Schooled by China and India
What US tech companies can learn about innovation from abroad. Hint: it isn't just about cheap labor.
NEW YORK (Fortune) -- It would be a groundbreaking deal if consummated: According to press reports, telephone operator Sprint is in serious discussions with Telefon AB L.M. Ericsson to outsource management of its wireless network to the Swedish equipment maker. If finalized, the arrangement would make Sprint (S, Fortune 500) the first major U.S. wireless operator to cede total maintenance of its network to a third party consultant.
But in parts of Asia, outsourcing whole swaths of a tech business is old hat. India's leading wireless operator, Bharti Airtel, for example, does little more than set strategy and handle marketing and sales of phones and service. Contractors, including Ericsson (ERIC) and IBM (IBM, Fortune 500), take care of running and upgrading the actual phone network, operating call centers and other day-to-day operations.
Global consultant John Hagel expects to see more U.S. companies plucking ideas from their international counterparts. Hagel, co-chairman of Deloitte Consulting's Center for Edge Innovation, says Asian companies have started to implement some innovative management ideas that could resonate in the United States. And while many of these ideas on the surface seem like cost-cutting initiatives, Hagel says they also give tech companies flexibility and leverage, two things that benefit companies in good times and bad. "Chinese and Indian entrepreneurs understand that the only way to get scale is to be very modular in terms of how you define activities," Hagel says.
He cites the example of motorcycle manufacturers in Chongqing, where groups of parts makers, designers and other suppliers come together on an ad hoc basis to build a line of products. Unlike more formalized supply chains, such as those in Japan, the suppliers and vendors in China's motorcycle circles aren't bound to one another: They can leave the alliance at any time or forge new relationships. Some analysts liken this structure to the U.S. movie industry, where artists and craftsmen work together on a project-by-project basis, but in China the relationships are even less formal, allowing the motorcycle maker to add (or subtract) capabilities midway through a production cycle.
In India, on the other hand, Hagel notes that companies use loose networks for distribution. Instead of trying to open offices in every rural village in India, banks, telcos and other retailers find ways to partner with community groups and even each other to extend their reach. "On one level, [western companies] have gotten into trouble because we've been so focused on financial leverage," Hagel muses. "There's a different kind of leverage that these Asian companies are pioneering: How do you connect with your customers without having to do it all yourself? "
India's outsourcing giants have jumped on the innovation bandwagon, too. Wipro (WIT), for example, has started a division to help its customers with research and development. A few years ago tech companies would have blanched at the idea of outsourcing R&D. (Then again, it was pretty unthinkable until recently that a U.S. carrier would outsource its network.) But Wipro executives say they've had some successes, most notably with telecom customers, but also with computer and electronics companies.
Co-CEO Girish Paranjpe has said the company often wins business because it can bring, say, telecom R&D expertise to a non-telecom customer: It recently successfully helped a medical device maker, for example, add wireless monitoring capabilities to a product.
And while many U.S. companies may turn to their Asian counterparts for inspiration as a way to cut costs and bolster flagging businesses (Sprint this week said it lost more than 180,000 net subscribers in the first quarter of the year), Hagel maintains that international companies have much more to offer than cost-cutting solutions. "These companies are finding new ways to organize large networks. They often have to deal with challenging business problems, and they come up with some very creative solutions," he says. "This is innovation."