So what does all of this mean for the job market – and, in particular, the financial services job market?

At The Smart Cube, we’ve just put the wraps on a survey that assessed the financial services employment market – interestingly, from the perspective of the financial services (FS) recruiter. Why the FS recruiter? Because our intent was to check the pulse of the market – and who better to speak with than the very individuals whose daily bread, if you will, is dependent on this important market.

The findings of our study were very interesting:

• Recruiters are in virtually unanimous agreement that compensation for new Wall Street hires will decline – potentially by as much as 20 percent
• Wall Street job candidates, particularly at the more senior level, have significantly scaled back their compensation demands
• Employees with secure jobs are considerably less receptive to accepting new positions elsewhere.
• Recruiters are almost evenly divided as to how the collapse of Bear Stearns will affect Wall Street. While many believe there will invariably be a “trickle down effect,” there also is a widespread belief that the circumstances leading to Bear’s collapse were the result of “their (individual) financial health and situation”
• Most recruiters say the Wall Street job market was more adversely impacted by the collapse of the dot.com bubble than the current sub-prime mortgage crisis

The Smart Cube US Press Release.

The Smart Cube UK Press Release.

To receive a copy of our survey findings, go here.

While it is true that the current market situation is the result of a different set of problems, one would normally expect cautious employer markets (which is what we have today) to quickly adopt as many cost reduction tools as possible. And offshoring has been one of the more pronounced cost reduction tools available in recent years. However, this is not the case, according to the recruiters we interviewed, and is borne out by further discussions with our financial services clients. The underlying commentary has been that off-shoring has now ‘graduated’ to become “a strategic option available to businesses…independent of the current financial crisis.”

In other words, offshoring has taken its place within the strategy toolkit - from management fad to management fact. There are three key reasons why this has happened.

Teething. First, the initial infatuation (and subsequent ‘rush to market’) with the new offshoring idea is over. Several years ago, organizations rushed to offshore whatever they could – some successfully, other less so. But by doing so, organizations learnt many important lessons – that offshoring works; that you need to be thoughtful about what you send offshore; that you need to carefully manage who does it; and that it is about more than the absolute dollar cost. As a management group, we know better now, and the only way we could have figured it out in those early years, was by doing.

Value. As they worked through the teething, organizations also came to realize that offshoring was about more than cost reduction. There was actually a greater set of talents that could be accessed – higher value capabilities such as analytics, insightful research and more, that could deliver greater value at still compelling economics. But this talent still needed to be managed carefully and as a core competence – not as a sidebar to the existing business, but one where due attention is paid to people and process.

Furthermore, engaging in an offshore strategy has allowed managers to examine their processes as a whole and introduce longer term, transformative, changes. For example, if you look at today’s investment banking operations, in most cases it is not the 22 year-old junior analyst cranking out pitch books until they either (1) burn out, or (2) leave for another firm. Investment banks are grooming their top talent much more efficiently now that much of the junior-analyst work is done in offshore locations.

Professionalization. Coupling the lessons from the teething process and the recognition of higher value skillsets offshore, was the progressive development of strong provider markets in the space. The last few years has seen the emergence of a host of professional markets, such as the offshore research market in India, which is what we operate in. This allows client organizations to tap into these markets quickly and effectively to gain leverage and improve profitability. They still need to be thoughtful about what they do, but they aren’t marching through uncharted territory – there are a host of organizations that are ready to work with them in this pursuit.

Taken together, these three factors have driven the shift in thinking around offshoring. It’s a far cry from the nascent, politically tinged tactic of 2003. We have clearly graduated to a new age of offshoring, one that has taken its rightful place amongst the pantheon of management tools and techniques.

*While Offshoring and Outsourcing are distinct topics, they are related in many respects and, for the purposes of this article, will be treated somewhat interchangeably.

At the same time, there is a persistent stream of thought in some quarters that one downside of the outsourcing trend is its detrimental impact on an organization’s ability to cultivate its future leadership. The premise: By shifting work offshore, career opportunities for junior and mid-level employees that would otherwise serve as fertile training grounds for acquiring organizational management skills and leadership qualities are unduly sacrificed – thereby creating an inextricable management void down the road.

Having spent a decade in the professional services world and the last half decade in the outsourcing world, this got me to thinking – does outsourcing truly undermine an organization’s ability to breed future leaders?

It is certainly fair to say that, until relatively recently, clients of the big investment banks and consulting firms essentially paid for the critical on-the-job training of the recently graduated, recently hired MBAs assigned to their engagement or deal team. In many cases, these individuals had little or no direct work experience in the specific areas they were operating in. But clients were fine with this because of the Bigger Picture – the otherwise unattainable value the firms provided in the way of data gathering and analysis, scenario planning, and other advisory services. Simply put, there were few effective alternatives for the total value that such firms delivered.

Ten years later, the landscape has changed considerably. It no longer takes an expensive Wall Street firm or management consulting firm to amass mission critical data. Indeed, thanks to the Internet, reams of previously hard-to-compile information is available to financial professionals and business strategists alike. And in terms of the cost of brain power, the labor market has matured to where graduate-level analytical work can be retained for hundreds of dollars per day rather than thousands. Furthermore, technological advancements have made geographic boundaries largely obsolete from both a workforce and project management perspective. Organizations that provide knowledge outsourcing services have essentially tapped into these new realities to effectively deliver services that are comparable to the high-quality standards one would expect from their domestic professional services counterparts, but at a fraction of the cost. To quote Thomas Friedman, the world is, indeed, flat.

As a result, there’s been a paradigm shift, a forced de-coupling of the traditional value chain between research and advisory services. Clients are still willing to pay top dollar, but only for true high-end advisory work. It is no longer “Tell me what is happening within a market or industry”, but rather “Tell me what I should do about it”.

With clients now demanding greater value for their limited advisory budgets, many professional services firms are partnering with specialized providers, including The Smart Cube, to deliver much of the work once reserved for analysts, associates, and in a number of cases, even managers. For financial services clients, this work includes equity research support, initiating coverage reports and commercial due diligence research for live deals; for consulting firms, it is ‘plug and play’ research solutions to client engagements, helping to improve not only resource leverage but also project profitability.

Under this new model, the role of the junior resource (broadly defined) at a professional service firm has not become obsolete; but it has changed. No longer should they be chained to a desk working solely on basic market analysis work or fundamental company research. They will learn this aspect of their trade through their formal education as well as on the job training by working closely with their outsourced provider counterparts. But they will also see an acceleration of their total responsibilities. When outsource companies are leveraged for knowledge-based work, junior staff resources are freed to spend more of their time on client facilitation and management – the very high-end advisory services that are ultimately their firms’ core business.

The Smart Cube often works as partners to other professional service firms, operating much like extended team members. From our experience, the overall quality of the junior resources’ education improves under the outsourcing approach, particularly when they are sent to work side-by-side – physically – with the outsource company, as is often the case with our clients. Companies like ours that are dedicated researchers and data analysts can offer a quality level that is beyond that which any single company would invest in or be exposed to across its service industry. As a result, the clients’ junior staffers learn the obvious and obscure differences between good analyses and great analyses.

The fundamental question here is no different that that the old line manufacturing companies had to ask with the advent of low cost manufacturing in the 50’s and 60s. What am I best at? Put another way, does Nike have to physically make the shoes themselves to be a great shoe company?

In professional services, there is only one truism – the client is king. And today, the client is demanding better value. The most successful firms are those that recognize this and change their operating model with the times. Far from leading to a loss of critical training and leadership building opportunities, knowledge-based outsourcing will, in fact, unleash a new breed of advisor that is more attuned to the client’s issues and better able to deliver value in its most intrinsic form – by helping client’s creatively and cost effectively solve their most pressing problems.

And that is one paradigm shift I think we can all appreciate.

Can you guess the technology CEO who recently said that? If you guessed anyone inhabiting the corner office of a Western company, you’d be off by a hemisphere.

The speaker was Jonney Shih of ASUSTeK Computer, a Taiwan-based company that’s one of the largest manufacturers of computers and related equipment, producing everything from motherboards and servers to PDAs and notebooks, among other products. Although you may not have heard of the company, with 97,000 employees and 2006 revenues of US$16.5 billion, they are unquestionably significant players in their niche.

Shih’s comment was lifted from a recent BusinessWeek story (Nov. 12th issue) about the growing trend of Taiwanese electronics companies evolving from their traditional role as behind-the-scenes anonymous suppliers to branded producers in their own right. The strategy shift is said to be due in large part to the suppliers’ weariness of the never-ending price competition game and the consistent margin erosion it inevitably brings.

Shih’s company is among those looking to play the margin game by launching a branded business not only in Asia but out here in the West. Although it’s a risky endeavor, hindsight will probably prove it to be a smart move for his company and other Chinese manufacturers currently following similar paths. Recent recall issues aside, the overall quality of their products is on par with goods produced in the U.S. or Europe. And, because these manufacturers are already familiar with Western product preferences and proclivities, they have the advantage of already knowing what “works” for Western consumers. These companies are building on this foundation by placing bets in the right places – investing in design, marketing, and strategic U.S. acquisitions to establish their gateway into the west – all of which are smart, practical investments that will smooth their transition from the price game to the margin game.

Now, contrast this approach to what many North American manufacturers are doing. The same BusinessWeek article featured a sidebar on how U.S. manufacturers – the ones who lost their business to the Asian companies in the first place – are trying to fight the decline of the North American contract manufacturing sector. Their strategy? Move into industry segments such as medical devices, aerospace parts, and auto components that haven’t farmed out their production to low-cost countries – yet. In other words, replace contract manufacturing business lost to Asia with contract manufacturing business in areas that the Asians aren’t particularly active.

They may want to rethink their Plan B. After all, unless there are legitimate national security or logistical or inherent product constraints, there are few areas where low-cost countries won’t be able to battle. Going after markets untapped by Asian manufacturers is more a stall tactic than a survival plan, much less a growth strategy. Ask any business person in any sector in any jurisdiction and they will tell you that cost containment is an issue. How could it not be? As such, it is no doubt a question of “when”, not “if”, the Asian producers will expand into these aforementioned underserved sectors themselves. And when they do, they’ll inflict just as much economic havoc and competitive angst on Western suppliers in those spaces as they have on companies in sectors already availing themselves of lower-cost outsourcing options.

Look at the story from a wider perspective, and you read a compelling tale between the lines about the contrasting competitive strategies of each “side”. It speaks not only to the battle for marketshare between Asian and Western manufacturers, but also more broadly about the business of business in the West versus the business of business in Asia.

The value chain in its traditional sense has been turned upside down, and we are all trying to figure out the new global playbook as it is being rewritten. That said, however, the value chain for any given product is not fixed and will fluctuate as industries grow and develop. Where once Japan was the hub of low-cost production, this hub has shifted and is now in China. Without question, it will move again in time – the difference between success and failure comes down to how a company reacts when it does.

Asian companies effectively introduced the concept of global price competition, and they are again taking the lead as the outsourcing arena evolves. These companies are adapting to changes in their business environments in innovative ways, carving out opportunities where there were previously challenges. While they have been busy redefining the rules of the proverbial game, their U.S. counterparts lag well behind, trying to figure out how best to play the old game. The notion of chasing industries not currently outsourcing to China on any grand scale is a prime example. Remind me – what is it they say about those that don’t learn the lessons of history?

The key to fighting a competitor with an inherent advantage (’superior’ products, vast resources, or, indeed, inherent cost superiority) isn’t to keep fighting the same battle over and over or, as is the case cited in the BusinessWeek sidebar, to delay the inevitable. You either join them (e.g. move your own manufacturing to Asia, perhaps splitting up higher end activities at the front end and shifting others to the back end) or you find a way to change the model.

Price competition doesn’t have to be the end game. Sure, you can buy and build, consolidate, play the numbers, and work the margins through scale economies, but that requires a certain level of intestinal fortitude, not to mention investment. Smart players try different tacks – for example, identify a niche that is focused on higher quality, emphasize an innovation that is sufficiently unique, positioning yourself differently by branding (and of course backing up with the right products). There are a myriad of ways to tackle this issue – none are easy or necessarily cheap. The key is to identify segments that allow you to play the margin (as opposed to margin erosion) game, and to look for ways to be truly innovative, the very bedrock of competitive strength in any geography.

As ASUSTeK’s Jonney Shih would agree, competing on price will only get you so far and for so long.

Innovation will carry you much further.

In the aftermath of the recent recalls of tainted and toxic China-made products, more than a few have speculated that manufacturers who have outsourced production operations there are no doubt rethinking their sourcing strategies and quality control processes, and, if some of the, shall we say, ‘more aggressive’ pundits are to be believed, even rethinking their continued presence there altogether. However, according to the results of a proprietary survey just completed by the smart cube, the pundits appear to be very much mistaken.

In fact, the majority of manufacturers surveyed are confident their supply chains are more than adequately secure to ensure the safety of their products. Indeed, nearly 80% of respondents (all of whom were manufacturers who currently manufactured their products in China) reported that they felt no need to review their supply chain activities in the wake of the well-publicized toy and toothpaste recalls. Further, these global manufacturers believe that the recent recall issues, while serious, are aberrations and not symptomatic of some more fundamental issue inherent within Chinese manufacturing. They appear to be on solid ground, as Mattel itself has apologized for initially putting the blame on its Chinese suppliers.

The fact that an overwhelming majority of manufacturers did not feel compelled to review their supply chains is reflective of remarkable confidence, especially in light of the media attention the issue has received. To be sure, though, this is not to imply any sort of complacency on the part of the these manufacturers. Indeed, in our one-on-one discussions with the surveyed companies, respondents indicated that they would “be more cautious” about their supply chain activities, which suggests that while they feel they are structurally sound, they are mindfully vigilant.

Among the 22% of respondents that did say they would review their supply chain activities, more than one-third said they would make changes to the supplier evaluation process during selection or they would assign a person to look over quality adherence at the supplier location. About 30% would send quality inspectors overseas to the production plants. This is noteworthy because these are not quick-fix solutions; these respondents are considering deploying significant resources to achieve greater product quality.

We were not surprised to see that none of the survey respondents indicated that they would stop outsourcing manufacturing altogether. Let’s face it – American consumers are bargain shoppers, and the big box retailers that clamor for their spending dollars are equally price sensitive. Consumer product companies are under constant competitive pressure to bring their wholesale costs down so that retailers can hit their target retail prices without cutting into their own margins.

In addition, almost all of the companies that outsourced to China indicated they would continue to do so, which if you really think about it, shouldn’t surprise anyone. After all, the underlying cause of many of these recalls has to do with inadequate product design specifications at the front end and improper oversight at the back end. Those shortcomings are not China-specific; they could happen anywhere. But if China is to continue to be the preferred source for production, how can we protect the supply chain from the breakdowns that have made consumers so fearful (at least temporarily) of the “Made in China” label?

A huge challenge is China’s rampant growth. One could argue that the demand for Chinese manufacturing has likely exceeded the supply of superior quality, reliable and competent sources. A consistently robust supply chain has been weakened by a multitude of opportunistic suppliers eager to meet even unreasonable cost expectations by any means necessary. For their part, many of the ‘outsourcerers’ i.e. those companies that subcontract to Chinese manufacturers, have done little to discourage this – if not by intent, certainly by implicit action. The pricing pressures they face are very real. Yet, competition among Chinese manufacturers for production contracts is intensely fierce – and western companies dealing with China know that, for the most part, if they lose one contract, there will always be another manufacturer waiting in the wings to take over. And so the cycle continues until we have the situation we went through this summer.

We would be remiss to suggest that western companies are without a sense of responsibility, though. Interestingly, survey respondents were very explicit that the onus was on them to ensure effective supply chain management and quality control. They feel that the U.S. government is doing everything reasonable within its power to improve the quality of outsourced products. The Chinese government, in their view, could do more, and by some possibly extreme measures, is at the moment trying. However, at the end of the day, it is the individual company’s responsibility to ensure safety and quality of the end product. (To illustrate the limitations of the regulatory approach, although the Consumer Product Safety Commission (CPSC) and General Administration of Quality Supervision (GAQS) of the U.S. and China, respectively, recently reached an agreement to boost the safeguards on Chinese-made toys, this is a mere sliver of the manufacturing universe.)

So how will they manage control? The majority (61%) of survey participants said that quality checks at multiple levels are their preferred strategy for managing quality control. It is worth noting that in Mattel’s situation, it was subcontracted suppliers who used paint from unauthorized suppliers that ultimately led to the recalls. Interestingly, while one would expect that better communication with vendors and more rigorous vendor selection and certification processes (throughout the value chain) would be foremost on manufacturers’ minds, these aspects of the supply chain management process were actually prioritized very low on the list of companies’ ‘quality strategies’.

So what does this all mean?

At the end of the day, there are probably a handful of truisms here that we can walk away with:

• It is counterintuitive to suggest that global manufacturers are producing substandard goods in overseas locations simply to squeeze a tad more profitability out of the process. Recalls are simply too costly in terms of the bottom line, reputation management, and consumer trust for such a misguided strategy to work in the long run.
• Most companies (well, the good ones, anyway) accept that the buck has to stop with them. They understand that, at the end of the day, their a** is on the line and the only folks who will make sure that there are no quality issues in their supply chain is themselves.
• Outsourcing isn’t going away. Its critics can rail against the perils of outsourcing and the problems it creates, but the reality is that most of the goods we encounter in our everyday lives are made anywhere but the US. And most of it (gasp) works.
• China isn’t going away. If that sounds like an obvious statement, it is, and it should be thoughtfully considered in light of the outcry over the last few months. The reality is that China has a pool of talent and a cost structure that allow us to pay a heck of a lot less for products than we would have to otherwise. And the reality on main street is that we implicitly value this economy. And there is no reason we wont continue to do so.
• (As for the manufacturers who operate in China, what are their alternatives? Sure there are other cost competitive locations – but who’s to say they wont encounter the same issue (perhaps even worse) in those locations?)

As our survey respondents would agree, there are meaningful ways to safeguard against the likelihood of production-related safety risks, but manufacturers must be vigilant and proactive. Superior quality products come from superior supply chain management, which is most definitely a “do it yourself” job.