countries. New York City police tickets have been processed in Ghana, Lexis-Nexis articles have been entered in China, and insurance claims have been keyed-in in India. Many see India’s success as a paradigm of international development based on IT services. Technology based development is faster, cheaper, better for the environment and more flexible than traditional resource or manufacturing development strategies. According the World Bank, the outsourced IT services market is estimated to represent $120 billion worldwide in annual spending and is growing at 20% per year. Within IT services, the total market for data processing and network services is more than $290 million, and growing five percent annually.

However, back in the United States, growth in outsourcing translates into serious job losses. According to most estimates, 2.5 million U.S. jobs have been lost to overseas workers since 2000. It’s important to distinguish between the types of jobs that are going abroad. In the world of data entry outsourcing, the work sent abroad enables U.S. workers to focus on more productive work. Doctors, secretaries, typists and archivists typically find themselves doing higher end, more value added work because of resources freed by outsourcing. In other industries, however, entire jobs are lost, such as when auto part manufacturers relocate to Mexico or call centers move to India. In this situation, the world’s gain is our loss, at least form an employment perspective. The key is to not universally judge the concept of outsourcing, but instead to understand each situation.

Recently, the Roberts Enterprise Development Fund has been promoting the calculation of Social Return on Investment (or SROI) as a means of addressing these types of situational issues. SROI works much like standard business ROI calculations but attempts to quantify the social impact of investment as well as the economic. In the case of DDD, consider the unfortunately common case of Soriya Nove, age 22. After being sold at the Thai border, she was rescued from a brothel last year and is now staying at a shelter for victims of sex trafficking while working for DDD. The cost for DDD to train her is roughly $1,000; she has the equivalent of a U.S. second grade education. In applying the SROI model to this case, one might measure the social impact like this:

Estimate that one in four urban Cambodian prostitutes have a lethal STD. Next estimate that the average prostitute my spread this STD to at least 20 people per year who then spread the disease to one additional person each, totaling 40 people now infected with a lethal STD annually and who will die prematurely. Now consider that the average prostitute works for three years and you arrive at a total of 120 people now likely to die because of one person’s activities. When DDD hires 60 trafficked women, the math adds up to 1,800 lives saved! That means that a $33 investment for DDD results in one life saved. This is an impressive SROI, and it doesn’t even consider the increase in standard of living, education, earnings power, and health care that come with DDD employment.

Clearly, there are number of problems with this type of SROI calculation. One can extrapolate to absurdum by considering economic and family impact, as well as social costs. Like most financial calculations, the SROI is influenced by one’s assumptions. Nonetheless, the logic of SROI proves a compelling case for DDD. Critics also contend that outsourcing leaves a developing country workforce stranded in low paying jobs. Yet, Keller who worked himself out of a job by transitioning management to Khmer staff adds: “DDD was never meant to be an end, but instead a path to something better. This is why all of our employees only work part-time, and all of our profits are reinvested into their continuing education
.” The World Bank tends to agree. It recently named DDD irs ‘Small to Medium Enterprise of the Year’ in 2003 and continues (along with the United Nations and USAID) to fund DDD’s expansion in Laos.

At the end of the day, the outsourcing dilemma seems to be a double-edged sword. Critics can rightly juxtapose domestic jobs loss with foreign exploitation and sweatshops. Yet, there is often a greater gain for developing countries that benefit from the resulting economic development. Creative social enterprises like DDD have found a way to make outsourcing a win-win proposition for all parties involved. Thus, it’s fair to say that ‘outsourcing’ in and of itself is a morally neutral concept, it’s the circumstances and implementation of outsourcing contracts that create the ethical challenges.

For more information see DDD’s summer fellows posting in the HBS job bank and visit www.digitaldividedata.com

November 15, 2004
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